Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Merger Control volume discussing topics including enforcement priorities, evidence review and notable cases within key jurisdictions worldwide.
1 What are the key developments in the past year in merger control in your jurisdiction?
Three key merger control developments in the past year are worthy of attention, which we elaborate on below.
First, the State Administration for Market Regulation (SAMR) greatly strengthened its enforcement effort against the illicit implementation of business concentration in the internet industry. From January to July 2021, the SAMR investigated and handed out 42 penalty decisions in this area. Before the issuance of the Anti-Monopoly Guidelines for the Platform Economy Industries (the Platform Guidelines), the issue of whether concentrations involving variable interest entity (VIE) structures require notification had not been fully clarified, leaving the antitrust compliance of a large number of transactions in the internet industry in an uncertain state. In July 2020, the SAMR publicly accepted and unconditionally approved a transaction involving a VIE structure for the first time. The Platform Guidelines further provide a clearer response to this issue: that is, business operator concentrations involving VIE structures fall within the scope of merger review.
Second, on 24 July 2021, the SAMR issued a penalty decision in the acquisition of China Music Corporation by Tencent Holdings Limited. This was the first time since the implementation of the Anti-Monopoly Law (AML) in 2008 that the Chinese antitrust enforcement agency had imposed not only fines but also restrictive conditions on the illicit implementation of business concentration, and also the first such penalty decision that ordered the party to the concentration to restore competition in the relevant market. According to the penalty decision, Tencent Holdings Limited (Tencent) was fined 500,000 yuan for completing the acquisition without prior notification in July 2016, and the SAMR ordered Tencent to restore competition in the online music broadcasting platform market and give up exclusive music streaming rights within 30 days.
Third, the Platform Guidelines emphasise that for those concentrations that do not reach the turnover thresholds but have or may have the effect of excluding or restricting competition, the antitrust enforcement agency shall, nevertheless, conduct an investigation. This might be the case when a start-up or an emerging platform is involved: the turnover of such party to the concentration may be relatively low due to its free or low-price model, while the concentration in the relevant market is high and the number of competitors is relatively small.
2 Have there been any developments that impact how you advise clients about merger clearance?
In 2020, the SAMR completed a total of 458 cases of merger review, among which 454 cases were approved unconditionally and four were approved conditionally. Compared with 2019, due to the impact of the covid-19 pandemic, the number of cases reviewed in 2020 has decreased slightly. With respect to the review period, in 2020, according to statistics published on the website of the SAMR, the average time from case acceptance to case approval for cases under the simplified review procedure is 13 days, 22 per cent faster than in 2019; the average time from case acceptance to case approval for cases under the normal review procedure is 163 days, 5 per cent faster than in 2019.
When it comes to the gun-jumping cases, while 2019 and 2020 saw increases from six to 15 and 18 compared with 2018 and 2019 respectively, the number fell to 12 in 2020. However, three of the 12 cases involving VIE were fined 500,000 yuan and seven cases were fined 300,000 yuan, which suggests a strengthening of enforcement. This flurry has continued in 2021 as social order is gradually restored; the SAMR issued 46 penalty decisions regarding gun-jumping during the first seven months alone. In addition, there is a stricter standard to judge whether the acquirer seizes the right to control the acquired party, as more and more small amounts of equity acquisition in the gun-jumping cases were found to be a violation of the law.
Furthermore, on 2 January 2020, SAMR published the Anti-Monopoly Law (Draft Amendment) (the Amendment). This draft amendment proposes an increase in the penalty for gun-jumping from the current punishment of no more than 500,000 yuan to up to 10 per cent of the violating company’s turnover from the previous year. Although the proposed maximum fine of 10 per cent of turnover is not necessarily included in the official Amendment, it is believed that the statutory fine for gun-jumping will definitely be greater than the current 500,000 yuan. The Amendment is expected to be passed in late 2021 or early 2022 and one may predict that stringent enforcement activities will continue.
Neither does the passage of time help. A transaction completed that violated the merger control rules years ago would still be subject to punishment under the AML, as the existence of a post-merger entity itself suggests a continuous illegal act; the limitation plea would not work. For example, two Shanghai companies were fined by the SAMR on 12 March 2021 for an equity transfer that took place on 7 June 2017.
One of the positive effects of the covid-19 pandemic is that the SAMR has changed its review procedures from offline to online submission, allowing the notifying parties to submit filing materials and supplementary documents online. The SAMR has greatly improved the efficiency of merger review and reduced the review time. For example, the average review time for the four cases approved with conditions in 2020 was about 291 days, which is relatively low compared to the 393 days in 2019.
Furthermore, based on practical experience, it has been observed that the SAMR is paying increasing attention to whether a definition of an adjacent market in individual cases is necessary. For example, in the Cisco/Acacia deal, the SAMR thought that two companies had an adjacent relationship in the coherent optical transceiver module market and the router market.
