The year 2019 marked the eleventh anniversary of the implementation of the PRC Anti-monopoly Law, which was also the first full calendar year for the State Administration for Market Regulation (SAMR) to take over the role as China's single central level antitrust enforcement agency. The antitrust functions of China' three former antitrust enforcement agencies – the National Development and Reform Commission (NDRC), the State Administration for Industry and Commerce (SAIC) and the Ministry of Commerce (MOFCOM) were integrated to SAMR in 2018. After integration, the SAMR was relatively active in its antitrust enforcement practice. In 2019, the SAMR published 19 penalty decisions on alleged monopoly agreements and abuse of market dominance and concluded 465 merger review cases. In particular, a total of 16 penalty decisions against non-filers of merger cases were published throughout the year, which reached a peak of non-filing enforcement crackdown over the past 10 years. In general, the SAMR demonstrated its professional competence, efficiency and consistency in China's antitrust enforcement in 2019.
As to legislative work, the SAMR revised three sets of interim provisions on the antitrust enforcement and released a revised draft of the Anti-monopoly Law for public comment (the Revised Draft). The SAMR also published several administrative regulations that provide clearer guidance on antitrust enforcement. The new antitrust regulations and revised draft of Anti-monopoly Law also provide clearer regulations on the compliance construction of undertakings.
As to antitrust enforcement, the SAMR maintained a consistent rigorous attitude. The types of industries investigated by antitrust law enforcement authorities in 2019 were diverse, while the key industries of the investigations were still in the areas closely related to the people's daily life, for example, gas and water supply, building materials, automobiles and pharmaceutical industries. Some 13 out of 19 cases published by the SAMR were related to the people's daily life.
As to merger control review, the SAMR maintained a consistently rigorous and prudent attitude towards merger control review in 2019. The overall case handling efficiency has been improved in view of the fact that the total number of cases concluded increased while the average time for case review was reduced. As to the cases that were conditionally approved, the SAMR imposed various tailored conditions. In addition, the SAMR investigated more non-filing cases and imposed more penalties on the non-filers compared with 2018.
i Prioritisation and resource allocation of enforcement authorities
Before the integration, the three antitrust enforcement agencies had their own responsibility respectively. The NDRC was responsible for price-related antitrust enforcement; the SAIC was responsible for antitrust enforcement that was not directly related to price; while MOFCOM was mainly focused on merger control review. And the Office of State Council Anti-monopoly Commission was seated in MOFCOM. After the integration, all of the above antitrust enforcement functions have been transferred to the Anti-monopoly Bureau of the SAMR.
On 2 January 2020, the SAMR released the Revised Draft for public comment. Although the Revised Draft follows the current Anti-monopoly Law's basic framework, it significantly enhances the legal liability of AML violators. It also clarifies practical issues such as 'controlling rights', improves merger control review procedures and introduces a new type of monopoly behaviour and methodology for identifying dominance in the internet sector. Currently, there is no clear timetable for the finalisation of the Revised Draft and promulgation of the new Anti-monopoly law. Nevertheless, the Revised Draft signals the SAMR's enforcement priorities and indicates the legislative trends that could have a profound impact on China's antitrust enforcement landscape.
While the Anti-monopoly Law is under revision, the SAMR released the Anti-monopoly Compliance Guidelines for Undertakings for public comments on 28 November 2019.2 It was the first time that antitrust compliance guidelines have been issued at the state level. In addition, in 2019 each of the provincial antitrust enforcement agency of Shanghai and Zhejiang also issued the respective antitrust compliance guidelines3 applicable to local enterprises.
Regarding the legislature in antitrust enforcement, the SAMR revised three sets of interim provisions to implementing the Anti-monopoly Law and unifying both substantive and procedural regulations previously published by NDRC and SAIC. On 26 June 2019, the SAMR promulgated the Interim Provisions on Prohibition of Monopoly Agreements,4 the Interim Provisions on Prohibition of the Abuse of Market Dominance,5 and the Interim Provisions on Curbing Abuse of Administrative Power to Exclude or Restrict Competition6 (collectively as 'Three Interim Provisions'). The Three Interim Provisions set out detailed behavioural monopoly models and assessment standards of various monopoly behaviours. The Three Interim Provisions also elaborate procedural requirements in the case investigation process. In particular, they specify the form and content of the third-parties report, and the procedures and content of the application, supervision, and decision for suspension and termination of the investigation. The Three Interim Provisions are extremely important regulations issued after the integration of the three antitrust enforcement agencies and they promote a more consistent and predicable enforcement practice.
