The Merger Control Review: China
Since the overhaul of the Chinese antitrust regulatory regime in 2018, the State Administration for Market Regulation (SAMR) has replaced the Ministry of Commerce (MOFCOM) to become the sole ministry-level authority responsible for merger control in China. On 27 October 2020, the SAMR issued the Interim Provisions on Review of Concentrations of Undertakings (the Provisions), which came into force on 1 December 2020. The Provisions, inter alia, opened the door for the SAMR to delegate its power to review concentrations of undertakings to provincial-level administrations for market regulation (AMRs),2 but there have been no actual cases for delegation to date. When, and how, the provincial-level AMRs will start to play a role in merger review remains to be seen.
The Provisions codified most of the previous merger review rules and guidance of the Anti-Monopoly Commission of the State Council, the SAMR and MOFCOM. The topics it covers include triggers and thresholds for merger filing, procedures and required information for notification, key elements and steps for review, considerations for imposing and enforcement of remedies, and investigation on gun-jumping conduct. The Provisions do not include many new rules for merger filings; however, in terms of consolidation of previous dispersed rules for merger review-related topics, it serves as the most authoritative guidance for antitrust practitioners.
2020 was a prolific year for antitrust legislation. In addition to the Provisions, the SAMR also published five guidelines on different antitrust topics3 and three draft guidelines for public opinion,4 among which the Anti-Monopoly Guidelines on Platform Economy Sectors (the Platform Guidelines) were finalised and published in early 2021. It is also noteworthy that the SAMR officially unveiled a draft amendment to the Anti-Monopoly Law (AML) (the Draft AML Amendment) for public comment in early 2020. The Draft AML Amendment proposes to further clarify the meaning of 'control' and authorises the SAMR to formulate and adjust the turnover thresholds based on the level of economic development and industry scale. It is anticipated that in the coming years, the merger filing thresholds will be adjusted upwards and that flexible supplementary factors such as transaction value may be introduced.
Year in review
2020 will not just be remembered for covid-19. For antitrust enforcement, it also marks a milestone. On 11 December 2020, the Political Bureau of the Central Committee of the Chinese Communist Party (the Political Bureau) emphasised in a statement that China would strengthen antimonopoly efforts and rein in the 'disorderly expansion of capital'. A few days later, the Central Economic Work Conference listed 'strengthening anti-monopoly enforcement and preventing the disorderly expansion of capital' as one of its eight top priorities for 2021, and emphasised that 'anti-monopoly and anti-unfair competition enforcements are the inherent requirements for perfecting the socialist market economic system and promoting high-quality economic development'. This is the first time that top Chinese policymakers have explicitly announced that antitrust enforcement should be one of the main goals in the macroeconomic policy, and antitrust subsequently became a hot topic for the rest of 2020 and continues to be so in 2021.
In 2020, the SAMR processed 481 merger filings, which was an increase of 5 per cent from 2019, and cleared 473 cases, a 1.7 per cent increase from 2019, among which four were approved with restrictive conditions. There were no prohibition decisions made in 2020.
While the number of cases reviewed and approved increased, the SAMR continued its improvement of efficiency in the review process. In 2020, the average time between initial submission to case acceptance has shortened to 17.52 calendar days from 24 calendar days in 2019, representing a 27 per cent decrease, and the average time from case acceptance to case conclusion has shortened to 24.2 calendar days from 28.3 calendar days in 2019, representing a 14.5 per cent decrease.5 The improvement of efficiency is largely attributable to the application of the simplified procedure to more cases. In 2020, 364 cases were reviewed and approved under the simplified procedure, namely 77.6 per cent of the total unconditionally cleared cases, and the average time taken to conclude a simplified case was 12.81 calendar days (a significant number of simplified cases were approved within one or two days of expiry of the 10-day public notice period).
ii Cases cleared with restrictive conditions
In 2020, the SAMR conditionally cleared four deals: Danaher/GE Biopharma, Infineon/Cypress, Nvidia/Mellanox and ZF/WABCO, with an average review period of 155.75 days from case acceptance to clearance, which was significantly shorter than in 2019. Nevertheless, all these cases involved the 'pull-and-refile' procedural step. The cases involved the biotech, semi-conductor, telecommunication network software and hardware, and auto parts sectors, all of which are particularly important for the Chinese economy. Among these four cases, two were found to have competition concerns under the 'conglomerate effect' theory, which is used more often in China than in many other major antitrust jurisdictions, while the other two decisions were based on concerns on vertical and horizontal relationships. The SAMR imposed structural remedies in the horizontal case only (Danaher/GE Biopharma), and behavioural remedies in the other three cases. The table and case summary below provide more details of the SAMR's decisions in these cases.
