The State Administration of Market Regulation (SAMR) is in charge of merger review in China. SAMR was established in April 2018 and is currently the exclusive enforcement authority of Chinese antitrust laws. Before the establishment of SAMR, the enforcement responsibilities of Chinese antitrust laws were shared by three separate agencies, namely the National Development and Reform Commission (NDRC), the State Administration for Industry and Commerce (SAIC) and the Ministry of Commerce (MOFCOM). MOFCOM was in charge of merger review before SAMR was founded.
In China, pre-merger notification is mandatory when a merger constitutes a 'concentration' and the entities participating in a merger meet a certain turnover threshold, which requires that during the previous fiscal year to the merger:
- the total global turnover of all the business operators participating in the concentration exceeds 10 billion yuan, and at least two of these business operators each has a turnover of more than 400 million yuan within China; or
- the total turnover within China of all the business operators exceeds 2 billion yuan, and at least two of these operators each has a turnover of more than 400 million yuan within China.
ii YEAR IN REVIEW
The Anti-Monopoly Law (AML) is the primary antitrust legislation that governs the merger control regime. Since the AML was enacted in August 2008, a number of regulations and guidelines related to merger control have been promulgated, including:
- the Remedy Trustee Agreement Template for Merger Review (Merger Remedy Trustee Template), which was released on 27 November 2015;2
- the Guiding Opinions of the Anti-Monopoly Bureau of the Ministry of Commerce on Regulating the Titles of Cases on the Declaration of Concentration of Business Operators, which were released on 6 February 2015;3 and
- the Provisions on Imposing Restrictive Conditions on the Concentration of Undertakings (for Trial Implementation) (Provisions on Imposing Restrictive Conditions), which were released on 4 December 2014 and came into effect on 5 January 2015.4
Most recently, SAMR published a revised version of the Guiding Opinions for the Declaration of Concentration of Undertakings on 29 September 2018 (the 2018 version), which was last revised by MOFCOM on 6 June 2014 (the 2014 version). The revision primarily reflected the reshuffling of antitrust enforcement agencies and did not introduce substantive changes about merger review procedures to the 2014 version.
Administrative clearances of merger control filings
In 2018, SAMR and MOFCOM (before August 2018) approved 444 notified transactions unconditionally. Of the 444 unconditional approvals, 365 were cleared under the simplified review procedure. Four transactions were given conditions. Ninety-nine per cent of the transactions under the simplified review procedure were cleared within Phase I. In addition, penalties were announced in 14 cases for failure to notify in 2018, compared with six cases in 2017. Below is a brief description of a merger that faced longest review by SAMR and was ultimately cleared with conditions in 2018.
Linde and Praxair
On 30 September 2018, SAMR issued a conditional clearance decision on the merger between Linde AG (Linde) and Praxair Inc (Praxair). As two of the largest industrial gas providers in the world, SAMR was concerned that the merger between Linde and Praxair would hinder the competition in the market of industrial gas in China. To reduce the negative impact of the merger on market competition, SAMR required a complex package of remedies, including assets divesture and behaviour monitoring.
Administrative penalty decisions
In 2018, SAMR published 15 administrative penalty decisions in relation to merger review:
- SAMR fined Thermo Fisher Scientific 150,000 yuan for breaching an obligation under the remedies in relation to Thermo Fisher Scientific's acquisition of Lifei Technology Co Ltd.
- SAMR fined Grand Baoxin Auto Group Limited and Beijing Yanbao Auto Service Limited 300,000 yuan each for failure to notify in relation to their acquisition of Sichuan Ganghong Automobile Sales Co Ltd.
- SAMR fined Wilmar International and CJ Corporation 150,000 yuan each for failure to notify in relation to their establishment of a joint venture that makes baking powder and similar products.
- SAMR fined Shandong Sun Holdings Group 300,000 yuan for failure to notify in relation to its acquisition of three other companies.
- SAMR fined China Merchants International Container Terminal (Qingdao) Co Ltd and Qingdao Port (Group) Co Ltd 200,000 yuan each for failure to notify in relation to their establishment of a joint venture.
- SAMR fined China Merchants International Container Terminal (Qingdao) Co Ltd and Qingdao Qianwan United Container Marina Co Ltd 200,000 yuan each for failure to notify in relation to their establishment of a joint venture.
- SAMR fined YunNan Metropolitan Real Estate Development Co 150,000 yuan for failure to notify in relation to its acquisition of shares of eight other companies.
- SAMR fined Tianjin Haiguang Information Technology Ltd and Advanced Micro Devices Inc 150,000 each for failure to notify in relation to their establishment of a joint venture.
