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Merger review

According to the data released on the SAMR's website, in 2018 the SAMR unconditionally approved 444 cases, a significant increase from 2017 (325 cases). Among these cases, 359 cases were concluded in Phase I (30 days from the acceptance date), accounting for 80.8 per cent of all concluded cases. The conclusion rate increased considerably compared with that in 2017 (76.9 per cent cases concluded in Phase I).

As to simple cases, a total of 362 cases were concluded in 2018, accounting for 81.53 per cent of all cases. The proportion of simple cases increased slightly compared with that of 2017 (the number of simple cases accounting for around 80.6 per cent of total cases in 2017). On average, simple cases took 16 days to be concluded, which is notably reduced from 24 days in 2017. And 99.4 per cent of the simple cases were cleared within 30 days after they were accepted by the SAMR. This demonstrates that simple case procedure plays an active role in enhancing the efficiency of concentration filing, particularly in the reduction of reviewing time.

i Significant casesPenalties for non-filers

In 2018, the SAMR significantly strengthened its supervision of and penalties for non-filing parties. Over the course of the year, 13 decisions were published, a sign that the SAMR is cracking down on non-filers. By the end of 2018, the SAMR/MOFCOM had released 30 non-filing cases and imposed total fines of 9.85 million yuan on 47 undertakings. The biggest fine issued was 400,000 yuan, while the smallest was 150,000 yuan. According to the statistics, since the merger review function was transferred from MOFCOM to the SAMR, penalty amounts have increased notably. The fine imposed on each party to a non-filing joint venture increased from 150,000 yuan to 300,000 yuan. The SAMR initiates investigations of non-filing based on self-observation, third-party reporting, and voluntary reporting by notifiable parties.

The non-filing of notifiable acquisitions is usually referred to as 'gun jumping'. The most common oversight of notifiable parties is the non-fulfilment of filing obligations in a step-by-step acquisition. The implementation of the first-step transaction indicates that the concentration has started; failure to file first-step transactions with the SAMR will constitute gun jumping. A typical case is the acquisition of Eldorado by Paper Excellence BV. The SAMR considers the object of the acquisition and the relationship between the different steps. Notifiable parties must submit their notifications and file with the SAMR before implementing the first step of a package deal composed of several steps.

In addition, the SAMR has no mercy on the non-filers that failed to file with the competition agency long time ago; and it conducts retrospective investigations once a failure has been discovered. For example, Linde Hong Kong was penalised three times in 2018 for its non-filing of three former joint ventures. These joint ventures were established in either 2011 or 2012. It is notable that the SAMR severely punished non-filing that happened seven years ago.

The SAMR may impose a maximum fine of 500,000 yuan on non-filers. The nature, extent and duration of the non-filers' behaviour must be considered, as well as the transaction's competitive effects. In addition to fines, penalties may include (1) the cessation of the concentration; (2) the disposal of shares or assets by a specified deadline; (3) the transfer of certain business operations by a specified deadline; and (4) other necessary measures (e.g., publication of the penalty decision). In addition, once penalties have been published, the non-filer's business reputation and social image will be damaged and its subsequent notification or filings with other government agencies may be adversely affected.

Bayer's acquisition of Monsanto

On 13 March 2018, MOFCOM conditionally approved the acquisition of Monsanto by Bayer. The case was filed on 5 December 2016 and accepted by MOFCOM on 24 February 2017 after withdrawal and refiling by Bayer due to the change of the agent firm. On 8 September 2017, the parties withdrew the case again and further refiled the case after several days.

MOFCOM found that Bayer and Monsanto were overlapped in 12 product markets (including different kinds of vegetable seeds, traits and digital agriculture) and vertically connected in three markets. MOFCOM believed that the concentration might have the impact of eliminating and restricting competition on the Chinese market of non-selective herbicides, vegetable seeds (e.g., long-day onion seeds, carrot seeds under cutting process for sales, and large-fruit tomato seeds), and the global market of corn, soybean cotton and oilseed rape traits and digital agriculture.

