Since the start of the year, the State Administration for Market Regulation (SAMR) has waved through more than 160 deals without remedies and imposed remedies in connection with four deals – Danaher/GE BioPharma, Nvidia/Mellanox, Infineon/Cypress and ZF Friedrichshafen/Wabco – bringing the total number of conditional clearances to date to 48.
Enforcement in other areas of merger control has continued almost uninterrupted, and SAMR has clarified its approach in some areas of practice.
In this blog, we review what has kept SAMR busy on the merger control front and consider some of the developments shaping the year so far.
Merger review timings currently remain stable
SAMR, and its predecessor MOFCOM, have reviewed over 3,000 transactions to date.
Far from slowing down its decision output during the global COVID-19 pandemic, SAMR’s decision-making levels remain high with no visible signs of material slowdown.
SAMR has maintained the pace of merger reviews and clearances in the last five months. It has cleared a comparable number of deals unconditionally compared with this time last year. It is currently approving deals on similar timelines as before:
- two to three months from filing in simple cases – reserved for deals that do not give rise to substantive issues and qualify for simple treatment under the market share thresholds or deal-type criteria;
- four to five months in standard cases with no, or with some but resolvable, issues; and
- upwards of nine-plus months in complex deals resulting in remedies.
In fact, in some deals notified under the simple case procedure, we have seen SAMR speed up clearance from two to three months to about one-and-a-half to two months from filing.
This may be due, in part, to SAMR’s decision to accept electronic filings and submissions at present. This has streamlined its internal procedures and, to some extent, facilitated deal reviews.
The modest uptick in speed can also be attributed to the types of simple cases notified to SAMR and their China nexus.
At the other end of the spectrum, merger review timetables in standard cases remain substantially the same. For example, SAMR took 10 months from filing to clear Danaher/GE BioPharma, 12 months to clear Nvidia/Mellanox and eight months to clear Infineon/Cypress.
And, most recently, SAMR cleared ZF Friedrichshafen/Wabco in nearly nine months with remedies. Separately, SAMR has also indicated that it will fast track review of transactions aimed at tackling COVID-19 (see our blog).
The conditional clearances in the past few months are a reminder to merging parties – if one were needed – that deal planning, engaging early and proactively with SAMR remain key to navigating the merger review process and managing deal timetables, especially in complex deals involving remedies.
The relative unpredictability of timing in complex deals remains and – as in Nvidia/Mellanox and Danaher/GE BioPharma – merging parties can be required to withdraw and refile their transaction if SAMR is unable to complete its review within the 180-calendar day statutory review period. Refiling a transaction restarts the review clock. There is currently no limit on the number of times a notification can be withdrawn and refiled, nor is there a deadline within which SAMR must complete its review of a refiled deal.
In practice, more than 50 per cent of refiled deals cleared with remedies were approved in Phase II – as in Nvidia/Mellanox and Danaher/GE BioPharma – or in the extended Phase II period.
In early January, SAMR proposed a ‘stop-the-clock’ mechanism in its draft amendments to China’s anti-monopoly law (AML). This could cut down the number of refiled deals considerably, but it remains to be seen whether the proposed change would fully address the timing challenges merging parties face.
If adopted, SAMR could stop the review clock, for example, for merging parties to provide requested information or to finalise remedies negotiations. The timing of adoption of the new AML is uncertain, although SAMR’s 2020 work plan, published a few weeks ago, indicated that SAMR plans to table the AML for review and deliberation by the hierarchy later this year.
For now, the signs point to SAMR generally maintaining pre-COVID-19 clearance timetables across the deal spectrum. That said, until China returns fully to ‘business as usual’ it remains important to factor in eventual delays in transaction documents.
This is true especially in high-profile, sector-transforming deals in sensitive or strategic sectors reviewed under the standard case procedure. SAMR continues to consult widely in such deals and will reach out to other ministries, sector regulators, trade associations, competitors, suppliers and/or customers.
Inevitably, if one or more of these constituencies cannot be reached immediately and/or does not respond promptly to SAMR’s requests – and its views are critical to informing the outcome of the review process – this could impact the timing of SAMR’s review.