- SAMR fined Paper Excellence BV 300,000 yuan for failure to notify in relation to its acquisition of Eldorado.
- SAMR fined Yunnan Metropolitan Construction Investment Group 300,000 yuan for failure to notify in relation to its acquisition of Chengdu Global Century Exhibition & Travel Group.
- SAMR fined GEM Co Ltd 300,000 yuan for failure to notify in relation to its acquisition of shares of Wuhan GHM Auto Parts Remanufacturing Co Ltd.
- SAMR fined Linde HKO and Dahua Group 300,000 yuan each for failure to notify in relation to their establishment of a joint venture.
- SAMR fined China Duty Free Group Co Ltd 300,000 yuan for failure to notify in relation to its acquisition of Sunrise Duty Free Ltd.
- SAMR fined Linde HKO and Guangzhou Iron & Steel Enterprises Group Co Ltd 300,000 each for failure to notify in relation to their establishment of a joint venture.
- SAMR fined Gaoji Health Ltd 400,000 yuan for failure to notify in relation to its acquisition of Henan Haoyisheng Ltd.
iii THE MERGER CONTROL REGIME
i Fast-track process
The Interim Provisions on the Standards for Simple Cases, which became effective on 12 February 2014, set forth the substantive criteria for determining which cases may be treated as simple cases. For example, for a merger between undertakings who compete in overlapping markets (horizontal merger), the market share requirement for a simple case is that the combined market share of the undertakings in any of the overlapping markets is less than 15 per cent. For a merger between undertakings who are either in an upstream-downstream relationship (vertical merger) or compete in adjacent markets, the market share requirement is that the market share of undertakings in each of the identified relevant markets is less than 25 per cent. In addition, notifications that concern establishment of joint ventures outside of PRC territory or acquisition of target companies located outside of PRC territory are qualified for the simplified procedure if the joint ventures or acquisition targets do not conduct business operations within PRC territories.
Despite meeting the above criteria, notifications may still be ineligible for the simplified procedure for reasons such as difficulties of defining relevant market or likelihood of potential adverse effects of the transactions on market entry, technology development, consumers, or national economic development. It is also worth noting that SAMR may revoke a simple case designation if (1) the notifying party has concealed any important information or provided any false materials or misleading information, (2) a third party has claimed that the concentration of undertakings has or may have the effects of eliminating or restricting competition, and has provided supporting evidence, or (3) SAMR has uncovered any material change in the circumstances of the concentration of undertakings or the competition condition in the relevant markets.
Pursuant to the Guidelines for the Notification of Simple Cases, after the official acceptance of a case filed under the simplified procedure, SAMR must publish an announcement of the simple case on its website for a period of 10 days. Any entity or individual (third parties) may lodge an objection with SAMR concerning its decision to classify the notification as a simple case, and provide any relevant evidence during the announcement period. Where SAMR finds that a case should not be qualified for the simplified procedure, it will require notifying parties to withdraw the case and refile under the normal procedure.
ii Waiting periods and time frames
There are broadly two review phases that a merger filing would have to go through with SAMR: the pre-acceptance phase and the formal review phase.
When entities submit a merger filing to SAMR, a case handler will determine whether SAMR is able to formally accept the filing. This case handler will review the filing material for completeness, and may also seek clarification or more details if certain aspects of the filing are unclear or need to be supplemented. This pre-acceptance period generally takes six to eight weeks. From our experiences, the more thorough the initial filing material is, the more quickly SAMR will formally accept the filing.
Formal review phase
Pursuant to the AML, there are two phases within the formal review phase: Phase I (the preliminary review period) and Phase II (the further review period).
Phase I lasts 30 calendar days from the date of official acceptance of the filing. During this phase, SAMR will review the merger filing and make a decision as to whether the merger should be cleared.
Phase II lasts 90 calendar days from the date of the notification of the further view. If SAMR has made a decision that a merger filing warrants further review, it will inform the parties in writing before or at the expiry of Phase I that the review period is being extended into Phase II.
Furthermore, SAMR may extend the Phase II period by another 60 calendar days at the most when any of the following conditions is met: (1) the merging parties agree to extend the time limit for the review; (2) the documents submitted by the parties are inaccurate and require further verification; or (3) the circumstances relating to the filing have significantly changed after the notification by the parties.
If SAMR fails to make a decision upon the expiry of each set time period as stated above, the parties may execute the transaction.
