This article is taken from GTDT Practice Guide: China M&A. Click here for the full guide.
As the world’s largest marketplace and manufacturing base, China is fertile ground for international M&A activity, despite the changing trade climate and the 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 in a more level, transparent and predictable business environment. On the other hand, a step-up in antitrust enforcement activities, in line with global antitrust regulatory trends, has placed multinational companies’ operations in China under closer scrutiny. The top Chinese policymakers have announced that antitrust enforcement will be one of the prioritised goals in economic policy planning and implementation. In 2021 alone, the Chinese competition authority has not only imposed a record high antitrust fine (up to 18.23 billion yuan, approximately US$2.8 billion) against Alibaba, the number one e-commerce player in China, but also probed more than 50 M&A deals involving a variable interest entity (VIE) structure (the most popular investment structure for Chinese digital platform players to attract international investors), handing down sanctions on Tencent, the number one social networking player in China, for its failure to notify of 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) in 2008, China has become one of the key competition jurisdictions, with increasing influence on global M&As. In the past 13 years, the Chinese competition authority has reviewed over 3,700 merger filing cases, with the annual case volume exceeding 350 since 2015. Among these cases, more than 70 per cent involve at least one non-Chinese party. From the third quarter of 2020 to August 2021 alone, over 500 mergers have been reviewed, including two conditional clearances and 56 failure-to-notify cases.
The year 2020 was also prolific for Chinese antitrust legislation, much of which contains merger review-related provisions. On 27 October 2020, the State Administration for Market Regulation (SAMR) issued the Interim Provisions on the Review of Concentrations of Undertakings (Merger Review Provisions), which came into force on 1 December 2020. SAMR also published five guidelines on different antitrust topics and three exposure draft guidelines; among the published draft guidelines, the Anti-Monopoly Guidelines on Platform Economy Sectors (Platform Guidelines) were finalised and published in early 2021. In 2021, China’s National People’s Congress (NPC) also included the proposed amendment to the AML (which contains a proposed tougher sanction for merger control-related violations, among other things) as a key piece of legislation work.
Over the past decade, the Chinese competition authority has firmly established that it will exercise independent analysis of an international transaction's competitive effect on the Chinese market, and often imposes separate remedies on the basis of such analysis. Therefore, the ability to manage competition aspects in China often significantly impacts the progress and outcome of a global M&A transaction.
Against this backdrop, this chapter deals with the competition aspects in China of global M&A from the following perspectives:
- the Chinese merger filing regulatory framework, including the regulatory body, filing thresholds, process and timeline, fast-track procedure, failure to notify, and competition assessment and remedies;
- a review of merger filing cases in China from the third quarter of 2020 to the present; and
- practical notes for the effective management of merger filing in China for global M&A transactions.
Regulatory framework of merger control in China
China overhauled its competition regime in 2018. SAMR took over merger control responsibility from the Ministry of Commerce (MOFCOM) on 10 April 2018. SAMR also took over antitrust enforcement responsibilities (on joint and unilateral conduct) from the National Development and Reform Commission and the State Administration for Industry and Commerce. In addition, the Merger Review Provisions also opened the door for provincial-level administrations for market regulation (AMRs) to review undertakings concentrations as delegated by SAMR (article 2). When and how the provincial-level AMRs will start to play a role in merger review remain to be seen.
Triggers and thresholds
A merger notification obligation is triggered in China when an acquisition of control occurs and the turnover threshold is met. An acquisition of control occurs in any of the following events:
- a merger;
- an undertaking gains control of another undertaking through an acquisition of shares or assets; or
- an undertaking gains control of or the power to exert a decisive influence over another undertaking by way of contract or via any other means.
In accordance with the Merger Review Provisions, ‘control’ includes sole control and joint control, which shall be decided by assessing various factors, such as:
- purpose of the transaction and future plan;
- shareholding structure and change thereof;
- voting items and mechanism of the shareholders’ meetings;
- composition and voting mechanism of the board of directors or board of supervisors;
- appointment, removal and other matters concerning senior executives;
- relationships between shareholders and directors, such as voting proxy and persons acting in concert;
- significant commercial relationships, cooperation agreements or other arrangements; and
- other factors that should be considered.