In 2019, the SAMR published 19 cases which increased slightly compared with that of 2018 (14 cases). Due to the decrease in law enforcement personnel numbers, the SAMR faced a shortage of manpower and the average workload has increased significantly. However, the decentralisation of antitrust enforcement has eased the workload pressure of the SAMR. On 17 February 2019, the SAMR released the 'Notice of the SAMR's Authorization on Anti-monopoly Law Enforcement',7 authorising provincial level Administrations for Market Regulation to take charge of antitrust enforcement in their respective local area. The scope of authorisation included monopoly agreements, abuse of market dominance, and abuse of administrative power cases. In 2019, 18 of 19 behavioural monopoly cases published by the SAMR were initiated and investigated by local enforcement agencies. Due to the better understanding of local market conditions, local enforcement agencies can detect and investigate anticompetitive acts in a timely and efficient manner. Therefore, it is expected that the number of antitrust investigations will increase in the future.
As to merger control review, according to data published on its website, the SAMR concluded 465 cases in 2019. Among the concluded cases, the SAMR unconditionally approved 460 cases in 2019. The number of unconditionally approved cases in 2019 slightly increased from 444 in the previous year. In addition, five cases were conditionally cleared in 2019. Meanwhile, the SAMR significantly strengthened its supervision of and penalties for non-filing parties. A total of 16 penalty decisions were published throughout the year, which reached a peak of non-filing enforcement crackdown over the recent 10 years. In addition, the SAMR released the Interim Provisions for Merger Control Review for public comments on 7 January 2020.8 The draft Interim Provisions for Merger Control Review incorporate all major regulations for merger control review into one comprehensive regulation.
ii Enforcement agenda
Yaqing Xiao, the chief director of the SAMR, stated in an interview of Xinhuanet on 15 January 20209 that the antitrust enforcement authority has been keeping a close eye on suspected monopolistic behaviours in key sectors that are of particular concern to the people's daily life such as utilities and active pharmaceutical ingredients.
In terms of merger control, the SAMR's law enforcement maintained MOFCOM's professionalism and stability after the integration. According to data released by the SAMR, the number of unconditional approved cases in 2019 is basically the same as the number in 2018. However, in practice, strict rules concerning the material and data required by the SAMR still apply. In particular, during the pre-review stage before official case acceptance, notified parties must often submit detailed materials. Therefore, this requirement may also extend the wait time before case filing. The Revised Draft introduces the 'stop-clock' clause that specifies three conditions to discontinue the timelines for merger review: (1) on application or consent by the notifying parties; (2) supplementary submissions of documents and materials at the request of the authority; or (3) remedy discussions with the authority. This would tackle the problem that in the absence of the 'stop-clock' clause, the notifying parties can only withdraw and refile the case when the statutory review period is running out.
2019 was a relatively quiet year for cartel investigation both in terms of the number of penalty cases and the total amount of the penalties. The SAMR and local agencies concluded and published nine cartel cases in 2019. Compared with that of 2018 (14 cases), the number of cartel cases dropped slightly in 2019. The published penalty cases involved a variety of industries, such as building materials, food, automobiles and gas. However, the total amount of the penalties was 20.97 million yuan, and the average amount of fines imposed in each case by the SAMR was relatively low compared with that of previous years. This may be because the penalised companies were small or medium-sized enterprises and their turnover was low. The most significant case was the Chongqing Sintered Brick Manufacturer cartel case10 where the enterprises argued for the exemption under Article 15 of the AML, but the enforcement authority rejected their arguments. Also, trade associations remained one of the focuses in the antimonopoly law enforcement by the SAMR. Trade associations were involved in two out of the nine cartel cases.
i Significant cases
Chongqing Sintered Brick Manufacturer cartel case
On 9 August 2019, Chongqing Administration for Market Regulation (Chongqing AMR) published a decision fining six Chongqing sintered brick manufacturers and three individuals a total of 1,938,501 yuan and confiscating unlawful gains of a total of 1,931,291 yuan for entering into a horizontal monopoly agreement. This was a rare case where a cartel investigation involved natural persons.
According to the penalty decision, the involved companies and individuals colluded with each other and entered into a joint operation agreement orally in March 2014. The involved companies and individuals engaged in the following activities during the period from March 2014 to July 2018:
- coordination of the production schedule of the participating members, and provision of compensation to members who ease to produce the sintered brick products;
- establishment of a joint operation office;
- price fixing of sintered brick products; and
- allocation of sales of sintered brick products and distribution the profits among participating members.
Chongqing AMR identified two types of monopolistic behaviours in this case:
- fixing the lowest prices of sintered brick products; and
- restricting the product quantity though the way of reducing member's production.
The involved companies and individuals argued in the hearing held by Chongqing AMR that the suspension of production of some members was a response to implement the government's 'off-peak production' and 'environmental protection' policies, which shall be regarded as an exception under Article 15 of the Anti-Monopoly Law. However, Chongqing AMR rejected this argument on the grounds that there were no objective factors such as economic downturns during the implementation of the monopoly, nor could it achieve the purpose of environmental protection. Therefore, Chongqing AMR concluded that the monopoly agreement reached by the involved companies and individuals shall not be entitled to exemption in accordance with Article 15 of the Anti-Monopoly Law.
