China revises its merger control filing thresholds for the first time

China’s State Council has published its Regulation on the Notification Thresholds for Concentrations between Undertakings ('2024 Thresholds Regulation', available in Chinese). The new regulation entered into force with immediate effect on publication on 26 January 2024. This marks China’s first revision of its merger control thresholds introduced 16 years ago. 

The 2024 Thresholds Regulation has significantly increased the turnover thresholds and empowers the State Administration for Market Regulation ('SAMR') to review and propose amendments to the merger control thresholds in the future. The proposed threshold to capture so-called ‘killer acquisitions’ has been dropped – likely due to the controversies raised by this threshold.

Increase of the turnover thresholds

A merger control filing is now triggered if one of the following two tests are met.

• The aggregate global turnover of all the undertakings concerned in the concentration exceeded RMB 12bn (approximately US$1.7bn), increased from RMB 10bn, or approximately US$1.4bn), and each of at least two of them generated turnover in China exceeding RMB 800m (approximately US$113.5m, increased from RMB 400m, or approximately US$56.8m) in the preceding financial year.
• The aggregate turnover in China of all the undertakings concerned in the concentration exceeded RMB 4bn (approximately US$567.6m, increased from RMB 2bn, or approximately US$283.8m), and each of at least two of them generated turnover in China exceeding RMB 800m (approximately US$113.5m, increased from RMB 400m, or approximately US$56.8 m) in the preceding financial year.

The previous lower thresholds resulted in a significant number of transactions being notified to SAMR. The number of merger control filings has steadily increased since China’s Anti-Monopoly Law ('AML') came into force in 2008, with nearly 800 transactions cleared in 2023. The introduction of the new, higher thresholds is expected to decrease the number of merger control filings in China.

Power to call in below-threshold transactions

The 2024 Thresholds Regulation reiterates SAMR’s ability to call in a below-threshold transaction for review at any time if that transaction may eliminate or restrict competition in China. The new AML, which came into force in August 2022, codified SAMR’s power to call in below-threshold transactions for review. In 2023, for the first time, SAMR reviewed and cleared a below-threshold transaction, subject to remedies (Simcere/Tobishi, involving two Chinese healthcare companies). This is a reminder that, for deals that are high-profile, transformative or involve sensitive sectors, it is increasingly important to conduct a detailed substantive assessment to assess the call-in risks.

Power to review and propose changes to filing thresholds 

The 2024 Thresholds Regulation empowers SAMR to review and propose adjustments to the merger control thresholds based on the state of economic development. This will allow SAMR to propose increases (or decreases) to the turnover thresholds to the State Council such as by reference to, for example, inflation, GDP growth or other economic growth metric. It remains to be seen how SAMR will implement this provision in practice, notably whether SAMR will propose changes to the thresholds regularly as in some jurisdictions and the factors it will consider when assessing whether to propose adjustments to the filing thresholds. 

Non-adoption of proposed “mega-corporation” threshold

SAMR’s 2022 draft State Council Regulation on the Notification Thresholds for Concentrations between Undertakings (Draft for Public Comment) sought to tackle ‘killer acquisitions’ by proposing the following threshold: 

• At least one of the transaction parties (e.g. the acquirer) has turnover in China exceeding RMB 100bn (approximately US$14.2bn) in the preceding financial year;
• Target has a market capitalisation (or valuation) of over RMB 800m (approximately US$113.5m) in the preceding financial year; and
• Target generated more than one-third of its global turnover in China in the preceding financial year.

The State Council chose not to adopt this threshold at this time possibly given the perceived challenges of applying the threshold and its potential to chill dealmaking. That this threshold was not endorsed does not prevent SAMR from scrutinising ‘killer acquisitions’. As discussed above, SAMR could resort to its call-in power to review a below-threshold ‘killer acquisition’ if that transaction may eliminate or restrict competition in China.

What the new thresholds mean for dealmaking

Fewer reportable deals. The increased turnover thresholds will reduce SAMR’s caseload and enable SAMR to continue enforcing the merger control regime in an efficient way. The new thresholds, coupled with SAMR’s delegation of certain transactions to five local branches for review, will allow SAMR to devote more resources to review transactions that will have the most impact on competition in China.

Closer scrutiny of most impactful deals and further streamlining for non-problematic deals. The freeing up of resources at SAMR could imply closer scrutiny of some transactions and increased interest to investigate or call in transactions below the turnover thresholds. At the same time, the additional capacity could lead to slightly quicker review periods for non-problematic transactions reviewed under the simplified procedure. In 2023, the majority of such transactions were cleared during the initial statutory review period of 30 calendar days with the review taking, on average, nearly 18 days from case acceptance to clearance.

Reviews are still possible for the most impactful deals even if turnover thresholds are not met. It will be important that deal timetables factor in potential review in China even if the filing thresholds are not met in circumstances where a transaction gives rise to significant overlaps or other material relationships between merging parties post-transaction. A comprehensive assessment of competition risks is needed in such cases. Proactive engagement with SAMR may be necessary in some cases for regulatory certainty and to manage deal timetables.

Applying the new turnover thresholds. Given the new law applies with immediate effect from 26 January 2024, transactions signed on or after the effective date will no doubt be governed by the new thresholds. The new regulation has not specified whether it also applies to transactions that have signed but have yet to be completed or filed to SAMR, or transactions that have been filed but the merger review is ongoing, which we will be happy to discuss with you if the question arises.

Special thanks to Hazel Yin, partner at Freshfields' StrongerTogether firm RuiMin, for her contribution to this article.