The turnover threshold is met when in the preceding financial year:
- the combined worldwide turnover of the parties to the transaction exceeded 10 billion yuan and the Chinese turnover of each of at least two of the parties to the transaction exceeded 400 million yuan; or
- the combined People’s Republic of China (PRC) turnover of the parties exceeded 2 billion yuan and the Chinese turnover of each of at least two of the parties to the transaction exceeded 400 million yuan.
For turnover calculation, the Merger Review Provisions provide that ‘turnover includes revenue received by the undertaking concerned through sale of goods and provision of services in the preceding financial year, net of applicable taxes and surcharges’. Such turnover should be the total turnover of the undertaking and all undertakings that have a direct or indirect control relationship with the undertaking at the time of declaration but shall exclude the turnover generated between the aforesaid undertakings.
It is noteworthy that SAMR officially unveiled a draft amendment to the AML (the Draft AML Amendment) for public comments in early 2020. The Draft AML Amendment proposes to further clarify the meaning of ‘control’ and authorises SAMR to formulate and adjust the turnover thresholds based on the level of economic development and industry scale. As noted above, the AML amendment has been listed as a priority for China’s NPC’s legislation plan for 2021. It is anticipated that in the coming years the merger filing thresholds will likely be adjusted upwards and flexible supplementary factors such as transaction value might be introduced.
Review process and timeline
A merger review process normally involves the following stages.
|Preparation of filing materials||Case specific||This varies depending on the number of relevant markets and the timeliness and completeness of relevant parties’ responses to information requests|
|Pre-docketing review||3–12 weeks||This varies depending on the case nature and SAMR’s caseload|
|Phase I review||30 days||Most simple cases are cleared within this stage|
|Phase II review||90 days||Most normal cases are cleared by the middle of this stage|
|Extended Phase II review||60 days||This is usually only for cases with complex issues or significant competition concerns|
The review timeline can also be extended by the voluntary resubmission of the merger notification by the parties (the ‘pull-and-refile’ step), which resets the clock. In some cases, SAMR might suggest or indicate that it expects certain remedial conditions that the parties are not yet ready to accept, or the extended Phase II review period might be about to expire. In these situations, if the parties wish to keep negotiations with SAMR open, they can voluntarily withdraw their application on certain technical grounds and then immediately resubmit it, starting again at Phase I. Since 5 February 2020, due to the impact of covid-19, SAMR has accepted merger filing cases through online channels or post only. In April 2020, SAMR further issued a notice supporting the country’s pandemic control and work resumption from an antitrust perspective. Indeed, the merger control regime has been optimised, with the timing for case docketing and clearance reduced, respectively, by 27 per cent and 14.5 per cent on a year-on-year basis, according to SAMR’s own statistics.
A common perception for merger filing in China is that it can easily become a deal bottleneck owing to the relatively low threshold, the relatively lengthy review period and the sometimes uncertain outcome. However, this is not always the situation, in particular if a deal qualifies as a simple case.
A fast-track procedure, known as the simplified procedure, was adopted on 12 February 2014. Between 2015 and August 2021, the Chinese competition authority cleared around 80 per cent of cases under the simplified procedure. During that period, the average review period of simple cases was 20 days. This review process has been further shortened in recent years; for example, the average review period of simple cases from the third quarter of 2020 to the second quarter of 2021 was only about 14 days upon case docketing.
There are three qualifying criteria for the simplified procedure: a lack of China market nexus, an insignificant market share and a change in joint control.
- Lack of China nexus: a merger lacking China nexus in either of the following scenarios qualifies as a simple case:
- participating undertakings establishing a joint venture (JV) outside China. The JV concerned will not be economically active in China; or
- participating undertakings acquiring equity or assets of an overseas enterprise. The overseas enterprise concerned is not economically active in China.
- Insignificant market share: to satisfy the insignificant market share criterion, all of the following three conditions must be met:
- the combined market share of all participating undertakings in the same relevant market is smaller than 15 per cent;
- for participating undertakings with an upstream or downstream relationship, their respective market share in the upstream or downstream market is smaller than 25 per cent; and
- for participating undertakings that neither are in the same relevant market nor have any upstream or downstream relationship, their respective market share in each market associated with the transaction concerned is smaller than 25 per cent.
- Change in joint control: for a JV under joint control of two or more undertakings, the post-concentration control of the JV concerned will vest in one or more of the foregoing undertakings. It will generally qualify as a simple case, except when such undertaking and the JV are competitors in the same relevant market.
