The Public Competition Enforcement Review: China
The year 2020 was an unusual year. The outbreak of the covid-19 pandemic and continued international trade tensions have posed challenges for the Chinese antitrust law enforcement authority, the State Administration for Market Regulation (SAMR). In particular, the SAMR was tested on its ability to address the impacts brought by the crisis and to rapidly respond to new circumstances in the Chinese market. Despite the challenges, the SAMR demonstrated its professional competence and enhanced efficiency in China's antitrust enforcement in 2020. In 2020, the SAMR published 18 penalty decisions on monopoly agreements and abuse of market dominance and concluded 473 merger review cases.2 In addition, a total of 13 penalty decisions against non-filers of merger cases were published throughout the year.
As to legislative work, on 2 January 2020 the SAMR released a revised draft of the Anti-monopoly Law of the People's Republic of China (AML) for public comment.3 The revised draft is the SAMR's key step to amending the law. Although the finalisation of the revised draft will be subject to several rounds of discussion by various government agencies and must be approved by the National People's Congress, it signals the SAMR's enforcement priorities and indicates the legislative trends that could have a profound impact on China's antitrust enforcement landscape. In addition to revising the AML, the SAMR and the Anti-monopoly Commission of the State Council (the Anti-monopoly Commission) also published a number of anti-monopoly guidelines that either pertain to the regulation of competition in several key industry sectors or clarify investigative procedural processes, including the Anti-monopoly Guidelines for Automotive Industry (the Automotive Guidelines),4 the Anti-monopoly Guidelines for Platform Economy Industry (the Platform Economy Guidelines),5 the Guidelines for Applying Leniency Program to Horizontal Monopoly Agreements (the Leniency Application Guidelines)6 and the Guidelines on Undertaking's Commitments in Anti-monopoly Cases (the Commitments Guidelines).7
As to antitrust behaviour investigations, the SAMR maintained its rigorous approach. The types of industries investigated by antitrust law enforcement authorities in 2020 were diverse, though the key implicated industries of the investigations were still closely related to people's livelihoods, (e.g., gas and water supply, building materials, automobiles, funeral and pharmaceutical industries). Sixteen out of 18 cases published by the SAMR concerned such areas.
As to merger control review, the overall case handling efficiency has improved in view of the fact that the total number of cases concluded increased while the average time for case review was reduced. According to SAMR's annual working report for 2020,8 the SAMR accepted 481 filings and concluded its review of 473 cases. The figures represent an increase of 5 per cent for accepted merger filings and 1.7 per cent for concluded merger cases from 2019. The average time for case filing and conclusion fell by 27 per cent and 14.5 per cent, respectively. As to conditionally approved cases, the figure was relatively stable in 2020 (four cases) compared to the previous year (five cases). In addition, the SAMR actively investigated non-filing cases and published 13 penalty decisions on non-filing cases.
Prioritisation and resource allocation of enforcement authorities
In 2020, the SAMR prioritised rulemaking. Apart from its publication of the revised draft of the AML, the SAMR and the Anti-monopoly Commission released several regulations and guidelines including the Interim Provisions for Merger Control Review (the Merger Control Regulation), Provisions on Prohibition of Abuse of Intellectual Property Rights to Exclude and Restrict Competition and the Anti-monopoly Guidelines for Platform Economic Industry.
Revision of the AML is in process
On 2 January 2020, the SAMR released a revised draft of the AML for public comment. In essence, the revised draft closely follows the AML framework currently in effect, and makes notable amendments to meet the changing demands of enforcement practice. For instance, the revised draft adds relevant provisions on hub-and-spoke agreements, clarifies the identification of dominance of the undertakings in the internet sector, and introduces potential criminal liability of monopolistic behaviour. Also, the revised draft significantly enhances the legal liability of AML violators. For example, Article 55 of the revised draft stipulates that the proposed penalty would be up to 10 per cent of the non-filer's annual sales in the previous year instead of the maximum amount of 500,000 yuan under the current AML. It is therefore expected to pose a greater deterrent effect on non-filers once the revised draft is adopted.
The revision of the AML has been scheduled as key legislative work for 2021,9 and the revised AML is expected to be adopted in the near future.
Release of the interim provisions for merger control review
In October 2020, the SAMR released the Merger Control Regulation.10 In general, the Merger Control Regulation consolidates all the previous major rules for merger control review into one coherent, comprehensive and easy-to-follow regulation, with no substantial changes being made. Nevertheless, it is notable that Article 2 of the Merger Control Regulation specifies that the SAMR can authorise its provincial branches to take charge of merger control review. Although it remains unclear what types of cases can be reviewed by provincial administrations for market regulation, it is believed that such decentralisation serves to relieve the burden of the SAMR and ensures that the SAMR can allocate more resources to handling other relatively more complex cases.
Industry focus: platform economy, automotive and pharmaceutical industry
In 2020, three major sectors: automotive, active pharmaceutical ingredients (APIs) and the internet, have been targeted as enforcement priorities, and the Anti-monopoly Commission has released relevant guidelines regulating competition in these industries.
