China

Introduction

Since the implementation of China’s Anti-Monopoly Law (AML) in 2008, the Chinese antitrust authorities (formerly the Ministry of Commerce (MOFCOM) and, since 2018, the State Administration for Market Regulation (SAMR)) have reviewed more than 3,600 cases, as at 31 July 2021, of which 50 have been approved with conditions and three were blocked. Despite its youth, the Chinese antitrust regime has quickly become one of the most influential and active in the world, with an increasingly sophisticated review process to scrutinise major transactions.

In particular, recent remedy decisions have demonstrated that:

  • the Chinese merger control review timeline for complex cases is often long and sometimes can be unpredictable;
  • sectors of strategic national importance to China will remain a focus, such as semiconductors, healthcare and life sciences, and key components;
  • the Chinese antitrust authority may still intervene in transactions when authorities elsewhere have found no competition concerns, especially if local stakeholders raise negative comments; and
  • additional remedies may be imposed to address China-specific concerns in global transactions on top of a global remedy package.

We set out below an overview of China’s merger control regime and the key trends we have observed based on recent remedy cases.

Remedy decisions at a glance

Although the majority of merger control cases are cleared unconditionally, to date 50 cases were cleared conditionally, with remedies imposed, and three were prohibited. These remedy cases showcase the uniqueness of the Chinese merger control regime. Especially in recent years, the Chinese competition authority has applied novel theories of harm and imposed unique remedies even though these cases were often cleared unconditionally in other jurisdictions.

There have been 11 remedy cases in China between January 2019 and July 2021. Of these, 10 are global transactions involving international parties, and only one (Zhejiang Garden Bio-chemical/High Tech Royal DSM (2019)) is a domestic transaction involving Chinese companies.

In six of the 10 global transactions, China is the only jurisdiction that has imposed remedies – they were cleared unconditionally elsewhere. The remaining four cases were also conditionally cleared outside China. In three of these cases (Novelis/Aleris, GE/Danaher and ZF Friedrichshafen/WABCO), SAMR imposed China-specific (behavioural) remedies that were either different from or in addition to the remedies imposed by antitrust agencies in other jurisdictions.

Remedy cases in China: January 2019 to July 2021
TransactionMain businessTheories of harmRemedies and durationUnconditional clearance in other jurisdictions?
KLA-Tencor/Orbotech (2019)Tech (semiconductors)Conglomerate and verticalBehavioural for 5 years (automatic expiry):
  • no tying and bundling
  • supply on FRAND terms
  • protect third-party confidential information
Yes
Cargotec/TTS Group (2019)Shipping machineryHorizontalBehavioural:
  • hold separate in China and set up firewalls for 2 years (automatic expiry)
  • continue to supply to Chinese customers and not raise prices for 5 years (subject to lifting by SAMR based on application)
Yes
II-VI/Finisar
(2019)
Tech (optical communications)HorizontalBehavioural for 3 years (subject to lifting by SAMR based on application):
  • hold separate and set up firewalls
  • supply on FRAND terms
Yes
Zhejiang Garden Bio-chemical/High Tech Royal DSM (2019)PharmaceuticalHorizontal and verticalBehavioural for 5 years (automatic expiry) – parents and joint venture (JV) to operate independently:
  • no exchange of competitively sensitive information and exclusive supply/purchasing obligations between parties as JV parents
  • keep pricing of relevant products confidential
  • supply on FRAND terms
No public record of notifications in other jurisdictions
Novelis/Aleris (2019)Aluminium rolled produceHorizontal

Structural:

  • divestment

Behavioural for 10 years (automatic expiry):

  • ban on merged entity from supplying input product in China (to prevent coordination between merged entity and its remaining competitor)
Structural remedies imposed in EU and US; unconditionally cleared elsewhere
Danaher/GE Healthcare (2020)Life sciencesHorizontalStructural:
  • divestment

Behavioural for 2 years (automatic expiry):

