China: Merger Control
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China’s merger control regime under the Anti-Monopoly Law (AML), which came into force in 2008, has continued to evolve in the past year, and in 2015, China’s Ministry of Commerce (MOFCOM) took on a record number of cases, with acquisitions and joint venture agreements in the manufacturing sector forming the majority of deals notified. This year, only two cases were cleared with conditions,1 and approximately two-thirds of all cases notified were handled under the simplified procedure introduced in February 2014. Cases that did not raise substantive antitrust issues and fell within the designated categories were granted simplified treatment, and in the case of normal case reviews completed swiftly within Phase I (30 days).
To further boost the efficiency of the merger control regime and streamline its merger review process, MOFCOM undertook to restructure the Anti-Monopoly Bureau in September 2015. MOFCOM’s Consultation division, which was previously in charge of the review of the completeness of filings before their formal acceptance and substantial review by the Legal Division or the Economic Division, has now become one of the three divisions responsible for merger reviews. All three divisions are now responsible for the pre-review before acceptance of the filings and the actual substantive review of the filings. It is anticipated that this will further shorten the average time for review of merger filings.
At the same time, MOFCOM has also conducted a consultation on draft revised versions of the Measures for Review of Concentration Between Undertakings and the Measures for Notification of Concentration Between Undertakings. The revised drafts aim to clarify certain concepts that remain unclear under the AML regime, such as that of control and change of control.
Building upon existing relationships with its counterparts in the United States and Australia, MOFCOM further consolidated its international presence by entering cooperation agreements with competition authorities in Austria and Canada, and further deepened its relationship with the European Commission.
With these developments, MOFCOM is making significant strides towards becoming a world class competition authority – embracing an increased caseload, improving operational efficiency, reviewing laws and guidelines, and moving to adopt international best practice.
Legislative developments in 2015
Regulation on remedies
MOFCOM promulgated the Provisions on the Imposition of Restrictive Conditions in Concentrations of Undertakings (for Trial Implementation) (Restrictive Conditions Provisions) on 4 December 2014, which came into force on 5 January 2015.
The Restrictive Conditions Provisions confirm that MOFCOM may seek structural, behavioural or hybrid conditions, and provide for:
- the respective duties and obligations of the parties and the divestiture and monitoring trustees;
- timing for the negotiation of remedies;
- variation or withdrawal of remedies; and
- consequences for breaching a condition imposed.
Compared to its predecessor, the Interim Provisions on the Divestiture of Assets or Businesses in the Concentration of Undertakings, the Restrictive Conditions Provisions set out a comprehensive set of rules for merger remedies that are mainly in line with international standards. Just as in the EU and the US, the Restrictive Conditions Provisions now provide for ‘upfront buyer’ or ‘fix it first’ solutions when there are doubts over the parties’ ability to find a suitable purchaser for the divested business. Similarly, the Restrictive Conditions Provisions codified ‘crown jewel’ provisions, which MOFCOM applied in the Glencore/Xstrata case in 2013. Crown jewel provisions allow MOFCOM to require the parties to provide an expanded or alternative divestiture package to ensure that the divestment is successful.
To supplement the Restrictive Conditions Provisions, on 27 November 2015, MOFCOM published a Chinese template agreement for the appointment of monitoring trustees. The sample agreement contains provisions tailored to both structural and behavioural remedies, and may also be adapted for hybrid remedies. According to MOFCOM’s press release, the template agreement is for guidance only and contains sections that may be customised to the specific circumstances of each case.
Draft Implementation Guidelines
In May 2015, the State Council’s Anti-Monopoly Commission announced that the National Development and Reform Commission (NDRC) has been tasked with developing a set of antitrust guidelines, in consultation with the State Administration for Industry and Commerce (SAIC) and MOFCOM.2
It is understood that these draft guidelines will address penalties, exemptions, leniency and suspensions. It is anticipated that intellectual property rights (IPR) specific guidelines will also be published to address IPR issues in relation to the conduct rules under the AML as well as merger control.
Decisional practice in 2015
On 25 November 2015, MOFCOM approved the conditional clearance of the acquisition of the entire share capital of Freescale Semiconductor, Inc (Freescale) by NXP Semiconductors N V (NXP). The deal was first notified to MOFCOM on 3 April 2015, withdrawn and refiled in November 2015, and finally cleared in Phase I of the second filing, bringing the entire duration of the review up to 235 days.
In reviewing the impact of the transaction on competition, MOFCOM focused on the product markets in which NXP and Freescale had horizontal overlap, particularly the markets for general micro-controllers, special analogue integrated circuits (applied in the field of automobiles) for power sources and radio frequency power transistors (RF power transistors). The relevant geographical market was global for each of these products.