|Case||Theory of harm*||Remedies|
|Danaher/GE Biopharma||||Divestiture||Transitional arrangement with divestiture buyer|
Research and development commitment
Fair, reasonable and non-discriminatory (FRAND) supply
Two other confidential remedies
FRAND development opportunities
|* H: horizontal; V: vertical; C: conglomerate|
Danaher, a New York-listed company engaged in life science, diagnostics and environmental business, proposed to acquire GE's biopharma business. The parties notified the SAMR in April 2019. The case was accepted on 24 June 2019 and cleared on 28 February 2020. The parties were found to have overlaps in 25 markets, 10 of which could suffer negative effects from the transaction. The SAMR required the parties to divest certain assets and imposed certain behavioural remedies (including a transitional arrangement with a divestiture buyer and commitments for continued research and development within certain businesses for two years post-closing). The transaction was also cleared with conditions in many other jurisdictions, including the EU, the US and Korea.
Infineon, a Germany-based multinational in the semiconductor industry, proposed to acquire Cypress, a US-based semiconductor company. The parties notified the SAMR in August 2019. The case was accepted on 9 October 2019 and cleared on 2 April 2020. The transaction was also filed in other jurisdictions, including the US, the EU, Taiwan and the Philippines. The parties were found to have overlaps in four markets and complementary relationship in five pairs of markets. The SAMR concluded that the transaction may negatively impact one market segment due to conglomerate effects and imposed several behavioural conditions.
Nvidia, a US-based supplier of graphics processors, proposed to acquire Mellanox, an Israel-based supplier of network interconnection products. The parties notified the SAMR in April 2019. The case was accepted on 15 August 2019 and cleared on 16 April 2020. The transaction was also filed in other jurisdictions, including the US, the EU, Israel and Mexico. The parties were found to have a vertical relationship in one pair of markets and complementary relationships in two pairs of markets. The SAMR concluded that the transaction may negatively impact three complementary markets and imposed several behavioural conditions.
ZF, a Germany-based supplier of automobile components, proposed to acquire WABCO, a US-based supplier of automotive brake control systems. The parties notified the SAMR in August 2019. The case was accepted on 25 November 2019 and cleared on 15 May 2020. The transaction was also filed in other jurisdictions, including the US, the EU, India, Turkey and Brazil, and received conditional approval in some (e.g., the US) and unconditional approval in others (e.g., the EU). The parties were found to have overlaps in two markets and have five pairs of vertical relationship and one pair of complementary relationships. The SAMR concluded that the transaction might negatively impact one pair of vertical markets and imposed several behavioural conditions.
iii VIE structure and gun-jumping as notifiable transactions
A remarkable sign of progress in China's antitrust enforcement in 2020 was the authority's explicit clarification of its position on the variable interest entity (VIE) structure in merger review. Since the promulgation of the AML in 2008, uncertainties have remained for merger filings of transactions involving a VIE structure: while the Chinese antitrust authority has never expressly affirmed that merger filing obligations do not apply to (or that it will not accept filings for) transactions with a VIE structure, no merger filings involving VIE structures have been accepted, except for the Walmart/Yihaodian transaction in which the filing parties undertook to dismantle the VIE structure after closing.
However, changes were observed on 16 July 2020 when the SAMR unconditionally approved a joint venture between Mininglamp, a Chinese hi-tech company, and Yum China, the restaurant business giant. Mininglamp uses a VIE structure to control its affiliate participating in this transaction. While practitioners were still debating whether the Yum China/Mininglamp decision meant the SAMR officially beginning to accept VIE notification, the issuance of the draft Platform Guidelines on 10 November 2020 answered this question in a more explicit manner. Article 18 of the draft provides that concentrations of undertakings involving a VIE structure fall into the scope of merger review, and any such transaction reaching the threshold must be subject to merger review. Furthermore, on 14 December 2020, three days after a Political Bureau meeting (see Section II.i), the SAMR announced three gun-jumping decisions involving the largest internet companies using VIE structures in China (affiliates of Alibaba, Tencent and Hive-Box), sending another strong signal that VIE structure notification is no longer a controversial issue.