The automotive industry has been a focus area of China's AML enforcement agencies since 2011. In June 2020, the Anti-monopoly Commission released the Automotive Guidelines, indicating future enforcement trends in this sector. For instance, the Automotive Guidelines have listed a number of non-price vertical restraints that may eliminate or restrict competition. Meanwhile, the Automotive Guidelines have also specified 'safe harbour rules' applicable for exempting particular vertical restraints.
The Anti-monopoly Commission released the world's first antitrust guideline that specifically focuses on the platform economy: the Anti-monopoly Guidelines for the Platform Economy Industry (effective from 7 February 2021). Furthermore, the SAMR announced three platform operator gun-jumping cases involving variable interest entity (VIE) structure and revealed several cases pending investigation (e.g., an investigation into Alibaba's exclusionary behaviour on its e-commerce platforms).
In the pharmaceutical sector, the focus is still on APIs, and the Calcium Gluconate API case 11 attracted the highest penalties in 2020. Also, in October 2020, the Anti-monopoly Commission released the draft Anti-monopoly Guidelines for APIs for public comment,12 but the formal version has yet to be adopted.
More legal certainty for undertaking's defences during the investigation procedures
In 2020, the Anti-monopoly Commission also introduced the Leniency Application Guidelines and the Commitments Guidelines. These two guidelines are consistent with the relevant clauses of the AML, and the guidelines further elaborate how the undertakings could make such an application in practice.
With regard to the scope of application, the Leniency Application Guidelines only apply to horizontal monopoly agreements, while the Commitments Guidelines can be applicable to various types of monopoly cases (except core cartels, such as price-fixing agreements). It is believed that the guidelines provide clearer guidance for the suspension and termination of investigations as well as greater clarity on the content of commitments that undertakings would need to make.
In November 2020, the Central Committee of the Communist Party of China emphasised that enforcement in the competition sphere would be strengthened, and disorderly capital expansion would be prevented. On 10 January 2021, Mr Gong Zhang, the chief director of the SAMR, stated in an interview with Xinhuanet13 that the antitrust enforcement authority had been keeping a close eye on new trends on market developments and issues of fair competition, and the enforcement authority would endeavour to address major competition concerns and promote fair market competition. It is expected that the SAMR will continue to intensify enforcement against anti-monopoly behaviour and anti-unfair competition practices, of which both the online and offline market will be under significant scrutiny in 2021.
With regard to monopolistic behaviour, it is expected that more cases relating to the internet sector, automotive, chemical industry, semiconductor, public utilities and pharmaceutical industry will continue to be investigated and penalised. In addition, we may expect a record penalty decision on an abuse of dominance case in 2021.
Regarding merger review, it is believed that the SAMR will maintain its professionalism and consistency during the review process. It is also likely that the average time for merger review will be further shortened, particularly for those simple procedure cases. Further, we believe that the SAMR will continue to adopt its usual approaches on reviewing normal procedure cases (particularly conditionally approved cases). In addition, we also believe that undertakings (especially in the internet sector) will need to spend significant time and resources to deal with non-filing cases from past years.
2020 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 10 cartel cases in 2020. Compared with that of 2019 (nine cases), the number of cartel cases increased slightly in 2020. The published penalty cases involved a variety of industries, such as building materials, automobiles and gas. The total amount of the penalties was 45.31 million yuan, and the average amount of fines imposed in each case by the SAMR was lower than that of previous years. Among the 10 cases, the case with the highest penalty was a price-fixing case relating to the building materials industry in Guangdong Maoming.14 The Guangdong Administration for Market Regulation (the Guangdong AMR) imposed a total of 7.65 million yuan on 19 local concrete companies for reaching and implementing the monopoly agreement.
i Significant cases
Hunan Zhongmin Gas cartel case15
On 2 July 2020, the Hunan Administration for Market Regulation (Hunan AMR) published a decision fining Hunan Zhongming Gas Co, Ltd (Zhongming) 1.76 million yuan for entering into a horizontal monopoly agreement.
According to the penalty decision, Zhongming and its rival Huaihua Railway Economic Technology Development Co, Ltd (Huaihua Railway) colluded with each other, entering into a joint operation agreement in March 2013 and dividing the gas supply market in Huaihua City. Specifically, they also verbally agreed that Huaihua Railway would take up 40 per cent of the total gas filling and distribution business, with Zhongmin taking up the remaining 60 per cent. The companies' conduct was organised by the local government agency (i.e., Huaihua Housing and Urban-Rural Development Bureau).
The market division conduct of Zhongming and Huaihua Railway violated Article 13 of the AML, which prohibits market players from reaching an agreement with rivals to divide the sales market or raw material procurement market. During the investigation, Huaihua Railway was the first to proactively report to Hunan AMR that it divided the distribution area with Zhongming and provided material evidence. Huaihua Railway also applied for an exemption from penalties for the following reasons:
- the activities of Huaihua Railway were organised by the local government department;
- the cooperation activities between Zhongming and Huaihua Railway had a positive effect on gas bottle security;
- Huaihua Railway conducted rectifications;
- Huaihua Railway once applied to stop cartel activities, but was rejected by local government; and
- Huaihua Railway reported the monopoly activities to Hunan AMR and provided material evidence.