Bayer and Monsanto were two global agriculture giants and collectively owned over 60 per cent of the overlapped product markets. The total market share of the two parties was much higher than the other competitors in the relevant market. MOFCOM concluded that the transaction would eliminate the competition between the two parties and would have adverse effects on the relevant markets. Also, MOFCOM believed that Bayer had the motive and ability to conduct bundling sales of seeds, traits and agrochemical products concerning non-selective herbicides. And there were not likely to be any new effective competitors in the relevant Chinese market in the short term. In addition, MOFCOM believed that the concentration would have negative impacts on the technical progress in relevant traits. Before the transaction, the two parties both had the power of innovation in the market of digital agriculture with large investments in research and development. Upon completion of the transaction, the entity may reduce its input in innovation and therefore would have adverse impacts on technical progress. This is the second profound case in terms of concern over innovation in the industry of agricultural chemistry. In the Dow/DuPont case, MOFCOM also considered that the combination of the two chemical giants would reduce the motivation and investment in innovation.

MOFCOM notified the filing parties of the adverse effects on the relevant market and held several rounds of negotiations with the parties. Upon evaluation, MOFCOM concluded that the final remedy proposal submitted by the parties would reduce the negative effects of the concentration. The conditions imposed on the entity after the concentration included: (1) to divest Bayer's business of vegetable seeds worldwide, including relevant facilities, personnel, intellectual property rights and assets; (2) to divest Bayer's non-selective herbicide business; (3) to divest Bayer's corn, soybean, cotton and oilseed trait business; and (4) to allow Chinese agricultural software and application developers to connect their software to the platform of the combined entity within five years on the basis of fairness, reasonableness and non-discriminatory clauses, and allow all Chinese users to register and use the products.

The merger of Essilor International and Luxottica Group

On 25 July 2018, the SAMR conditionally cleared the merger of Essilor International and Luxottica Group. This marked the first conditional merger clearance case reviewed by the SAMR. The SAMR concluded that the proposed merger might exclude or restrict competition in the Chinese wholesale markets for optical lenses, optical frames, and sunglasses, as well as the Chinese retail market for glasses products.

The parties submitted the merger filing on 23 May 2017 and the SAMR officially accepted the case on 17 August 2017. The parties withdrew their filing on 11 February 2018, which was near the end of extended review period. The SAMR accepted the refiling of the parties on 7 March 2018 and conditionally cleared the merger in Phase II. It took more than 400 days from the date of first submission to the date of conditional clearance. During the case review, the SAMR solicited feedback from relevant government departments, industry associations and downstream enterprises, and held several seminars to assess the definition of the relevant markets and the structure of the market competition. Also, the SAMR hired an independent consulting party to conduct economic analysis on the proposed concentration.

The SAMR defined seven relevant product markets – six wholesale markets and one retail market. As to the geographic market, the geographic market of the wholesale products was China, and the geographic market of the retail glasses was the Chinese urban market. The parties collectively owned an almost 50 per cent market share in the relevant product markets, while the market share of the other competitors was relatively lower than the combined entity. After analysis, the SAMR concluded that:

  1. the proposed transaction was expected to further strengthen the combined entity's control over the wholesale markets for mid-to-high-end optical lenses, low-end optical lenses and the mid-to-high-end sunglasses;
  2. the proposed transaction would increase the likelihood of the combined entity engaging in bundling or tie-in sales in the market for optical lenses, optical frames and sunglasses; and
  3. the proposed transaction may eliminate or restrict competition in the glasses retail market by enforcing unfair trading terms and refusing to supply popular products through a special programme.

Therefore, the SAMR concluded that the combination of the two eyeglasses enterprises might have anticompetitive impacts on the Chinese relevant markets. After multiple rounds of negotiations, the SAMR concluded the remedies proposed by the two enterprises would eliminate the impacts of the combination.

Essilor, Luxottica and the combined entity are required to fulfil the following obligations: (1) not engaging in the tie-in practice nor imposing unreasonable trading conditions without justifiable reasons; (2) making their special programme available to Chinese eyeglasses stores and let the stores participate in the programme by their sole discretion; (3) not imposing exclusive conditions on Chinese stores nor prohibit or restrict Chinese stores from selling lenses, frames, and sunglasses supplied by competitors; (4) supplying eyeglasses products and necessary trademark licences on fair, reasonable, and non-discriminatory terms; (5) not selling eyewear products at below-cost prices without justifiable reasons; and (6) reporting to the SAMR on any proposed acquisition of a Chinese target within 10 working days of signing the acquisition agreement.