In 2020, the SAMR investigated 21 gun-jumping cases, with 15 enterprises in 13 cases being fined, including the three above-mentioned cases relating to VIE structures. It is noteworthy that all parties to the three cases paid the maximum fine applicable to gun-jumping conduct.
The merger control regime
i Review process and timeline
A merger review process normally involves the following stages.
|Preparation of filing materials||Case-specific||The timing varies depending on the number of relevant markets and the timeliness and completeness of relevant parties' responses to information requests|
|Pre-acceptance review||3–12 weeks||The timing varies depending on the nature of each case and the SAMR's caseload|
|Phase I review||30 days||Most simple cases are cleared within this stage|
|Phase II review||90 days||Most normal cases are cleared by the middle of this stage|
|Extended Phase II review||60 days||This is usually only for cases with complex issues or significant competition concerns|
The review timeline can also be extended by the voluntary resubmission of the merger notification by the parties (the pull-and-refile approach), which resets the clock. In some cases, the SAMR may suggest or indicate that it expects certain remedial conditions that the parties are not yet ready to accept, particularly if the Extended Phase II review period is about to expire. In that situation, if the parties wish to keep negotiations with the SAMR open, they can voluntarily withdraw their application on certain technical grounds, and immediately resubmit it, starting again at Phase I.
A common perception for merger filing in China is that it can easily become a deal bottleneck owing to the relatively low threshold, the relatively lengthy review period and sometimes uncertain outcome. However, this is not always the situation, particularly if a deal qualifies as a simple case.
A fast-track procedure, known as the simplified procedure, was adopted on 12 February 2014. From 2015 to the end of 2020, the Chinese competition authority has cleared approximately 80 per cent of cases under the simplified procedure. The average review time of these simple cases from 2015 to the end of 2020 was approximately 19 days. The review process has since been shortened, notably in 2020.
There are three qualifying criteria for the simplified procedure:
- lack of China nexus: a merger lacking China nexus in either of the following scenarios qualifies as a simple case:
- participating undertakings establishing a joint venture outside China (the joint venture concerned will not be economically active in China); or
- participating undertakings acquiring equity or assets of an overseas enterprise (the overseas enterprise concerned is not economically active in China);
- insignificant market share: to satisfy the insignificant market share criterion, all of the following three conditions must be met:
- the combined market share of all participating undertakings in the same relevant market is lower than 15 per cent;
- participating undertakings with upstream or downstream relationships must have respective market shares in the upstream or downstream market of less than 25 per cent; and
- participating undertakings that are neither in the same relevant market nor have any upstream or downstream relationship must have respective market shares in each market associated with the transaction of less than 25 per cent; and
- change in joint control: for a joint venture under joint control of two or more undertakings, the post-concentration control of the joint venture concerned will vest in one or more of the foregoing undertakings. It will generally qualify as a simple case, except when the undertaking and the joint venture are competitors in the same relevant market.
In our experience, more than 85 per cent of simple cases qualify based on the market share criterion and approximately 10 per cent of cases are simply offshore deals with no or limited China nexus; very few cases are qualified as simple cases based on the change in joint control criterion.
iii Special scenarios
The coronavirus pandemic has brought unexpected difficulties to the Chinese economy as well as to the merger review process. Since 5 February 2020, due to the impact of covid-19, the SAMR has been accepting merger filing cases through online or postal methods only and has held online meetings instead of physical meetings. In April 2020, the SAMR further issued a notice supporting the country's pandemic control and work resumption from an antitrust perspective. Indeed, the merger control regime has been optimised, with the timeline for case acceptance and clearance in the first half of 2020 shortened, respectively, by 20.9 per cent and 14.5 per cent on a year-on-year basis, according to the SAMR's own statistics.6
Tender offer or hostile takeover
As an exception, if a concentration occurs through public tender offer or a hostile takeover of a public company, rather than through an amicable agreement, the SAMR allows the acquiring party to use the offer, instead of an executed acquisition agreement, to make the notification. The SAMR may also demonstrate a reasonable level of tolerance for unavailability of certain non-substantive materials and information of the target company, such as the parties' certified certificate of incorporation or subsidiaries' business licences, in these special scenarios. However, the largest challenge for this type of transaction has always been how to meet the deadline for a public takeover while the SAMR sets its own case review pace. It is strongly recommended that a pre-notification consultation is made to seek the SAMR's understanding of the urgent nature of the transaction and to communicate the key competition issues, if there are any, to the SAMR.
