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Merger review

The SAMR concluded 727 merger review cases in 2021. Among them, one case was prohibited, four were conditionally approved and the remainder were unconditionally approved.

With regard to simple cases, a total of 641 were concluded in 2021 and accounted for 88 per cent of all cases. The proportion of simple cases increased significantly compared with 2020, when the number of simple cases accounted for around 77 per cent of all cases. On average, simple cases took 13.69 days to conclude, which was slightly longer than in 2020 (12.81 days).

In 2021, 631 cases were concluded in the first stage within 30 days, accounting for 97.83 per cent of all cases. Compared with 2020, when 80.6 per cent of cases were concluded in the first stage, the speed of conclusion has significantly increased.

Furthermore, the SAMR has taken a tougher approach against non-filers. The SAMR published an unprecedented 107 non-filing cases in 2021, which is seven times the number of such cases in 2020.

i Significant casesNon-filing penalties

In 2021, the SAMR published 107 non-filing cases. This represents a significant increase in the number of cases in 2021 compared with the 13 non-filing cases in 2020, indicating that the SAMR is still greatly concerned about non-filing cases in mergers and acquisitions, and continues to strengthen its supervision of non-filing parties.

Among the 107 published non-filing cases in 2021, the average case duration (from filing to decision) was 113.46 days. Of these cases, 21 were concluded within 50 days, accounting for 19.6 per cent of all cases heard, and 68 were concluded within 100 days, accounting for 63.55 per cent of all cases. Compared with the average duration of 250 days in 2020, the time scale for non-filing cases has shortened and the efficiency of the anti-monopoly enforcement agencies has improved markedly.

Continued strengthening of platform economy regulation

The non-filing cases in 2020 involved penalties against entities in various industries, such as building materials, pharmaceuticals, logistics and retail. Unlike in 2020, however, the internet industry accounted for an absolute majority of non-filing cases in 2021. Of the 107 published cases, 97 involved the internet sector and accounted for 90.65 per cent of all cases.

The high-profile antitrust enforcement actions in the internet sector in China have been noteworthy. For example, Tencent was involved in 30 cases in 2021 and received penalties totalling 15 million yuan, and Alibaba was involved in 18 cases and received penalties totalling 9 million yuan.

China's regulation of the internet industry and other new economic fields will continue to be tough. Platform enterprises, including those focused on specific market segments, need to be alert to possible monopoly risks and current regulatory winds.

Increased percentage of cases involving maximum penalties

Of the 107 penalty cases in 2021, regulators imposed the maximum penalty of 500,000 yuan in 99, representing 92.52 per cent of all cases concluded. Compared with 2020, this means a continued strengthening of anti-monopoly enforcement.

Innovative punishment in non-filing cases

On 24 July 2021, the SAMR published its penalty decision against Tencent Holdings Ltd (Tencent)11 for its failure to notify the SAMR of its acquisition of China Music Group. This case was the first time that the SAMR imposed restrictive conditions in a non-filing case. In addition to issuing a fine of 500,000 yuan against Tencent, the SAMR ordered Tencent and its affiliates to take a series of measures (e.g., termination of its exclusive copyright licensing agreement with key label companies) to restore competition in the relevant market.

This is the first case since the AML came into effect in 2008 in which necessary measures have been ordered to restore market competition conditions in response to the illegal implementation of a notifiable merger. As a result of this case, the possibility of the SAMR attaching conditions to penalties in non-filing cases has increased.

Downward trend in the proportion of equity interests with controlling rights

Among the non-filing cases in 2021, there were 10 cases in which the parties acquired no more than 10 per cent of target company equity yet were deemed to have acquired joint control. In previous years, the relevant shareholding percentage threshold in a minority equity acquisition transaction was usually more than 30 per cent. That is to say, the percentage of a shareholding alone is no longer a sufficient determinant of whether control rights have been obtained.

In addition, when considering whether or not a transaction needs to be declared, enterprises should consider not only the percentage of equity interests but also the company's articles of association and, pursuant to Article 4 of the Interim Provisions on the Review of Concentration of Undertakings, the provisions on corporate governance systems in the relevant transaction documents, such as the existence of a voting trust, voting matters and voting mechanisms.