In this case, the SAMR hired a third party to study the possible impacts caused by the concentration, and made the prohibition of tie-in practice one of the remedies to approve the combination. Additionally, Chinese antitrust agency increasingly relies on a variety of analysis tools to assist in the case review (e.g., economic analysis, research reports from third parties).

United Technologies' acquisition of Rockwell Collins

On 23 November 2018, the SAMR conditionally approved the proposed acquisition of Rockwell Collins by United Technologies. The SAMR was concerned that the transaction might eliminate or restrict competition in 14 markets. The SAMR believed that after the transaction the combined entity's market share in the 14 markets would reach 50 per cent, even almost 70 per cent in some markets. The SAMR concluded that:

  1. the transaction may further enhance United Technologies' market power in each of the 14 overlapped markets;
  2. the transaction may eliminate the close competition between the two companies in the market for rudder brake pedal systems, while before the transaction the two parties were two major players closely competing with each other;
  3. after the concentration, the parties would have the ability to conduct bundling sales, which would eliminate and restrict competition in the relevant market, particularly for the markets in which downstream aircraft manufacturers have weak bargaining power; and
  4. the transaction may also discourage United Technologies from investing in the research and development of innovative products in the market for oxygen-supply systems. Also, United Technologies may slow the pace of new-product launches, which will eventually have an adverse impact on competition and technological progress.

It is notable that the SAMR narrowed the total market volume of some overlapped markets in this case. The SAMR believed that the concentration would result in the parties obtaining a share of 65 to 70 per cent in the global adjustable horizontal stabiliser actuator market. Based on the product's total volume, the market share would be only 40 to 45 per cent after the acquisition. However, the SAMR believed that the part produced by aircraft manufacturers for their self-use would not enter the market; as such, that part was excluded. This would result in the market share of the merged entity increasing to 65 to 70 per cent after the acquisition. The exclusion of the self-use part from the calculation of market share also happened in the global rudder brake pedal system market. This calculation method would make the total market volume shrink and the market share increase, which would have a material change on the evaluation of the competition.

The SAMR cleared this case with both structural and behavioural remedies. Compared with structural remedies, behavioural remedies were customised. The SAMR attached various customised conditions closely related to competition concerns after carefully studying and analysing the relevant market, the characteristics and competition status of the upstream and downstream market, and the economic analysis. The structural remedies included the divesting of business units and R&D projects; and the behavioural remedies included the prohibition from tying or proactively bundling, or imposing other unreasonable conditions on transactions, to force Chinese customers to purchase product portfolios. Also, the combined entity shall not substantially change their current business models in some affected markets if the demand for related products still exists in Chinese markets.

Furthermore, the SAMR had particular concerns regarding possible bundling in complementary product markets. The SAMR may intervene when the economic analysis shows that the merged entity may gain more profits by bundling or tying after the concentration. The SAMR was concerned with the possible leverage effect associated with the bundling or tying. The entity may leverage its power in a dominant market into the other market and therefore damage the market competition.

ii Trends, developments and strategies

The SAMR has become more stringent and detail-oriented with respect to the analysis of relevant markets and the competition impact for mergers.

All the four conditionally cleared cases in 2018 were withdrawn just before the review period expired and subsequently refiled. The long review period observed in each of the above cases was partly due to the complicated market and a lack of authoritative data. Case withdrawal can buy the parties more time to communicate with the SAMR if the concentration would otherwise be prohibited due to the lack of satisfactory commitments. The long review process for the conditionally approved cases also reflects that the SAMR takes a prudent approach by consulting extensively with third parties, including industry regulators, industry associations, upstream and downstream enterprises and competitors.

In contrast, for the cases unconditionally approved, the rate of case review increased significantly. Among the unconditionally approved cases, 80.8 per cent of cases were cleared in Phase I (i.e., 30 days from the acceptance date). In particular, for the cases applied to the simple case review procedure, 99.4 per cent cases were concluded in Phase I. On average, simple cases took only 16 days to be concluded. It is worth mentioning that the SAMR may not officially accept a case unless the materials can satisfy the requirements.

iii Outlook

It is expected that in 2019 the SAMR's merger control enforcement will maintain its professionalism and stability. In addition, the large number of gun-jumping cases and the increased fines indicate that the SAMR is gradually strengthening its enforcement crackdown on non-filers. Furthermore, the proposed revision of the Anti-monopoly Law is expected to increase the penalties for non-filing.