Introduction

The year 2020 was unusual. The outbreak of the COVID-19 pandemic and continued international trade tensions posed challenges to the Chinese antitrust law enforcement authority, the State Administration for Market Regulation (SAMR). In particular, the SAMR was tested on its ability to address the effects of the COVID-19 crisis and rapidly respond to new circumstances in the Chinese market. Despite the challenges, the SAMR maintained a prudent attitude towards merger control review and even concluded more merger cases compared with 2019. The SAMR's review process became more efficient in 2020. On average, compared with 2019, it took less time to conclude merger case reviews, especially in 'simple' and 'normal' cases with less of a competition impact. According to the SAMR's 2020 working report,(1) it accepted filings of 481 cases and concluded the review of 473 cases. These figures represent an increase of 5% for accepted merger filings and 1.7% for concluded merger cases compared with 2019. The average time for case filing and conclusion fell by 27% and 14.5%, respectively.

In 2020 the SAMR conditionally approved four cases, a relatively stable number compared with 2019 (five cases). Four cases were approved with behavioural conditions. Two of the four conditionally approved cases were withdrawn and resubmitted before the expiry of the first statutory merger review period (ie, 180 days). This shows that the SAMR is still prudent in reviewing mega mergers which may raise competition concerns. Withdrawal of the filing also provides notifying parties with flexibility and sufficient time to communicate with the SAMR. From the first submission of filing materials to the case being conditionally concluded, the review process for the above four cases lasted a minimum of 238 days,(2) a maximum of 358 days(3) and an average of 291 days. In 2020 the SAMR rendered no prohibition decisions.

Further, the SAMR continued its tough stance against non-filers. The SAMR published 13 penalty decisions that failed to fulfil the notification obligations under the Anti-monopoly Law (AML). In addition, the SAMR clarified that the concentration involving variable interest entity (VIE) structure transactions(4) is within the scope of merger control review.

Legislation

Release of Interim Provisions for Merger Control Review

On 7 January 2020 the SAMR released a draft of the Interim Provisions for Merger Control Review for public comment. In October 2020 the final version of the interim provisions was adopted.(5) The interim provisions consolidate all major regulations for merger control review into one coherent, comprehensive and easy-to-follow regulation, although no substantial changes have been proposed thereunder.

Notably, pursuant to Article 2 of the interim provisions, the SAMR can authorise its provincial branches to take charge of merger control review. The decentralisation of antitrust enforcement helps to better allocate the heavy workload undertaken by the SAMR, so that it can focus on reviewing relatively complex cases. Therefore, the SAMR will likely continue to lead the review process of most cases in the near future. However, specific questions remained unanswered. For example, in what types of case will the SAMR authorise its provincial branches? When exactly will the SAMR authorise? If authorised, what scope (ie, to what extent) will the authorisation be? These questions are expected to be answered through observation of SAMR practices.

Revision of Anti-monopoly Law in process

On 2 January 2020 the SAMR released a draft of revisions to the AML for public comment.(6) Although the revised AML follows the current AML's basic framework, it significantly enhances the legal liability of AML violators. For example, in accordance with Article 55 of the revised AML, the proposed penalty will be up to 10% of the non-filer's annual sales in the previous year instead of the maximum fine of Rmb500,000 under the current AML, which is clearly insufficient for deterring non-filers. The revised AML also clarifies practical issues such as controlling rights for merger filing purposes. In addition, the revised draft introduces the so-called 'stop-clock' clause, which specifies three conditions to discontinue the mandatory timelines for merger review:

  • on application or consent by the notifying parties;
  • supplementary submissions of documents and materials at the request of the antitrust authority; or
  • remedy discussions with the antitrust authority.

The revision of AML has been scheduled as key legislative work for 2021,(7) and the new AML is expected to be adopted in the near future.

Enhanced antitrust scrutiny of e-commerce platforms

In November 2020 the SAMR released the Antitrust Guidelines for the Platform Economic Industry for public comment. On 7 February 2021 the final version of guidelines was approved and implemented.(8) The guidelines include a chapter of regulations, specifically subjecting business operators in the platform economic industry to merger control review, including the filing standard, evaluation of competition concerns and restriction conditions. Notably, the guidelines clarify that concentrations involving VIE structure transactions are within the scope of merger control review. The guidelines further clarify that transactions involving start-ups, new types of platform or free business models with the possibility of eliminating or restricting competition cannot be exempted from merger filing, even though they do not meet the turnover standard.