Filings involving other legal procedures
Other than public takeover, filing parties may also need to reconcile the merger filing process with certain other legal procedures, such as bankruptcy or a state-owned assets disposal procedure.7 Usually, these procedures can be conducted independently from the merger review, but in certain cases there may be a deadline for the payment in consideration, which may contradict the SAMR's rule of not closing a deal before clearance. Parties are advised to take these requirements into consideration when making timetables for transactions.
iv Practical steps to effectively manage merger control in China
Given the significance of the Chinese market, the Chinese competition authority has increasingly become a key player in global deals. Those dealmakers that understand China's regulatory dynamics and practice and proactively manage their merger filings in China will gain an edge in winning and closing deals. Set forth below are some practical notes for global M&A transactions.
Seek pre-filing consultation with the SAMR
The SAMR offers a pre-filing consultation mechanism whereby parties may submit questions on substantive or procedural issues and request a consultation. The SAMR will then arrange an in-person meeting with the parties, typically providing oral advice only. The process usually takes one to two weeks.
The process allows parties to gain more clarity and to some extent pre-warns the relevant SAMR officials about a forthcoming notification. However, the process also alerts the SAMR to a proposed deal. The party must reveal its identity and ask actual and relevant questions; no anonymous consultations or hypotheticals are allowed in the consultations. If an officer suggests or requests that the parties file, it leaves the parties little choice but to file.
Prepare a filing as early as is practicable
Notification must be made after the definitive transaction documents are executed, once the requisite notification documents and materials are in order, but no later than the consummation of the proposed merger. Given the significant lead time for information collection and notification materials preparation, the best practice to speed up the merger review process is to get a head start. By completing most of the groundwork in advance of the execution of the merger documents, notifying parties can submit the merger notification filing soon thereafter. In a number of cases, with the substantive analysis more organised and prepared, the parties received limited supplemental questions and the response time was shortened, thereby substantially shortening the pre-acceptance time and post-acceptance review period.
Weighing the options of seeking a simplified procedure
Compared with the normal procedure, the simplified procedure is significantly faster, as it requires much less substantive information in filing, and takes less steps to reach conclusion. While many normal procedure cases take two to three months, most simplified cases are generally cleared within the 30-day Phase I review period. Therefore, it is more appealing to filing parties with apparently low market share or that are qualified under other simplified procedure criteria. Nevertheless, despite the benefits of lighter information requests and shorter review periods, the parties need to weigh up the following potential issues when deciding whether to apply for the simplified procedure.
Information disclosure concern
A simple case requires a 10-day public announcement upon case acceptance, which is designed to allow comments from the public, primarily various stakeholders in the industry. Therefore, for deals with high sensitivity or confidentiality concerns (e.g., hostile takeovers or private deals), this may not be the best approach owing to concerns regarding publicity.
Risk of disqualification and prolonged review
Owing to potential third-party challenges under the public announcement regime, a simple case runs the risk of being disqualified during the review process. Once the case is disqualified, it takes even more time and resources to re-assemble the notification materials to take the normal procedure route, ultimately delaying the review process. For example, it took 278 days (even longer than the standard 180-day review period) to secure the clearance of Sanhuan/Hitachi Metals in 2015, which was originally filed as a simple case but was reported to be disqualified owing to a third party's challenge relating to Hitachi's involvement in another AML litigation in China. The conditional clearance of Novelis/Aleris suggests that even a simple case cannot be completely immune from in-depth investigation and potential merger remedies.
Dealing with possible delaying factors in merger review
There are a number of issues that may delay the merger review process.
Level of competition concerns
Significant competition concern is the key factor in delaying merger clearance in most cases. If there is already a high degree of concentration in the relevant market, or if the combined market shares of the parties will be significant, there is a higher likelihood that competitors, suppliers, customers or an industry association will voice concerns or raise objections, and sometimes hearings or meetings with stakeholders are needed to understand and address the competition issues and possible remedies. If the parties anticipate substantive competition concerns, it is recommended to proactively prepare and negotiate a remedial plan with the SAMR at an early stage.
