China Releases Draft Rules on Fines for Gun-Jumping and Other Merger-related Contraventions of the AML

On August 16, 2024, China’s State Administration for Market Regulation (“SAMR”) released for public comment its draft rules on administrative penalties for the illegal implementation of a concentration (“Draft Rules”).¹ The Draft Rules aim to make SAMR’s decision-making for the imposition of fines relating to gun-jumping and other merger control violations of the competition rules more transparent and predictable.

The Draft Rules primarily define what is meant by the “illegal implementation of a concentration.” They specify which parties are subject to penalties; and outline the methodology and considerations that SAMR will have regard to when assessing fines for the illegal implementation of a concentration. The Draft Rules also provide that fines may be waived in certain cases.

The illegal implementation of a concentration

The Draft Rules bring clarity to the area of fines for gun-jumping and related violations. In particular, they define the illegal implementation of a concentration to include (1) not reporting a notifiable transaction (i.e., one which satisfies the relevant revenue thresholds); (2) failing to file a non-reportable transaction called-in by SAMR for review; (3) closing a notified transaction before completion of SAMR’s review; (4) failure to comply with a restrictive condition imposed by SAMR in a conditional clearance decision; and (5) closing a transaction that SAMR has decided to block.

Parties subject to penalties

The Draft Rules state that penalties apply to all merging parties in case of a merger, or the parties acquiring control or decisive influence in other types of concentration. This provision codifies SAMR’s existing practice as regards the party liable for a failure to file.

Fines for illegally implementing a concentration with no anti-competitive effects

The Anti-Monopoly Law (“AML”) was amended on August 1, 2022 (“2022 Amendments”), to substantially increase fines for the illegal implementation of a concentration. (See our China Competition & Trade Review (Issue #7 January 2023) for an in-depth discussion of the issues.) The 2022 Amendments provide that the illegal implementation of a concentration that does not cause harm to competition is subject to a lower maximum fine of RMB 5 million (approx. USD 700,000). The Draft Rules propose a two-step methodology for setting the specific amount for the fine in this scenario.First, the regulator will select an initial level for the fine having regard to certain factors (discussed below); second, the initial amount will be adjusted upward or downward to arrive at the final amount.

Regarding the first step, the Draft Rules propose three alternative initial amounts depending on the specifics of the case:

1. RMB 1 million (approx. USD 140,000) is specified as the initial amount for a violation with mitigating features (e.g., where the undertaking ceases implementation of the concentration or takes steps to eliminate any anticompetitive effects arising out of it immediately upon learning that SAMR has opened an investigation; where the investigated undertaking was coerced or deceived into illegally implementing the concentration; or where it self-reports before SAMR has become aware of the violation of the AML);
   
   
2. RMB 4 million (approx. USD 560,000) is specified as the initial amount for a violation with aggravating features (e.g., the undertaking coerces, deceives or induces others into illegally implementing a concentration; it has already been penalized by SAMR for a merger-related violation of the AML within the past year; it obstructs or refuses to cooperate with SAMR or takes retaliatory action against enforcement officials; or it fabricates, conceals or destroys evidence); and
   
   
3. RMB 2.5 million (approx. USD 350,000) is specified as the initial amount of the fine for a violation that either lacks any mitigating or aggravating features or that has both such features. 

Once the initial amount has been determined, it will be adjusted, in a second step, to arrive at a final amount. This includes factors not initially considered when in determining the initial amount. Factors that may warrant a downward adjustment include: (1) the post-transaction entity has not started operations or the acquiring party has not yet exercised control over the target; (2) the infringing undertaking has not been penalized before for gun-jumping or any other illegal implementation of a concentration; (3) the infringing undertaking proactively establishes or improves an antitrust compliance program which substantially raises merger control compliance awareness within its organization; and (4) the infringing party actively cooperates with SAMR during the investigation. Each of these factors may result in a 10% discount being applied to the initial amount.

Factors that may result in an upward adjustment to the initial amount include: (1) failure to file a transaction which SAMR has called in (this may result in the initial amount being increased by 20%); (2) providing misleading and false information to SAMR during the review; or (3) failure to cooperate with SAMR . Each of factors (2) and (3) may result in a 10% increase to the initial amount of the fine.