Unconditionally cleared cases

The SAMR unconditionally approved 469 cases in 2020 – slightly more than in 2019 (460 cases). With regard to simple cases, 364 cases were concluded in 2020, accounting for 76.96% of all cases. The proportion of simple cases increased compared with 2019 (the number of simple cases accounted for approximately 73.3% of total cases in 2019). On average, simple cases took 12.81 days to be concluded (among which they took an average of 12.79 days for the first quarter of 2020, 12.59 days for the second, 13.35 days for the third and 13.35 days for the fourth), which was a slight reduction from 15.37 days in 2019 (among which they took an average of 15.12 days for the first quarter of 2019, 18.29 days for the second, 18.24 days for the third and 13.37 days for the fourth). In 2020 27.47% of those cases were unconditionally approved on expiration of the 10-day publication period. This demonstrates that simple case procedure plays an active role in enhancing the efficiency of concentration review, particularly in the sense of reducing reviewing time.

Based on the above statistics, since the fourth quarter of 2020, the SAMR has been exploring tailored approaches of review to different types and structures of transaction and accelerating its process for certain transaction types. Moreover, from the fourth quarter of 2020, the accelerating rate of the SAMR's review of simple cases has slowed. Accordingly, it can be estimated that time spent before the acceptance of a case (ie, the time from the submission of filing materials to the acceptance notice of filing) would have been longer had the SAMR intended to further reduce the interval between the public notification and that of case conclusion. Notably, for the first time, the SAMR disclosed that the time spent before the acceptance of a case was 24 days on average in 2019, as provided in its 2019 Annual Report on the Enforcement of Anti-monopoly Law of China.(9)

Based on recent cases, it appears that the SAMR's merger control review process varies depending on the nature and structure of the transaction. First, horizontal mergers typically attract a greater level of scrutiny compared with non-horizontal mergers. Second, the SAMR pays closer attention to transactions concerning industries with a higher level of concentration. Third, for purely offshore transactions (ie, transactions that involve only joint ventures or companies with a small asset base in China that do not engage in substantial economic activities within China), the level of scrutiny is noticeably (and unsurprisingly) lower compared with transactions with a domestic implication. Fourth, transactions that involve the acquisition of an equity stake will be more closely reviewed compared with joint ventures. Finally, complex transactions (eg, multi-stage acquisition, privatisation of a listed company and red-chip model restructuring) will likely endure a more prolonged review process by the SAMR.

Mingcha Zhegang

On 16 July 2020 the SAMR unconditionally approved the joint venture between Shanghai Mingcha Zhegang Management Consulting Co, Ltd and Huansheng Information Technology (Shanghai) Co, Ltd.(10) Mingcha Zhegang provides data analysis and AI solutions to enterprises in the catering industry, whereas Huansheng is a subsidiary of Yum China, which owns brands including KFC, Pizza Hut and Taco Bell. The joint venture proposes to engage in information and network technology development in the catering industry. This was the first case reviewed by the SAMR where it officially acknowledged the presence of a VIE structure used by a party to the transaction. The ultimate controlling party of Mingcha Zhegang is a Cayman-incorporated company, Leading Smart Holdings Limited. Since the SAMR's publication of the simple case review on 20 April 2020, the case received widespread attention due to the uncertain result of merger control review involving VIE arrangements.

Despite the lengthy approval process (88 days), which is significantly longer than the average review period of unconditionally approved cases, taking up almost the entire duration allowed for in simple case review, the delay, contrary to public perception, may be unrelated to the presence of the VIE structure. Instead, the delay was more likely a result of the reasonable objections of related third parties regarding the relevant market definition and the market share of the notifying parties, which in turn led to competition concerns in the eyes of the SAMR. As the transaction was likely motivated by data consolidation between the two notifying parties, it was also alleged that this would raise issues relating to data monopolisation. However, ultimately, these issues did not appear to be detrimental to the result of merger control review as the SAMR approved the transaction unconditionally.