  • provide R&D resources for pipeline product to acquirer of divested business
Structural remedies imposed in EU, US and South Korea
Infineon/Cypress (2020)Tech (semiconductors)ConglomerateBehavioural for 5 years (automatic expiry):
  • no tying and bundling
  • supply on FRAND terms and continuous supply of stand-alone products
  • maintain interoperability
Yes
NVIDIA/Mellanox (2020)Tech (semiconductors)ConglomerateBehavioural for 6 years (subject to lifting by SAMR based on application)
  • maintain interoperability
  • no tying and bundling
  • supply on FRAND terms; no discrimination and continuous supply of stand-alone products
  • open-source commitment
  • protect third-party confidential information
Yes
ZF Friedrichs-hafen/WABCO (2020)Vehicle technology/auto partsVerticalBehavioural for 6 years (automatic expiry):
  • continuous supply of products to existing customers on same terms and supply on FRAND terms to Chinese customers
  • continue to provide Chinese customers with opportunity to develop input products
Structural remedies imposed in US and India; unconditionally cleared elsewhere
Cisco/Acacia Communica-tions (2021)Tech (communications equipment)VerticalBehavioural for 5 years (automatic expiry):
  • continue to execute obligations of existing customer contracts and supply on FRAND terms to Chinese customers
  • no tying and bundling
Yes
Danfoss/Eaton (2021)HydraulicsHorizontalStructural:
  • divestment
Structural remedies also imposed in EU, US and Brazil; unconditionally cleared in Australia.

Our four key observations from these remedy cases are as follows.

Observation 1: Clearance timeline – a marathon, not a sprint

For transactions that may give rise to competition concerns and require SAMR’s close attention, review timelines in China have been known to be unpredictable and long, compared with other jurisdictions. Between 1 January 2019 and 30 June 2021, the time SAMR took to clear remedy cases averaged at around 356 days. Nine of 11 remedy cases since 2019 have involved ‘pull and refile’ situations, which effectively restart the clock of China’s 180-day statutory timeline. The remaining two were both cleared in Phase III (120 to 180 days).

A myriad of factors, including lengthy pre-acceptance phases that are not statutorily time-barred, extensive stakeholder consultations and multiple rounds of remedy negotiations in China, contribute to the long timeline:

For transactions that may potentially raise concerns, SAMR tends to spend significant time consulting stakeholders for their opinions and conducting an economic analysis with its economist unilaterally. This is generally the case even in transactions where overseas antitrust authorities have already reached conclusions and imposed remedies, as SAMR is inclined to conduct its own independent review. In general, SAMR is reluctant to share its concerns with the parties until it has reached a preliminary conclusion. The parties can only discuss and determine the remedy proposal upon learning SAMR’s concerns, which generally happens during Phase III at the earliest. Given that the remedy negotiation process can be lengthy, the clearance time frame of remedy cases is usually long, and ‘pull and refile’ is often required.

Concerns raised by stakeholders are also likely to affect SAMR’s review timeline. As part of its review, SAMR will routinely conduct an extensive consultation with stakeholders and market testing (except for simple case filings with competition concerns). The consultation process provides an open platform for stakeholders – including industrial regulators, trade associations, suppliers and customers – to raise both competition and non-competition concerns. In general, SAMR does not dismiss these concerns and would ask the parties to address the issues raised. As a result, any concerns raised by stakeholders can complicate and significantly delay the review process, particularly if the stakeholders are government agencies or Chinese state-owned enterprises. In Lite-On Semi/Diodes (2020), SAMR had initially reviewed the case under the simplified procedure (indicating that there was unlikely to be any competition problem), but subsequently reviewed the deal under the normal procedure following complaints from Chinese industry players and other stakeholders in the semiconductor industry. The transaction was eventually cleared without conditions in September 2020, but clearance was delayed by almost a year.

