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As the largest marketplace and manufacturing base worldwide, China is fertile ground for international merger and acquisition (M&A) activities despite the changing trade climate and continued global impact of covid-19. The implementation of the Foreign Investment Law and further streamlining of business administrative rules have enabled foreign businesses to navigate on a more level, transparent and predictable business environment. On the other hand, an increase in antitrust enforcement activities, in line with global antitrust regulatory trends, has placed multinational companies' operations in China in closer scrutiny. The top Chinese policy makers have announced that antitrust enforcement is one of the prioritised goals in economic policy planning and implementation. In 2021 alone, the Chinese competition authority not only imposed a record high antitrust fine (18.23 billion yuan) on Alibaba, the largest e-commerce player in China, but also probed nearly 200 deals, with many involving a variable interest entity structure (the most popular investment structure for Chinese digital platform players to attract international investors), handing down sanctions on Tencent, the top social networking player in China, for its failure-to-notify acquisition as well as blocking its plan to merge the top two Chinese live gaming platforms.
Since the implementation of the Anti-Monopoly Law (AML)2 in 2008, China has become one of the key competition jurisdictions, with increasing influence on global M&A. In the past 13 years, the Chinese competition authority has reviewed over 4,000 merger filing cases, with the annual case volume exceeding 350 since 2015 and a record high of over 800 in 2021. Among these cases, more than 70 per cent, including 56 out of 57 conditionally cleared/prohibited cases, involve at least one non-Chinese party.
2021 undoubtedly marks a milestone for antitrust enforcement in China, as the top policymakers have explicitly stated that 'strengthening anti-monopoly enforcement and preventing the disorderly expansion of capital' is one of the country's eight top priorities for economic policy going forward,3 and emphasised that 'anti-monopoly and anti-unfair competition enforcements are the inherent requirements for perfecting the socialist market economic system and promoting high-quality economic development'.4
From a legislative perspective, the Chinese national lawmakers have been deliberating an amendment to the AML since its promulgation in 2008, which proposes to significantly lift the upper limit of fines for illegal behaviour, including failure-to-notify circumstances. Also, the State Council Anti-Monopoly Commission has issued antitrust guidelines for the platform economy and active pharmaceutical ingredients sectors, which includes guidance on antitrust compliance in China and beyond, prompting many businesses to heighten their efforts in assessing and strengthening internal compliance systems to better manage their antitrust risks.
2021 also witnessed significant reform of the institutional structure of the antitrust enforcement arm of the State Administration for Market Regulation (SAMR). The Anti-Monopoly Bureau under the SAMR had its status upgraded with a name and organisational change in November and is increasing staffing to strengthen its enforcement function, following the overhaul of the Chinese antitrust regulatory regime in 2018.
From an enforcement perspective, in 2021 the SAMR processed 824 merger filings (an increase of 58.5 per cent from 2020) and cleared 727 cases (an increase of 52.9 per cent from 2020), among which four were approved with restrictive conditions and one was prohibited (the proposed merge of the top two Chinese live gaming platforms controlled by Tencent), and probed nearly 200 failure-to-notify cases including those involving many household internet players such as Alibaba, Tencent, ByteDance, Meituan and Baidu.
A common perception of merger filing in China is that it can easily become a deal bottleneck owing to the relatively low thresholds involved. However, a fast-track procedure (known as the simplified procedure), which was adopted on 12 February 2014, has significantly shortened the review period for qualified cases. Between 2015 and 2021, the Chinese competition authority cleared around 80 per cent of cases under the simplified procedure. In 2021 alone, 603 cases were reviewed and approved under the simplified procedure, and the average time taken to conclude a simplified case was 15 calendar days (a significant number of simplified cases were approved within a few days of expiry of the 10-day public notice period).