Our statistics show that more than 85 per cent of simple cases qualify based on the market share criterion; about 10 per cent of cases are simply offshore deals with no or limited China nexus; and very few cases qualify as simple cases based on the change in joint control criterion.
Failure to notify
Under the AML, an unnotified concentration refers to a concentration that meets the notification thresholds but is consummated without first notifying and receiving clearance from the competition authority. Once a failure to notify is found, the following might occur.
Monetary fine and behavioural sanctions
If SAMR finds that a party has completed a notifiable concentration without obtaining clearance beforehand, it can impose a fine of up to 500,000 yuan and order any of the following:
- cessation of the transaction (where it has not been completed);
- divestiture of the relevant shares or assets;
- transfer of a business; or
- restoration of pre-merger conditions by any other means.
Prior to 2021, in each of the failure-to-notify cases, the Chinese competition authority had concluded that the transactions in question would not result in any competition concern. Accordingly, all penalties had been monetary in nature, with the amounts ranging from 150,000 yuan to 500,000 yuan. In 2021, SAMR set a new precedent on a failure-to-notify case involving Tencent, ordering the parties to restore the market competition status, in addition to a 500,000 yuan (approximately US$75,000) monetary fine. This is the first failure-to-notify case that was subject to a series of restrictive conditions designed to restore market competition status and establish an M&A monitoring mechanism, highlighting a more aggressive antitrust enforcement stance on infringers. Hence, one can no longer safely presume that a failure-to-notify case would only expose the merger parties to a moderate monetary fine without worrying about substantive adverse consequences.
It is worth noting that the Draft AML Amendment proposes to significantly increase the upper limit of the monetary penalty up to 10 per cent of an undertaking’s group-level turnover in the preceding year for failure-to-notify cases. Should such proposed provision be enacted, even a fine based on a low single digit percentage could see billions of dollars at stake.
Prolonged merger review process
If the preliminary investigation determines that there should have been notification of the transaction, the investigation enters a second phase whereby the parties must notify of the merger within 30 days and the competition authority has 120 days to conduct an assessment of the transaction on receipt of a complete notification. This results in a significantly prolonged merger review process beyond the usual time limits. The longest review period of all the published sanction decisions for failure to notify is 670 days, and the average review period of those cases is around 170 days.
Although the current monetary penalty for failure to notify is limited, it affects the reputation of the party involved, particularly when it is a public company. The administrative sanction decision on failure to notify will be posted on the competition authority’s website for a non-fixed term. This will leave a non-compliance record and might result in a stakeholder’s closer scrutiny of the company’s business dealings. The case handlers might also become more cautious and conservative in any merger review process involving such company.
Potential implication to the subsequent filings
If a prior failure-to-notify instance is uncovered during review of a new merger, it might cause delay to the merger review and to the approval of the new merger.
Enforcement efforts against failure to notify are aided by several informational channels. For instance, the notification form requires disclosure of mergers in the relevant market in which the applicant has been involved for the past three years. In addition, media monitoring, reporting by local regulators or industry regulators, and whistle-blowing (note that a whistle-blower does not need to establish standing) also increase the risk exposure of a failure to notify.
Competition assessment and remedies
Competition assessment is at the heart of a merger review, and the notifying parties need to submit an assessment of the merger’s competitive impact. When assessing whether a concentration would result in horizontal, vertical or conglomerate effects (the theories of harm), SAMR will examine a number of factors, including market shares, level of concentration, barriers to market entry, impact on consumers, technological advancement and national economic development. The theories of harm adopted by the Chinese competition authority are generally in line with those adopted in the EU and the US, except that China takes into account the additional factor of impact on technological advancement and national economic development, and, where the relevant market is defined as global, tends to focus its assessment on the Chinese market.
Although Chinese competition officials might exchange views with authorities in other major jurisdictions in determining remedies in some of the global deals, they tend to conduct independent in-depth and China-specific investigations, including sophisticated economic analyses. A global transaction unconditionally cleared by the EU or the US authorities might still be challenged in China if SAMR determines that the transaction will result in competitive harm to the Chinese market.
Similar to other major jurisdictions, if a proposed merger raises significant competition concerns, SAMR can impose conditions (or remedies). These remedies, which might be structural, behavioural or hybrid, must be sufficient to remove or mitigate the competition concerns and should be practically feasible.
