China: Merger Control
China’s Anti-Monopoly Law (AML) was enacted in August 2008. With the world still mired in the pandemic and downward pressure on global economic growth in 2021, there have been unprecedented developments in the merger review regime in China under the AML through legislative proposals and enforcement practices from the enforcement authority. Many have even dubbed 2021 ‘the year of antitrust’. We lay out in this article major breakthroughs in the merger review regime in China in 2021 and provide our insights, which we hope will help you develop a better grasp of merger review in China for the years to come.
- Institutional reform of the Antitrust Enforcement Agency
- Key Points on merger review in the Anti-Monopoly Law (Draft Amendment)
- Big hammer on failure to notify
- Breakthrough in quantitative analysis in the merger review
Referenced in this article
- Huang Huishi, ‘Annual Anti-monopoly Inventory of Platforms: The Target of 92 Cases and Fines of More than RMB 21.7 Billion?’ Posted on the WeChat official account ‘Anti-monopoly Frontier’ on 17 December 2021.
Institutional reform of the Antitrust Enforcement Agency
Since the Central Economic Work Conference at the end of 2020 clearly stated that ‘strengthening anti-monopoly and preventing disorderly expansion of capital’ was a key national task, antitrust enforcement, and particularly merger review, in China has seen a dramatic ramp-up. On 15 November 2021, Gan Lin was appointed as the head of the newly established National Antimonopoly Administration, which signalled the start of the authority reshuffling that aims to enhance the efficiency of antitrust enforcement. Previously, China’s antitrust enforcement unit, the Antimonopoly Bureau of the State Administration for Market Regulation (SAMR), was a bureau-level agency. The National Antimonopoly Administration is currently a vice-ministerial level body remaining under the SAMR. The National Antimonopoly Administration is further split into three bureaus, engaging in merger control, antitrust investigation and competition policy respectively.
The creation of a separate merger control bureau within the National Antimonopoly Administration clearly signals that merger control will continue to be a key antitrust enforcement area in China for the years to come.
Key Points on merger review in the Anti-Monopoly Law (Draft Amendment)
On 23 October 2021, the Standing Committee of the National People’s Congress published the Anti-Monopoly Law of the People’s Republic of China (Draft Amendment) (the Anti-Monopoly Law (Draft Amendment)) for public comment. The Anti-Monopoly Law (Draft Amendment) puts forward a series of new rules in the merger control area, such as enhancing the penalties for failure to notify a concentration of undertakings, which will have far-reaching implications.
Enhancing legal liabilities for failure to notify
A major revision of the Anti-Monopoly Law (Draft Amendment) is to improve the legal liability system for merger review. It significantly increases the amount of fines for failure to notify. Specifically:
|Enhance the existing upper limit of fines||For illegal concentration that does not have the effect of eliminating or restricting competition, the upper limit of fines is increased from 500,000 yuan to 5 million yuan;|
For illegal concentration that has the effect of eliminating or restricting competition, the upper limit of fines is increased from 500,000 yuan to less than 10 per cent of the sales amount in the preceding year.
|Add credit punishments||Where a business operator is subject to administrative penalties due to violation of the AML, such penalties shall be recorded in the credit record in accordance with the relevant provisions of the state, and credit punishments shall be imposed on serious illegal and dishonest acts, which shall be disclosed to the public.|
Focusing on killer acquisition
The Anti-monopoly Law (Draft Amendment) specifies that:
where the notification threshold stipulated by the state council are not met, but there is evidence that the concentration of undertakings has or may have the effect of eliminating or restricting competition, the antitrust enforcement authority under the state council shall conduct an investigation in accordance with the law.
This provision is aimed at ‘killer acquisitions’ that have occurred frequently at home and abroad in recent years. Some internet giants, leveraging their huge capital advantages, carry out large-scale ‘killer acquisitions’, leading to a winner-takes-all situation. Under this provision, the antitrust enforcement authority may strengthen ex ante regulation to prevent distorting the competitive structure of the market through concentration. It is worth noting that major jurisdictions such as the European Union and the United States are also highly concerned about ‘killer acquisitions’ and are actively exploring updates of their merger review systems to allow law enforcement authorities to intervene in advance. The lessons learnt therein will also be of reference significance to future law enforcement in China.