Car Inc (Shenzhou Zuche)

On 25 November 2020 the SAMR published a simple case summary advising that it would be reviewing MBK Partners' proposed acquisition of Car Inc (Shenzhou Zuche).(11) MBK Partners is a private equity firm predominantly focused on North Asia and Shenzhou Zuche is China's largest car rental company. Similar to the Mingcha Zhegang case, this case involved the use of a VIE structure, although this was almost certainly not the focus of the SAMR's review. Instead, the SAMR closely scrutinised this transaction for competition concerns, as this particular transaction involved the financial and transport industries, which have been the focus of regulatory attention in recent years. With MBK's shares in the consortium that took eHi Car Services, China's second largest car rental firm, private in 2019, such competition concerns would have been more pronounced. Beyond anti-competition issues, this transaction may also have triggered foreign investment concern with the recent passage of the Measures on Security of Foreign Investments.(12) Ultimately, on 21 January 2021 the SAMR approved this case, following a lengthy approval process (57 days).

As highlighted by these two cases, the SAMR has signalled its intention to review, with heightened scrutiny, cases which involve VIE structures. Putting aside any extrapolation from these decisions of the SAMR's stance on the legality of the VIE structure, it is evident that – at least within the anti-monopoly enforcement framework – it would be imprudent for companies which employ a VIE structure to ignore filing obligations. This is further evidenced by:

  • the introduction of the Antitrust Guidelines for the Platform Economic Industry;
  • the penalties opposed on three tech companies for failing to comply with their filing obligations; and
  • recent statements made by the SAMR.(13)

Given the SAMR's approval in the Mingcha Zhegang and Car Inc (Shenzhou Zuche) cases, the consensus among practitioners is that transactions involving a VIE structure will not be adversely affected. Thus, companies should proactively assess their situation and ensure that they are compliant with the AML.

Conditionally cleared cases

In 2020 the SAMR conditionally approved four cases, a relatively stable number compared with 2019 (five cases). Figure 1 illustrates the number of cases conditionally cleared between 2009 and 2020.

Figure 1

These conditional cases cover the automobile, computer, electronic components and pharmaceutical industries. They are the key areas of antitrust enforcement. The relevant products involved in these cases are not only related to people's daily life but are also high-tech driven. For example:

  • the relevant product markets in ZF Friedrichshafen AG's acquisition of WABCO Holdings relate to automatic manual transmission controllers;
  • Nvidia's acquisition of Melox relates to Ethernet adapters; and
  • Danaher's acquisition of GE's BioPharma relates to microcarrier and other biological analysis instruments.

Due to the relatively strong technical nature of the relevant market, the notifying parties in two of the four conditional cases withdrew and resubmitted the notifications. From the first submission of filing materials to the case being conditionally concluded, the review process for the four cases lasted for a minimum of 238 days, a maximum of 358 days and an average of 291 days. There are many reasons for the lengthy review process, which may include the following:

  • In the absence of the 'stop-clock' clause in the AML, the process of preparation for supplementary materials and negotiation for restrictive conditions are included in the reviewing period. Therefore, the review time for complex cases may exceed the statutory merger review period.
  • The transaction structures and the relevant products are complicated (eg, in GE/Danaher, Danaher and the target had horizontal overlaps in 25 products).
  • The relevant market is highly technical and complicated (eg, the Ethernet adapter and data centre server in Melox/Nvidia).
  • The SAMR became more cautious in analysing the competition impact of these cases.

Danaher's acquisition of GE's BioPharma

On 28 February 2020 the SAMR conditionally approved Danaher's acquisition of GE's BioPharma unit, almost one year after the transaction's initial merger filing.(14) Danaher is a US-diversified conglomerate involved in the healthcare and environmental industry. GE's BioPharma unit, renamed 'Cytiva', provides both hardware and software used in biopharmaceutical research.

In addition to implicating a sensitive and strategically important industry, this case stands out for its complexity; it involved 25 different product markets where the notifying parties had horizontal overlaps. In the SAMR's analysis, the relevant geographical market for these product markets was defined as the worldwide market given that there were minimal trade barriers (as evinced by the low ratio of shipping cost to sales prices) and minimal price differentiation across borders. The SAMR found that in many of the product markets, including the markets for microcarriers, chromatography systems and hollow fibre filter modules, the transaction would have the effect of eliminating or restricting competition. For example, the SAMR found that in the microcarriers market, the notifying parties would have a combined market share of nearly 70% to 75% worldwide. In addition to market share, the SAMR also appeared to be concerned with the impact of the transaction on innovation and research and development (R&D), particularly in the hollow fibre filter module market.