Structural remedies aiming to maintain or potentially enhance the level of competition on the relevant market include:
- divestiture of part of an undertaking’s business to an independent party, thereby reducing the post-merger entity’s market power (divestiture);
- prohibiting the undertaking from seeking to increase its market power through additional acquisition or capacity expansion (standstill commitment); and
- severance of link with a competitor through measures such as the waiving of rights associated with a minority stake in a competitor (removal of links with competitors).
Structural remedies are generally adopted in horizontal concentrations, and, in general, divestiture (especially the transfer of a controlling stake in a viable stand-alone business to a single competitor) is the best way to eliminate competition concerns resulting from product overlaps. If the merger will result in the merged entity having a fairly high market share in a concentrated market, a combination of divestiture and standstill commitment can be used, and for a merger in an industry in which market concentration level is relatively low, a standstill commitment is usually adopted.
Behavioural remedies focus on elimination of barriers to entry into the market, namely in the form of access to patents, essential facilities, licensing of intellectual property rights or conclusion of distribution agreements (or termination of existing exclusive distribution agreements). Behavioural remedies are mainly considered in conglomerate and vertical mergers where structural remedies might not be available or appropriate.
Compared with behavioural remedies, structural remedies have a more immediate and lasting effect and are much easier to control and monitor in terms of implementation. Accordingly, structural remedies are the preferred type. Nevertheless, where structural remedies are not feasible, commitments relating to the future behaviour of the merged entity might be acceptable remedial measures if their effects are comparable with structural remedies.
Hybrid remedies are combinations of structural and behavioural remedies in a single case. Such remedies usually appear in cases involving more than one type of competition concern (eg, horizontal plus conglomerate concerns) to ensure sufficient mitigation of competition concerns in all relevant markets involved in the case.
Interestingly, the Chinese competition authority appears to be more receptive to behavioural remedies in both horizontal and non-horizontal mergers compared with its counterparts in the EU and the US; as at August 2021, 24 of the 50 conditionally cleared and three blocked cases involved non-horizontal concerns, and 40 of the 50 involved behavioural remedies. Even in pure horizontal cases, if the merger parties believe that a typical structural remedy such as divestiture is overly onerous but can live with a more moderate alternative such as hold separate plus certain behaviour commitments, the Chinese competition authority might be more receptive to clear the cases with such hybrid remedies.
Review of recent merger filing cases
As noted above, SAMR took over merger control responsibility from MOFCOM in April 2018. Following this reorganisation, on 29 September 2018, SAMR re-promulgated a series of merger filing-related rules inherited from MOFCOM without changing their substance. Those rules include the Guiding Opinions, Documentation Guidelines for Notification of Concentration of Undertakings, the Guiding Opinions on Notification of Concentration of Undertakings for Simple Cases and the Guiding Opinions on Regulating the Case Name for Notification of Concentration of Undertakings. From the third quarter of 2020 to August 2021, SAMR closed 581 merger filing cases, including two conditionally cleared cases. Among these cases, 474 (approximately 80 per cent) were notified as simple cases, with an average review period of 14 days.
Statistics also show that SAMR is strengthening its enforcement efforts against non-compliance. Probes on failure to notify have become increasingly active in recent years; as of August 2021, 95 out of the 112 published sanctions have been issued since 2018.
Conditionally cleared cases
From the third quarter of 2020 to August 2021, SAMR conditionally cleared two deals, namely Cisco Systems/Acacia Communications and Danfoss/Eaton, with an average review period of 398 days. These all involved the pull-and-refile procedural step, with Cisco Systems/Acacia Communications doing so twice. The Cisco Systems/Acacia Communications case is also a good illustration of SAMR’s adoption of the independent analytical approach: it was conditionally cleared after receiving unconditional clearances in other major jurisdictions. The following table provides an overview of these cases.
|Case||Theory of harm*||Remedies|
|Cisco Systems/Acacia Communications||✔||✔||N/A||
Fair, reasonable and non-discriminatory (FRAND) supply terms
No raising prices
* H: horizontal; V: vertical; C: conglomerate.