Since the monopoly agreement lasted more than four years, severely disrupted the competition of the sintered brick sales market and had a great negative impact on the sintered bricks market in Chongqing, Chongqing AMR imposed fines equivalent to five per cent of each entities' respective revenues for 2017.
It is notable that the involved companies and individuals defended themselves citing Article 15 of the Anti-monopoly Law. However, the defences were not accepted by the SAMR, and it might show that the SAMR takes a strict approach in application of Article 15 of the Anti-monopoly Law.
ii Trends, developments and strategies
In 2019, the SAMR and local agencies concluded nine cartel cases and none of them was a high-profile case. The number of cartel cases decreased slightly and the total amount of penalties was relatively low compared with previous year. However, in early 2019, the SAMR started an investigation on German carmakers including Daimler, Volkswagen and BMW with regard to their possible collusion in emission controls following the European Commission's probe in September 2018. This shows that Chinese antitrust law enforcement agencies have been closely monitoring the cases investigated by other jurisdictions and may follow the suit from time to time.
The key industries of cartel investigations in 2019 were focused on the construction and automobiles industries. In particular, four out of nine cases were related to the building materials industry. In addition to the above-mentioned Chongqing Sintered Brick Manufacturer cartel case, a number of concrete manufacturers (Quzhou Concrete Companies11 case, Yan'an Concrete Companies case12 and Yongji Concrete Companies case13) were also investigated and penalised, which signals the SAMR's greater antitrust concerns on the building materials industry.
III ANTITRUST: RESTRICTIVE AGREEMENTS AND DOMINANCE
In 2019, the SAMR and local agencies concluded six abuse of dominance cases. Among these cases, two cases were terminated without any penalties due to the timely rectification of the investigated parties. This shows the importance of active rectification and cooperation during the investigation.
Furthermore, the antitrust agencies concluded and published four cases in relation to vertical restriction cases, and all of them related to resale price maintenance (RPM). However, among these cases, the Hydron Contact Lens RPM case14 was terminated and the Lenovo RPM case15 was suspended without any penalties. They were the first and the second vertical monopoly that were suspended or terminated. In these cases, although the parties had carried out the monopoly behaviour, they acknowledged their misconduct and provided remedial measures during the investigation. This shows that even in vertical restriction cases, as long as the parties can actively offer the remedial measures that can eliminate the adverse effects on competition, they may be exempted from penalty. In addition, in accordance with Article 50 of the Revised Draft, except those hardcore horizontal agreements, violators of other monopolistic behaviours including vertical restraints can apply for a suspension of investigation.
The most significant dominance case concluded in 2019 was the Eastman case. Eastman's complex exclusive dealing model constituted abusive behaviour and attracted widespread attentions. This case set a new benchmark for, inter alia, the definition of exclusive dealing and refusal to deal. The antitrust enforcement agency also explored the new types of restrictive behaviours such as most-favoured-nation (MFN) clauses and loyalty discounts.
i Significant cases
Tianjin Water Supply: abuse of dominance
On 12 July 2019, the SAMR issued a penalty decision against Tianjin Water Supply Group Co, Ltd (Tianjin Water Supply) for the abuse of dominance in relation to its urban water supply services. Tianjin Water Supply was fined 7.4 million yuan.
The relevant market in this case was urban water supply services in the southern part of Tianjin City. Tianjin Water Supply was the only provider in the relevant market holding a 100 per cent market share. Tianjin Water Supply required local real estate developers to only use smart electric control cabinets and remote monitoring units manufactured by its subsidiary for the secondary water supply facilities. Secondary water supply facilities are essential to the provision of water for buildings. Tianjin Water Supply refused to supply water to the real estate developers that did not use the designated electric control cabinets and remote monitoring units. Due to unreasonable restrictive conditions imposed by Tianjin Water Supply, the real estate developers had no choice but to accept the instruction of Tianjin Water Supply.
According to the penalty decision, Tianjin Water Supply abused its dominance by imposing unreasonable conditions on transactions with the real estate developers and thus violated Article 17(5) of Anti-Monopoly Law. Considering the responsive cooperation, proactive submission of relevant evidence materials by Tianjin Water Supply, the SAMR imposed a relatively lighter fine in this case, namely 7.4 million yuan, equivalent to 3 per cent of Tianjin Water Supply's revenue.
The key industries of antitrust enforcement in 2019 were mainly in the industries that were closely related to the people's daily life, especially water supply and gas supply. Tianjin Water Supply abuse of dominance case was a typical sample.