In 2021, the SAMR conditionally cleared four deals: Cisco/Acacia, Danfoss/Eaton, Illinois/MTS and SK Hynix/Intel, with an average review period of 344 days from case acceptance to clearance, which was significantly longer than that in 2020. All these cases involved the 'pull-and-refile' (see Section III.i), with Cisco/Acacia doing so twice. The cases involved semi-conductor and industrial manufacturing, which are both particularly strategically important for the Chinese economy. Among these four cases, all were based on concerns regarding vertical or horizontal relationships, or both, and one was also found to have competition concerns under the 'conglomerate effect' theory, which is used more often in China than in many other major antitrust jurisdictions. The SAMR imposed structural remedies in one case and behavioural remedies in all four cases. In addition, the Cisco/Acacia case is also a good example of the SAMR's adoption of the independent analytical approach: it was conditionally cleared upon receipt of unconditional clearances in other major jurisdictions. The table and case summary below provide more details of the SAMR's decisions in these cases.
Information firewall Supply commitment Compatibility commitment
Cisco Systems, established in the US in 1984 and listed on the NASDAQ stock exchange, primarily provides information technology networking-related products, services and integrated solutions. Acacia Communications, established in the US in 2010 and listed on the NASDAQ stock exchange, primarily engages in the optical communication products business. On 8 July 2019, the parties signed a merger agreement and plan, under which Cisco intended to acquire all shares of Acacia and obtain sole control. The parties notified the SAMR in October 2019. The case was accepted on 20 December 2019 and cleared on 14 January 2021. The parties were found to have a vertical relationship in four pairs of markets and complementary relationships in two pairs of markets. The SAMR concluded that the transaction may negatively impact one market segment (optical transmission systems) due to conglomerate effects and imposed several behavioural conditions.
Danfoss, a Denmark-based global supplier engaging in the research, development, manufacture and sale of products in the fields of refrigeration, heating and hydraulics, proposed to acquire Eaton, a company engaging in the manufacture and sale of hydraulic components and systems for industrial and mobile equipment. On 21 January 2020, the parties signed a merger agreement and plan, under which Danfoss intended to acquire all shares of Eaton's hydraulics business and obtain sole control of that part of the company. The parties notified the SAMR on 30 June 2020. The case was accepted on 4 September 2020 and cleared on 4 June 2021. The parties were found to have horizontal overlaps in the markets for hydraulic products in the mobile field. The SAMR concluded that the transaction may negatively impact one market segment (cycloid motor), and required the parties to divest certain business in China and imposed certain behavioural remedies.
Illinois Tool Works Inc, incorporated under the laws of the US in 1912 and listed on the New York Stock Exchange, is engaged in the production of various industrial products and equipment. MTS Systems Corporation, incorporated under the laws of the US in 1966 and listed on the NASDAQ stock exchange, is engaged in the testing and simulation business. According to the concentration agreement, Illinois planned to acquire all the issued and circulating share capital of MTS and obtain separate control over MTS. The parties notified the SAMR in March 2021. The case was accepted on 21 April 2021 and cleared on 18 November 2021. The parties were found to have a horizontal relationship in four pairs of markets. The SAMR concluded that the transaction may negatively impact one market segment (high-end electro-hydraulic servo material testing equipment) and imposed certain behavioural remedies.
SK Hynix Inc, incorporated in South Korea in 1983 and listed on the Korean stock exchange in 1996, is mainly engaged in businesses related to memory, solid state disk and image sensors. Intel Corporation is mainly engaged in the NAND flash memory and solid state disk (SSD) businesses. According to the concentration agreement, SK Hynix would control a part of Intel's storage business separately. The parties notified the SAMR in December 2020. The case was accepted on 22 March 2021 and cleared on 22 November 2021. The parties were found to have a horizontal relationship in three pairs of markets and vertical overlaps in two pairs of markets. The SAMR concluded that the transaction may negatively impact two market segments (serial advanced technology attachment interface for SSD and peripheral component interconnect express interface for SSD) and imposed certain behavioural remedies.
On 10 July 2021, the SAMR announced its decision to prohibit Tencent's acquisition of DouYu International Holdings Limited through HUYA Inc. This is not only the first case in which a concentration has been prohibited in the platform economy field in China, but also the first time a merger between two domestic enterprises has been prohibited since the AML came into effect.