Following any necessary adjustments, the final amount of the fine must be no lower than 40% of the initial amount selected but no higher than RMB 5 million (approx. USD 700,000) in absolute terms.

Fines for illegally implementing a concentration with anticompetitive effects

Pursuant to the 2022 Amendments, the illegal implementation of a concentration with anticompetitive effects is punishable by a fine of up to 10% of the offending undertaking’s turnover in the prior fiscal year. SAMR may also issue an order enjoining completion or unwinding the transaction.

In determining the specific amount of the fine for an anti-competitive merger, the Draft Rules propose that SAMR take into account the steps for setting fines for violations with no anticompetitive effects and then have regard to the timing of the illegal conduct, the duration and scope of its anticompetitive effects, and whether or the extent to which the anticompetitive effects are continuing. The minimum fine for illegally implementing an anticompetitive merger must be at least RMB 5 million (approx. USD 700,000).

The Draft Rules state that SAMR may impose the maximum statutory fine of 10% of the offending undertaking’s annual turnover, and an injunction on implementation of the transaction or issue an order to unwind it in the case of a blatant violation of the AML.A blatant violation is one where the undertaking concerned implements the concentration notwithstanding that SAMR has informed that party of its competition concerns or has issued a decision blocking the transaction.

Exemption from penalties

The Draft Rules propose that in certain cases the offending party may be spared an administrative fine. For example, when a first-time offender voluntarily reports a violation of the AML to SAMR and takes timely measures to restore the pre-transaction state of affairs. Or when it can be shown that the violation of the rules was caused by unforeseen, unavoidable, or insurmountable events.

Aggravated penalties

The 2022 Amendments introduced a provision concerning aggravated penalties (Article 63 of the AML). This provision allows SAMR to increase the fine five-fold for violations of the AML, including the illegal implementation of a concentration, that are “pernicious” (highly injurious) or result in “particularly serious” consequences. The AML does not specify criteria for assessing what is “pernicious” or “particularly serious”.Unfortunately, the Draft Rules merely repeat the terms of the AML that SAMR has a power to impose these aggravated penalties without more guidance. This would seem to be a missed opportunity.

The Draft Rules are open for public consultation until September 14, 2024. However, if adopted in their current form, the Draft Rules will apply to any case of gun-jumping or other illegal implementation of a concentration (such as breach of a remedy) that occurred on or after August 1, 2022, if SAMR has not imposed a fine by the date when the finalized Draft Rules come into force. This is arguably not a retroactive application of the Draft Rules as such: the underlying statutory basis for the fines came into force with the 2022 Amendments. However, there is an element of retroactivity in so far as parties to transactions violating the AML did not have the guidance in the Draft Rules when they engaged in the illicit conduct.

It is worth noting too that SAMR has already drawn on at least some of the mechanisms in the Draft Rules in its first merger control penalty decision since the AML was amended. On May 28, 2024, two Chinese firms were fined RMB 1.5 million each for failure to notify SAMR before establishing a notifiable joint venture. SAMR found that the transaction did not harm competition. SAMR’s penalty decision discloses that it considered the following factors when setting the fine: the case did not have any aggravating factors; the parties were first-time offenders; the parties cooperated with SAMR’s investigation and provided evidence in a proactive manner; and the parties established a merger control compliance program. SAMR’s emphasis on cooperation, rectification and compliance highlights the importance of an active engagement with regulators in the China context and an expectation that parties demonstrate that they have changed their ways.

The guidance on fines in the Draft Rules is welcome but also sobering—10% of turnover is a significant penalty. Gone are the days when disregard of a China merger control obligation was a low-risk option for the parties to global deals.

¹ See here.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Philip Monaghan, an O’Melveny partner licensed to practice law in Hong Kong, England and Wales, and Ireland; Lining Shan, an O’Melveny senior legal consultant in the firm’s Beijing office; and Vivian Wang, an O’Melveny associate licensed to practice law in New York and the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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