Accordingly, for transactions that may give rise to competition concerns in China, transaction parties should allow sufficient time for closing and avoid an overly ambitious transaction timetable to prevent unexpected situations, including disputes. Two major deals that were thought to have reached the finish line in 2020 are Cisco’s US$2.6 billion proposed acquisition of Acacia Communications and Applied Materials’ US$3.5 billion proposed acquisition of Kokusai Electric Corporation. Both deals involve or are related to semiconductors and were unconditionally cleared in all the other required jurisdictions, but had to extend the termination dates of their merger agreements to address competition concerns raised in China. Acacia/Cisco was ultimately cleared by SAMR subject to non-structural remedies in January 2021 following a review period that lasted for 14 months. This was after the parties had reportedly been in disputes as to whether the merger agreement should be ended on the grounds that SAMR approval was not obtained by the long-stop date.[2] In contrast, Applied Materials/Kokusai was ultimately terminated as Applied Materials failed to offer satisfactory remedies to address SAMR’s concerns before the extended long-stop date and, accordingly, it had to pay a termination fee of US$154 million to investment firm KKR.[3]

Observation 2: Sectors of strategic importance invite scrutiny

SAMR’s focus on certain sensitive industries and sectors is reflected in the types of trans­actions that receive conditional clearances, namely semiconductors (four of the 11 aforementioned cases), health care and life sciences (two cases) and key components for manufacturing (two cases).

The politics of sensitive industrial sectors

Unlike other merger control regimes, China’s merger control rules cater to non-competition and industrial policy considerations. In particular, Article 7 of the AML allows the government to protect industries that have an influence on the national economy, national security, and industries with monopolies over the production and sale of certain commodities.[4]

In light of this, the main factor that has driven strict antitrust scrutiny by Chinese regulators against deals concerning the aforementioned industries is the reliance of the downstream Chinese domestic companies on imported products in these sectors. For instance, China’s semiconductor market is the largest in the world in terms of consumption. In particular, (1) more than half of all semi­conductors manufactured globally are being used in China, which is expected to increase in the future, and (2) China is dependent on imported semiconductor products and technology as most of the semiconductors used in China are manufactured by foreign players. Similar supply-demand structures can be found in life sciences, auto parts and other key components for important manufacturing, which are also seen to be under strict antitrust scrutiny.

Given the political sensitivity of these sectors, a host of factors come into play in a merger control review, including both competition and non-competition concerns, and an appreciation of these dynamics can lead to a greater understanding of the potential pitfalls that exist when a transaction is reviewed in China. Irrespective of the specific type of competition concern involved, SAMR has shown a willingness to independently raise concerns to protect competition in the Chinese market even if similar concerns have not been raised by other competition authorities globally. Again, taking the semiconductor deals as an example, in all four semiconductor remedy cases cleared in China since January 2019, China has been the only jurisdiction to have required remedies. Often, this reflects a differentiation in the competitive dynamics in China compared with other markets, which necessitate a China-specific response.

Similarly, in II-VI/Finisar (2019), which concerns optical communication components and subsystems, Novelis/Aleris (2019), which concerns aluminium rolled products, and Danaher/GE Healthcare (2020), which concerns life sciences and biopharmaceutical sectors, SAMR either required remedies (even though the transaction was cleared unconditionally elsewhere) or required an additional China-specific remedy to clear the transaction.

How stakeholders’ concerns are likely to affect the SAMR review

The feedback of customers, competitors and other industry stakeholders are paramount to merger control review in China – arguably more so than in other jurisdictions. The key stakeholders that SAMR will consult include regulatory authorities, Chinese customers and competitors, as well as relevant trade associations. SAMR has been sensitive to any harm to domestic customers and competitors, even if those harms were not raised by any other competition authorities. See section titled ‘Non-competition parameters’, below, for further details.

Observation 3: China-specific concerns in remedy cases

Theories of harm

Horizontal concerns: economic metrics remain crucial

In reviewing horizontal mergers, in particular, SAMR has typically been highly reliant on market share, economic HHI and delta measures[5] to determine concentration levels and the parties’ market power in transactions that might require closer inspection and possible remedies. In recent cases, SAMR has also conducted win–loss assessment and price pressure tests to assess the potential effects on the price increase post-transaction. Notably, there is no need for the merged entity’s market share to reach the presumed threshold of dominance in China (50 per cent).

