An extract from The Public Competition Enforcement Review, Edition 13

Merger review

The SAMR unconditionally approved 469 cases in 2020 – slightly more than the previous year (460 cases). With regard to simple cases, a total of 364 cases were concluded in 2020, accounting for 76.96 per cent of all cases. The proportion of simple cases increased compared with that of 2019 (the number of simple cases accounted for around 73.3 per cent of total cases in 2019). On average, simple cases took 12.81 days to be concluded, which was slightly reduced from 15.37 days in 2019. And in 2020, 27.47 per cent of those cases were unconditionally approved upon expiration of the 10-day publication period. This demonstrates that simple case procedure plays an active role in enhancing the efficiency of concentration review, particularly in the sense of reducing the review time.

However, we also noticed that the time from submission of filing materials to the acceptance notice of filing is becoming longer, given that the SAMR intends to further reduce the interval time between public notification and case conclusion. Notably, for the first time, the SAMR disclosed in its Annual Report on the Enforcement of Anti-monopoly Law of China (2019) that the time spent before accepting a case was 24 days on average in 2019, as provided in its Annual Report on the Enforcement of Anti-monopoly Law of China (2019).18

Furthermore, the SAMR continued its tough stance against non-filers. The SAMR published 13 penalty decisions against parties involved in merger cases that failed to fulfil their notification obligations under the AML.

i Significant casesPenalties on non-filers

In recent years, antitrust authorities have not relaxed their supervision of non-filing cases. In 2020, the SAMR significantly strengthened its supervision of and increased its penalties on non-filing parties. The SAMR published 13 non-filing cases with a total fine of 5.65 million yuan. The highest fine issued was 500,000 yuan, while the lowest was 300,000 yuan. The SAMR initiates investigations on non-filing cases based on its own observations, third-party reporting and voluntary reporting by notifiable parties.

MBK Partners/Siyanli Industrial case19

On 6 January 2020, the SAMR published its penalty decision against MBK Partners for its failure to notify its acquisition of a 23.53 per cent stake in Siyanli Industrial (Siyanli). By failing to do so, the notifying parties breached Article 21 of the AML and were fined 350,000 yuan.

This case also marks the first penalty decision relating to an investment fund acquiring a minority interest, suggesting that the SAMR has not only kept itself up to date on market movements, but that it is taking up a proactive role in policing this area. While the stake of 23.53 per cent prima facie appears to be a small proportion of the overall business, it is likely that the SAMR took a strict approach with its interpretation on 'controlling rights'. The reason could be that this transaction is distinguished from most other PE/VC transactions where there is a greater difference in the proportion of equity stake between the fund investor and controlling party, and where the investment fund was largely kept away from the operations of the business.

Based on our experience, notifying parties holding a minority interest would have to assess their filing obligations under specific circumstances. Typical considerations include:

  1. the voting right arrangement on major corporate decisions (such as whether financial investors had veto power); and
  2. the presence of any special shareholder rights (such as pre-emptive rights, preferential rights, drag-along rights, buyback rights).

If an investor in a later financing round shares the same special shareholder rights to previous investors due to a most-favoured-nation clause, this may also trigger filing obligations.

Intime Retail case, New Classics Media case and China Post Smart Delivery case

On 14 December 2020, the SAMR published its penalty decisions against three non-filers, namely, (1) Alibaba for its acquisition of Intime Retail (the Intime Retail case),20 (2) China Literature Limited for its acquisition of New Classics Media (the New Classic Media case),21 and (3) Hive Box Technology for its acquisition of China Post Smart Delivery (the Hive Box Technology case).22 The three cases all involve internet companies using a VIE structure. It is the first time the SAMR penalised a concentration involving a VIE structure.

Among the three cases, the SAMR's investigation into the Intime Retail case and New Classics Media case each took approximately 40 days, whereas the SAMR's investigation into the China Post Smart Delivery case took 174 days, significantly longer than the other two. It is further worth noting that the actual transaction of the first two cases took place in 2017 and 2018 respectively, whereas Hive Box Technology's acquisition of China Post Smart Delivery was only recently completed in May 2020, implying that the SAMR had begun its investigation only a month after the deal's conclusion. According to the SAMR's subsequent press conference,23 the SAMR conducted a comprehensive review of the transactions' impact on market competition, examining the underlying market condition and the effect that the concentration would have. In the end, however, the SAMR concluded that the three transactions would not reduce or eliminate competition.