Cisco Systems/Acacia Communications
Cisco Systems (hereinafter referred to as Cisco), a listed company that primarily provides information technology networking-related products, services and integrated solutions, proposed acquisition of Acacia Communications Inc. (hereinafter referred to as Acacia), a listed company primarily engaged in the optical communication products business. The parties notified SAMR in October 2019. The case was docketed on 20 December 2019 and cleared on 14 January 2021. The transaction was also filed in other jurisdictions, including the US, Germany and Austria, and received unconditional approval.
The parties were found to have a vertical relationship between Acacia (upstream) and Cisco (downstream), as well as adjacent relationships in two markets. Among the analysed markets, SAMR found that the transaction was likely to eliminate or restrict competition in the Chinese optical transmission system market and required the parties to fulfil a number of behavioural remedies. It is noteworthy that one behavioural remedy required that the two parties and the combined entity maintain existing customer contracts, including various commercial terms and existing sales practices and procedures, unless the Chinese customers voluntarily decided to terminate them.
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. The parties notified SAMR in June 2020. The case was docketed on 4 September 2020 and cleared on 30 June 2021. The transaction was also filed in other jurisdictions, including the US and the EU, and both granted conditional approval, with the divestment of parts of the businesses, technology transfer commitment and information firewall. In the merger review, the parties were found to have horizontal overlap in hydraulic products for the mobile sector, specifically hydraulic steering components, hydraulic valves, hydraulic motors and hydraulic pumps. SAMR found that the transaction could have a negative effect on the Chinese cycloidal motor market and required the parties to hold such businesses separate, along with other behavioural remedies such as an information firewall and supply commitment with no price raising.
Summary of conditionally cleared cases
These recent conditionally cleared cases echo the authors’ earlier observation that, compared with SAMR’s counterparts in the EU and the US, it is more receptive to behavioural remedies to address non-horizontal effects. They are also good illustrations of China’s increasing influence on global M&A deals in terms of both the outcome and the deal closing timeline.
From the third quarter of 2020 to August 2021, SAMR published 56 failure-to-notify sanction decisions, with an average formal investigation period of approximately 173 days, although most of them were found to have no competition concerns. Among these cases, 18 involved at least one non-Chinese party.
A failure-to-notify case might significantly impact the progress of another transaction involving the same party or parties. For example, the transaction documents of Saft Batteries/Tianneng Power were executed on 3 April 2019 but the merger filing was only docketed on 9 August 2019 when a failure-to-notify case (docketed on 14 May 2019) involving an affiliate of Tianneng Power was about to close (on 16 August 2019). The merger filing was finally cleared on 21 August 2019.
As mentioned earlier, one of the failure-to-notify cases was ultimately subject to remedies in addition to monetary sanction, the first of its kind antitrust enforcement in China. Tencent, a China-based supplier of social and communication services, social networking platforms, online music platforms, games and online video services, acquired CMC, a China-based supplier of an online music platform, in July 2016 without first obtaining approval from SAMR. The transaction was then docked for investigation by SAMR on 25 January 2021. SAMR concluded that the transaction was implemented illegally and might further negatively impact the online music platform market. As a result, Tencent was ordered to restore the market competition status, including foregoing exclusive music copyrights within 30 days, and is subject to ongoing monitoring in its M&A activities.
On 10 July 2021, SAMR announced that it had prohibited the merger of the Tencent-backed game streaming platforms DouYu and Huya because of serious competition concerns. This is not only the first case whereby a concentration is prohibited in the field of platform economy in China but also the first time that a merger between two domestic enterprises was prohibited since the AML came into effect.
HUYA Inc., which through a VIE structure controls various Chinese domestic entities mainly engaged in interactive entertainment video business, such as live game broadcasting, proposed to acquire DouYu International Holdings Limited, a company mainly engaging in the interactive entertainment video business, such as live game broadcasting, also with a VIE structure. SAMR concluded that this concentration would strengthen the market power of the combined entities both upstream and downstream because, in terms of number of active users and anchor resources, the combined shares would exceed 60 per cent and would give the combined entity the ability and incentive to implement a two-way vertical blockade strategy. This case indicates that SAMR has stepped up antitrust oversight of China’s largest technology firms, including more stringent ex ante merger reviews.
In 2020, SAMR sanctioned the first gun-jumping case. The transaction was notified to SAMR after the signing of the transaction documents and was docketed on 9 April 2020 as a simple case. Before receiving clearance (the public announcement period of the simplified procedure was to expire on 18 April 2020), the parties closed the transaction on 17 April 2020. Such conduct was deemed gun-jumping by SAMR and was subsequently investigated and sanctioned.
