The merger control regimei Review process and timeline
A merger review process normally involves the following stages.
|Preparation of filing materials||Case-specific||The timing varies depending on the number of relevant markets and the timeliness and completeness of relevant parties' responses to information requests|
|Pre-acceptance review||3–12 weeks||The timing varies depending on the nature of each case and the 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 approach), which resets the clock. In some cases, the SAMR may suggest or indicate that it expects certain remedial conditions that the parties are not yet ready to accept, particularly if the Extended Phase II review period is about to expire. In that situation, if the parties wish to keep negotiations with the SAMR open, they can voluntarily withdraw their application on certain technical grounds, and immediately resubmit it, starting again at Phase I.Fast-track procedure
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 sometimes uncertain outcome. However, this is not always the situation, particularly if a deal qualifies as a simple case.
A fast-track procedure, known as the simplified procedure, was adopted on 12 February 2014. From 2015 to the end of 2020, the Chinese competition authority has cleared approximately 80 per cent of cases under the simplified procedure. The average review time of these simple cases from 2015 to the end of 2020 was approximately 19 days. The review process has since been shortened, notably in 2020.
There are three qualifying criteria for the simplified procedure:
- 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 outside China (the joint venture 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 lower than 15 per cent;
- participating undertakings with upstream or downstream relationships must have respective market shares in the upstream or downstream market of less than 25 per cent; and
- participating undertakings that are neither in the same relevant market nor have any upstream or downstream relationship must have respective market shares in each market associated with the transaction of less than 25 per cent; and
- change in joint control: for a joint venture under joint control of two or more undertakings, the post-concentration control of the joint venture concerned will vest in one or more of the foregoing undertakings. It will generally qualify as a simple case, except when the undertaking and the joint venture are competitors in the same relevant market.
In our experience, more than 85 per cent of simple cases qualify based on the market share criterion and approximately 10 per cent of cases are simply offshore deals with no or limited China nexus; very few cases are qualified as simple cases based on the change in joint control criterion.iii Special scenariosFinancial distress
The coronavirus pandemic has brought unexpected difficulties to the Chinese economy as well as to the merger review process. Since 5 February 2020, due to the impact of covid-19, the SAMR has been accepting merger filing cases through online or postal methods only and has held online meetings instead of physical meetings. In April 2020, the 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 timeline for case acceptance and clearance in the first half of 2020 shortened, respectively, by 20.9 per cent and 14.5 per cent on a year-on-year basis, according to the SAMR's own statistics.6Tender offer or hostile takeover
As an exception, if a concentration occurs through public tender offer or a hostile takeover of a public company, rather than through an amicable agreement, the SAMR allows the acquiring party to use the offer, instead of an executed acquisition agreement, to make the notification. The SAMR may also demonstrate a reasonable level of tolerance for unavailability of certain non-substantive materials and information of the target company, such as the parties' certified certificate of incorporation or subsidiaries' business licences, in these special scenarios. However, the largest challenge for this type of transaction has always been how to meet the deadline for a public takeover while the SAMR sets its own case review pace. It is strongly recommended that a pre-notification consultation is made to seek the SAMR's understanding of the urgent nature of the transaction and to communicate the key competition issues, if there are any, to the SAMR.Filings involving other legal procedures
Other than public takeover, filing parties may also need to reconcile the merger filing process with certain other legal procedures, such as bankruptcy or a state-owned assets disposal procedure.7 Usually, these procedures can be conducted independently from the merger review, but in certain cases there may be a deadline for the payment in consideration, which may contradict the SAMR's rule of not closing a deal before clearance. Parties are advised to take these requirements into consideration when making timetables for transactions.iv Practical steps to effectively manage merger control in China
Given the significance of the Chinese market, the Chinese competition authority has increasingly become a key player in global deals. Those dealmakers that understand China's regulatory dynamics and practice and proactively manage their merger filings in China will gain an edge in winning and closing deals. Set forth below are some practical notes for global M&A transactions.Seek pre-filing consultation with the SAMR
The SAMR offers a pre-filing consultation mechanism whereby parties may submit questions on substantive or procedural issues and request a consultation. The SAMR will then arrange an in-person meeting with the parties, typically providing oral advice only. The process usually takes one to two weeks.
The process allows parties to gain more clarity and to some extent pre-warns the relevant SAMR officials about a forthcoming notification. However, the process also alerts the 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 the consultations. If an officer suggests or requests that the parties file, it leaves the parties little choice but to file.Prepare a filing as early as is practicable
Notification must 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 practice 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 more organised and prepared, the parties received limited supplemental questions and the response time was shortened, thereby substantially shortening the pre-acceptance time and post-acceptance review period.Weighing the options of seeking a simplified procedure
Compared with the normal procedure, the simplified procedure is significantly faster, as it requires much less substantive information in filing, and takes less steps to reach conclusion. While many normal procedure cases take two to three months, most simplified cases are generally cleared within the 30-day Phase I review period. Therefore, it is more appealing to filing parties with apparently low market share or that are qualified under other simplified procedure criteria. Nevertheless, despite the benefits of lighter information requests and shorter review periods, the parties need to weigh up the following potential issues when deciding whether to apply for the simplified procedure.Information disclosure concern
A simple case requires a 10-day public announcement upon case acceptance, which is designed to allow comments from the public, primarily various stakeholders in the industry. Therefore, for deals with high sensitivity or confidentiality concerns (e.g., hostile takeovers or private deals), this may not be the best approach owing to concerns regarding 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 the case is disqualified, it takes even more time and resources to re-assemble the notification materials to take the normal procedure route, ultimately delaying the review process. For example, it took 278 days (even longer than the standard 180-day review period) to secure the clearance of Sanhuan/Hitachi Metals in 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 another AML litigation 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 may delay the merger review process.Level of competition concerns
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 higher likelihood that competitors, suppliers, customers or an industry association will voice concerns or raise objections, and sometimes hearings or meetings with stakeholders are needed to understand and address the competition issues and possible remedies. If the parties anticipate substantive competition concerns, it is recommended to proactively prepare and negotiate a remedial plan with the SAMR at an early stage.Stakeholders' comments
It is standard practice for the SAMR to seek comments from stakeholders (eg, competitors, trade associations, customers, suppliers and other authorities) for a normal procedure case (even if there has been no apparent evidence of competition concerns). Stakeholders may also raise concerns or file complaints to the SAMR even if their comments are not solicited. While these comments or objections may not necessarily have competition-related merit (e.g., an industrial regulatory perspective or other non-compliance issues may be factored in), the SAMR must handle them as a procedural matter, and this process can take months and substantively prolong the review period. It is useful for filing parties to identify hostile stakeholders and manage the relationship before filing to minimise potential delay or other adverse impact on the filing.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. The SAMR has always been interested to learn about progress and (remedy) discussions in other major jurisdictions when they are processing parallel filings. It is also the SAMR's usual practice to keep close communications with other key jurisdictions regarding competition issues during the review process.Addressing China-specific issues
China has heightened scrutiny on strategically key industries (e.g., semi-conductors, ICT, healthcare, agriculture) and may expect behavioural or non-typical remedies (e.g., continuation of supply or maintaining interoperability) 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.