The addition of a ‘stop the clock’ mechanism
The Anti-monopoly Law (Draft Amendment) also adds a ‘stop the clock’ mechanism for the review of concentration of undertakings, which is designed to deal with three common circumstances in the notification process: (1) the undertaking concerned fails to submit documents and materials as required, as a result of which the review cannot be conducted; (2) new situations or facts that have a significant impact on the review; (3) the restrictive conditions imposed on the concentration of undertakings need to be further evaluated and agreed by the undertaking concerned.
With regard to (1), the ‘stop the clock’ mechanism is less likely to be applied to the simplified review procedure, as in general, the substantive review of simple cases is commenced before the acceptance of the case. If no objections are received after the formal acceptance and public review, the SAMR is unlikely to request additional documents and information. If there are no competition concerns, the current deadlines are generally sufficient even without the ‘stop-the-clock’ mechanism. This provision is most likely applicable when, after the initial notification is submitted, there is a long delay due to unanticipated issues arising from the transaction, or the notifying parties cannot provide the documents and materials required within a short period of time. In such cases, the antitrust enforcement authority may initiate the ‘stop the clock’ mechanism to ‘urge’ the notifying parties to provide documents and materials as required.
With regard to (2), the ‘stop the clock’ mechanism will make it unnecessary that undertakings concerned need to withdraw the notification. The review period will commence after the transaction resumes normal, and the predictability of the review period will be enhanced. Compared with the mechanism of re-notification and restarting, the uncertainty of the transaction will be reduced to some extent.
Finally, regarding (3), in cases of concentration of undertakings that may eliminate or restrict competition, the undertakings concerned need to repeatedly negotiate with the antitrust enforcement authority about remedies or commitments. If the undertakings concerned cannot agree with the enforcement authority on remedies, in many previous cases, the undertakings concerned must withdraw the original notifications. The ‘stop the clock’ mechanism is expected to improve the efficiency of the review of complex cases and reduce unnecessary procedural work.
Big hammer on failure to notify
Significant increase in the number of penalty cases
In 2021, the antitrust enforcement authority investigated and publicly punished 94 cases of failure to notify, reaching the highest point in history. According to our statistics, the antitrust enforcement authority has made public 156 cases of failure to notify since 2014, and the number of cases in 2021 would account for 60 per cent of the total number of cases released. Compared with the previous year, the number of cases of failure to notify released in 2021 is seven times that in 2020. From this data, it can be seen that the antitrust enforcement authority continues to strengthen the investigation and punishment of failure to notify.
With regard to the cases of failure to notify by platform enterprises, from the end of 2020 to the end of 2021, the SAMR in total released five batches of cases, of which the number of cases reached 84. In addition, in the case of the equity acquisition of a music company by a large domestic internet platform enterprise, the SAMR not only imposed penalty for failure to notify, but also found that the transaction had the effect of eliminating or restricting competition in the relevant market, subsequently ordering the enterprise to take remedy measures to reinstate the competition status in the relevant market.
Maximum fine imposed
In 2021, in most of cases of failure to notify, a maximum fine of 500,000 yuan was applied. Of the 94 cases released by the antitrust enforcement authority in 2021, only eight cases were subject to a fine of less than 500,000 yuan and the remaining 86 cases were subject to a maximum fine of 500,000 yuan.
The ‘reinstate’ remedy
In a penalty decision on the failure to notify an equity acquisition of an internet platform released in July 2021, the antitrust enforcement authority determined that the transaction had the effect of eliminating or restricting competition in the relevant market of online music playing platform market within the territory of China. Based on this, in addition to imposing a maximum fine for failure to notify, the antitrust enforcement authority for the first time applied article 48 of the AML in mandating the concerned parties to take necessary measures to restore the pre-concentration status.
This case, to a certain extent, is consistent with where Anti-Monopoly Law (Draft Amendment) is headed. According to the Anti-Monopoly Law (Draft Amendment), penalties for failure to notify are further distinguished between those that have the effect of eliminating or restricting competition and those that do not – for the former, penalties include both reinstating the pre-concentration status and an increase in the amount of fines to less than 10 per cent of the previous year’s sales amount; and for the latter, only a fine will be imposed, but the upper limit of the fine will be increased to 5 million yuan.