With the escalation of US-China tensions lately, there is growing concern again over the implications on the merger filing process in China for US-related deals. While it is still early to see any immediate impact, it is likely that SAMR will continue to review transactions involving non-strategic or non-sensitive sectors and with no competition issues as usual without extra delay.
But, for transactions involving strategic or sensitive sectors and with competition issues, SAMR is likely to apply extra caution leading to protracted review periods, as reflected in some of the transactions discussed below.
Deals in sensitive and strategic sectors continue to attract behavioural remedies
The recent conditional clearances highlight sectors that are sensitive or of strategic importance in China.
Deals in the healthcare, life science, and semiconductors, as well as generally IT/technology space account for most of the deals cleared with remedies to date in China (c. 40 per cent), and in more than 50 per cent of the deals behavioural remedies were imposed (sometimes alongside a structural or quasi-structural remedy) to address the China-specific concerns raised by the deal.
Structural or quasi-structural remedies include, for example, divestment of a business, minority interest, assets or plant; or grant of a licence together with related tangible and intangible assets.
SAMR has a range of behavioural remedies in its toolbox including:
- commitments on terms of supply (eg in relation to price, quality, type of products or services supplied);
- commitments not to tie/bundle, impose unreasonable commercial terms and/or force sales on customers;
- interoperability-related commitments;
- access rights including commitments to supply on fair, reasonable and non-discriminatory (FRAND) terms;
- confidentiality obligations including commitments to erect firewalls to preserve the confidentiality of third party information;
- restrictions on exercise of shareholder rights;
- growth restrictions; and
- capacity limitations.
The toolbox also includes the so-called hold-separate remedy, which is by far the most controversial. A hold-separate remedy enables merging parties to proceed with a deal that would otherwise have been blocked but obliges them to operate independently for some time post-merger.
Typically, merging parties must apply for the hold-separate remedy to be waived after the relevant period set in the decision. The remedy can be in place for long and delays full realisation of anticipated deal synergies.
For example, in Seagate/Samsung (2011), MOFCOM waived the hold-separate remedy roughly four years after its decision; in Western Digital/Hitachi HDD (2012), the remedy was completely waived about five-and-a-half years after its decision; and in MediaTek/MStar (2013), it did so more than four years after its decision.
Occasionally, the decision will include a sunset clause indicating that the hold-separate remedy will expire automatically after the period set in the decision. In Advanced Semiconductor Engineering/Siliconware Precision Industries (ASE/SPIL) (2017), the hold-separate was set to expire automatically two years after the decision. In Cargotec/TTS (2019), this will expire automatically two years post-decision.
The healthcare, life sciences, semiconductor and certain other IT/technology-rich sectors, among others, feature in China’s 13th five-year plan, the country’s latest blueprint for economic and social development.
Five-year plans set out China’s strategic objectives and plans for specific sectors over a five-year term and, broadly, are indicative of industries which are sensitive or of strategic importance.
This does not necessarily mean that deals in these sectors invariably raise issues and attract remedies. However, a high profile and sector-transforming deal in a sensitive or strategic sector that gives rise to competition concerns, with a perceived adverse impact on Chinese industry or interests, will almost certainly attract SAMR scrutiny and could lead to remedies as the conditional clearances so far this year suggest.
In Danaher/GE Biopharma, SAMR pointed to, among others, very high combined market shares and high market concentration levels, and imposed structural remedies to address its concerns. It also imposed other remedies designed to protect R&D and investment in future products.
In Nvidia/Mellanox, SAMR acknowledged the largely complementary nature of the parties’ products and services but pointed to foreclosure risks in certain adjacent markets where the parties are active given, among others, high market shares, perceived ability to control prices, and high barriers to entry.
SAMR imposed behavioural remedies to guarantee access and security of supply to certain products and services in China. It imposed no tying (or imposing unreasonable commercial terms), interoperability and confidentiality commitments. It also required the parties’ relevant products subject to remedies to be supplied in China on FRAND terms and that existing open source commitments are maintained.
There was media speculation before the decision that SAMR considered a hold-separate remedy, which the decision suggests was dropped. In an unusual move, the decision includes two confidential remedies and it is unclear whether this is solely to protect the parties’ business secrets or potentially to address other concerns (given the possible dual use of some of the products in issue).