Beyond classic unilateral concerns, SAMR has also raised concerns about coordin­ated effects in Zhejiang Garden/Royal DSM. The parties intend to establish a new, non-full-function joint venture. The scope of the joint venture was limited to the production of a chemical precursor for the parties to manufacture a downstream product. In reviewing this case, SAMR identified that the joint venture parents have horizontal and vertical relationships, with relatively high market shares in the upstream and downstream markets. SAMR was concerned about the potential coordination between the joint venture parents via the joint venture. Among the conditions imposed, SAMR requested that (1) the joint venture parents not coordinate with each other, and (2) the joint venture remain independent from its parents and that a mechanism should be established to prevent the exchange of competitively sensitive information between the parties via the joint venture.

Input foreclosure identified as a concern by stakeholders

Input foreclosure has been a common theory of harm associated with vertical deals in China. Typically, these concerns have been raised by SAMR if the merged entity would be likely to raise the costs of downstream competitors by restricting their access to an important input.

This was observed in ZF Friedrichshafen/WABCO and Cisco/Acacia Communications. In both cases, the merged entity would be vertically integrated with a relatively high market share in the upstream input market, as well as a competitor with Chinese manufacturers heavily relying on the input products in the downstream market. In both cases, SAMR requested that the merged entities continue honouring existing supply obligations, and continue supplying to Chinese customers on fair, reasonable, and non-discriminatory (FRAND) terms so as not to foreclose competitors in the respective downstream markets.

Conglomerate effects used more frequently by SAMR

In cases that are neither horizontal nor vertical mergers, SAMR has readily identified adjacent markets and applied conglomerate theories of harm. Compared with China, conglomerate concerns have been far more limited in other jurisdictions. For example, between 2015 and 2019, only about 5 per cent of cases reviewed by the European Commission raised conglomerate concerns compared with 40 per cent of all remedy cases in China.[6]

In particular, in addressing conglomerate effects, SAMR has been sensitive towards two issues:

  • potential foreclosure practices would allow the merged entity to leverage a strong market position from one market to another by tying, bundling or other exclusionary practices. The most direct way for such a foreclosure to take place would be if the post-transaction entity simply refuses to supply products on a stand-alone basis or ties the products together by technical means, which SAMR has often addressed directly through behavioural remedies; and
  • the degradation of interoperability between the merged entity’s products and competitors has also been an integral feature of the conglomerate theory of harm. This concern has most frequently been raised in semiconductor deals, given that many of the components are meant to fit together and function as part of a larger product.

Innovation and pipeline products

In addition to concerns about the supply of critical products to Chinese customers, SAMR has also demonstrated a continued desire to protect innovation, including research and development pipelines. This follows trends focusing on innovation concerns in Bayer/Monsanto (2018) (in line with the European Commission) and KLA/Orbotech (2019). The divestment imposed by SAMR in Danaher/GE Biopharma (2020) largely aligns with the global divestment package also negotiated with other competition authorities, but SAMR raised separate innovation concerns about the market for hollow-fibre filters for tangential flow.

Non-competition parameters

Besides competition factors, merger control scrutiny can extend to non-competition parameters given China’s sensitivity to its reliance on foreign suppliers. As mentioned above, unlike other competition agencies such as the European Commission, SAMR is expressly required under China’s competition laws to take industrial policy considerations into account during its merger review. SAMR does not explicitly identify concerns as non-competition issues. Instead, in response to any non-competition concerns that might typically arise during market testing and stakeholder consultations, SAMR may apply various competition theories of harm more strictly. This is particularly evident from the strict and frequent application of conglomerate theories of harm in China when those types of concerns have been far more limited elsewhere.[7] The approach is manifested in particular in three semiconductor deals – KLA-Tencor/Orbotech, Infineon/Cypress and NVIDIA/Mellanox. In addition, SAMR may also be led to define markets more strictly. In Infineon/Cypress (2020), SAMR defined relevant markets for certain types of digital integrated circuits narrowly,[8] which appeared to be driven by feedback from Chinese stakeholders during the market testing stage. In ZF Friedrichshafen/WABCO, while other jurisdictions (i.e., the United States and India) focused on horizontal concerns, SAMR identified input foreclosure as a concern, which is also likely to be raised by certain customers during the consultation process.