3 Do recent cases or settlements suggest any changes in merger enforcement priorities in your jurisdiction?
Despite the recovery from the covid-19 outbreak, the SAMR has not relaxed its antitrust scrutiny standards relating to merger review. China has attached great importance to antitrust enforcement since late 2020, which is reflected in many announcements of the central government that have emphasised strengthening antitrust enforcement on many occasions. It has also been reflected in the SAMR’s more frequent enforcement activities against failure to notify concentration of undertaking. Statistically, from 1 January to 28 July 2020, there have already been 47 fines for failure to notify or gun-jumping, more than a third greater than the total number for 2020.
In addition, as mentioned above, the SAMR has shown a strong interest in the internet industry. The SAMR prohibited the acquisition of HUYA and DouYu in July 2021, which are giant internet companies specialising in interactive entertainment video services. The SAMR considers that their merger would bring Tencent market dominance and eliminate or restrict competition.
Increasingly, internet companies have chosen to file their closed transactions post-merger. For example, in April 2021, under the supervision of the SAMR, 34 internet companies signed the Legal and Compliant Operation Commitment, promising to sort out all their historical transactions and notify the transactions that meet the merger filing standard in accordance with the AML.
Furthermore, China maintains vigilant and stringent antitrust scrutiny over global semiconductor mergers. For instance, so far during 2021, the SAMR has already conditionally approved two cases, and one of them, the Cisco/Acacia deal, is related to the semiconductor industry. Public data also shows that, since 2008, antitrust enforcement agencies have conditionally approved 49 cases, of which the semiconductor industry accounted for 12, or nearly a quarter.
A few characteristics can be observed in China’s merger review practice in the semiconductor industry. For one thing, there is a relatively long review period, characterised by a need to pull and refile. For example, the merger review procedure took around 15 months in the Cisco/Acacia deal. In addition, the authority will always consider economic analysis. In some relatively complex cases, both the notifying party and the authority may engage economic experts to conduct specialised economic analyses of transactions. In the Qualcomm/NXP deal, Qualcomm abandoned the acquisition because the parties could not receive approval from China’s antitrust authority before the longstop date. Similarly, in the Applied Materials/Kokusai deal, the transaction was also abandoned because the parties could not obtain China’s antitrust approval before the longstop date.
In summary, because of the SAMR’s gradually stricter attitude, China’s merger review authority has monitored the cases in the semiconductor industry and internet industry very closely, resulting in a review that is more painstaking and rigorous. In preparing a merger filing in China, companies in these industries need to prepare carefully and exercise caution. It is suggested that antitrust lawyers be involved in the early stages of transaction, so that favourable terms may be obtained by taking a comprehensive view of the related antitrust risks.
4 Are there any trends in merger challenges, settlements or remedies that have emerged over the past year? Any notable deals that have been blocked or cleared subject to conditions?
The SAMR has adopted a more aggressive attitude towards merger control last year. Supporting evidence is as follows.
The SAMR has made 47 penalty decisions regarding gun-jumping cases in 2021 to date, comprising 42.8 per cent of all such cases of since 2014. Nearly half of the 47 cases concern online platforms, which reflects the trend of reinforcing antitrust enforcement in both internet industries and other bricks-and-mortar industries. Previously, the SAMR rarely imposed remedies other than fines on gun-jumping cases, for those cases did not give rise to competitive concerns. However, in a recently released decision regarding the merger between Tencent and CMC, the SAMR concluded that the merger in question would significantly reduce competition restraints and increase entry barriers post-merger in the online music platforms market. The SAMR therefore prohibited Tencent from obtaining exclusive licences for music from upstream copyrighters and foreclosing other competitors by exclusive licensing. This case, together with a great many other similar cases, has placed huge competition law compliance pressure on tech giants operating in China.
Since 2020, the SAMR has blocked one merger case and approved seven cases with conditions. The blocked case concerns the merger between HUYA and DouYu; this is the very first merger between domestic undertakings that has been blocked by the Chinese antitrust authority. In its competition analysis of this case, besides competition concerns in the live game streaming market, the SAMR was also concerned about the foreclosure effects on the upstream markets. In that case, Tencent was recognised as the ultimate beneficiary of the transaction; the transaction would enable Tencent to have two-way foreclosure capabilities in both the upstream market (the Chinese market for online game operation services) and the downstream market (the Chinese market for live game streaming). This was the decisive factor for the SAMR to block the transaction. This case showed that the SAMR now tends to consider changes in competition conditions in the industry as a whole instead of just one specific market. This is especially true when it comes to mergers in the field of online platform economies.
Lastly, several conditionally approved cases in 2020 have shown that in addition to horizontal overlapping markets that may cause competition concerns, vertical and complementary relationships may also cause concerns. For example, in the ZF AG/Wilberco deal, the SAMR considered that five groups of automotive equipment system markets had vertical relationships.