In view of the fact that the evidence provided by Huaihua Railway played a key role in identifying the content and implementation status of the monopolistic agreement, Hunan AMR accepted Huaihua Railway's arguments and granted it a full exemption from penalty. In contrast, Zhongming, which raised similar arguments but failed to become a whistle-blower, was still given a fine equal to 3 per cent of its previous year's turnover.
This is a typical case where a cartel member can be exempted from penalties under the leniency programme in accordance with Article 46 of the AML, provided that the cartel member voluntarily reports to the anti-monopoly enforcement authority about the monopoly agreement and provides material evidence and satisfies other procedural requirements. In addition, the Anti-monopoly Commission published the Leniency Application Guidelines in 2020. The Guidelines provide detailed provisions on leniency application and determination, such as the application time, the materials and evidence to be submitted, the form of application, the order of leniency and other conditions that shall be met.
Another notable feature of this case is that even though the monopoly agreement was reached under pressure from or under the instruction of the government agencies, undertakings cannot be exempted from liability for breaching the AML. Undertakings must therefore be cautious not to engage in monopolistic conducts organised or instructed by administrative agencies.
ii Trends, developments and strategies
In 2020, the SAMR and local agencies concluded 10 cartel cases and none of them were high-profile cases. The number of cartel cases increased slightly and the total amount of penalties was relatively low compared to the previous year. However, the SAMR is investigating 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 cases investigated by other jurisdictions and may follow suit from time to time.
Another noteworthy point is that in January 2021, the SAMR published five cartel cases (involving the automotive, insurance, tourism and firefighting industries) that were penalised in 2020. This is in line with the SAMR's focused scrutiny on particular industries, and it is expected that more horizontal cases will be investigated and penalised in 2021.
The key industries for antitrust enforcement in 2020 were those closely related to people's daily lives, especially those relating to water and gas supply. The Hunan Zhongmin Gas case is a typical example. Other than cases relating to water and gas supply, cases relating to the construction and automobile industry was also a key focus of cartel investigation in 2020. In particular, six out of the 10 cases were related to the automobile industry. It signals the SAMR's greater antitrust concern in the automobile industry.
In addition, since the revised draft of the AML and the Platform Economy Guidelines have introduced clauses on hub-and-spoke agreements and algorithmic collusion, it is expected that the SAMR may keep track of several life services or OTA platforms' potential illegal price or non-price collusion in the near future.
Antitrust: restrictive agreements and dominance
In 2020, the SAMR and local agencies concluded eight abuse of dominance cases. Of those cases, five were concerned with the public utility industry, while two were concerned with APIs. As for specific types of monopolistic conduct, half the cases involved imposing unreasonable transactional terms, while three cases were related to exclusive dealing. Because of the Calcium Gluconate API case, the total amount of penalties reached 342.18 million yuan, and the average amount of fines imposed in each case by the SAMR was considerably higher compared to that of previous years.
Furthermore, the antitrust agencies only concluded and published one case (i.e., the Lenovo RPM case) in relation to vertical restraint cases. However, the Lenovo RPM case was terminated without any penalties.16 The Hydron Contact Lens RPM case17 in 2019 and the Lenovo RPM case were the first and the second vertical monopolies that were terminated. In these cases, although the parties had carried out the monopolistic behaviour, they acknowledged their misconduct and provided remedial measures during the investigation. This shows that even in vertical restraint cases, parties can be exempted from penalties as long as they actively offer remedial measures that eliminate the adverse effects on competition. In addition, in accordance with Article 50 of the Revised Draft, except those hardcore horizontal agreements, violators of other monopolistic behaviours, including those engaged in vertical restraints, can apply for a suspension of investigation.
The most significant dominance case concluded in 2020 was the Calcium Gluconate API case. Besides the record fine, this case was notable due to its sophisticated theories of harm on identifying excessive pricing and the relationship among the alleged three undertakings. It also clearly indicates that the SAMR still keeps a close eye on the pharmaceutical industry, particularly APIs.
i Significant cases
Calcium Gluconate APIs case
On 9 April 2020, the SAMR issued a penalty decision on three calcium gluconate active pharmaceutical ingredient (API) distributors for abuse of dominance. Throughout its investigation, SAMR found that between August 2015 and December 2017, the three companies, namely Shandong Kanghui Medicine (Kanghui), Weifang Puyunhui Pharmaceutical (Puyunhui) and WeifangTaiyangshen Pharmaceutical (Taiyangshen) abused their dominant position in the Chinese market for the sale of calcium gluconate APIs for injection by selling the commodity at an unfairly high price and imposing unreasonable trading conditions. The three companies' illegal gains were confiscated and they were fined a total of 325.5 million yuan.
