China’s merger control regime has been a topic of discussion for some time now.
Some commentators interpret Chinese merger control as being influenced by political factors; namely, more than encourage competition, it is yielded by authorities to stop foreign competitors from flooding China’s market.
But is that really the case?
What is the merger control regime like in China?
In China, like in the EU and the US, merger control regulates mergers, acquisitions and other transactions involving concentrations of undertakings. Since a concentration of undertakings may lead to concentration of market power, merger control is an important ex ante regulatory tool employed by antitrust authorities to keep markets healthy in many jurisdictions, and China is no exception.
If Chinese antitrust authorities decide that a concentration has the effect of eliminating or restricting competition in the relevant market, they may decide to prohibit the concentration, or more often approve it but with remedies imposed.
According to the 2008 Anti-Monopoly Law of the People's Republic of China (“AML”), if a transaction involving a merger, acquisition (including equity or asset deals) or establishment of a joint venture meets the notification threshold prescribed by the State Council, the parties concerned must notify the State Administration for Market Regulation ("SAMR”). Otherwise, the transaction violates the AML, and SAMR may initiate an investigation and impose a penalty against the transacting entities.
To date, the notification thresholds for merger control in China are (generally) as follows:
- At least two of the concentration parties each has an annual turnover (within China and during the last fiscal year) which exceeds CNY 400 million (approx. USD 63 million); and
- The aggregate turnover in the last fiscal year of all concentration parties exceeds
- (Globally) CNY 10 billion (approx. USD 1.58 billion); or
- (Domestically, within China) CNY 2 billion (approx. USD 315 million).
Because the determining factor is turnover, the above notification standards apply regardless of the nationality of the undertaking. In other words, a company’s status as a Chinese or foreign company is not a consideration that triggers Chinese merger control review. Merger review is also required for mergers between foreign entities operating in the PRC. For example, where an American company acquires 100% of a German company — both foreign entities in China — and either their global or Chinese turnover meets one of the standards above, the transaction must be notified to SAMR.
Failure to file a notification of concentration of undertaking renders it illegal, exposing the entities involved to regulatory penalties. Pursuant to the current AML, SAMR may decide to impose a fine of up to CNY 500,000 (approx. USD 72,000). This, limit however, may increase under the expected amendments to the AML (currently under review by the Chinese legislative branch). The penalties SAMR may impose against an illegal concentration of undertakings also include ordering the undertakings to cease the concentration, dispose of shares or assets, divest from the business, or adopt other necessary measures to restore the market situation before the concentration within a prescribed period of time. However, practically speaking, fines are the enforcement tool of choice and SAMR rarely imposes structural or behavioral remedies on illegal concentrations of undertakings. Since the introduction of AML in 2008, such remedies were imposed only in one case, namely the acquisition of China Music Corporation by Tencent Holdings Limited (who was ordered to give up its exclusive music rights to restore competition to the market).
These penalties apply without regard to the nationality of the undertaking. As in the example above, a foreign company operating in China which fails to notify a necessary transaction may be subject to such penalties even when the transaction involves only foreign-owned entities.
For concentrations falling below notification thresholds, Chinese antitrust authorities have the power to initiate an investigation if there is evidence indicating that the concentration has or is likely to have the effect of eliminating or restricting competition; additionally, undertakings may also voluntarily file notice of the concentration. Currently, under Chinese merger regulations, proactive investigation and voluntary filing are mainly used for “killer acquisitions” of startups by larger companies, especially in the Internet industry.
Chinese merger control is used to maintain domestic market competition.
Antitrust law and accompanying legislative intent vary across economic regions. That said, generally speaking merger control rules are designed to prevent excessive concentration of market power within a given market. Since the implementation of the AML, Chinese antitrust authorities have published regulations, guidelines, and other documents to clarify China’s AML standards.
Accordingly, in China there usually are six main factors to be considered during the review of a concentration:
- The market share (in the relevant market) of each undertaking involved in the concentration and their existing control over the market;
- Existing market concentration in the relevant market;
- The effect of the concentration of undertakings on market entry and technological progress;
- The effect of the concentration of undertakings on consumers and other relevant undertakings;
- The effect of the concentration of undertakings on the development of the national economy; and
- Other factors affecting market competition, such as the effect of the concentration on the public interest, and whether the undertakings involved in the concentration are enterprises on the verge of bankruptcy.
In practice, Chinese antitrust authorities apply these factors to review merger filing cases regardless if a foreign entity is involved.
In fact, in recent years Chinese antitrust authorities have shown they typically approve merger filings involving foreign entities. According to the 2020 annual report published by SAMR, it approved 85 merger filings for transactions between domestic and foreign entities. These approvals included 37 foreign acquisitions of domestic entities; 15 domestic acquisitions of foreign entities; and 33 joint ventures between domestic and foreign entities. For filings between foreign entities, SAMR approved 179 concentrations of undertakings.
For concentrations involving only domestic entities and no foreign entities, the numbers speak for themselves. Failure to notify typically leads to an investigation and then penalties. In 2021, SAMR published 107 penalty decisions against concentrations which failed to notify under Chinese law. Among these penalties, 105 were applied only against domestic entities (98% of all cases). In other words, domestic (and not foreign) firms overwhelmingly bear the brunt of SAMR’s merger controls and accompanying penalties.