In light of the recent developments in regulatory practices, we recommend that if an acquisition would result in an equity interest close to or greater than 10 per cent, the relevant party should carefully assess whether it might acquire control of the target company.

Prohibited case

On 10 July 2021, the SAMR prohibited the proposed acquisition of DouYu by Huya.12 The parties are two of the largest online game live-streaming platforms in China. Huya is solely controlled by Tencent.

The combined market share of the two parties would be over 70 per cent after the proposed merger. Moreover, the merger would strengthen Tencent's market power and remove its closest competitor from the market. Furthermore, the entry barriers are high because of copyrights, capital investment and streaming resources. Thus, it is difficult for new competitors to enter this arena in the short term.

The proposed merger would give Tencent two-way blocking capabilities, in both the upstream and the downstream markets (respectively the Chinese markets for online game operation services and for online game live-streaming), which could eliminate and restrict competition. In light of the above, the SAMR concluded that the proposed merger would eliminate and restrict competition in the online game live-streaming market. This case is the third blocked merger decision since the AML came into force. Also, it is the first case blocked in the internet sector since the SAMR's establishment in 2008. This case shows that the SAMR has become more stringent in reviewing concentrations involving the digital economy.

Conditionally cleared cases

In 2021, the SAMR conditionally approved four cases. All the conditional cases cover the high-tech manufacturing industry. This is a key area of antitrust enforcement. For example, the relevant product markets are solid-state memory disks in the semiconductor industry in two cases; hydraulics products in one case; and material testing equipment in the remaining case. For various reasons, these cases could not be cleared during the normal statutory review period (180 calendar days). Therefore, all the notifying parties in the four conditional cases withdrew and resubmitted their notifications. From the first submission of filing materials to the case being concluded conditionally, the review process for the four cases lasted for a minimum of 211 days, a maximum of 391 days, and an average of 286.75 days. There are many reasons for such lengthy review processes, including:

  1. in the absence of a 'stop-the-clock' clause in the Anti-monopoly Law, the process of preparing supplementary materials and negotiating restrictive conditions is included in the review period. Therefore, the review for complex cases may exceed the statutory merger review period;
  2. the transaction structures and the products concerned are complicated;
  3. the relevant market is highly technical and complicated; and
  4. the SAMR has become more cautious in analysing the impact on competition in these cases.
Cisco acquisition of Acacia

On 19 January 2021, the SAMR approved the proposed acquisition by Cisco Systems Inc (Cisco) of Acacia Communications Inc (Acacia) with behavioural conditions.13 Cisco is a listed American technology company engaged in selling networking hardware, software, telecommunications equipment and other high-technology services and products. Acacia is a company that designs, develops, manufactures and markets communication equipment.

The SAMR found that the proposed acquisition would restrict competition for the following reasons: (1) Acacia is the No.1 supplier of coherent digital signal processors (DSP) with a global market share of 45–50 per cent and a share of 40–45 per cent in China; (2) given that coherent DSPs serve core components in an optical transmission system, suppliers of optical transmission systems' switching costs for coherent DSPs are high; and (3) the entry barriers to supply coherent DSPs are high and thus it is difficult for new competitors to enter into this area in the short term.

To address these concerns, the SAMR imposed the following conditions, requiring the combined entity to: (1) continue to perform its existing contracts without termination unless otherwise requested by customers; (2) continue to supply coherent DSPs to Chinese customers on FRAND terms; (3) not impose unreasonable trading terms when supplying coherent DSPs; and (4) hold training sessions for management and employees to ensure compliance with the commitments.

Danfoss acquisition of Eaton

On 7 June 2021, the SAMR conditionally approved Danfoss's acquisition of Eaton's hydraulic business.14 Danfoss is a Danish company engaged in the research and development (R&D), manufacturing and engineering of heating and hydraulics products. Eaton is a company based in Ireland that produces hydraulic components and systems.