Eastman: abuse of dominance
On 16 April 2019, the Shanghai Administration for Market Regulation (the Shanghai AMR) issued a penalty of 24.38 million yuan on Eastman (China) Investment Management (Eastman) for its abuse of dominance. The Shanghai AMR states that Eastman abused its dominant position in the alcohol ester-12 coalescing agent market in mainland China, and unreasonably conducted exclusive dealing, thereby eliminating and restricting market competition.
To identify the dominant position of Eastman, the Shanghai AMR mainly considered Eastman's market share in the relevant market, financial and technological conditions, competition constraints from competitors and customers' reliance on the product and entrance barrier. Based on the above assessment, the Shanghai AMR held that Eastman had a dominant position in the alcohol ester-12 market in China.
According to the penalty decision, Eastman conducted the following wrongdoings:
- Eastman and its six direct distributors agreed on the minimum purchase quantity for each contract year in the next two to three years (the minimum purchase quantity term). According to the Shanghai AMR, the annual minimum purchase quantity stipulated in the above six contracts accounts for over 60 per cent of each of the direct distributors' actual annual demand for alcohol ester-12, among which the minimum purchase quantity requirement of five distributors accounts for over 80 per cent of each of their annual demand.
- Eastman required its direct clients and distributors in the Chinese mainland market to sign a long-term take-or-pay clause in the relevant agreement. Under the take-or-pay clause, direct clients and distributors shall fulfil the minimum purchase requirement even if the minimum purchase quantity exceeds their actual demand. Nevertheless, its direct clients and distributors have to pay the full price of the minimum purchase requirement.
- Eastman signed and implemented exclusive agreements involving MFN clauses. The MFN clauses in this case refer to the global best price and regional sales discount given to the customer whose purchase reaches the agreed global summation ratio and agreed regional quantity. Unlike the typical MFN clause in the context of EU and US jurisdictions, which refers to the company with dominant position requiring the counterparty to offer the most preferential terms, the above-mentioned clause in this case is actually a type conditional rebate.
According to the Shanghai AMR, the combination of minimum purchase quantity term, take-or-pay clause and MFN clause enabled Eastman to conduct exclusive dealing, which imposed the lock-in effect on the market competition.
First, the minimum purchase quantity term in the take-or-pay agreement was based on the long-term cooperation relationship between Eastman and its customers. The agreed minimum purchase quantity accounted for most of the customers' demand. The customers would be likely to purchase alcohol ester-12 only from Eastman due to reasons such as switching cost, product compatibility and stability. In addition, the take-or-pay clause exerted more burdens for the customers' liability for breach of contract, which enhanced the lock-in effect of the minimum purchase quantity term.
Second, the Shanghai AMR stated that the additional discount agreement based on the worldwide MFN treatment enabled Eastman to lock above 75 per cent of total market demand in mainland China. The other domestic competitors could not provide this discount and other preferential conditions, thus the customers were restricted to only deal with Eastman.
The Shanghai AMR stated that the concurrence of MFN clause and take-or-pay agreement imposed a lock-in effect on the market. The customers who were locked-in were all direct distributors with greater market shares. This prevented competitors from participating in the major market.
The Shanghai AMR held that Eastman abused its dominant position in the alcohol ester-12 coalescing agent market in mainland China, and unreasonably conducted exclusive dealing, thereby eliminating and restricting market competition. Therefore, Eastman was fined amounting to 5 per cent of its respective revenue in 2016. In this case, the SAMR establishes a precedent for the identification of exclusive dealing and refusal to deal, and it also challenges the legality of new type of restrictive behaviour such as the MFN clause (even it is not a typical MFN in the US and EU jurisdictions) and royalty rebates.
On 15 November 2019, the SAMR released the decision on suspending investigation against Lenovo (Beijing) Ltd. The investigation was launched by the former NDRC and concluded by Beijing Administration of Market Regulation (the Beijing AMR).
The investigation was launched base on third party's complaint. The Beijing AMR found that between 2016 and 2017, Lenovo set the minimum resale prices of its authorised after-sales and maintenance service providers. During the investigation, Lenovo admitted its wrongdoings and the adverse impact on the competition. It immediately took measures to rectify and promised to adopt further actions to eliminate the anticompetitive effect. These rectified measures include suspending the alleged vertical restraints on resale prices and conducting compliance trainings for all employees. Since the requirement of Article 45 of the Anti-monopoly Law was met, the Beijing AMR suspended the investigation on Lenovo.