After several rounds of consultation, the SAMR accepted Danaher and GE's proposal for structural remedies to salvage the transaction, concluding that the remedies would reduce the transaction's adverse impact on competition. Danaher was to divest various businesses, such as the businesses in the aforementioned product markets which raised competitive concerns, including all of its tangible and intangible asset and staff. Moreover, Danaher was to reach a transitional agreement and share its relevant tangible assets and proprietary research of the 'Emily Project' to buyers of its divested businesses, aimed at encouraging R&D and investment in new products. This last remedy stands out, with the SAMR going beyond its traditional anti-competition toolbox to impose conditions that it believed would encourage innovation and facilitate greater product selection within the relevant market, instead of merely eliminating the negative impact raised.

The SAMR will likely continue to explore and deepen its anti-competition toolbox in major scientific research fields in life sciences and other high-end scientific research fields (eg, cutting-edge R&D involving biopharmaceuticals or transactions involving innovative drugs for the treatment of critical and rare diseases). The notifying parties should weigh up and coordinate the filing strategies of various jurisdictions and carefully submit remedies based on the impact on the Chinese market to resolve the SAMR's competition concerns.

Penalties for non-filers

In recent years, the antitrust authorities have never relaxed their supervision of non-filing cases. In 2020 the SAMR significantly strengthened its supervision of and penalties imposed on non-filing parties. The SAMR published 13 non-filing cases with total fines of Rmb5.65 million. The highest fine issued was Rmb500,000, while the lowest was Rmb300,000.

MBK Partners/Siyanli Industrial

On 6 January 2020 the SAMR published its penalty decision against MBK Partners for its failure to notify its acquisition of a 23.53% stake in Siyanli Industrial.(15) By failing to do so, the notifying parties breached Article 21 of the AML and were fined Rmb350,000 accordingly.

This case marks the first penalty decision relating to an investment fund acquiring a minority interest, suggesting that the SAMR has not only kept itself up to date on market movements, but also that it is taking a proactive role in policing this area. While the stake of 23.53% prima facie appears to be a small proportion of the overall business, it is likely that the SAMR took a strict approach with its interpretation of 'controlling rights'. The reason could be that this transaction is distinguished from most other private equity or venture capital transactions where there is a greater difference in the proportion of equity stake between the fund investor and the controlling party and where the investment fund was largely kept away from the operations of the business.

Notifying parties holding a minority interest should assess their filing obligations under specific circumstances. Typical considerations include:

  • the voting rights arrangement on major corporate decisions (eg, whether financial investors had veto power); and
  • the presence of any special shareholder rights (eg, pre-emptive, preferential, drag-along or buyback rights).

If an investor in a later financing round shares the same special shareholder rights as previous investors due to a most-favoured-nation clause, this may also trigger filing obligations.

Intime Retail, New Classics Media and China Post Smart Delivery

On 14 December 2020 the SAMR published its penalty decisions against three non-filers – namely:

  • Alibaba for its acquisition of Intime Retail;(16)
  • China Literature Limited for its acquisition of New Classics Media;(17) and
  • Hive Box Technology for its acquisition of China Post Smart Delivery.(18)

The three cases all involved internet companies using a VIE structure. These cases were the first time that the SAMR penalised concentrations involving a VIE structure.

Among the three cases, the SAMR's investigation into the Intime Retail and New Classics Media cases each took approximately 40 days, whereas its investigation into the China Post Smart Delivery case took 174 days, significantly longer than the other two. Notably, the actual transaction of the first two cases took place in 2017 and 2018, respectively, whereas Hive Box Technology's acquisition of China Post Smart Delivery was completed in May 2020, implying that the SAMR had begun its investigation only one month after the deal's conclusion. According to the SAMR's subsequent press conference,(19) it had conducted a comprehensive review of the transactions' impact on market competition, examining the underlying market condition and the effect that the concentration would have. However, the SAMR concluded that the three transactions would not reduce or eliminate competition.

Dohia

On 9 September 2020 the SAMR published its penalty decision against Zhejiang Construction Investment Group (ZCIGC) for its failure to notify the agency of its 29.83% acquisition of Dohia Group.(20) The transaction was conceived as a reverse merger whereby ZCIGC, a private company, would bypass the initial public offering process and become publicly listed through a complex arrangement with Dohia. The first phase involved ZCIGC acquiring 29.83% of shares in Dohia. This was completed on 10 May 2019, when ZCIGC became Dohia's largest shareholder. The second phase involved an asset swap between the two entities such that ZCIGC's shareholders would become shareholders in Dohia.