MOFCOM identified concerns in the market for RF power transistors, as the transaction saw the combination of the two market players in a concentrated market of eight, which accounted for a combined 54 per cent of global market share in 2014. Relying on statistics published by IHS, MOFCOM noted in particular that Freescale and NXP have been the top market players in the market for RF power transistors since 2011, which employ similar, mainstream production technologies, and have the same client base. In other words, the two companies imposed a strong competitive restraint on each other, which will be removed by the proposed combination.
On the demand side, MOFCOM took the view that the combination would reduce choice and increase procurement risk for customers in the relevant market. MOFCOM noted that most customers in the relevant market were large providers of wireless infrastructural facilities who would usually purchase from both Freescale and NXP.
MOFCOM also expressed concerns that the combination would affect R&D and technological innovation in the relevant market by reducing competitive pressure on NXP and Freescale to innovate. It was considered that the consolidation of technology and patent ownership between NXP and Freescale would also raise entry barriers in the market for RF power transistors.
To address MOFCOM’s concerns, NXP proposed the remedy of divesting the parties’ RF power transistor business to Beijing Jianguang Asset Management Co, Ltd (JAC Capital).
In accordance with the Restrictive Conditions Provisions, MOFCOM accepted the proposed structural remedy after evaluating the scope of business proposed to be divested, the competitiveness and qualification of JAC Capital as the proposed purchaser, and engaging in consultation with relevant customers.
On 19 October 2015, MOFCOM gave conditional clearance to Nokia’s proposed acquisition of Alcatel-Lucent.
MOFCOM analysed the impact of the proposed acquisition on the markets in which the parties had a horizontal overlap, namely the Chinese markets for radio access network equipment, core network systems equipment, network infrastructure services and communication technology standard essential patents (SEPs).
In the markets for access network equipment, core network systems equipment and network infrastructure services, MOFCOM considered that the transaction was unlikely to eliminate or restrict competition as the parties’ combined market share was relatively modest and there were strong players in the market.
Focusing on the market for 2G, 3G and 4G Wi-Fi technology SEPs, MOFCOM noted that Nokia and Alcatel-Lucent were both members of key international standard setting organisations and participated in formulating current communication standards. Together, Nokia and Alcatel-Lucent will hold the highest share of patents in the SEPs market, causing a reduction in competition and increase in concentration of the Chinese SEP market. This was considered to be not only significant in the SEP licensing market, but also likely to affect the downstream market for wireless communication equipment and mobile terminals, where manufacturers require 2G, 3G and 4G patents to support product compatibility and functionality. MOFCOM was particularly concerned that downstream manufacturers would be unable to cross-license with Nokia, and lacked countervailing power in licensing negotiations with Nokia. MOFCOM also thought that the consolidation of market power in Nokia might lead to unreasonable licensing fees, which would impact the competitive landscape of the Wi-Fi equipment and mobile terminal manufacturing markets.
MOFCOM concluded that the proposed acquisition may eliminate or restrict competition in the Wi-Fi technology SEP licensing market. To address MOFCOM’s concerns Nokia proposed the following behavioural remedies:
- a commitment not to pursue injunctions to prevent the enforcement of FRAND-encumbered SEPs unless the potential licensees refused to accept or comply with FRAND terms;
- a commitment to notify MOFCOM if Nokia transfers its SEPs to a third party, and to accord licensees the opportunity to renegotiate their loyalty fees where the value of the SEP is significantly affected by the sale;
- a commitment to require any transferee of Nokia’s SEPs to accept the FRAND commitments that bind Nokia; and
- a requirement to report to MOFCOM 45 days before the end of each calendar year, until 2020.
These remedies were accepted by MOFCOM and will be binding on Nokia until their expiry or earlier removal.
Failure to notify
The year 2015 has seen MOFCOM step up its enforcement against cases of failure to notify under the Interim Measures for the Investigation and Handling of Concentrations of Undertaking Not Notified According to Law (Investigation Measures), which entered into force on 1 February 2012.
Following the publication of MOFCOM’s first failure-to-notify decision pursuant to the Investigation Measures on 8 December 2014 (in which MOFCOM fined Tsinghua Unigroup a total of 300,000 renminbi for failing to notify MOFCOM of its acquisition of RDA Microelectronics), MOFCOM published four more decisions on 29 September 2015 pursuant to the Investigation Measures.
MOFCOM fined Microsoft and Best New Media 200,000 renminbi each for failure to notify the establishment of a joint venture. The joint venture was established in October 2013 and brought to the attention of MOFCOM in mid-2014 by a third-party complainant.
Fujian Electronics & Information Group was fined 150,000 renminbi for failure to notify its acquisition of a 35 per cent equity stake in Shenzhen CHINO-E Communication prior to completion of the acquisition. This was a case of late filing as the deal was in fact notified to MOFCOM, but only after Fujian Electronics had acquired control in Shenzhen CHINO-E.