The following table sums up the various waiting periods as described above and possible outcomes of the review (i.e., approved, approved with conditions or prohibited).
|Phase I (preliminary review)||30 days||Decision for further review||Pending|
|Decision for no further review||Attachment of restrictive conditions||Obtained conditionally|
|No restrictive conditions||Obtained|
|Phase II (further review)||90 days (plus possibly 60 additional days)||Decision of prohibition||Denied|
|Decision of not prohibiting the transaction||Attachment restrictive conditions||Obtained conditionally|
|No restrictive conditions||Obtained|
iii Parties' ability to accelerate the review procedure
Most mergers are time-sensitive. As a result, notifying entities usually hope for the merger review to proceed as swiftly as possible. To assist SAMR in making clearance decisions expediently on behalf of clients, we have adopted the following approaches in previous cases: first, we articulate why a merger is time-sensitive (e.g., one entity is a failing firm); second, we ensure that the filing material is meticulously prepared so that it meets SAMR's acceptance requirements; and third, we respond to SAMR's supplementary questions swiftly.
iv Third-party access to the file and rights to challenge mergers
Third parties do not possess any statutory rights to access merger filing material, but they do possess a right to challenge mergers during the review process.
During its review process, SAMR may seek opinions from third parties (including government agencies, industry associations and other entities) with respect to the proposed merger, and third parties may voice their opinions through these consultations.
In addition, pursuant to Articles 6 to 8 of MOFCOM's Measures for Inspecting Concentration of Business Operators (effectively on 1 January 2010), third parties may be involved in the merger review process if the merger review agency decides to conduct hearings. Participants in these hearings may include entities involved in the filing; competitors; representatives of upstream and downstream entities (and other related entities); experts; representatives of industry associations; representatives of relevant government authorities; and consumers. Third parties may therefore express their opinions on the proposed merger through these hearings.
v Resolution of authorities' competition concerns, administrative reconsiderations and judicial review
Pursuant to Article 29 of the AML, SAMR has the right to impose conditions on mergers to alleviate their negative impacts on competition. Article 29 gives SAMR wide discretion to impose a variety of both structural and behaviour conditions, including divesture of assets, commitment to sell in fair, reasonable and non-discriminatory terms, and commitment not to compete with buyers of divested assets for specific customers.
Further, according to the Provisions on Imposing Restrictive Conditions (effective on 5 January 2015), notifying parties can propose restrictive conditions either before or after competition concerns are raised by SAMR. SAMR will then consult with the notifying parties in respect of such restrictive conditions, seek relevant opinions and conduct an evaluation before making a decision.
Pursuant to Article 53 of the AML, if notifying parties are not satisfied with SAMR's decisions, they may seek administrative review of the decisions by Department of Regulations of SAMR.
Entities who are dissatisfied with the appeal decisions of Department of Regulations of SAMR may then seek further review of its decisions by the State Council of the People's Republic of China or judicial review of administrative decisions by the courts. In the former case, the administrative decision of the State Council is final.
Entities can only seek a review of SAMR's decisions for an error of law that may include, for example, unlawful application of administrative procedures or abuse of administrative discretion.
vi Effect of regulatory review
SAMR is the exclusive authority in charge of merger review. Therefore, there is no concurrent review of mergers in China.
During the review process, SAMR regularly consults with other government agencies about certain mergers. For instance, SAMR may consult with the State Administration of Radio, Film and Television (SARFT) and seek SARFT's opinions on a merger in the broadcasting industry; for mergers in the semiconductor industry, SAMR may consult with the Ministry of Industry and Information Technology for its opinions. Because such consultation can be time-consuming, entities should take into account the length of cross-agency consultation when timing a merger filing. Practically, a merger filing may lapse into Phase II while SAMR awaits opinions from other government agencies.
Furthermore, pursuant to Article 26 of the AML, business operators shall refrain from implementing the mergers during the review phase.
iv OTHER STRATEGIC CONSIDERATIONS
i Coordinating with other jurisdictions
In recent years, SAMR has enhanced its cooperation with antitrust authorities in other jurisdictions.
On 27 July 2011, MOFCOM (now SAMR) signed a memorandum of understanding (MoU) with its US counterparts (i.e., the US Federal Trade Commission and the Department of Justice). The MoU listed several specific areas for cooperation, including sharing experiences on competition law enforcement and exchanging information regarding specific mergers.
Since the enactment of the AML in 2008, SAMR has signed MoUs with competition authorities in 13 countries and regions, including Brazil, Spain, Russia, Austria, Canada, Kenya, Portugal, South Korea, India, Australia, South Africa, the United States and the EU.