Shortened case closing cycle
The investigation process for a case of failure to notify includes supplementary filing, preliminary investigation, further investigation, and making an administrative penalty decision. When the case enters the further investigation stage, the enterprise involved is required to submit the same set of material as in a normal merger filing. Compared with the normal merger filing, the enterprise involved is required to submit some additional statements and documents in a supplementary filing, and the investigation process often takes longer. Nevertheless, in recent years, the antitrust enforcement authority has accumulated rich experiences in investigating and punishing cases of failure to notify, and the average investigation time tends to be significantly shortened. According to our statistics, the average investigation time for failure to notify cases announced in 2021 is less than 100 days, of which 21 cases take less than 50 days from case filing to penalty. Compared with previous years, the case closing cycle is significantly shorter, which increases the predictability of the investigation process for the enterprises involved.
Sharp sword hanging over key fields
Industries closely related to people’s livelihood, such as automobile, medicine and public utilities, still receive significant regulatory attention. In 2021, financial enterprises such as banking and insurance also began to enter the regulatory radar, and the antitrust enforcement authority announced several penalty cases against the financial industry. This also echoes the content of article 37 of the Anti-Monopoly Law (Draft Amendment), which clearly states that people’s livelihood, finance, technology, media, etc, are the key areas of focus in the review of concentration of undertakings.
Minority equity investments requesting for caution
Among the failure to notify cases in 2021, many transactions involved minority equity investments. For example, there were 22 cases in which the proportion of equity acquired (including increased shareholding) or joint venture was less than 15 per cent. In some cases, the proportion of equity acquisition was less than 5 per cent, or one of the joint venture parties only held less than 5 per cent of the equity of the joint venture.
This once again reminds enterprises that they should pay enough attention and prudently assess whether a transaction triggers the filing obligation. In particular, when a minority equity transaction is involved, the transaction parties need to assess whether they will obtain control (including joint control) after the transaction. The determination of control under the AML is different from that under the Securities Law. No control under the Securities Law does not mean no control under the AML. Control under the AML needs to be analysed case by case, taking into account whether the shareholders have the right to decide or veto the daily operation and management matters of the target company, whether they appoint senior management, and whether they enter into specific business arrangements with the target company, etc.
Breakthrough in quantitative analysis in the merger review
Summary of cases with conditional approval
In 2021, the antitrust enforcement authority conditionally approved four notifications, and prohibited one notification. The average review time for these five cases was 10.8 months. Of the four conditionally approved notifications, three were subject to behavioural remedies and one was subject to structural remedies. In the review of the above notifications, the antitrust enforcement authority continued to focus on the market structure analysis. In terms of designing remedies, the antitrust enforcement authority’s main concern was whether the transaction would increase the possibility of unilateral price increase by the merged entity, and in particular, whether the merged entity would have the incentive and market power to provide Chinese customers with relatively worse treatment in terms of the product price, the product quality, the transaction conditions and so on after the transaction. We also note that the antitrust enforcement authority delivered more refined competition analysis, using more quantitative criteria and introducing some innovative remedy conditions.
The following is a summary of the basic fact of cases subject to conditional approval or prohibition in 2021.