Filing for transactions involving a variable interest entity structure
A remarkable development in China’s antitrust enforcement in 2020 was the authority making explicit its position on the notifiability of mergers involving a VIE structure (VIE structured mergers). Since the promulgation of AML in 2008, uncertainties remained for merger filings of VIE structured mergers: although the Chinese antitrust authority had never expressly affirmed that merger filing obligations do not apply to VIE structured mergers or that it will not accept filings for them, no filing for a VIE structured merger has been accepted.
Although there existed no legal grounds for exempting such a transaction, in practice, parties had often adopted various tactics to keep an otherwise notifiable VIE structured merger off the China merger review radar. However, antitrust practitioners started to see changes on 16 July 2020, when SAMR unconditionally approved a JV between Mininglamp, a Chinese high-tech company, and Yum China, the restaurant business giant (the M/H case), the first of its kind. The M/H case has demonstrated that a VIE structure is not an impenetrable area in China’s merger control or in other antitrust enforcement activities. The parties should conduct an antitrust assessment during early stages and, where a merger filing is required, formulate and implement a proper strategy to mitigate uncertainty during the merger review process.
Given the heightened antitrust exposure, VIE structured firms or those that plan to introduce a VIE element to their group structure should be vigilant about antitrust compliance in their M&A transactions. For practical filing guidance for VIE structured mergers, below are some highlights.
- Given the potential severe consequence for failure-to-notify cases (fines of up to 10 per cent of group revenues in the preceding year if the proposed amendment to AML becomes law), companies need to reassess their past and pending VIE structured transactions that might have crossed the filing thresholds, and to formulate a proper filing strategy.
- SAMR’s approach to a VIE structured merger review will vary in light of the specific circumstances. The regulatory restrictions on foreign investment associated with VIE structures will not likely become an insurmountable obstacle to docket and clear a notifiable transaction.
- Innovative formats and dynamic landscapes (eg, digital platform competition) in the sector concerned might impact the market definition, competitive analysis, and eventual deal structuring or notification strategy; a below threshold transaction that will otherwise be exempt from filing might still trigger scrutiny from SAMR (especially if a third-party complaint is filed).
- A VIE arrangement falls within the scope of ‘control’ under the AML, and the turnover and competitive analysis will trace through the VIE structure up to the ultimate controlling party.
Practical steps to effectively manage merger control in China
As the Chinese competition authority is increasingly playing an active role in global deals, those dealmakers who understand China’s regulatory dynamics and practice and proactively manage their China merger filings will gain an edge in winning and closing deals. Set forth below are some practical notes for global M&A transactions.
Whether to seek pre-filing consultation with SAMR
SAMR offers a pre-filing consultation mechanism whereby parties may submit questions on substantive or procedural issues and request a consultation. SAMR will then arrange an in-person meeting with the parties, typically providing oral advice only. The process usually takes one to three weeks.
The process allows parties to gain more clarity and to some extent prewarns the relevant SAMR officials about a forthcoming notification. However, the process also alerts 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 such consultations. If an officer suggests or requests that the parties file, the parties are left with little choice but to file.
Prepare a filing as early as is practicable
The notification should 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 way 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 having been organised and prepared, the parties received limited supplemental questions and the response time was shortened, thereby substantially shortening the pre-docketing time and the post-docketing review period.
Weighing the options of seeking a simplified procedure
Once a merger filing obligation is triggered, the merger parties can assess whether they are eligible to pursue a simple case filing. If the notifying party does not apply, SAMR will not initiate a simplified review process on its own, even if such case substantively qualifies as a simple case. Compared with a normal notification, the simplified procedure removes many substantive information requirements. Generally, the simplified procedure is more attractive to transactions involving low market shares, with readily available supporting market data. Compared with the normal procedure, which usually takes two to three months or even longer, a simple case review cycle is substantially shortened – generally within the 30-day Phase I review period upon formal docketing.
Despite the benefits of a lighter information requirement and shorter review period, parties need to weigh up the following side effects when deciding whether to apply for a simplified procedure.
Information disclosure concern
A simple case requires a 10-day public announcement upon case docketing, which is designed to allow comments from the public, primarily various stakeholders in the industry. Therefore, for deals with high sensitivity or confidentiality concerns (eg, hostile takeovers or private deals), this might not be the best approach if there are concerns about publicity.