In the context of multi-jurisdictional merger review, SAMR monitors the progress of merger control reviews in other jurisdictions closely. SAMR may also ask the entities involved in the proposed transaction to provide information on the status of their filings in other jurisdictions. In 2018, SAMR cooperated with competition authorities of foreign jurisdictions, such as the United States or the EU, in several cross-border mergers and acquisition cases, including the merger between Linde and Praxair.
ii Special situations
Financial distress and insolvency
Under Article 54(2) of the now-repealed Acquisition of Domestic Enterprises by Foreign Investors Provisions, foreign entities that hoped to purchase domestic entities under the financial distress or insolvency could apply to SAMR for an exemption of notification or review. Currently, although there are no statutory exemptions of merger review concerning acquisition of entities in financial distress or insolvency pursuant to the AML or related regulations and rules, SAMR will take this factor into consideration during the review by, for example, expediting the review. In addition, pursuant to Article 12 of the Interim Provisions on Assessment of the Impact of Business Operator Concentration on Competition, whether the business operator concerned is an enterprise on the brink of bankruptcy is one of the factors to be considered in assessing the impact of a concentration.
Although neither the AML nor other antitrust regulations unambiguously state that hostile transactions are reviewed differently from non-hostile transactions, the acquiring party to a hostile transaction may face some practical difficulties in the review process. In a hostile transaction, the acquired target may not be cooperative in providing proprietary information, such as the market data of the acquired target, which is necessary for the filing. Even though Article 13 of the Guiding Opinions for the Declaration of Concentration of Undertakings has provided that the acquired target shall assist the acquirer's filing, there are no specific rules about the legal liabilities of breaching the obligation to assist. Based on our experiences, a possible solution is that the acquiring party can apply for pre-notification consultation to inform SAMR of potential difficulties and try to request SAMR to accept alternative solutions.
Minority ownership interests
Acquisition of minority ownership interests may give rise to a notifiable transaction if such acquisition confers 'control' of the target company on the acquirer, although there are no specific provisions under the AML or related regulations and rules that address the acquisition of minority ownership interests.
In practice, SAMR may consider minority ownership interests in the substantive review process. For instance, in MOFCOM's decision regarding the acquisition by Penelope of Savio, MOFCOM mainly raised competition concerns about Uster Technologies Co Ltd (Uster) and Loff Brothers Co Ltd (Loff), which were the only two manufacturers of electronic yarn cleaners for automatic winders in the world. Loff was a wholly owned subsidiary of Savio, the target company. Alpha Private Equity Fund V (Alpha V), as the parent company of the acquiring party, Penelope, only held a 27.9 per cent stake in Uster. Even so, MOFCOM held that it cannot 'rule out the possibility that Alpha V may get involved or influence the business operations of Uster'.
v OUTLOOK and CONCLUSIONS
i Pending legislation
The following measures in relation to merger review are still in draft form:
- Tentative Measures for Investigation and Handling of Concentration of Business Operators Not Satisfying Notification Thresholds But Involving Alleged Monopoly Acts (released on 19 January 2009 by MOFCOM);
- Tentative Measures for Collection of Evidences on Concentration of Business Operators Not Satisfying Notification Thresholds But Involving Alleged Monopoly Acts (released on 6 February 2009 by MOFCOM); and
- Merger Review Procedure (revision in process).
ii Unresolved issues
It would be useful if the SAMR clarified matters pertaining to companies with variable interest entities (VIE) structure. Because the legality of the VIE structure is still unclear under Chinese law, normally SAMR would not accept notifications of concentrations involving companies with VIE structures. It remains unclear how SAMR will deal with this issue in the future.
In addition, it would be helpful if SAMR issued more detailed merger clearance decisions, such as proposed market definition or summary of competition analysis. Currently, SAMR publishes its decisions only for mergers that it has approved with conditions or prohibited, and brief summaries of cases under the simplified procedure for the purposes of public announcement. For mergers it has approved unconditionally, which account for a large proportion of reviewed cases each year, it only publishes the name of the transactions without providing any substantive details. If SAMR can disclose more details about its decisions in relation to unconditionally approved mergers, not only is it useful for the notifying parties to understand SAMR's thinking, but it also helps to improve the transparency of the merger clearance process.
1 Susan Ning is a senior partner at King & Wood Mallesons. The author would also like to recognise Ruohan Zhang (a partner at the firm) and Weimin Wu (an associate at the firm) for their contribution to this chapter.
2 The Merger Remedy Trustee Template applies where MOFCOM imposes structural and behavioural conditions and was published by MOFCOM to facilitate it to entrust a third party carrying out the supervision.
3 The Guiding Opinions set forth the rules for titles of cases that undertakings shall adopt in declaration materials.
4 The Provisions on Imposing Restrictive Conditions set forth the rules for the determination, implementation and supervision in relation to restrictive conditions.