5 Have the authorities released any key studies or guidelines or announced other significant changes that impact merger control in your jurisdiction in the past year?
On 7 February 2021, the Anti-Monopoly Committee of the State Council (AMC) officially published the Platform Guidelines, which present detailed regulations for, and explanations of, enforcement issues on monopoly agreement, abuse of dominant market position, business operator concentrations and other anti-competitive behaviours in the internet industry. Central to this is the concentration filing obligation of VIE structure transactions. Also, the Platform Guidelines, together with the AML, provide a general but clearer principle for defining the relevant market and competition analysis when it comes to digital economy-related cases.
On 20 October 2020, the Interim Provisions on Undertaking Concentration Examination were approved. The most significant provisions and changes in this regulation include:
- the SAMR has the discretion, in accordance with work needs, to entrust the market supervision departments at the level of provinces, autonomous regions, and municipalities directly under the central government to review the concentration of undertakings; and
- the simple case review process cannot apply when a joint venture (JV) controlled by two or more operators – through the concentration – is to be controlled by one operator that competes with the JV in the same relevant market and has a combined share of more than 15 per cent together with the JV in the market.
On 18 September 2020, the SAMR released the revised Draft Overseas Anti-Monopoly Compliance Guideline for Enterprises based on the comments collected. This guideline includes the introduction of antitrust enforcement in several important jurisdictions and especially highlights the obligation of merger filing in different jurisdictions for enterprises.
On 18 October 2020, the SAMR started to solicit comments on the Draft Anti-Monopoly Guidelines for APIs (application programming interfaces). In this draft, the similarity of the quality of active pharmaceutical ingredients is mentioned as an important factor in terms of defining the relevant product market. It also points out that competition concerns may occur in a highly concentrated market even if the concentration does not meet merger filing criteria. Notably, violation of the AML may subject undertakings in the APIs sector to severe punishment.
6 Do you expect any significant changes to merger control rules? How could that change your client advocacy before the authorities? What changes would you like to see implemented in your jurisdiction?
As predicted, in 2021, the SAMR continues to push forward the amendment of the AML. It is reported in the Standing Committee of the National People’s Congress that the modification of the AML is a priority of the legislation plan in 2021. The amendment of the AML significantly increases the maximum penalty for failure to file for merger control from the current 500,000 yuan to 10 per cent of the parties’ turnover in the preceding year (although the figure may not be as high in the finalised version). If this is retained in the officially approved version, the maximum penalty for illicit implementation of business concentration will be greatly increased. Therefore, we would recommend that enterprises conduct a comprehensive review of whether their past transactions have met the threshold for concentration filings and analyse the potential antitrust compliance risks.
In addition, the AMC has separately guided the approach to functional and industrial characteristics to be considered when defining the relevant market in the platform economy, automobile sector, intellectual property rights sector and API sector by issuing the Anti-Monopoly Guidelines for the Platform Economy Industries, the Anti-Monopoly Guidelines for the Automobile Sector, the Anti-Monopoly Guidelines for Intellectual Property Rights and the Draft Anti-Monopoly Guidelines for APIs. It indicated the increasing trend towards enhancing stricter antitrust regulation of these industries; thus, enterprises in those industries should be on their guard.
The Inside Track
What should a prospective client consider when contemplating a complex, multi-jurisdictional transaction?
It is suggested that the client conduct a comprehensive assessment at an early stage as to which jurisdictions the client is under an obligation to notify, which jurisdictions are easy to get clearance in, and which jurisdictions are difficult. The client should also assess the timeline for each jurisdiction to make a plan for filing preparations and filing for all jurisdictions. Coordination between filings in all the required jurisdictions is necessary to ensure consistency on key substantive matters. In some high-profile and complex cases, communication between merger review authorities is possible; therefore, preparation for such inter-jurisdictional communication is also suggested.
In your experience, what makes a difference in obtaining clearance quickly?
For normal procedure cases, the speed of third-party feedback is important in obtaining clearance quickly. The SAMR will solicit opinions from key stakeholders after accepting the case, including relevant governmental agencies, trade associations, key downstream customers and competitors. Since the SAMR values stakeholder opinions, the speed of their feedback often determines whether the review process can proceed in a timely manner. For simplified procedure cases, correctly defining the relevant market and providing information that is as complete as possible in the initial filing, as well as supplementing information required in the request for information, quickly makes a difference in obtaining clearance quickly.
What merger control issues did you observe in the past year that surprised you?
Since the issuance of the Platform Guidelines on 7 February 2021, the SAMR has started to pay great attention to the platform economy and the recent penalties imposed on platform economy enterprises for gun-jumping are on the rise. The Platform Guidelines also clarified that deals involving the VIE structure cannot be excluded from merger review. The SAMR has already fined several firms for gun-jumping in the internet sector, which involves the VIE structure.