Observation 4: China’s distinct take on remedies

SAMR’s receptiveness to behavioural remedies

SAMR’s focus on addressing stakeholders’ concerns and the resulting inclination to identify novel theories of harm has led to the authority imposing unique, China-specific (behavioural) remedies, including in cases that have been cleared unconditionally elsewhere.

As evidenced in the recent 11 remedy cases, SAMR has continued to be more receptive than its counterparts in the European Union and the United States to using behavioural remedies to address competition concerns, even though they are more difficult to implement and monitor than structural remedies. In fact, classic structural remedies, such as divestitures, are relatively rare in China. Since 2019, structural remedies (divestiture) were imposed in only three cases: Novelis/Aleris, Danaher/GE Healthcare and Danfoss/Eaton. In all these cases, overseas antitrust agencies had also imposed some structural remedies on the parties before SAMR rendered its decisions.

Instead, behavioural commitments are the preferred instrument in the implementation of merger control. This ranges from the more burdensome remedy of the long-term ‘hold separate’ obligation to lighter remedies such as commitments to ensure continuous supply, maintain interoperability, or prohibit bundling and tying practice.

Hold separate remedies

Whereas other jurisdictions typically use divestiture to address horizontal concerns, SAMR often imposes hold separate remedies in transactions that are cleared unconditionally outside China, but nonetheless raised China-specific horizontal concerns, as they would allow parties to complete a transaction without structural change. Since 2019, SAMR has imposed a hold separate remedy in two cases (Cargotec/TTS Group and II-VI/Finisar) that were cleared unconditionally in other notifiable jurisdictions.

Despite its advantage in keeping the transaction structure intact, compared with divestiture, hold separate remedies are more difficult for the parties to comply with and for the regulator to monitor, as they require parties to keep all or a portion of their businesses independent and prevent full integration until the remedy is lifted. Importantly, if a stand-alone China-specific business cannot be carved out for the purpose of a hold separate, a broader hold separate may need to be implemented.

Other behavioural remedies

In addition to hold separate remedies, SAMR has also imposed a wide range of innovative remedies to address concerns arising from Chinese stakeholders, particularly consumers raising concerns about input foreclosure and interoperability.

  • Continuous supply commitments: This commitment is fairly typical in vertical and conglomerate mergers and requires the parties to continue to supply products to customers on existing terms, including price, quality, quantity, delivery times, technology levels and after-sales services.
  • FRAND sale commitments: This commitment requires the merged entity to continue to supply various products on FRAND terms in the Chinese market.
  • Maintain or decrease the product price: This commitment requires the merged entity not to increase the product price or reduce the product price by a certain amount in the Chinese market.
  • Ensuring interoperability: The parties are required to ensure that certain products continue to remain interoperable with third-party products; this is seen particularly in semiconductor cases.
  • No tying or bundling: This is generally observed in cases giving rise to conglomerate effects. A commitment not to tie or bundle often covers other indirect conduct that could amount to tying or bundling.
  • Protecting third-party information: This remedy addresses the competitive concern that third-party competitively sensitive information to which one transaction party has access pre-transaction will be shared within the post-transaction entity to gain an unfair advantage in the markets where the third parties operate. The remedy, therefore, restricts the sharing and use of such competitively sensitive information to gain an unfair advantage.
  • Continuous research and development obligation: SAMR has imposed this obligation on parties to ensure the continuous development of pipeline products post-merger to address innovation concerns.

Lifting of remedies

Whereas some behavioural commitments automatically expire, others require the parties to apply to SAMR for them to be lifted. SAMR may require a monitoring trustee to be appointed to supervise compliance with behavioural commitments, which can add an additional layer of compliance costs to the transaction. For example, in April 2020, SAMR lifted the remedies imposed in 2014 in respect of the establishment of a joint venture by Corun, Toyota, Primearth EV Energy and Sinogy upon the parties’ application. SAMR lifted the remedies on the grounds that material changes in the competitive dynamics of the markets have taken place, such as the changes in the applicable policies in the automotive industry, the advancement of technology and the parties’ decreasing market share.