Unlike Lenovo RPM, the Hydron case was terminated without penalty. This case was launched by the former Shanghai Price Bureau on 2 November 2017. The Shanghai AMR made the termination decision on 24 April 2019, and the SAMR published the decision on 21 May 2019. Hydron Contact Lens Co, Ltd Shanghai Branch (Hydron) and Shanghai Horien Contact lens Optics Co, Ltd (Horien) set minimum prices for online retail pharmacy. On 13 November 2017, Hydron and Horien applied for suspension of investigation and promised to adopt rectification remedies including self-checking, conducting business in compliance with the law and conducting legal training, Shanghai AMR issued the suspension decision on 16 March 2018. After the expiry of the inspection period, the Shanghai AMR decided to terminate the investigation because the involved companies fulfilled the commitments under the rectification remedies and there were no longer any anticompetitive effects on the relevant market.
On 27 December 2019, the SAMR published the penalty decision against Toyota Motor (China) Investment Co, Ltd (Toyota). The former Jiangsu Price Bureau launched its investigation in December 2017, and the penalty decision was concluded by Jiangsu Administration for Market Regulation (the Jiangsu AMR) on 20 November 2019. Toyota fixed local distributors' prices displayed on internet portals and set minimum resale prices for multiple Lexus models.
Toyota instructed its distributors in Jiangsu to offer same price quote for online inquiry and set minimum resale price for off-line sales of certain Lexus passenger cars. Toyota also specified discount policies and related monitoring and punishment measures. The distributors implemented the resale price stipulated by Toyota. Jiangsu AMR, therefore, concluded that Toyota reached and implemented an illegal vertical agreement.
Similarly, Changan Ford Motor Co, Ltd (Ford) was also penalised for engaging in the RPM monopoly by the SAMR according to a press release published on 5 June 2019 on the SAMR's website; however, the penalty decision has not yet been published. Since 2013, Ford has restricted the distributors' resale price by formulating a 'price list', reaching a 'price self-discipline agreement', and setting the lowest prices during the auto show and the lowest online prices in Chonqing.
It is worth noting that Toyota was fined for 87.6 million yuan, representing 2 per cent of its sales in 2016 in Jiangsu Province. The Jiangsu AMR considered Toyota's active cooperate, acknowledgment of the misconduct and active rectification to give such a low penalty. The fine was not based on the total sales of Toyota in China; rather it was based on the regional sales. The penalty imposed on Ford is also based on the regional sales in Chongqing (i.e., 162.8 million yuan, representing 4 per cent of Ford's previous year sales in Chongqing). Article 46 of the Anti-monopoly Law does not specify whether the fine should be based on the total sales or the regional sales or sales of related product, so it is at discretion of the enforcement agencies. Even the Revised Draft does not provide any clarification in this regard.
ii Trends, developments and strategies
As in the past, antitrust law enforcement authorities have kept an eye on the automobile industry, in which vertical restrains are often conducted. Due to the large sales of car companies, the fine imposed on them is always large even if the penalty calculation was based on regional sales of these companies.
The SAMR has been more confident and professional when handling abusive cases. Eastman was the first influential abuse of dominance case published one year after the unification of China anti-monopoly law enforcement agencies into the SAMR, indicating the SAMR's competition concern on chemical industry and similar anticompetitive conduct in other industries. The detailed analysis illustrated in this case indicates the competition authority's competence and courage to investigate some of the most complicated and new types of monopoly behaviours.
RPM has been the focus of law enforcement agencies for years, especially in certain industries such as automobile and pharmaceutical. Compared to the previous consultation draft,20 the deletion of the 'safe harbor' clause in the Interim Provisions on Prohibition of Monopoly Agreements also shows that the SAMR is still cautious about vertical restrictions. We expect that RPM will remain to be the focus of law enforcement agencies in the future, and companies should remain vigilant.
In 2019, antitrust law enforcement agencies showed greater concerns in the fields that were closely related to people's daily life. Most of the published cases were related to these fields, including public sector enterprises, pharmaceutical, automobiles, consumer goods, chemical, building materials and food, etc. The most prominent are enterprises of public utilities. There were five abuse of dominance cases involving industries of public utilities such as power supply, gas supply and water supply.
IV SECTORAL COMPETITION: MARKET INVESTIGATIONS AND REGULATED INDUSTRIES
V STATE AID
VI MERGER REVIEW
According to the data released on the SAMR's website, the SAMR unconditionally approved 460 cases in 2019, slightly higher than the previous year (444 cases). The number of conditionally approved cases is relatively stable in 2019 (five cases) compared with the previous year (four cases). Four cases were approved with behavioural conditions, and the remaining one was approved with both structural and behavioural conditions. All of the five conditionally approved cases in 2019 were withdrawn and resubmitted before the expiry of the first statutory merger review period (i.e., 180 days). This shows that the SAMR is becoming more prudent in reviewing mega mergers which may raise competition concerns. Withdrawal of the filing also provides notifying parties with certain flexibility and more time to communicate with the SAMR. From the first submission of filing materials to the case being conditionally concluded, the review process for the above five cases lasted for a minimum of 263 days21 and a maximum of 562 days.22 There was no prohibition decision rendered by the SAMR in 2019.
