China’s State Administration for Market Regulation conditionally cleared three global deals between 19 February and 10 April. Charles McConnell explores what those clearances mean and how they fit into broader trends within the SAMR’s merger regime.
Not long ago, one of the most common questions posed to competition law practitioners in China was whether the State Administration for Market Regulation would block or unreasonably hold up deals as a consequence of the trade war with the US.
That trade war – between the world’s two largest economies – dominated headlines in 2018 and 2019, prompting many businesses to consult with their outside antitrust counsel on what that might mean for mergers.
One lawyer who spoke to GCR on the condition of anonymity in December 2018 said practitioners in China believed at the time that the government was using the merger regime as a means to counter-attack US trade pressure. The lawyer cited the Qualcomm/NXP merger collapse, which some observers felt was due to the souring of trade relations between the US and China, despite a statement by the SAMR on the competition concerns.
Other practitioners struck a more optimistic tone – that the SAMR was trying to establish itself as a credible, productive competition agency and would not let industrial policy dictate the outcomes of merger reviews.
Then there were those in the middle. They believed that the SAMR would not block a deal solely due to the trade war, but they cautioned that the authority might take longer to review mergers in sensitive industries involving the US and other Western companies.
Deals in sensitive industries involving Western companies
Fast forward to the middle of April 2020 and a portfolio of conditional merger clearances – including three within 50 days this year – seems to demonstrate that the SAMR will protect Chinese customers but not block deals in the more sensitive sectors.
The SAMR last week cleared US-based chipmaker Nvidia’s acquisition of Israeli cloud-computing company Mellanox after the companies agreed to provide certain technology to the Chinese market on fair, reasonable and non-discriminatory terms for six years, among other conditions.
A week earlier, the Chinese competition watchdog imposed similar restrictions for five years on German chipmaker Infineon Technologies’ purchase of US-based rival Cypress Semiconductor. That review centred on concerns that the deal would harm competition in the markets for several key automotive components.
The SAMR in February ordered divestitures in Danaher’s acquisition of GE’s biopharma business. The divestitures largely mirrored ones ordered in the EU, the US and Korea. Danaher also agreed to provide research and development resources for an unfinished project related to the separation and purification of biomolecules, as well as remain involved with the project for two years.
While the behavioural and structural conditions are clearly meant to protect Chinese customers from potential competitive harm, the decisions include a detailed competition analysis and outline high market shares in defined markets.
Usual timing with the occasional hiccup
The Nvidia/Mellanox deal went through a pull and refile and ultimately took nearly a year from filing to approval. Stephanie Wu at East & Concord Partners said the timeframe “is long for the parties, especially considering that it got cleared in the US and EU rather early and unconditionally”.
But Wu said that even if a handful of Western deals or companies face obstacles – including having to pull and refile – in China, the bigger picture is more positive.
“I do not think it is in the interest of China to bias against the majority of Western companies. On the other hand… China is promoting [a] sound ‘business environment’ which shows that it is aware of the criticisms and is responding to them in its own way,” Wu said.
The Infineon/Cypress deal took 238 days from filing to decision; the SAMR cleared the deal within the 180-day statutory timeframe from accepting the companies’ filing – without a pull and refile.
Danaher and GE announced their deal in February 2019, and they had to pull and refile notification with the SAMR. Altogether, the authority took 305 days to issue a decision after the original filing.
One lawyer speaking anonymously explained that some deals attract a lot of comments from stakeholders, which takes time for the SAMR to handle; some deals require extensive negotiation on conditions; and “often it can be a combination of both”.
“This inevitably takes time and the timeframes here look quite normal,” the source said.
And in the background of all three reviews – at least the final months of them – was the coronavirus pandemic that halted life in parts of China, including Beijing.
Another lawyer speaking anonymously said the recent spate of conditional clearances serves as reassurance that the SAMR remains free of political considerations, examines these “sensitive” deals on a normal time frame – especially given the health crisis – and tailors remedies to competition concerns in the local Chinese market.
It is worth noting that all three conditional approvals came in the wake of the “Phase 1 trade deal” signed between the US and China in January. The White House has agreed to relax tariffs on some Chinese goods and China has pledged to buy more American farm, energy and manufactured goods, while also addressing complaints about intellectual property malpractice.
But 2019 told a similar story to the 2020 clearances. A conditional clearance alleviated the SAMR’s foreclosure concerns raised by KLA Tencor’s acquisition of Israel-based Orbotech in the semiconductor equipment industry.
The SAMR in 2019 imposed hold-separate and behavioural remedies on II-VI’s acquisition of Finisar – two American companies operating in the market for optical communications network components; Cargotec’s acquisition of certain businesses of TTS Group; and a joint venture between China’s Zhejiang Garden Biochemical High-Tech and Royal DSM of the Netherlands.
Still, conditional approvals – even on timeframes that largely fit within the definition of “normal” – might not be enough to satisfy everyone.
The US Department of State last summer slammed China’s antitrust enforcement for being biased in an annual report on the global investment climate. The report said that there are concerns that antitrust enforcement in China is “often selectively used to target foreign companies, becoming an extension of other industrial policies that favour [state-owned enterprises] and Chinese companies deemed potential national champions”.
The report claimed there is suspicion that China rarely puts conditions on its approval of any deals involving two local companies, “thus signaling an inherent anti-monopoly law bias against foreign enterprises”.
Indeed, none of the 23 conditional clearances since October 2015 have involved two Chinese companies and just one – the ZGBH/Royal DSM joint venture – involved a Chinese company at all.
The Asia Society, a global non-profit organisation focused on bringing Asia and the West closer together, in its Winter 2020 China Dashboard said that while the SAMR has steadily increased the number of domestic mergers it reviews, “foreign-related transactions remain disproportionally targeted for review.”
The Chinese authority’s pattern of extracting behavioural commitments from global companies seems to also fit a broader playbook. Igor Artemiev, the head of Russia’s Federal Antimonopoly Service, suggested in September that Brazil, Russia, India, China and South Africa should consider extracting promises of non-discriminatory access when clearing global mergers.
The BRICS countries as of late last year accounted for 42% of the world’s population, 26% of the world’s territory, about a third of its gross domestic product and 48% of the global consumption of goods, works and services. It is unclear how the global economy will respond to the economic slowdown caused by the covid-19 pandemic, however.
Trade relations between the US and China seem to be on the mend, but companies should take solace that even when the going got tough between the world’s two superpowers, deals in sensitive sectors secured approval.
Companies should just be prepared to provide commitments to alleviate the SAMR’s concerns that their global mergers could harm Chinese customers.