Firstly, the SAMR defined the relevant market as the Chinese market for the sale of calcium gluconate APIs. Secondly, the three companies' combined market share in the calcium gluconate APIs market from 2015 to 2017 was over 90 per cent, which the SAMR deemed a dominant position. In addition, the three companies controlled the sales of calcium gluconate APIs by stopping the supply of its products to other distributors and other manufacturers of calcium gluconate APIs. Consequently, the downstream calcium gluconate injection manufacturers could only purchase the calcium gluconate APIs from the three companies. According to the penalty decision, the three companies conducted the following wrongdoings:
- Selling the commodity at an unfairly high price. The sale price of calcium gluconate API exceeded the purchase cost several times. In 2017, the three parties acquired the calcium gluconate API at around 80 yuan per kilogram but sold it at 760 to 2,184 yuan per kilogram, 9.5 to 27.3 times the purchase cost. Compared historically, 2017 price levels were 19 to 54.6 times of 2014 levels.
- Imposing unreasonable conditions. The three companies forced downstream calcium gluconate injection manufacturers to sell their products to the three companies or to sell their calcium gluconate injection products as the three companies' original equipment manufacturers. Otherwise, the three companies refused to supply calcium gluconate APIs to manufacturers.
According to the penalty decision, the three companies abused their dominance by selling at an unfairly high price and imposing unreasonable conditions on their transactions. As such, they violated Article 17(1)(5) of the AML. Considering that the violation was serious and egregious, extended for a long period of time, and harmed the interests of relevant manufacturers and patients, the SAMR imposed a higher fine in this case, namely 325.5 million yuan, setting a record for penalties imposed in the field of API cases.
The relationship between the three companies is also a notable issue. The SAMR drew on the EU's 'single entity theory' and treated the three companies as essentially the same enterprise. While Puyunhui and Taiyangshen were registered as independent entities, the SAMR concluded that Kanghui had actual control over Puyunhui and Taiyangshen's operation of calcium gluconate APIs. The two carried out business activities according to the instructions of Kanghui. Although Puyunhui, Taiyangshen and Kanghui had no equity relationship with each other, and furthermore, their shareholders, directors, supervisors and senior management had no familial relationship, the SAMR believed that the three companies were closely related in terms of personnel appointments, business connections and financial connections. Therefore, the three companies were deemed to be a single entity relating to their monopolistic behaviour.
As Kanghui andPuyunhui and their related employees obstructed and resisted the investigation, the SAMR imposed a penalty on the two companies and 16 relevant individuals, with a total fine of 2.53 million yuan. Criminal liability has also been considered for one of the company's director due to his obstructive behaviour.
Lenovo RPM case
On 9 March 2020, the Beijing Administration of Market Regulation (Beijing AMR) issued a decision to terminate its investigation into Lenovo. The preliminary probe was initiated on 9 November 2017, and the case was formally filed on 3 July 2018. Lenovo's monopolistic conduct at issue was concerned with RPM in the after-sale service market on PCs and PC-related components. On 16 September 2019, the Beijing AMR suspended its investigation into Lenovo. During the suspension, the Beijing AMR conducted on-site inspections and visits, finding that the company implemented remedial measures, effectively offsetting the negative effects of the company's monopolistic conduct. The Beijing AMR therefore decided to terminate its investigation in accordance with Article 45 of the AML.
The enforcement authority may decide to suspend or terminate the investigation if undertakings propose commitments on their own initiative. In the Lenovo case, Lenovo actively cooperated with the investigation and committed that they would take active and effective measures to eliminate the consequences and impact of their suspected illegal behaviour. Due to such, Lenovo was successful in having the investigation suspended and eventually terminated.
Extrapolating trends from instances of successful termination of investigations, such as the Lenovo case and the Hydron case in 2019, the offer to reduce price by the investigated company seems to be one of the most important consideration for law enforcement agencies to suspend or terminate the investigation. Therefore, when an enterprise encounters an investigation by anti-monopoly enforcement authorities, it should cooperate with the investigation, actively submit and implement commitments to obtain the suspension or even termination of the investigation.
ii Trends, developments and strategies
So far, it is believed that the SAMR will continue to deem RPM illegal per se, especially for the cases where key industries (e.g., automotive) are involved (e.g., Toyota RPM case in 2019). On the other hand, for those cases where the effect of eliminating or restricting competition is not quite severe (e.g., Lenovo RPM case), lessons can be learnt that the commitments on price reductions for relevant products may play an important role in obtaining a mitigated punishment or even exemption from punishment.
Another notable alert is that the SAMR's enforcement attitude towards non-price vertical restraints is increasingly stringent. For instance, the Automotive Guidelines and the draft Anti-monopoly Guidelines for APIs explicitly provide that non-price vertical restraints could lead to potential antitrust risks. Also, the SAMR has drawn attention on some new types of vertical restraints such as most-favoured-nation clauses, as stipulated in the Platform Economy Guidelines.
As for abuse of dominant position, the public utility sector has been one of the major enforcement targets since 2016, and we would expect more significant antitrust scrutiny on those public utility services (e.g., the supply of water, electricity or gas) in 2021.