As to simple cases, a total of 341 cases were concluded in 2019, accounting for 73.3 per cent of all cases. The proportion of simple cases decreased compared with that of 2018 (the number of simple cases accounted for around 81.53 per cent of total cases in 2018). On average, simple cases took 15 days to be concluded, which was slightly reduced from 16 days in 2018. And almost all of the simple cases were cleared within 30 days of formal acceptance by the SAMR. This demonstrates that simple case procedure plays an active role in enhancing the efficiency of concentration filing, particularly in the sense of reduction of reviewing time.
Furthermore, the SAMR continued its tough stance against non-filers. Compared with the number of non-filing cases in 2018 (13 cases), the SAMR strengthened its efforts on the investigation of non-filings in 2019. The SAMR published 16 penalty decisions against parties involved in the merger cases that failed to fulfil their notification obligations under the Anti-monopoly Law.
i Significant cases
Penalties on non-filers
Over the past years, the antitrust authorities have never loosened their supervision on non-filing cases. By the end of 2019, the SAMR had released 46 non-filing cases and imposed total fines of 16.1 million yuan on 68 undertakings. In 2019, the SAMR significantly strengthened its supervision of and penalties on non-filing parties. 16 cases were published, and 21 undertakings were punished with a total fine of 6.25 million yuan. The biggest fine issued was 400,000 yuan, while the smallest was 200,000 yuan. The SAMR initiates investigations on non-filing cases by means of its self-observation, third-party reporting, and voluntary reporting by notifiable parties.
It is notable that the SAMR has been going after non-filers even where their failure of notification occurred many years ago. Each of Pierburg and Xingfu Motorcycle was fined 350,000 yuan for their failure to notify a proposed joint venture before its establishment,23 while the joint venture was established in 2013. This case shows that the SAMR had no mercy on the non-filers that failed to fulfil their notification obligations long time ago.
Also, the SAMR investigated several non-filing cases involving minority equity investment in 2019. For instance, MBK Partners, LP (MBK) was fined 350,000 yuan for its failure to notify its acquisition of a 23.53 per cent stake in Shanghai Siyanli Industrial Co, Ltd. Furthermore, Dejin Enterprise was fined 300,000 yuan for its failure to notify its acquisition of a 29.99 per cent stake in Huitong Energy deal. Whether an acquisition of relatively small equity (e.g., less than 30 per cent equity) constitutes a change of control needs to be determined case by case. According to Article 23 of the Revised Draft, the 'control' refers to an undertaking's rights or actual status to, directly or indirectly, individually or jointly, exert or potentially exert a decisive influence on another undertaking's production and operation activities or other major decisions. Given the remarkable increase of non-filing fines and the robust enforcement towards non-filings in recent years, undertakings should deliberately consider whether there is a change of control in each transaction.
At present, the maximum amount of fines imposed on non-filer is 500,000 yuan, which is obviously insufficient for deterring non-filer. In accordance with Article 55 of the Revised Draft,24the proposed penalty will be up to 10 per cent of the non-filer's annul sales in previous year. This adjustment will greatly increase the deterrence of illegal acts in relation to violation of merger filing regulations if the proposed change is adopted in the future.
Novelis' acquisition of Aleris25
On 12 December 2019, the SAMR conditionally approved the acquisition of Aleris by Novelis. Novelis is a leading producer of aluminium rolled products and the world's largest recycler of aluminium. Aleris is a global leader in manufacturing and sales of aluminium rolled products.
In this case, the parties overlapped in two markets, namely interior aluminium auto-body sheets market and exterior aluminium auto-body sheets market. Since the relevant product markets' competition structure in China was different from that in other jurisdictions, and the main foreign-invested operators all have local production in China, the relevant geographic market was defined as China.
Novelis was the largest player in the above-mentioned markets, and Aleris ranked third in both markets. After transaction, the market share of Novelis and Aleris would reach 70 to 75 per cent in the interior aluminium auto-body sheets market and 75 to 80 per cent in the exterior aluminium auto-body sheets market. Furthermore, the level of concentration would be highly increased. After transaction, there would be only four main competitors in the interior aluminium auto-body sheets market and two main competitors remaining in the exterior aluminium auto-body sheets market. Apart from that, the SAMR also assessed factors such as the elimination of competition restraint of Alereis on Novelis, the incentive of the merged entity to eliminate or restrict competition after the transaction, the entry barriers of the relevant markets, the recognition of downstream customers.
The SAMR approved the proposed concentration with both structural and behavioural conditions. Given that the relevant products that Aleris sold in China market were mainly exported from Europe, Aleris was required to divest its entire business relating to interior and exterior aluminium auto-body sheets in the European Economic Area. Also, the merged entity will be prohibited from supplying cold-rolled sheet to its business partners in order to maintain market competition.