One interpretation of these numbers is that SAMR is significantly more lenient in its application of merger control rules towards foreign investors than it is towards domestic entities. Another interpretation is that foreign investors are typically more antitrust aware (even to the point of adopting China-specific market strategies), and as such are more likely to retain experienced antitrust counsel when considering large transactions. Both theories appear to have at least some traction in academia.
Merger review across different jurisdictions is mainly based on whether the transaction will raise competition concerns within the jurisdiction. As a result, the same transaction may face different competition concerns and merger decisions across different countries and areas.
For example, in 2017, Chinese antitrust authorities unconditionally approved ChemChina’s acquisition of Syngenta, a global business operating in the agrochemical sector with its headquarters in Switzerland. However, this same concentration received only conditional approval from authorities in the EU, which had major reservations about the deal’s effect on competition in the European market.
A more nuanced understanding of Chinese merger control helps better predict merger approvals
It is common for analysis surrounding Chinese developments to be overly simplified, and merger control is no exception. This includes the facially appealing but flimsy argument that Chinese merger control is a political exercise, an argument that saw its apogee after the failed acquisition of Huiyuan by Coca-Cola in 2009.
In 2009, China’s Ministry of Commerce (“MOFCOM”, the predecessor to SAMR) blocked Coca-Cola’s acquisition of Huiyuan, a popular Chinese fruit juice producer. The decision was brief, and as a result The Economist ran an article titled “Coca-Cola in China — Squeezed Out” quoting Coca-Cola as describing MOFCOM’s decision as protectionist. The Economist bemoaned the outcome as “unfortunate […] in an industry that has no economic or national-security significance.”
This decision ignited tremendous controversy that the AML was introduced to insulate Chinese companies from overseas competition. One theory, reported as the “Huiyuan test”, emerged to describe what foreigners could expect when acquiring targets in China’s market.
However, the Huiyuan merger occurred while China’s anti-monopoly regime was still in its infancy. The test, while illustrative of the controversy, wariness, and disappointment among foreign investors in response to the decision, is not particularly helpful to predict or understand which mergers will ultimately receive approval.
One insight from the Huiyuan case is that in order to better understand and predict merger results in China, adopting a European competition policy lens may be more helpful than a US lens. MOFCOM had explained that Coca-Cola’s acquisition of Huiyuan failed merger review on three major grounds. According to a case study on the Huiyuan deal, two of these reasons mirror the portfolio effects theory that the European Commission employs when intervening in conglomerate merger cases (namely the Tetra Laval/Sidel and Guiness/Grand Metropolitan cases). The third reason strongly resembles another approach, also used in EU cases, to maintain a competitive market structure. It is thus more likely that the Huiyuan decision reflected a divergence between US and EU approaches (with MOFCOM preferring the latter, at least during the AML’s early years) rather than a divergence between Chinese and Western approaches. With the benefit of hindsight, commentators increasingly consider the concerns following Huiyuan unjustified
Moreover, with China’s increasing antitrust enforcement experience since the introduction of the AML in 2008, published decisions present specialized economic and antitrust analysis that is much closer to western standards. For example, on December 22, 2021, SAMR published the decision conditionally clearing the acquisition by SK Hynix of the NAND memory and storage business of Intel. In the decision, SAMR used the Herfindahl-Hirschman Index (HHI) to analyse the concentration level in the relevant market and the market power of the merged entity post-deal. Another example of an Chinese antitrust authority using economic tools in its decision in 2021 was the penalty imposed against Sherpa (a popular food takeout app among foreigners in Shanghai) for abuse of dominance on April 12. In that case, the Shanghai Administration for Market Regulation published detailed reasons applying the small but significant non-transitory increase in prices (SSNIP) test to define the relevant market, and explained how the SSNIP test was applied within its monopoly theory.
Chinese merger review authorities understand that Chinese corporate champions are forged in the crucible of healthy, fair, and transparent domestic competition. In fact, the “regulatory windstorm” of 2021 against Chinese tech companies was a powerful statement to this effect. That windstorm was almost entirely directed against home-grown tech champions, particularly in the platform economy, and not foreign investors.
Allegations of protectionism against the application of competition law are common when those on the receiving end of a regulatory decision are unhappy with the result. However, the differences between Chinese merger control regulation and the US approach (which is influenced more by the Chicago school) do not amount to a protectionist agenda. Overseas investors in China who spend the time and resources necessary to become more familiar with China’s regulatory concerns typically reap rewards from their efforts.
Large foreign companies active in China need to understand and become familiar with Chinese merger control
Like the EU and the US, Chinese merger control regulation is used to ensure a well-functioning market and benefit consumers. To analyze and decide whether a concentration raises concerns of eliminating or limiting competition, numerous factors may be involved, such as market share and market concentration, market competition structure, potential unilateral and coordinated effects, foreclosure and conglomerate effects, the relevant industry’s maturity, and so forth. Like in other jurisdictions, when a foreign transaction or cross-border investment raises competition concerns within the relevant market, it may be blocked or approved with conditions.
For foreign companies running merger deals in China, it is necessary to retain counsel with an in-depth understanding of Chinese merger control and to consider the potential market impacts that may result from the transaction.