|The name of the transaction||Field||Review timeline (from initial submission to publication of decision)||Main relevant markets||Competition analysis (abstract)||Restrictive conditions (abstract)|
|The acquisition of Intel SSD businesses by SK Hynix||Semiconductors||About 12 months|
Horizontal overlap: global SATA enterprise level SSD market
Horizontal overlap: global PCIe enterprise level SSD market
Upstream: Global NAND flash market
Adjacent: global DRAM market
|In global SATA enterprise level SSD market, post-transaction HHI is 2851 with an increase of 307|
In global PCIe enterprise level SSD market, post-transaction HHI is 3456 with an increase of 681
|Behavioural remedies mainly include:|
|The acquisition of MTS Systems Corporation by Illinois Tool Works Inc||Industrial machinery||About eight months||High end electro-hydraulic servo material testing equipment market within the territory of China||Post-transaction HHI is 4946.23 with an increase of 2286.36||Behavioural remedies conditions mainly include:|
|The acquisition of Eaton’s hydraulics business by Danfoss||Industrial machinery||About 12 months||Chinese cycloid motor market||Post-transaction HHI is 3259.4 with an increase of 1476||Structural remedies mainly include:|
|The acquisition of Acadia Communications by Cisco||Photovoltaic equipment||About 14 months|
Upstream: Global coherent digital signal processors market, global coherent photonic integrated circuits market, Chinese coherent optical transceiver modules market
Downstream: optical transmission system market within the territory of China
Adjacent: global routers market
|The post-concentration entity has the ability and motive to implement raw material lock-in||Behavioural remedies mainly include:|
|The acquisition of Huya by Douyu||Internet||About eight months||Horizontal overlap: games live streaming market within the territory of China|
Upstream: Online game operation service market within the territory of China
|Shares of the transaction parties exceed 40 per cent and 30 per cent respectively, and exceed 70 per cent in aggregate||The transaction is prohibited|
More refined competition analysis and applying more quantitative criteria
We note that the antitrust enforcement authority is making greater use of quantitative analysis. In the acquisition of MTS Systems Corporation by Illinois Tool Works Inc above, the antitrust enforcement authority analysed the closeness in competition relationship between the two parties to the transaction. In addition to paying attention to the qualitative relationship between the products of both parties in terms of performance and quality, the authority calculated the diversion ratio between the products of both parties based on the bidding data submitted by the parties. Although the degree of closeness in competition relationship between the parties has been mentioned in previous cases, according to public information, the acquisition of MTS Systems Corporation by Illinois Tool Works Inc is the first case in which the diversion ratio was published in an official decision.
To analyse the possibility of unilateral price increase after the transaction, in the acquisition of MTS Systems Corporation by Illinois Tool Works Inc, the authority also calculated the gross upward pricing pressure index (GUPPI) to illustrate the possibility of price increase after the transaction. According to public information, this is the first time that the authority provided the calculation data of the GUPPI in a formal decision.
Setting assisting a third-party competitor to enter relevant market as a remedy
The antitrust enforcement authority will usually focus on market entry barriers when analysing market structure. High entry barrier is an important prerequisite for the post-transaction entities’ ability to unilaterally raise product prices. Based on previous cases, the authority tends to impose behavioural remedies for the post-transaction entities to prevent it from raising prices by leveraging favourable market position. However, such behavioural remedies cannot fundamentally change the market structure. In the acquisition of Intel SSD businesses by SK Hynix above, the authority required the post-transaction entity to help a third-party competitor enter the relevant market. According to public information, this is the first time that the post-transaction entities are required to help a third party competitor enter the relevant market as a remedy in a formal decision.
From the announcement of the Antitrust Guidelines for Platform Economy at the beginning of the year to the issuance of the Anti-Monopoly Law (Draft Amendment) at the end of the year, and further to the recent establishment of the National Antimonopoly Administration, 2021 is undoubtedly a milestone year in the merger control regime in China.
Firstly, the Anti-Monopoly Law (Draft Amendment) proposes a series of new rules in the merger control area with the aim of improving the procedural efficiency of merger review and enhance the legal liabilities for failure to notify.
Second, in 2021, the antitrust enforcement authority paid unprecedented attention to cases of failure to notify at both the law enforcement and legislative levels. From the beginning of 2022, the antitrust enforcement authority has already announced 13 penalty cases of failure to notify. We expect that the antitrust enforcement authority will continue to investigate rigorously cases of failure to notify in 2022.
Third, since developing a healthy and competitive digital economy has been a focal point in China’s industrial policy, we believe that the antitrust enforcement authority will be empowered to continue to closely scrutinise transactions by platform enterprises in the digital economy.
In this context, we recommend that enterprises strengthen internal merger control compliance management. On the one hand, it can prevent a company’s reputational or financial losses caused by regulatory penalties. On the other hand, it can enhance a company’s reputation and increase the company’s brand value. We hope that through our joint efforts, we have provided readers with a deeper understanding of the complexity of Chinese merger control regime in 2022.