In addition, it is worth noting that the proposed acquisition was initially filed for a review under the simplified procedure, and the SAMR accepted the case on 30 September 2018. Due to an objection raised by a third party during the public consultation period, the SAMR found that the proposed acquisition did not meet the standards for the simplified procedure and thus revoked the acceptance of the case and asked the notifying party to refile the case under the regular procedure. The notifying party resubmitted the case under regular procedure on 1 November 2018, and the case was formally accepted on 13 December 2018. This back and forth process shows that the notifying party should choose the most appropriate procedure to file in order to avoid waste of time. The merger control review could be delayed for months if the SAMR revokes the case acceptance when the notified concentration does not meet the standards for the simplified procedure.
Cargotec's acquisition of TTS Group26
On 5 July 2019, the SAMR conditionally approved the acquisition of TTS Group by Cargotec. The acquirer of the transaction is MacGregor Group, a subsidiary of Cargotec. The MacGregor Group is principally engaged in the sales and service of products in marine transportation cargo handling. TTS Group is mainly engaged in the sales and service of hatch covers, ro-ro equipment for commercial vessels, ship cranes and winches, etc. The transaction was filed on 15 June 2018 and then the parties were required to provide supplemental material. The SAMR formally accepted the case on 26 July 2018 and decided to conduct further review on 22 August 2018. Before the expiry of the review period, the parties withdrew the filing on 11 January 2019. The SAMR accepted the refiling on 14 January 2019 and the review process was prolonged to 9 July 2019.
In this case, the parties had overlaps in several markets, e.g. hatch covers, ro-ro equipment for commercial vessels, ship cranes, winches and related after-sales services. The SAMR conditionally approved the proposed acquisition with behavioural remedies. The remedies included ensuring the independence of relevant businesses, maintaining the respective competition, not raising prices of related products in the Chinese market and not refusing or restricting supplies of the products to Chinese customers. In addition, in this case, the SAMR adopted the remedy of setting up 'firewall guidance handbook + training' proposed by the filing parties. The parties committed to create an internal firewall between their respective employees, separate their competition-sensitive information and workplaces, issue a detailed firewall guidance handbook and conduct training. Setting up internal firewall and the application of related remedies will improve the efficiency and feasibility of the implementation as well as the supervision of the behavioural remedies. Although these types of 'hold separate' and 'setting up internal firewall' measures have been adopted in previous behavioural remedy cases, this case provides guidance on the practical implementing details of the remedy measures.
The above-mentioned measures on the firewall management were proposed again in a subsequent case in 2019, namely II-VI's acquisition of Finisar.27 In this case, the SAMR imposed behaviour conditions on the parties that they shall set up a firewall and supply the product in accordance with the FRAND principle. Particularly, the SAMR put forward the requirement of 'firewall guidance handbook + training' on the implementation of behavioural remedies.
ii Trends, developments and strategies
The SAMR has become more stringent and detail-oriented with respect to the analysis of relevant markets and the competition impact of the mergers.
In the five cases that were conditionally approved in 2019, most of the conditions attached were only behavioural remedies. Different from the structural remedies, behavioural remedies have a high degree of flexibility, which can avoid excessive intervention of the antitrust agencies in concentration. However, it also requires more regulatory supervision post the mergers. Compared with EU and US antitrust enforcement agencies' preference on structural remedies, Chinese antitrust enforcement agency seems more comfortable in imposing behavioural conditions to address the competition concerns.
It is expected that in 2020 the SAMR's merger control enforcement will maintain its professionalism and stability. In addition, the large number of no-filing cases and the increased fines indicate that the SAMR is gradually strengthening its enforcement crackdown on non-filers. Furthermore, the proposed revision of the Anti-monopoly Law is expected to increase the penalties for non-filers. There is also a tendency that behavioural conditionals would be imposed more often than structural remedies in the future, while the cost of supervision of the implementation of behavioural remedies might be high.
i Pending cases and legislation
In May 2018, the SAMR raided the China offices of memory chip makers Micron, Samsung, and SK Hynix, all of them are major players in the market for dynamic random access memory. The raids were prompted by complaints from downstream Chinese companies that the three giants were engaged in price collusion among other unfair competition conducts. On 16 November 2018, the SAMR disclosed in its press conference28 that the SAMR has already received a significant amount of evidence from the three companies and the investigation is still ongoing.
According to the media reports, Chinese music-streaming service Tencent Music Entertainment has been investigated by the SAMR since early 2019. The alleged monopoly behaviour might be related to its potentially anticompetitive exclusive-licensing agreements with Universal Music Group, Sony Music Entertainment and Warner Music Group. It is one of the few Chinese internet companies that have been formally investigated. This case shows that antitrust enforcement is starting to target companies in digital sector.