Meanwhile, the SAMR has strengthened its supervision on online platform operators' potential monopolistic conduct and is expected to investigate and penalise some leading firms in the internet sector (e.g., the SAMR's investigation into Alibaba).
Since October 2020, there are growing indications from the Chinese Communist Party that it will strengthen antitrust enforcement, encouraging the SAMR to perform its function more proactively. This can be observed by the greater weight placed by the SAMR on providing guidance, disclosure, and thereby transparency on its enforcement procedure (e.g. the SAMR's announcements on its investigations into Alibaba, Yangzte River Pharmaceutical Group, and the China Architectural and Industrial Glass Association) and reasoning behind formal decisions (e.g. the SAMR's penalty decisions on three online platform operators involving a VIE structure).
Alongside stricter supervision and enforcement by the authority, penalized undertakings are becoming more inclined to appeal their decision. Although it is much more difficult for such plaintiffs to win the appeal, it may still prompt the authorities to further improve investigation procedures and enhance its reasoning on imposing penalties.
The SAMR unconditionally approved 469 cases in 2020 – slightly more than the previous year (460 cases). With regard to simple cases, a total of 364 cases were concluded in 2020, accounting for 76.96 per cent of all cases. The proportion of simple cases increased compared with that of 2019 (the number of simple cases accounted for around 73.3 per cent of total cases in 2019). On average, simple cases took 12.81 days to be concluded, which was slightly reduced from 15.37 days in 2019. And in 2020, 27.47 per cent of those cases were unconditionally approved upon expiration of the 10-day publication period. This demonstrates that simple case procedure plays an active role in enhancing the efficiency of concentration review, particularly in the sense of reducing the review time.
However, we also noticed that the time from submission of filing materials to the acceptance notice of filing is becoming longer, given that the SAMR intends to further reduce the interval time between public notification and case conclusion. Notably, for the first time, the SAMR disclosed in its Annual Report on the Enforcement of Anti-monopoly Law of China (2019) that the time spent before accepting a case was 24 days on average in 2019, as provided in its Annual Report on the Enforcement of Anti-monopoly Law of China (2019).18
Furthermore, the SAMR continued its tough stance against non-filers. The SAMR published 13 penalty decisions against parties involved in merger cases that failed to fulfil their notification obligations under the AML.
i Significant cases
Penalties on non-filers
In recent years, antitrust authorities have not relaxed their supervision of non-filing cases. In 2020, the SAMR significantly strengthened its supervision of and increased its penalties on non-filing parties. The SAMR published 13 non-filing cases with a total fine of 5.65 million yuan. The highest fine issued was 500,000 yuan, while the lowest was 300,000 yuan. The SAMR initiates investigations on non-filing cases based on its own observations, third-party reporting and voluntary reporting by notifiable parties.
MBK Partners/Siyanli Industrial case19
On 6 January 2020, the SAMR published its penalty decision against MBK Partners for its failure to notify its acquisition of a 23.53 per cent stake in Siyanli Industrial (Siyanli). By failing to do so, the notifying parties breached Article 21 of the AML and were fined 350,000 yuan.
This case also marks the first penalty decision relating to an investment fund acquiring a minority interest, suggesting that the SAMR has not only kept itself up to date on market movements, but that it is taking up a proactive role in policing this area. While the stake of 23.53 per cent prima facie appears to be a small proportion of the overall business, it is likely that the SAMR took a strict approach with its interpretation on 'controlling rights'. The reason could be that this transaction is distinguished from most other PE/VC transactions where there is a greater difference in the proportion of equity stake between the fund investor and controlling party, and where the investment fund was largely kept away from the operations of the business.
Based on our experience, notifying parties holding a minority interest would have to assess their filing obligations under specific circumstances. Typical considerations include:
- the voting right arrangement on major corporate decisions (such as whether financial investors had veto power); and
- the presence of any special shareholder rights (such as pre-emptive rights, preferential rights, drag-along rights, buyback rights).
If an investor in a later financing round shares the same special shareholder rights to previous investors due to a most-favoured-nation clause, this may also trigger filing obligations.
Intime Retail case, New Classics Media case and China Post Smart Delivery case
On 14 December 2020, the SAMR published its penalty decisions against three non-filers, namely, (1) Alibaba for its acquisition of Intime Retail (the Intime Retail case),20 (2) China Literature Limited for its acquisition of New Classics Media (the New Classic Media case),21 and (3) Hive Box Technology for its acquisition of China Post Smart Delivery (the Hive Box Technology case).22 The three cases all involve internet companies using a VIE structure. It is the first time the SAMR penalised a concentration involving a VIE structure.