Relevantly, ZCIGC notified the SAMR when it was engaging in the second phase of its reverse merger in October 2019. However, the SAMR found that filing obligations would already have been triggered in the first phase of the transaction and handed down a penalty decision accordingly. Based on the penalty decision, the SAMR likely made its decision based on the ownership concentration. With the SAMR specifically highlighting the 29.83% of shares, this suggests that it intended to create a deterrence effect, serving as a clear warning sign for other undertakings, as in MBK Partners/Siyanli Industrial.(21) Therefore, companies engaging in asset restructuring, reverse mergers and other multi-stage transactions should critically assess and determine the relevant stage at which filing obligations may be triggered. Moreover, publicly listed companies with a disperse shareholder base should be mindful that a minority interest of less than 30% may still be considered a controlling interest. Any transaction that involves a change in ownership should be critically assessed as to whether it triggers filing obligations.

Based on the non-filing cases above, the SAMR will likely continue its ex post crackdown on previous transactions involving internet companies using a VIE structure which have failed to comply with their filing obligations. Such companies must remain vigilant and ensure that a robust compliance framework is in place. Strategic decisions, including the order of transactions to be reported and the supplementary material to be provided, must consider all potential repercussions. The aforementioned cases are good precedents which shed light on the SAMR's approach to defining the relevant market and determining whether the conduct engaged in would amount to monopolistic behaviour.

Comment

In 2020 the SAMR maintained a consistently rigorous and prudent attitude towards merger control review. Despite the COVID-19 pandemic, the timeframe for filing and approving merger control review (especially in simple cases) was shorter than in 2019. As for conditional cases, the SAMR imposed various conditions based on the characteristics of relevant products and the competition and innovation conditions of the relevant market, so as to eliminate the possible negative effects of concentration. In addition, 13 non-filing cases published in 2020 show that the SAMR maintains its supervision of and penalties imposed on non-filing parties. The SAMR also clarified its attitudes towards transactions in the internet sector involving a VIE structure.

The SAMR's new trends and tools should pique the attention of enterprises in the relevant industries – whether it be the trend of scrutinising transactions involving a VIE structure and the non-filing of minority stake investment by funds or the trend of undertaking intensive competition analysis of innovative markets. The SAMR will likely continue to accelerate the construction of antitrust enforcement system in 2021. When conducting merger control review, the SAMR usually maintains the consistency between current and past cases, particularly with regard to market definition and certain factual issues. Meanwhile, to facilitate efficiency, high-quality notification materials will be required from the SAMR. Therefore, enterprises should focus on the trends of antitrust enforcement and the revision process of the AML. In particular, enterprises must understand the regulations of merger control review, actively fulfil their filing obligations and work closely with external experts to avoid delays in the closing of transactions, which could affect their business plans. Further, the SAMR will likely continue to strengthen its investigation and penalisation of non-filing cases in 2021. Thus, before the revision of the AML, enterprises should consider submitting to the SAMR the post-consummation filing of such transactions.

Endnotes

(1) The original Chinese version of the SAMR's 2020 working report is available here.

(2) Infineon's acquisition of Cypress; the announcement is available here.

(3) Nvidia's acquisition of Melox; the announcement is available here.

(4) A VIE structure is designed to allow foreign offshore investors to invest in and control Chinese onshore businesses through a series of contracts and agreements, overcoming foreign capital restrictions in particular sectors.

(5) The original Chinese version is available here.

(6) The original Chinese version is available here.

(7) Available here.

(8) The original Chinese version is available here.

(9) The original Chinese version is available here.

(10) The announcement of unconditional approval is available here.

(11) The publication of simple case review is available here.

(12) The original Chinese version is available here.

(13) The press conference of the SAMR is available here.

(14) The original Chinese version is available here.

(15) The original Chinese version is available here.

(16) The original Chinese penalty decision is available here.

(17) The original Chinese penalty decision is available here.

(18) The original Chinese penalty decision is available here.

(19) The press conference is available here.

(20) The original Chinese penalty decision is available here.

(21) The original Chinese penalty decision is available here.