It is likely that the SAMR will continue its ex post crackdown on previous transactions involving internet companies using a VIE structure that have failed to comply with their filing obligations. Such companies shall remain vigilant and ensure that a robust compliance framework is in place. Strategic decisions, including the order of transaction to be reported and the supplementary material to be provided, shall consider all potential repercussions. The aforementioned cases are good precedents that shed light on the SAMR's approach to defining the relevant market and determining whether conduct would amount to monopolistic behaviour.

At present, the maximum amount of fines imposed on non-filers is 500,000 yuan, which is obviously insufficient as a deterrent. In accordance with Article 55 of the Revised Draft,24 the proposed penalty will be up to 10 per cent of the non-filer's annual sales in the previous year. This adjustment will greatly increase the deterrence of illegal acts in relation to a violation of merger filing regulations if the proposed change is adopted in the future.

Unconditionally approved cases Mingcha Zhegang case25

On 16 July 2020, the SAMR unconditionally approved the joint venture between Shanghai Mingcha Zhegang Management Consulting Co, Ltd (Mingcha Zhegang) and Huansheng Information Technology (Shanghai) Co, Ltd (Huansheng). Mingcha Zhegang provides data analysis and artificial intelligence solutions to enterprises in the catering industry, whereas Huansheng is a subsidiary of Yum China, which in turn owns brands including KFC, Pizza Hut and Taco Bell. The joint venture proposes to engage in information and network technology development in the catering industry. This is the first case reviewed by the SAMR where it officially acknowledged the presence of a VIE structure used by a party to the transaction. Here, the ultimate controlling party of Mingcha Zhegang is a Cayman-incorporated company, Leading Smart Holdings Limited. Since the SAMR's publication of the simple case review on 20 April 2020, the case received widespread attention due to the uncertain result of merger control review involving VIE arrangements.

Despite the lengthy approval process (88 days), which is significantly longer than the average review period of unconditionally approved cases, taking up almost the entire duration allowed for in simple case review, the delay, contrary to public perception, may be unrelated to the presence of the VIE structure. Instead, the delay was more likely a result of the reasonable objections by related third parties, with regard to relevant market definition and market share of the notifying parties, which in turn led to competition concerns of the SAMR. As the transaction was likely motivated by data consolidation between the two notifying parties, it was also alleged that this would raise issues relating to data monopolisation. Ultimately, however, these issues did not appear to be detrimental to the result of merger control review, as the SAMR approved the transaction unconditionally.

Car Inc (Shenzhou Zuche) case26

On 25 November 2020, the SAMR published the simple case summary that it would be reviewing MBK Partners' proposed acquisition of Car Inc (Shenzhou Zuche). MBK Partners is a private equity firm predominantly focused on the North Asia region, and Shenzhou Zuche is China's largest car rental company. Similar to the Mingcha Zhegang case, this case also involves the use of a VIE structure, though this would almost certainly not be the focus of the SAMR's review. Instead, the SAMR closely scrutinised the transaction for competition concerns, as this particular transaction involves financial and transportation industries, a key focus of regulatory attention in recent years. With MBK's shares in the consortium that took eHi Car Services, China's second largest car rental firm, private last year, such competition concerns would certainly be more pronounced. Beyond anti-competition issues, this transaction may also trigger foreign investment concern with the recent passage of Measures on Security of Foreign Investments.27 Ultimately, the SAMR approved this case on 21 January 2021, which was a rather lengthy approval process (57 days).

As highlighted by the two cases, the SAMR has signalled its intention to review, with heightened scrutiny, cases which involve VIE structures. Putting aside any extrapolation from these decisions of the SAMR's stance on the legality of the VIE structure, it is evident that at least within the anti-monopoly enforcement framework, it would be imprudent for companies that employ a VIE structure to ignore filing obligations. This is further evidenced by the introduction of the Guidelines for Platform, the penalties opposed on three tech companies for failing to comply with their filing obligations, and from recent statements made by the SAMR.28 Given the SAMR's approval in the Mingcha Zhegang case and Car Inc (Shenzhou Zuche) case, the consensus among practitioners is that transactions involving a VIE structure will not be adversely affected. Companies should proactively assess their situation and ensure that they are compliant with the AML.

Conditionally approved cases

In 2020, SAMR conditionally approved four cases, namely Danaher Corporation's acquisition of the GE Healthcare Life Sciences biopharmaceutical business, Infineon Technologies' acquisition of Cypress Semiconductor, NVIDIA's acquisition of Melos Technology Co, Ltd, and ZF's acquisition of WABCO Holdings.