Among the three cases, the SAMR's investigation into the Intime Retail case and New Classics Media case each took approximately 40 days, whereas the SAMR's investigation into the China Post Smart Delivery case took 174 days, significantly longer than the other two. It is further worth noting that the actual transaction of the first two cases took place in 2017 and 2018 respectively, whereas Hive Box Technology's acquisition of China Post Smart Delivery was only recently completed in May 2020, implying that the SAMR had begun its investigation only a month after the deal's conclusion. According to the SAMR's subsequent press conference,23 the SAMR conducted a comprehensive review of the transactions' impact on market competition, examining the underlying market condition and the effect that the concentration would have. In the end, however, the SAMR concluded that the three transactions would not reduce or eliminate competition.
It is likely that the SAMR will continue its ex post crackdown on previous transactions involving internet companies using a VIE structure that have failed to comply with their filing obligations. Such companies shall remain vigilant and ensure that a robust compliance framework is in place. Strategic decisions, including the order of transaction to be reported and the supplementary material to be provided, shall consider all potential repercussions. The aforementioned cases are good precedents that shed light on the SAMR's approach to defining the relevant market and determining whether conduct would amount to monopolistic behaviour.
At present, the maximum amount of fines imposed on non-filers is 500,000 yuan, which is obviously insufficient as a deterrent. In accordance with Article 55 of the Revised Draft,24 the proposed penalty will be up to 10 per cent of the non-filer's annual sales in the previous year. This adjustment will greatly increase the deterrence of illegal acts in relation to a violation of merger filing regulations if the proposed change is adopted in the future.
Unconditionally approved cases
Mingcha Zhegang case25
On 16 July 2020, the SAMR unconditionally approved the joint venture between Shanghai Mingcha Zhegang Management Consulting Co, Ltd (Mingcha Zhegang) and Huansheng Information Technology (Shanghai) Co, Ltd (Huansheng). Mingcha Zhegang provides data analysis and artificial intelligence solutions to enterprises in the catering industry, whereas Huansheng is a subsidiary of Yum China, which in turn owns brands including KFC, Pizza Hut and Taco Bell. The joint venture proposes to engage in information and network technology development in the catering industry. This is the first case reviewed by the SAMR where it officially acknowledged the presence of a VIE structure used by a party to the transaction. Here, the ultimate controlling party of Mingcha Zhegang is a Cayman-incorporated company, Leading Smart Holdings Limited. Since the SAMR's publication of the simple case review on 20 April 2020, the case received widespread attention due to the uncertain result of merger control review involving VIE arrangements.
Despite the lengthy approval process (88 days), which is significantly longer than the average review period of unconditionally approved cases, taking up almost the entire duration allowed for in simple case review, the delay, contrary to public perception, may be unrelated to the presence of the VIE structure. Instead, the delay was more likely a result of the reasonable objections by related third parties, with regard to relevant market definition and market share of the notifying parties, which in turn led to competition concerns of the SAMR. As the transaction was likely motivated by data consolidation between the two notifying parties, it was also alleged that this would raise issues relating to data monopolisation. Ultimately, however, these issues did not appear to be detrimental to the result of merger control review, as the SAMR approved the transaction unconditionally.
Car Inc (Shenzhou Zuche) case26
On 25 November 2020, the SAMR published the simple case summary that it would be reviewing MBK Partners' proposed acquisition of Car Inc (Shenzhou Zuche). MBK Partners is a private equity firm predominantly focused on the North Asia region, and Shenzhou Zuche is China's largest car rental company. Similar to the Mingcha Zhegang case, this case also involves the use of a VIE structure, though this would almost certainly not be the focus of the SAMR's review. Instead, the SAMR closely scrutinised the transaction for competition concerns, as this particular transaction involves financial and transportation industries, a key focus of regulatory attention in recent years. With MBK's shares in the consortium that took eHi Car Services, China's second largest car rental firm, private last year, such competition concerns would certainly be more pronounced. Beyond anti-competition issues, this transaction may also trigger foreign investment concern with the recent passage of Measures on Security of Foreign Investments.27 Ultimately, the SAMR approved this case on 21 January 2021, which was a rather lengthy approval process (57 days).
As highlighted by the two cases, the SAMR has signalled its intention to review, with heightened scrutiny, cases which involve VIE structures. Putting aside any extrapolation from these decisions of the SAMR's stance on the legality of the VIE structure, it is evident that at least within the anti-monopoly enforcement framework, it would be imprudent for companies that employ a VIE structure to ignore filing obligations. This is further evidenced by the introduction of the Guidelines for Platform, the penalties opposed on three tech companies for failing to comply with their filing obligations, and from recent statements made by the SAMR.28 Given the SAMR's approval in the Mingcha Zhegang case and Car Inc (Shenzhou Zuche) case, the consensus among practitioners is that transactions involving a VIE structure will not be adversely affected. Companies should proactively assess their situation and ensure that they are compliant with the AML.
Conditionally approved cases
In 2020, SAMR conditionally approved four cases, namely Danaher Corporation's acquisition of the GE Healthcare Life Sciences biopharmaceutical business, Infineon Technologies' acquisition of Cypress Semiconductor, NVIDIA's acquisition of Melos Technology Co, Ltd, and ZF's acquisition of WABCO Holdings.