The SAMR found that the proposed acquisition would restrict competition for the following reasons: (1) Danfoss and Eaton are the two largest orbital motor market participants in China and they would have a combined market share of 50–55 per cent after the proposed transaction; (2) Danfoss and Eaton are the two closest competitor in the relevant market and thus the proposed acquisition would remove competitive restraints; (3) as the two companies have existing advantages, such as brand image, high-quality products and R&D strengths, the proposed acquisition would raise entry barriers by reinforcing these strengths; and (4) because of the limited availability of substitutes, the bargaining power of customers would be further eroded.

To address the competition concerns, Danfoss was required to divest the orbital motor business of Danfoss Power System (Jiangsu) Co, Ltd, including all tangible and intangible assets, agreements, leasing contracts, commitments, client orders and personnel.

Structural remedies are relatively rare in China and the SAMR usually prefers behavioural commitments; however, in this case, the SAMR imposed structural remedies requiring Danfoss to divest the orbital motor business of Danfoss Power System (Jiangsu) Co, Ltd.

SK Hynix acquisition of Intel memory and storage business

On 22 December 2021, the SAMR conditionally approved SK Hynix's acquisition of Intel's memory and storage business.15 SK Hynix is a listed South Korean semiconductor company engaged in memory, solid-state disk (SSD) and imaging sensor businesses. Intel is a leading semiconductor chip manufacturer. The proposed transaction would enable SY Hynix to acquire Intel's entire NAND memory and storage business.

The SAMR found that SK Hynix and the memory and storage business of Intel overlap in four areas: (1) consumer-class SSDs; (2) peripheral component interconnect express (PCIe) enterprise-class SSDs; (3) serial advanced technology attachment (SATA) enterprise-class SSDs; (4) NAND flash memory (all four areas collectively, the relevant markets). The SAMR held that the proposed acquisition would be likely to give rise to competition concerns in PCIe enterprise-class SSD and SATA enterprise-class SSD markets for the following reasons: (1) the combined market share of the two companies would be over 80 per cent after the proposed acquisition; (2) given that the customers have extremely strict requirements for product quality and stability and it is difficult for new competitors to enter into the relevant markets in the short term, the proposed acquisition would remove the competitive restraints between the two companies. The SAMR held that the proposed transaction would be likely to eliminate or restrict competition.

To address the competition concerns, the SAMR imposed the following conditions and required SK Hynix to: (1) maintain product prices at no higher than the average price of the same products in the past two years; (2) continue to expand the quantity of production of PCIe and SATA enterprise-class SSDs; (3) continue to supply all products in China; (4) refrain from exclusive dealing when supplying products in China; and (5) assist an independent competitor in China in entering the PCIe and SATA enterprise-class SSD markets.

Notably, in this case, the SAMR required the merged entity to assist an independent competitor in China to enter the PCIe and SATA enterprise-class SSD markets. Although it is a behavioural condition, it may have the effect of reducing the negative impact of competition similarly to a structural condition.

ii Trends, developments and strategies

In 2021, the SAMR maintained its rigorous approach towards merger control reviews. The SAMR took aggressive enforcement actions to investigate failures to file transactions, which contributed to a dramatic increase in the number of non-filing cases published in 2021. As to conditional cases, the SAMR has imposed various conditions based on the characteristics of relevant products and the competition and innovation conditions in the relevant market to eliminate the possible adverse effects of concentrations. The SAMR has also clarified its attitudes towards transactions in the internet sector involving VIE structures.

Enterprises in relevant industries should pay attention to the new trends and features of the SAMR, whether this is the trend of scrutinising transactions involving VIE structures and the non-filing of minority stake investments by funds or the trend of conducting intensive competition analyses in innovative markets.

iii Outlook

The SAMR usually maintains consistency between cases when conducting merger control reviews, especially for market definitions and certain factual issues. Furthermore, high-quality notification materials are now required by the SAMR to facilitate efficiency. Therefore, enterprises are advised to focus on antitrust enforcement trends and the AML revision process. In particular, enterprises should understand merger control review regulations correctly and actively fulfil their filing obligations; they should also work closely with external experts to avoid delays in closing transactions, which would, in turn, affect their business plans. Furthermore, we expect the SAMR to continue strengthening the investigation of and penalties for non-filing of cases in 2022.