In the DouYu/HUYA case, HUYA is solely controlled by Tencent and DouYu is jointly controlled by Tencent and DouYu's founding company. The SAMR was concerned that the limited competition between HUYA and DouYu could be completely eliminated post-concentration, thus further strengthening Tencent's dominance in the Chinese live gaming market, and enabling Tencent to foreclose both the Chinese online gaming operation market and the live gaming market. This case indicates that the SAMR has increased antitrust oversight of China's largest technology firms, including more stringent ex ante merger reviews.
In 2021, the SAMR investigated nearly 200 gun-jumping cases (with 107 cases being fined), involving various industries with a focus on top market players in the digital platform sector. Both the number of cases and the penalty amounts hit record highs, demonstrating the SAMR's firm determination to strengthen antimonopoly and prevent the disorderly expansion of dominant market players.
In addition, Tencent's acquisition of China Music Corporation (the CMC case) became the first gun-jumping case ordered to restore market competition. In addition to a monetary fine, the SAMR ordered Tencent to restore the competition status of the market under the AML. From 2014 to 2021, the Chinese antitrust authority published 170 failure-to-notify cases, all involving monetary fines only (up to 500,000 yuan under the AML). In the past, it was often safely presumed that a failure-to-notify case would only expose the merging parties to a moderate monetary fine without the worry of substantive remedies. However, the CMC case set a vital precedent that failure-to-notify cases can be ultimately subject to remedies in addition to monetary sanctions.
A merger review process in China normally involves the following stages.
The review timeline can also be extended by the voluntary resubmission of the merger notification by the parties (the pull-and-refile approach), which resets the clock. In some cases, the SAMR may suggest or indicate that it expects certain remedial conditions that the parties are not yet ready to accept, particularly if the Extended Phase II review period is about to expire. In that situation, if the parties wish to keep negotiations with the SAMR open, they can voluntarily withdraw their application on certain technical grounds, and immediately resubmit it, starting again at Phase I.
As mentioned above, a common perception of merger filing in China is that it can easily become a deal bottleneck owing to the relatively low thresholds, the relatively lengthy review period and sometimes uncertain outcome. However, this is not always the situation, particularly if a deal qualifies as a simple case.
A fast-track procedure, known as the simplified procedure, was adopted on 12 February 2014. From 2015 to 2021, the Chinese competition authority cleared approximately 80 per cent of cases under the simplified procedure. The average review time of these simple cases was approximately 19 days and the review process has since been significantly shortened.
There are three qualifying criteria for the simplified procedure:
Our statistics show that more than 85 per cent of simple cases qualify based on the market share criterion, and approximately 10 per cent of cases are simply offshore deals with no or limited China nexus; very few cases qualify as simple cases based on the change in joint control criterion.
On 10 July 2021, the SAMR announced its decision to prohibit Tencent's acquisition of DouYu International Holdings Limited through HUYA Inc, the first of its kind for a merger involving all Chinese players. Two weeks later, on 24 July, the SAMR issued an administrative sanction decision against Tencent for its failure to notify its acquisition of China Music Corporation and ordered Tencent to restore the competition status of the market, including exclusive music copyrights within 30 days, and subjecting it to ongoing monitoring of its M&A activities. In 2021 alone, the SAMR issued more than 90 administrative sanction decisions for failure-to-notify deals, many of which involved platform operators. This enforcement further indicates that key players in China's digital sector are facing increasingly heightened antitrust scrutiny. This wave of enforcement has also impacted the pattern of private equity and venture capital activity in China as it has deterred key internet players from investing in start-ups, which are increasingly considering merger control analysis (and filing) in their business decisions.