These conditionally approved cases cover the automobile, computer, electronic component and biomedical industries. All of these cases are high-profile and sophisticated multinational transactions, partially explaining the significantly longer review process compared to the previous year (the average review time was up to 291 days). Among these conditionally approved cases, behavioral remedies were imposed in three of the four cases. These remedies include FRAND obligations (e.g., supply to Chinese clients, commitment of ensuring interoperability. Compared to other jurisdictions, the SAMR's particular interest in imposing behavioural remedies reflects its prudent attitude towards those high-profile cases that may have an effect of eliminating or restricting China's market competition or may adversely affect Chinese clients' interest.
Danaher's acquisition of GE's BioPharma case29
On 28 February 2020, the SAMR conditionally approved Danaher's acquisition of GE's BioPharma unit, almost a year after the transaction's initial merger filing. Danaher is an American diversified conglomerate involved in the healthcare and environmental industry. GE's BioPharma unit, renamed Cytiva, provides both hardware and software used in biopharmaceutical research.
In addition to implicating a sensitive and strategically important industry, this case stands out for its complexity, involving 25 different product markets where the notifying parties had horizontal overlaps. In the SAMR's analysis, the relevant geographical market for these product markets was defined as the worldwide market given that there were minimal trade barriers (as evinced by the low ratio of shipping cost to sales price) and minimal price differentiation across borders. The SAMR found that in many of the product markets, including the markets for microcarriers, chromatography systems and hollow fibre filter modules, the transaction would have the effect of eliminating or restricting competition. For example, the SAMR found that, in the microcarriers market, the notifying parties would have a combined market share of nearly 70 to 75 per cent worldwide. In addition to market share, the SAMR also appeared to be concerned with the impact of the transaction on innovation and R&D, particularly in the hollow fibre filter module market.
After several rounds of consultation, the SAMR accepted Danaher and GE's proposal for structural remedies to salvage the transaction, concluding that the remedies would reduce the transaction's adverse impact on competition. Danaher was to divest various businesses, such as the businesses in the aforementioned product markets, which raised competitive concerns, including all its tangible and intangible assets and staff. Moreover, Danaher was to reach a transitional agreement and share its relevant tangible assets and proprietary research of the 'Emily Project' to buyers of its divested businesses, aimed to encourage R&D and investment into new products. This last remedy stands out with the SAMR going beyond its traditional anti-competition toolbox to impose conditions that the agency believed would encourage innovation and facilitate greater product selection within the relevant market, instead of merely eliminating the negative impact raised.
We expect that the SAMR will continue to explore and deepen its anti-competition toolbox in major scientific research fields in life sciences and other high-end scientific research fields (for example, cutting-edge R&D involving biopharmaceuticals, or transactions involving innovative drugs for the treatment of critical diseases and rare diseases). The notifying parties should weigh and coordinate their filing strategies in various jurisdictions and carefully submit remedies based on the impact on the Chinese market to resolve the competition concerns of the SAMR.
ii Trends, developments and strategies
Enterprises shall heed the new trends reflected in the SAMR's enforcement cases,whether it be the trend of scrutinising transactions involving VIE structures and the non-filing of minority stake investments by funds, or the trend of making intensive competition analysis of innovative markets. We expect that the SAMR will continue to accelerate the development of the antitrust enforcement system in 2021. When conducting merger control review, the SAMR usually maintains consistency between cases, particularly relating to market definition when coming across similar factual scenarios. Furthermore, high-quality notification materials will be required by the SAMR to facilitate efficiency. Therefore, enterprises are advised to focus on trends of antitrust enforcement and the revision process of the AML. In particular, enterprises shall understand the regulations of merger control review correctly, actively fulfil their filing obligations, and work closely with external experts to avoid delays in the closing of the transaction, which would in turn affect their business plans.
In 2020, the SAMR maintained a consistently rigorous and prudent attitude towards merger control review. Despite the covid-19 pandemic, the time interval for filing and approval of merger control review (especially simple cases) has shortened compared to the previous year. As to conditionally approved cases, the SAMR has imposed various conditions based on the characteristics of the relevant product and the competition and innovation condition of the relevant market, so as to eliminate the possible negative effect of the merger. In addition, the 13 non-filing cases published in 2020 show that the SAMR maintains its supervision of non-filing parties and are promptly prepared to impose penalties. The SAMR has also clarified its attitudes towards transactions in the internet sector involving a VIE structure.
i Pending cases and legislation
According to the Annual Enforcement Report (2019) released by the SAMR , it disclosed that the SAMR has pushed forward the investigation of the suspected abuse of collective market dominance by Samsung, SK Hynix and Micron Technology. It also revealed that SAMR has entrusted a third party to evaluate and address major legal issues in this case.
Meanwhile, the SAMR vigorously promoted its investigative work regarding the antitrust case against DuPont. In addition, the SAMR's investigation against Ericsson over suspected abuse of market dominance in the wireless communication standard essential patent market is also ongoing.