It is standard practice for the SAMR to seek comments from stakeholders (eg, competitors, trade associations, customers, suppliers and other authorities) for a normal procedure case (even if there has been no apparent evidence of competition concerns). Stakeholders may also raise concerns or file complaints to the SAMR even if their comments are not solicited. While these comments or objections may not necessarily have competition-related merit (e.g., an industrial regulatory perspective or other non-compliance issues may be factored in), the SAMR must handle them as a procedural matter, and this process can take months and substantively prolong the review period. It is useful for filing parties to identify hostile stakeholders and manage the relationship before filing to minimise potential delay or other adverse impact on the filing.
Timely coordination with counsel across jurisdictions
For cases involving multiple jurisdictions, it is important to coordinate, and align, with counsel in other jurisdictions in preparing the filing materials. The SAMR has always been interested to learn about progress and (remedy) discussions in other major jurisdictions when they are processing parallel filings. It is also the SAMR's usual practice to keep close communications with other key jurisdictions regarding competition issues during the review process.
Addressing China-specific issues
China has heightened scrutiny on strategically key industries (e.g., semi-conductors, ICT, healthcare, agriculture) and may expect behavioural or non-typical remedies (e.g., continuation of supply or maintaining interoperability) for China-specific concerns. It is important to understand and effectively deal with such differences in competition analysis and remedy approaches to better manage the filing process in China.
Other strategic considerations
In addition to merger control, other regulatory requirements may also impact the process and prospect of an international deal. For example, on 19 December 2020, China's National Development and Reform Commission and the Ministry of Commerce published the Measures on Foreign Investment Security Review (the FISR Measures), signalling an increased emphasis on safeguarding national security, a trend that has also gained prominence in other jurisdictions such as the United States (Committee on Foreign Investment in the United States review) and the European Union (foreign direct investment screening).
One important note is that an international deal involving two foreign entities may also trigger the application of the FISR Measures if the target company has subsidiaries within China and the sectoral tests are met.
Merger control review may also prompt the FISR procedure or other regulatory process. For example, following merger control clearance in Wuhan Zhongbai/Yonghui, the parties announced that the deal should also be subject to the FISR procedure, and was eventually dropped.
Outlook and conclusions
As stated above, in addition to the SAMR's five guidelines published in 2020 and the Platform Guidelines published in 2021, the SAMR is also collecting comments on the Guidelines on Foreign Jurisdiction Antitrust Compliance for Enterprises and the Anti-Monopoly Guidelines on Active Pharmaceutical Ingredients, which are likely to be issued in 2021.
More importantly, the amendments to the AML have also been listed as a priority in China People's Congress' legislation plan for 2021. There is a high likelihood that the amendments will be passed in 2021.
With 'strengthening anti-monopoly efforts' recognised as a top economic policy in China by the Political Bureau, there is no doubt that enforcement of antitrust law will be strongly reinforced in 2021 and beyond, not only on merger review, but also on abuse of dominance and multi-lateral conduct. We anticipate a significant increase in the number of merger cases being reviewed and gun-jumping cases being investigated in 2021, with the provincial-level antitrust regulators (i.e., the AMRs) playing a more active role.
1 Scott Yu and Frank Jiang are partners at Zhong Lun Law Firm.
2 Article 2 of the Provisions.
3 The Anti-Monopoly Guidelines on the Automotive Industry, the Anti-Monopoly Guidelines on Horizontal Cartel Leniency, the Anti-Monopoly Guidelines on Undertakings' Commitments in Anti-Monopoly Cases, the General Guidance on Antitrust Compliance of Undertakings, and a new edition of the Anti-Monopoly Guidelines for Intellectual Property Areas.
4 The Guidelines on Foreign Jurisdiction Antitrust Compliance for Enterprises, the Anti-Monopoly Guidelines on Active Pharmaceutical Ingredients and the Anti-Monopoly Guidelines on Platform Economy Sectors.
5 See 'A Summary of the Anti-Monopoly Work in 2020' on the SAMR website, at http://www.samr.gov.cn/xw/zj/202102/t20210205_325918.html, for percentages. The number of days are calculated by using the percentage and number of days for case acceptance and case conclusion disclosed in the SAMR's China Anti-Monopoly Enforcement Report 2019.
6 For more detail and analysis on the SAMR's efforts to support pandemic control and work resumption, please see the SAMR Notice on Antitrust Enforcement to Support Pandemic Prevention and Control and the Resumption of Work and Production http://gkml.samr.gov.cn/nsjg/xwxcs/202004/t20200417_314334.html.
7 Under China's state-owned assets regulations, in some cases state-owned equity must be traded in a state-owned equity exchange, which has its own trading rules and document templates.