All in all, transactions that have been cleared in other jurisdictions could be subject to unique continuing compliance requirements post-transaction that could last for a significant amount of time as a result of behavioural remedies imposed by SAMR.

Key takeaways

In coordinating the merger filing process in China, particularly global trans­actions involving multi-jurisdictional filings, transaction parties and legal advisers should be fully aware of the obstacles ahead, including unpredictable and potentially lengthy timelines, novel theories of harm or non-competition concerns raised by stakeholders, as well as the unique (behavioural) remedies that SAMR may impose, which could result in substantial compliance obligations.

In structuring these types of transactions, consideration should be given to the following:

  • transaction parties should design the transaction timetable carefully to cater to the potentially unpredictable and long SAMR review process; and
  • the transaction documents should clearly set out each party’s contractual obligations to facilitate and ensure merger clearance to avoid future disputes.

In identifying or addressing potential China-specific concerns, consideration should be given to the following:

  • Parties may wish to engage economists early in the review process to substantiate the parties’ argument from a quantitative perspective, given that SAMR places significant emphasis on economic metrics. Even for the global market, a specific economic analysis of China would be plausible, especially for sectors likely to be under strict scrutiny or attract stakeholder concerns in China.
  • Assessment of potential stakeholder concerns may be advanced and stakeholder outreach shall be planned, if necessary, to prevent potential delays in the review process.

In dealing with SAMR, the transaction parties may consider the following strategies:

  • To shorten the review time frame, consideration can be given to ‘upfront buyer’[9] or ‘fix-it-first’[10] divestitures. Historically, the Chinese antitrust authority has requested such a divestiture only occasionally, notably in NXP/Freescale (2015), Abbot/St Jude Medical (2016) and AB InBev/SAB Miller (2016). In recent cases, however, SAMR has tended to favour behavioural remedies and hence not required divestitures. That said, in ZF Friedrichshafen/WABCO – in which the target, Wabco, divested a business with horizontal overlaps with the acquirer upfront (as per the request of the United States Department of Justice) in parallel with the merger review process – SAMR could focus on the other non-horizontal competitive concerns. In the end, ZF/Wabco was cleared in approximately nine months after filing without any ‘pull and refile’ – a relatively fast time frame for remedy cases.
  • In light of SAMR’s receptiveness of behavioural remedies, in negotiating remedies with SAMR, transaction parties can be creative in proposing remedies to address the authority’s specific concerns, noting that the types of remedies that SAMR may expose are expanding.

Notes

1 Michael Han and Jin Wang are partners and Joy Wong and Harris Zhang are associates at Fangda Partners.

2 GlobeNewswire, ‘Acacia Communications Terminates Merger Agreement’ (8 January 2021), available at https://www.globenewswire.com/news-release/2021/01/08/2155548/0/en/Acacia-Communications-Terminates-Merger-Agreement.html (last assessed on 13 August 2021).

3 Press Release, State Administration for Market Regulation [SAMR], ‘Applied Materials gave up the acquisition of Kokusai’ (1 April 2021, in Chinese). available at http://www.samr.gov.cn/zt/qhfldzf/202104/t20210401_327502.html (last assessed on 13 August 2021).

4 According to the Measure for the Undertaking Concentration Review, SAMR also needs to consult with the industry regulator to seek its opinions about a notified transaction and the remedy proposal.

5 The Herfindahl-Hirschman Index [HHI] is a common measure of market concentration that is used to determine market competitiveness. The ‘delta’ is the change in HHI arising from a merger.

6 Organisation for Economic Co-operation and Development, ‘Conglomerate effects of mergers – Note by the European Union’ (24 May 2020), available at https://one.oecd.org/document/DAF/COMP/WD(2020)8/en/pdf.

7 id.

8 Specifically, the microcontroller unit.

9 In China, the upfront buyer divestment requirement involves the execution of the divestment agreement after the antitrust authority approves the main transaction but before the closing of the main transaction. This is similar to the EU’s upfront buyer divestment requirement.

10 In China, the fix-it-first divestment requirement involves the execution of the divestment agreement before the antitrust authority approves the main transaction. This is similar to the upfront buyer divestment process in the United States.

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