Another notable case that is likely to lead to a record fine (i.e., the SAMR's investigation into Alibaba's exclusive dealings) is expected to conclude soon. This would demonstrate that China's antitrust enforcement agencies is strengthening antitrust scrutiny into the internet sector.
Pending legislation includes:
- the revised AML; and
- the Anti-monopoly Guidelines for APIs.
After 12 years of AML's 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, Chinese enforcement authorities have increasingly turned their gaze to the activities of big tech companies in China. The SAMR has also clarified its attitude towards transactions in the internet sector involving VIE structures. Therefore, undertakings should pay more attention to the antitrust compliance work in their daily operations in response to more frequent and severe crackdowns by local enforcement agencies as well as the SAMR.
In 2021, we further expect that more antitrust enforcement guidelines and regulations will be promulgated to promote anti-monopoly law enforcement and the establishment and development of a relatively mature and transparent anti-monopoly 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 AML 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 Charles Xiang, Grace Wu and Ziyao Wang for their contributions to this chapter.
2 The original Chinese version of the working report 2020 of the SAMR is available at the SAMR's website: http://www.samr.gov.cn/xw/zj/202102/t20210205_325918.html.
3 The original Chinese version is available at the SAMR's website: http://www.samr.gov.cn/hd/zjdc/202001/t20200102_310120.html.
4 The original Chinese version is available at the SAMR's website: http://gkml.samr.gov.cn/nsjg/xwxcs/202010/t20201030_322780.html.
5 The original Chinese version is available at the SAMR's website: http://gkml.samr.gov.cn/nsjg/fldj/202102/t20210207_325967.html.
6 The original Chinese version is available at the SAMR's website: http://gkml.samr.gov.cn/nsjg/xwxcs/202010/t20201030_322781.html.
7 The original Chinese version is available at the SAMR's website: http://gkml.samr.gov.cn/nsjg/xwxcs/202010/t20201030_322782.html.
8 The original Chinese version of the working report 2020 of the SAMR is available at the SAMR's website: http://www.samr.gov.cn/xw/zj/202102/t20210205_325918.html.
9 The original press release is published on the National People's Congress' website, available at: http://www.npc.gov.cn/npc/c30834/202012/f4fd27270f78471dbe8f88c31c47cb0f.shtml.
11 The original Chinese penalty decision is available at the SAMR's website: http://www.samr.gov.cn/fldj/tzgg/xzcf/202004/t20200414_314227.html.
12 The original Chinese version is available at the SAMR's website: http://www.samr.gov.cn/hd/zjdc/202010/t20201013_322278.html.
13 The interview of Xinhuanet is available at: http://www.xinhuanet.com/2021-01/10/c_1126967075.html.
14 The original Chinese penalty decision is available at: http://www.samr.gov.cn/fldj/tzgg/xzcf/202006/t20200624_317369.html. The original Chinese penalty decision is available at: http://www.samr.gov.cn/fldj/tzgg/xzcf/202006/t20200624_317369.html.
15 The original Chinese penalty decision is available at: http://www.samr.gov.cn/fldj/tzgg/xzcf/202007/t20200702_319339.html.
16 The original Chinese termination decision is available at the SAMR's website: http://www.samr.gov.cn/fldj/tzgg/xzcf/202003/t20200309_312674.html.
17 For a detailed discussion of this case, see The Public Competition Enforcement Review (Twelfth Edition), pp. 55–56.
18 The original Chinese version is available at the SAMR's website: http://www.samr.gov.cn/xw/zj/202012/t20201224_324676.html.
19 The original Chinese penalty decision is available at the SAMR's website: http://www.samr.gov.cn/fldj/tzgg/xzcf/202001/t20200106_310261.html.
20 The original Chinese penalty decision is available at the SAMR's website: http://www.samr.gov.cn/fldj/tzgg/xzcf/202012/t20201214_324334.html.
21 The original Chinese penalty decision is available at the SAMR's website: http://www.samr.gov.cn/fldj/tzgg/xzcf/202012/t20201214_324340.html.
22 The original Chinese penalty decision is available at the SAMR's website: http://www.samr.gov.cn/fldj/tzgg/xzcf/202012/t20201214_324337.html.
23 The press conference is available at the SAMR's website: http://www.samr.gov.cn/xw/zj/202012/t20201214_324336.html.
25 The announcement of unconditional approval is available at the SAMR's website: http://www.samr.gov.cn/fldj/ajgs/wtjjzajgs/202007/t20200722_320099.html.
26 The publication of simple case review is available at the SAMR's website http://www.samr.gov.cn/fldj/ajgs/jzjyajgs/202011/t20201125_323881.html.
27 The original Chinese version is available at the NDRC's website: https://www.ndrc.gov.cn/xxgk/zcfb/fzggwl/202012/t20201219_1255025_ext.html.
28 The press conference of the SAMR is available at the SMAR's website: http://www.samr.gov.cn/xw/zj/202012/t20201214_324336.html.
29 The announcement is available at the SAMR's website: http://www.samr.gov.cn/fldj/tzgg/ftjpz/202002/t20200228_312297.html.