Shanghai Fosun Pharmaceutical Group was fined 200,000 renminbi for failure to notify the acquisition of a 35 per cent equity stake in Suzhou Erye Pharmaceutical Company Limited. In this case, the parent company of Shanghai Fosun Pharmaceutical Group had in fact notified the acquisition of a 65 per cent equity stake in Suzhou Erye; however, its Shanghai subsidiary neglected to notify the prior acquisition of the remaining 35 per cent equity stake. The non-notified acquisition of a 35 per cent stake constituted gun jumping in breach of the AML.
Lastly, CSR Nanjing Puzhen and Bombardier Transportation Sweden were each fined 150,000 renminbi for failing to notify a proposed joint venture before its completion.
These decisions demonstrate MOFCOM’s increasing zeal in enforcing the merger control regulations under the AML and asserting its jurisdiction to penalise companies for non-compliance even in respect of transactions that would not eliminate or restrict competition. According to MOFCOM, the penalty for non-filing will be set by reference to, and should exceed the cost of a typical filing. The maximum penalty under the Investigation Measures is 500,000 renminbi, but according to the decisions published so far, the highest fine MOFCOM has imposed is 300,000 renminbi.
It remains to be seen how MOFCOM will approach a transaction, which does raise significant competition concerns – under the Investigation Measures, MOFCOM has the power to unwind a transaction.
Removal of remedies
For the first time, MOFCOM lifted remedies imposed on parties in a merger before their expiry date.
On 9 January 2015, MOFCOM agreed to remove a condition, imposed in the 2012 acquisition of Motorola Mobility by Google, that required Google to treat all original equipment manufacturers (OEMs) equally in relation to its android platform. However, after Lenovo acquired Motorola Mobility on 30 October 2014, the remedy was no longer necessary as the competitive landscape had changed – Google would no longer be engaged in the manufacturing of smart phones.
On 19 October 2015, MOFCOM decided to partially remove hold-separate remedies imposed on Hitachi and Western Digital in March 2012. Western Digital had applied for the removal of the remedies in 2014, but MOFCOM was prevented from considering the application as it was investigating a suspected breach of the remedies. After the investigation was concluded with Western Digital being fined 600,000 renmenbi, MOFCOM was able to commence its review of the remedies in January 2015. MOFCOM considered that the hold-separate remedies imposed in 2012 had prevented synergies in production and R&D. To capture these savings and promote innovation, MOFCOM lifted the hold-separate remedies in relation to production and R&D operations, but held the remedies in place for sales and branding.
Pursuant to the Restrictive Conditions Provisions, parties may apply to MOFCOM to change or lift restrictive conditions imposed in a merger clearance. MOFCOM may also, on its own initiative, conduct a review of the remedies afresh with a view to altering or waiving them. Article 27 of the Restrictive Conditions Provisions specifies that MOFCOM should consider the following factors when considering an application to change or eliminate restrictive conditions:
- whether there have been major changes to the parties in the transaction;
- whether there have been material changes in competition in the relevant market;
- whether it is not necessary or impossible to implement restrictive conditions; and
- other factors.
With respect to ‘other factors’, it should be noted that, whereas in other jurisdictions remedies are used to address only competition concerns, MOFCOM is empowered under article 24 of the AML to require remedies to address non-competition concerns, such as the effect of the proposed transaction on national economic development.
In 2015, MOFCOM continued to raise its international profile by entering into cooperation with foreign competition authorities.
In May, MOFCOM entered into a memorandum of understanding (MOU) with the Canadian Competition Bureau. Shortly afterwards, in August, MOFCOM reached an agreement with the Austrian Federal Competition Authority on the terms of an MOU.
MOFCOM signed a practical guidance document with the European Commission that creates a dedicated framework to strengthen cooperation and coordination between the Commission and MOFCOM, which will facilitate communication between the authorities throughout the merger review procedure on issues of procedure and substance, including market definition, theories of harm, competitive impact assessments and remedies. It is anticipated that enhanced coordination between competition authorities will increase the efficiency of investigations, reduce the burden on notifying parties, and improve the cohesiveness of review and remedies in international transactions with multi-jurisdictional filings.
Last year, we predicted that MOFCOM would embrace its role as a regulator in a key merger control regime, seek recognition in international competition law organisations, and strengthen its communication and cooperation with regulators in other jurisdictions. 2016 promises further developments that will see the Chinese regulator reach new heights on the world stage.
- Only cases cleared with conditions are published by MOFCOM.
- The NDRC and SAIC are China’s two non-merger enforcement agencies, which are responsible for enforcement against price-related and non-price-related anticompetitive conduct, respectively. They are, however, usually consulted as part of the merger review process.