As an exception, if a concentration occurs through public tender offer or a hostile takeover of a public company, rather than through an amicable agreement, the SAMR allows the acquiring party to use the offer, instead of an executed acquisition agreement, to make the notification. The SAMR may also demonstrate a reasonable level of tolerance for unavailability of certain non-substantive materials and information of the target company, such as the parties' certified certificate of incorporation or subsidiaries' business licences, in these special scenarios. However, the largest challenge for this type of transaction has always been how to meet the deadline for a public takeover while the SAMR sets its own case review pace. It is strongly recommended that a pre-notification consultation is made to seek the SAMR's understanding of the urgent nature of the transaction and to communicate the key competition issues, if there are any, to the SAMR.
Other than public takeover, filing parties may also need to reconcile the merger filing process with certain other legal procedures, such as bankruptcy or a state-owned assets disposal procedure.5 Usually, these procedures can be conducted independently from the merger review, but in certain cases there may be a deadline for the payment in consideration, which may contradict the SAMR's rule of not closing a deal before clearance. Parties are advised to take these requirements into consideration when making timetables for transactions.
Given the significance of the Chinese market, the Chinese competition authority has increasingly become a key player in global deals. Those dealmakers that understand China's regulatory dynamics and practice and proactively manage their merger filings in China will gain an edge in winning and closing deals. Set forth below are some practical notes for global M&A transactions.
The SAMR offers a pre-filing consultation mechanism whereby parties may submit questions on substantive or procedural issues and request a consultation. The SAMR will then arrange an in-person meeting with the parties, typically providing oral advice only. The process usually takes one to two weeks.
The process allows parties to gain more clarity and to some extent pre-warns the relevant SAMR officials about a forthcoming notification. However, the process also alerts the SAMR to a proposed deal. The party must reveal its identity and ask actual and relevant questions; no anonymous consultations or hypotheticals are allowed in the consultations. If an officer suggests or requests that the parties file, it leaves the parties little choice but to file.
Notification must be made after the definitive transaction documents are executed, once the requisite notification documents and materials are in order, but no later than the consummation of the proposed merger. Given the significant lead time for information collection and notification materials preparation, the best practice to speed up the merger review process is to get a head start. By completing most of the groundwork in advance of the execution of the merger documents, notifying parties can submit the merger notification filing soon thereafter. In a number of cases, with the substantive analysis more organised and prepared, the parties received limited supplemental questions and the response time was shortened, thereby substantially shortening the pre-acceptance time and post-acceptance review period.
Compared with the normal procedure, the simplified procedure is significantly faster, as it requires much less substantive information in filing, and takes less steps to reach conclusion. While many normal procedure cases take two to three months, most simplified cases are generally cleared within the 30-day Phase I review period. Therefore, it is more appealing to filing parties with apparently low market share or that are qualified under other simplified procedure criteria. Nevertheless, despite the benefits of lighter information requests and shorter review periods, the parties need to weigh up the following potential issues when deciding whether to apply for the simplified procedure.
A simple case requires a 10-day public announcement upon case acceptance, which is designed to allow comments from the public, primarily various stakeholders in the industry. Therefore, for deals with high sensitivity or confidentiality concerns (e.g., hostile takeovers or private deals), this may not be the best approach owing to concerns regarding publicity.
Owing to potential third-party challenges under the public announcement regime, a simple case runs the risk of being disqualified during the review process. Once the case is disqualified, it takes even more time and resources to reassemble the notification materials to take the normal procedure route, ultimately delaying the review process. For example, it took 278 days (even longer than the standard 180-day review period) to secure the clearance of Sanhuan/Hitachi Metals in 2015, which was originally filed as a simple case but was reported to be disqualified owing to a third party's challenge relating to Hitachi's involvement in another AML litigation in China. The conditional clearance of Novelis/Aleris suggests that even a simple case cannot be completely immune from in-depth investigation and potential merger remedies.
There are a number of issues that may delay the merger review process.
Significant competition concern is the key factor in delaying merger clearance in most cases. If there is already a high degree of concentration in the relevant market, or if the combined market shares of the parties will be significant, there is a higher likelihood that competitors, suppliers, customers or an industry association will voice concerns or raise objections, and sometimes hearings or meetings with stakeholders are needed to understand and address the competition issues and possible remedies. If the parties anticipate substantive competition concerns, it is recommended to proactively prepare and negotiate a remedial plan with the SAMR at an early stage.