Risk of disqualification and prolonged review
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 a case is disqualified, it takes even more time and resources to reassemble the notification materials for normal procedure, ultimately delaying the review process. For example, it took 278 days (longer than the ordinary 180-day review period) to secure the clearance of San Huan/Hitachi Metals (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 an AML litigation case 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.
Dealing with possible delaying factors in merger review
There are a number of issues that might delay the merger review process.
Profile and value of the transaction
For high-profile or high-value transactions, SAMR tends to exercise more caution in reaching a decision, and might take time to observe how other merger control authorities in major jurisdictions (such as the EU and the US) are likely to rule on the transaction.
Complexity of the transaction
For complex transactions (eg, if there are multiple parties that are acquirers), the review process tends to take longer.
Number and sophistication of products covered by the transaction
If the transaction concerns a large number of sophisticated products, more time and effort will be required to examine them, and more stakeholders will need to be consulted. There is also an increased likelihood that SAMR will ask the notifying party to submit additional materials both before the notification is officially docketed and during the actual review phase or phases.
Level of competition concern
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 high likelihood that competitors, suppliers, customers or an industry association will voice concerns or raise objections, and sometimes hearings need to be scheduled to discuss the competition issues and possible remedies. Where the transaction is determined to eliminate or have a restrictive effect on competition, a remedial plan has to be negotiated with SAMR.
In response to solicitation of comments, or by proactively submitting comments, stakeholders (eg, competitors, trade associations, customers, suppliers and other authorities) may raise concerns or file complaints to SAMR. Although these comments or objections might not necessarily have competition-related merit (eg, an industrial regulatory perspective or other non-compliance issues might be factored in), SAMR has to handle them as a procedural matter, and this process can take months and substantively prolong the review period.
Although the above factors are out of the control of the merger parties, proactive efforts such as those below often help to smooth out the merger notification and review process.
Timely coordination with counsel across jurisdictions
For cases involving multiple jurisdictions, it is important to coordinate and align with counsel in other jurisdictions in preparing the filing materials. SAMR is interested to learn about progress and (remedy) discussions in other major jurisdictions, and is likely to consult with other jurisdictions regarding competition issues during the review process.
Effective outreach with stakeholders
As mentioned above, stakeholders’ comments can impact the timing and outcome of an SAMR review. For high-profile cases, it is advisable to engage outreach efforts with important stakeholders, including government authorities, trade associations, and key suppliers or customers, to encourage timely and appropriate feedback and monitor the process.
Addressing China-specific issues
China has heightened scrutiny of strategically key industries (eg, ICT, healthcare, agriculture) and might expect behavioural or non-typical remedies (eg, hold separate) 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.
Staying vigilant against gun-jumping
As mentioned above, the AML prohibits a merger from consummation without official merger clearance. Although any assessment of AML risks in pre-merger activities is inherently fact specific, as a rule of thumb, integration planning is generally permissible, whereas implementation is not. To manage the risk of gun-jumping, the merger parties should continue to act as separate and independent companies until the transaction is closed and should avoid coordinating market actions, transferring operational control or prematurely integrating the companies before merger clearance.
Competitive information exchange before the closing will be deemed likely to lead to collaboration or coordinated market activities. Such collaboration or coordination could be viewed as the implementation activity of a merger, on one hand; on the other hand, if the parties are competitors, such exchange could potentially be viewed as cartel activity. Thus, all pre-closing information exchanges must be closely monitored and controlled to mitigate potential AML risk exposures. In particular, competitively sensitive information (such as price, cost, volume, inventory, trading conditions, targeted customers, sales markets, and restrictions on new technologies and new products) should be treated with care and safeguarding measures.
Other regulatory requirements.
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 Ministry of Commerce published the Measures on Foreign Investment Security Review (the FISR Measures), signalling an increased emphasis on safeguarding national security, a trend also gaining more prominence in other jurisdictions such as the US (CFIUS review) and the EU (FDI 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 a subsidiary within China, and the sectorial tests are met.
Also, merger control review may interact with FISR procedures or other regulatory processes. For example, in Wuhan Zhongbai/Yonghui, following the merger control clearance, the parties announced that the deal should also be subject to FISR procedures, and the deal was eventually dropped.