In Infineon/Cypress, SAMR’s decision raised foreclosure concerns in relation to certain adjacent markets where the parties are active. SAMR imposed behavioural remedies including commitments not to tie (or impose unreasonable commercial terms), force sales on customers or refuse to supply Chinese customers the relevant products individually if requested. SAMR also required one of the relevant products supplied in China to comply with certain industry standards noted in the decision and others to be supplied in China on FRAND terms.
In ZF Friedrichshafen/Wabco, SAMR concluded that the transaction raised vertical foreclosure concerns in relation to a pair of vertically related products. SAMR pointed to, among others:
- the parties’ high market shares in the relevant technology-rich up- and downstream markets;
- the fact that Wabco was one of two main suppliers of the relevant upstream product in China, it had won most of the tenders of key customers and its competitive edge;
- customer stickiness;
- high barriers to entry; and
- Chinese customers’ reliance and dependence on the parties’ products.
In short, it considered that the parties had the ability and incentive to engage in anticompetitive refusal to supply strategies with adverse consequences for Chinese customers. The parties committed to continue to supply the upstream product to existing customers and on terms that afford security of supply in terms of price, quality, quantity, delivery time, available technology and after-sales service levels – and to do so having regard to FRAND principles. SAMR also required the parties to commit to offer Chinese customers the opportunity to develop the upstream product to aid access to future supplies.
Other merger control activity continues unabated – fines, remedies and policy shifts
In other areas of merger control enforcement, SAMR remains relatively busy, among others, investigating and fining parties for failing to file reportable deals as well as reviewing applications to waive remedies imposed in prior cases. SAMR has also signaled a shift in its approach to so-called VIE structures – otherwise known as a variable-interest entity.
SAMR has continued to impose fines – albeit modest – for late filings. The maximum fine that SAMR can impose for failure to file or closing before clearance is RMB500,000 (approximately $70,000 or €65,000). This could increase to up to 10 per cent of a firm’s turnover if SAMR’s proposal in its draft amendments to the AML is adopted. The fines imposed this year remain within range, ie less than RMB400,000.
In March, SAMR confirmed that the hold-separate remedy imposed in ASE/SPIL had expired according to a press release published by ASE. In April, SAMR waived the remedies imposed in 2014 in connection with the establishment of the Corun/Toyota China/PEVE/Sinogy/Toyota Tsusho automotive batteries JV.
SAMR pointed to material changes in the competitive dynamics of the markets involved including, among others:
- changes to regulations on the auto sector and hybrid vehicles;
- the limited uptake of hybrid vehicles;
- advances in battery technology and the emergence of effective alternatives;
- Toyota’s declining market share in China’s hybrid vehicles market;
- Toyota’s decision to alter the access terms to certain patents including those related to hybrid vehicles; and
- the fact that the JV had not secured purchase orders from hybrid vehicle manufacturers since starting to produce automotive batteries.
In April, SAMR signaled a shift and possible relaxation of the approach to VIE structures in merger review procedures. SAMR published a public notice on its website indicating that it had accepted and is reviewing a VIE-related deal under the simple case procedure – in this case, the establishment of a greenfield JV involving a JV parent ultimately controlled by a VIE.
This marks a departure from the position taken by its predecessor MOFCOM. VIEs are a controversial legal construct in China based on a complex set of contractual arrangements. They are commonly seen in sectors subject to foreign investment restrictions in China (eg telecommunications and the internet) and are designed to side-step foreign investment restrictions to enable a foreign investor to acquire control over them.
As of today, the transaction has not yet been approved, although Phase I should have expired on 19 May. It is rumoured that the transaction has been challenged for qualification for treatment under the simplified procedure, as the parties’ market share would exceed the relevant market share threshold in a properly defined (narrower) market.
SAMR has yet to complete its review, but the decision to accept and review the deal suggests that at least some VIE-related deals will now need to be notified to SAMR. It remains to be seen whether SAMR will accept and review all VIE-related deals going-forward – including an acquisition of control over a VIE.
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SAMR has been very active on the merger control front in this past five months. The high levels of activity are expected to continue in the coming months.