It is standard practice for the SAMR to seek comments from stakeholders (e.g., trade associations, customers, suppliers, competitors and other authorities) for a normal procedure case (even if there has been no apparent evidence of competition concerns). Stakeholders may also raise concerns or file complaints to the SAMR even if their comments are not solicited. While these comments or objections may not necessarily have competition-related merit (e.g., an industrial regulatory perspective or other non-compliance issues may be factored in), the SAMR must handle them as a procedural matter, and this process can take months and substantively prolong the review period. It is useful for filing parties to identify hostile stakeholders and manage the relationship before filing to minimise potential delay or other adverse impact on the filing.
For cases involving multiple jurisdictions, it is important to coordinate, and align, with counsel in other jurisdictions in preparing the filing materials. The SAMR has always been interested to learn about progress and (remedy) discussions in other major jurisdictions when they are processing parallel filings. It is also the SAMR's usual practice to keep close communications with other key jurisdictions regarding competition issues during the review process.
China has heightened scrutiny on strategically key industries (e.g., semi-conductors, information and communications technology, healthcare, agriculture) and may expect behavioural or non-typical remedies (e.g., continuation of supply or maintaining interoperability) for China-specific concerns. It is important to understand and effectively deal with such differences in competition analysis and remedy approaches to better manage the filing process in China.
In addition to merger control, other regulatory requirements may also impact the process and prospect of an international deal. For example, on 19 December 2020, China's National Development and Reform Commission and the Ministry of Commerce published the Measures on Foreign Investment Security Review (the FISR Measures), signalling an increased emphasis on safeguarding national security, a trend that has also gained prominence in other jurisdictions, such as the United States (the Committee on Foreign Investment in the United States review) and the European Union (foreign direct investment screening).
One important note is that an international deal involving two foreign entities may also trigger the application of the FISR Measures if the target company has subsidiaries within China and the sectoral tests are met.
Merger control review may also prompt the FISR procedure or other regulatory process. For example, following merger control clearance in Wuhan Zhongbai/Yonghui, the parties announced that the deal should also be subject to the FISR procedure, and was eventually dropped.
There have been significant developments in China's antitrust regime in the past 12 months that will have profound implications for firms doing business in China.
First, on 18 November 2021, the State Anti-Monopoly Bureau (SAMB) was officially announced to the public. The new SAMB shares the same office building with the SAMR in Beijing and is led by a vice minister of the SAMR. It is anticipated that the SAMB's staffing will be further expanded to significantly strengthen China's antitrust enforcement task forces. Also, a separate bureau (the No. 2 Enforcement Bureau) was established within the SAMR to specifically oversee all merger control cases.
Second, on 24 June 2022, the Chinese National People's Congress Standing Committee officially approved the draft amendments to the AML (following its first release to the public on 23 October 2021), which will come into force on 1 August 2022. This is the first amendment to the AML since its promulgation in 2008. Against the backdrop of the development of a unified national market and heightened antitrust enforcement in China, these amendments signal the significance of the AML as the fundamental law for the market economy and the prioritised trends of antitrust enforcement and judicial practice in the future.
Third, on 27 June 2022, the SAMR released six drafts of AML implementing rules for public comment, which are designed to streamline and harmonise the existing operational rules with respect to: filing thresholds (e.g., a significant increase in the turnover thresholds); merger review rules (e.g., clarifying the 'stop-the-clock' mechanism, intensifying the failure-to-notify sanction obligations); joint conduct rules (e.g., introduction of safe harbour rules); unilateral conduct rules (e.g., clarifying situations applicable to platform players); intellectual property abuse rules (e.g., clarifying abusive conduct where standard essential patents are concerned); and administrative monopolies.
Conclusively, with 'strengthening anti-monopoly efforts' recognised as a top economic policy by the top Chinese policymakers, along with the forthcoming new rules and regulations, we anticipate that the AML and its implementing rules in the merger control regime will continue to be viably enforced in 2022 and beyond.
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