As to the legislative work, proposed Laws, guidelines and regulations to be promulgated include:
- a revised draft of the Anti-monopoly Law;
- the Anti-monopoly Compliance Guidelines for Undertakings;
- the Interim Provisions for Merger Control Review; and
- Guidelines on Abuse of Intellectual Property Rights.
After 11 years of Anti-monopoly Law implementation, China's antitrust enforcement agency has accumulated a wealth of experience, and China has become one of the most important antitrust jurisdictions in the world. In addition, due to the decentralisation of law enforcement powers, local antitrust enforcement agencies are becoming more and more active in their investigations. Therefore, undertakings should pay more attention to the antitrust compliance work in their daily operations in response to more frequent and severe crack-down by local enforcement agencies as well as the SAMR.
Furthermore, in 2020, we expect more antitrust enforcement guidelines and regulations will be promulgated that will promote antimonopoly law enforcement and promote the establishment and development of a relatively mature and transparent antimonopoly legal framework.
In terms of merger control review, the SAMR is enhancing its crackdown on non-filers. In particular, the penalty on non-filing cases may increase significantly if the proposed revision of the Anti-Monopoly Law is adopted in the future. Enterprises should acknowledge the thresholds and criteria of merger filing in order to fulfil their obligations to avoid penalties and any adverse consequences of closing a transaction.
1 Michael Gu is a founding partner of AnJie Law Firm. The author would like to thank associates Sihui Sun, Charles Xiang, Qiang Fu and Grace Wu for their contributions to this chapter.
2 The original Chines version is available at the SAMR's website: www.samr.gov.cn/hd/zjdc/201911/t20191128_308890.html.
3 The original Chinese version is available at the Shanghai AMR's website: http://scjgj.sh.gov.cn/shaic/html/govpub/2019-12-31-0000009a201912250001.html. The original Chinese version is available at the Zhejiang AMR's website: http://zjamr.zj.gov.cn/art/2019/8/6/art_1228969897_41121733.html.
4 The original Chinese version is available at the SAMR's website: http://gkml.samr.gov.cn/nsjg/fldj/201907/t20190725_305165.html.
5 The original Chinese version is available at the SAMR's website: http://gkml.samr.gov.cn/nsjg/fldj/201907/t20190725_305166.html.
6 The original Chinese version is available at the SAMR's website: http://gkml.samr.gov.cn/nsjg/fldj/201907/t20190725_305167.html.
7 The original Chinese version is available at the SAMR's website: http://gkml.samr.gov.cn/nsjg/bgt/201902/t20190217_289791.html.
8 The original Chinese version is available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/zqyj/202001/t20200107_310322.html.
9 The original Chinese version of the interview is available at the SAMR's website: www.samr.gov.cn/xw/zj/202001/t20200115_310507.html.
10 The original Chinese penalty decision is available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/xzcf/201908/t20190821_306163.html.
11 The original Chinese penalty decisions are available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/xzcf/201905/t20190529_301526.html.
12 The original Chinese penalty decisions are available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/xzcf/201908/t20190830_306396.html.
13 The original Chinese penalty decisions are available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/xzcf/201910/t20191008_307206.html.
14 The original Chinese terminal decision is available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/xzcf/201905/t20190521_293971.html.
15 The original Chinese suspension decision is available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/xzcf/201911/t20191115_308573.html.
16 The original Chinese penalty decisions are available at the SAMR's website: http://samr.saic.gov.cn/gg/201901/t20190118_280436.html.
17 The original Chinese penalty decisions are available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/xzcf/201905/t20190521_293971.html.
18 The original Chinese penalty decision is available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/xzcf/201912/t20191227_309552.html.
19 The press release is available at the SAMR's website: www.samr.gov.cn/xw/zj/201906/t20190605_302109.html.
20 The original Chinese version is available at the SAMR's website: http://gkml.samr.gov.cn/nsjg/bgt/201902/t20190216_288687.html.
21 II-VI's acquisition of Finisar case, the announcement is available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/ftjpz/201909/t20190920_306948.html.
22 JV between DSM and Zhejiang Garden Biochemical case, the announcement is available at the SAMR's website: http://gkml.samr.gov.cn/nsjg/fldj/201910/t20191018_307458.html.
23 The original Chinese penalty decision is available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/xzcf/201911/t20191114_308483.html.
24 The original Chinese version is available at the SAMR's website: www.samr.gov.cn/hd/zjdc/202001/t20200102_310120.html.
25 The announcement is available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/ftjpz/201912/t20191220_309365.html.
26 The announcement is available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/ftjpz/201907/t20190712_303428.html.
27 The announcement is available at the SAMR's website: www.samr.gov.cn/fldj/tzgg/ftjpz/201909/t20190920_306948.html.