These conditionally approved cases cover the automobile, computer, electronic component and biomedical industries. All of these cases are high-profile and sophisticated multinational transactions, partially explaining the significantly longer review process compared to the previous year (the average review time was up to 291 days). Among these conditionally approved cases, behavioral remedies were imposed in three of the four cases. These remedies include FRAND obligations (e.g., supply to Chinese clients, commitment of ensuring interoperability. Compared to other jurisdictions, the SAMR's particular interest in imposing behavioural remedies reflects its prudent attitude towards those high-profile cases that may have an effect of eliminating or restricting China's market competition or may adversely affect Chinese clients' interest.

Danaher's acquisition of GE's BioPharma case29

On 28 February 2020, the SAMR conditionally approved Danaher's acquisition of GE's BioPharma unit, almost a year after the transaction's initial merger filing. Danaher is an American diversified conglomerate involved in the healthcare and environmental industry. GE's BioPharma unit, renamed Cytiva, provides both hardware and software used in biopharmaceutical research.

In addition to implicating a sensitive and strategically important industry, this case stands out for its complexity, involving 25 different product markets where the notifying parties had horizontal overlaps. In the SAMR's analysis, the relevant geographical market for these product markets was defined as the worldwide market given that there were minimal trade barriers (as evinced by the low ratio of shipping cost to sales price) and minimal price differentiation across borders. The SAMR found that in many of the product markets, including the markets for microcarriers, chromatography systems and hollow fibre filter modules, the transaction would have the effect of eliminating or restricting competition. For example, the SAMR found that, in the microcarriers market, the notifying parties would have a combined market share of nearly 70 to 75 per cent worldwide. In addition to market share, the SAMR also appeared to be concerned with the impact of the transaction on innovation and R&D, particularly in the hollow fibre filter module market.

After several rounds of consultation, the SAMR accepted Danaher and GE's proposal for structural remedies to salvage the transaction, concluding that the remedies would reduce the transaction's adverse impact on competition. Danaher was to divest various businesses, such as the businesses in the aforementioned product markets, which raised competitive concerns, including all its tangible and intangible assets and staff. Moreover, Danaher was to reach a transitional agreement and share its relevant tangible assets and proprietary research of the 'Emily Project' to buyers of its divested businesses, aimed to encourage R&D and investment into new products. This last remedy stands out with the SAMR going beyond its traditional anti-competition toolbox to impose conditions that the agency believed would encourage innovation and facilitate greater product selection within the relevant market, instead of merely eliminating the negative impact raised.

We expect that the SAMR will continue to explore and deepen its anti-competition toolbox in major scientific research fields in life sciences and other high-end scientific research fields (for example, cutting-edge R&D involving biopharmaceuticals, or transactions involving innovative drugs for the treatment of critical diseases and rare diseases). The notifying parties should weigh and coordinate their filing strategies in various jurisdictions and carefully submit remedies based on the impact on the Chinese market to resolve the competition concerns of the SAMR.

ii Trends, developments and strategies

Enterprises shall heed the new trends reflected in the SAMR's enforcement cases,whether it be the trend of scrutinising transactions involving VIE structures and the non-filing of minority stake investments by funds, or the trend of making intensive competition analysis of innovative markets. We expect that the SAMR will continue to accelerate the development of the antitrust enforcement system in 2021. When conducting merger control review, the SAMR usually maintains consistency between cases, particularly relating to market definition when coming across similar factual scenarios. Furthermore, high-quality notification materials will be required by the SAMR to facilitate efficiency. Therefore, enterprises are advised to focus on trends of antitrust enforcement and the revision process of the AML. In particular, enterprises shall understand the regulations of merger control review correctly, actively fulfil their filing obligations, and work closely with external experts to avoid delays in the closing of the transaction, which would in turn affect their business plans.

iii Outlook

In 2020, the SAMR maintained a consistently rigorous and prudent attitude towards merger control review. Despite the covid-19 pandemic, the time interval for filing and approval of merger control review (especially simple cases) has shortened compared to the previous year. As to conditionally approved cases, the SAMR has imposed various conditions based on the characteristics of the relevant product and the competition and innovation condition of the relevant market, so as to eliminate the possible negative effect of the merger. In addition, the 13 non-filing cases published in 2020 show that the SAMR maintains its supervision of non-filing parties and are promptly prepared to impose penalties. The SAMR has also clarified its attitudes towards transactions in the internet sector involving a VIE structure.