CHINA: An Introduction to Competition/Antitrust (PRC Firms)
An Overview of Enforcement Trends for China’s Merger Remedies
Under China’s merger control regime, when a transaction may have anti-competitive effects on the relevant markets, it may be approved with additional restrictive conditions (also referred to as “merger remedies”), if not be prohibited. Its significance lies in minimising the negative impact that a concentration may have on market competition while respecting the freedom of transactions between economic entities. Drawing insights from a comprehensive analysis of publicly disclosed conditional approvals spanning the period from 2017 to 2023, we aim to present an overview of the landscape and highlight the enforcement trends in merger remedies cases in mainland China.
Overview: a Broad Spectrum of Industries with an Emphasis on Advanced Technology Fields
From 2017 to 2023, China’s antitrust authority conditionally cleared 33 cases covering 15 different industries, without a strong industry focus. Among these cases, the top five industries with the highest numbers of cases were semiconductors, communications equipment, pharmaceuticals & medical devices, chemicals and transportation. This indicates that transactions in advanced technology fields are more likely to be imposed with merger remedies. To provide a specific breakdown, eight cases fell within the semiconductor industry, accounting for 24.24%; five cases were related to the communications equipment industry, accounting for 15.15%; four cases were within the pharmaceuticals & medical devices industry as well as chemical industry, each accounting for 12.12%; and three cases pertained to the transportation industry, accounting for 9.09%.
Types of Merger Remedies
China’s merger control regime incorporates three different types of merger remedies: structural remedies, behavioral remedies and hybrid remedies that combine both structural and behavioral remedies. Structural remedies usually target existing elements of competition, and may require divestiture of tangible assets, intangible assets such as intellectual property or data, or relevant rights and interests. In contrast, behavioral remedies typically address anti-competitive behaviors following the transactions, and may involve actions such as providing access to networks, platforms, or other infrastructure, licensing key technology, or maintaining operational independence. Statistical analysis reveals the following trends.
Favouring Behavioral Remedies Over Structural Remedies
31 out of 33 cases (93.94%) have been imposed with behavioral remedies. Among them, 21 cases have adopted purely behavioral remedies, while 10 cases have opted for hybrid remedies. This data underscores the prevalent use of behavioral remedies over structural remedies in Chinese merger control enforcement from 2017 to 2023. China’s antitrust authority are cautious in the use of the structural remedies. Since the enactment of China’s Anti-Monopoly Law(“AML”), behavioral remedies are often viewed and used as flexible solutions to resolve competition concerns raised by various stakeholders in transactions, including customers, suppliers, competitors and relevant government bodies. Notably, commitments to ensure continued supply on Fair, Reasonable, and Non-Discriminatory (“FRAND”) terms, pricing commitments, and the non-tying or bundling commitments are among the most frequently used behavioral remedies.
Applying Structural and Behavioral Remedies to Address Different Competition Concerns
All 12 cases where structural remedies were imposed involved horizontal mergers or acquisitions. It indicates that the structural remedies are primarily applied in horizontal mergers involving significant business overlaps between the parties. Conversely, behavioral remedies tend to be used in those mergers involving vertical or neighboring relationships. All 16 cases involving vertical relationships and 11 cases involving neighboring relationships were imposed with behavioral remedies. Among these cases, only four cases involving vertical relationships and one case involving neighboring relationship were imposed with concurrent structural remedies.
The Duration and Compliance Costs of Merger Remedies
Structural remedies usually bring about permanent changes to the structure of the relevant business. In contrast, behavioral remedies often have a defined duration, which may be automatically lifted upon expiration or require the obligated party to apply to the antitrust authority for the removal.
The majority of behavioral remedies featured a five-year duration, accounting for 61.29% (19 out of 31). The longest duration observed was 10 years, accounting for 12.9% (four out of 31), while the shortest duration was merely two years. Since the enactment of the AML, only two cases were imposed with a two-year duration for behavioral remedies. Mr. Ye had led and handled one of these two cases – the transaction between ASE and SPIL. In this case, Mr. Ye assisted the clients in designing the merger remedies plan and negotiating with the antitrust authority, and finally secured a particularly favourable condition – the "automatic release of restrictive conditions at the end of the following two years."
Merger remedies, especially those with a long duration, may impose heavy costs and burdens on the transaction parties. In practice, it is often required to entrust an independent trustee to supervise the implementation of merger remedies. This involves activities such as reviewing relevant documents, conducting interviews, as well preparing and submitting regular compliance reports to the antitrust authority, which all require the parties to allocate resources for additional personnel and implementation expenses. In addition, merger remedies with a long duration may also prevent the transaction parties from efficiently responding to changing market conditions. Therefore, it is crucial to endeavour to secure an economically reasonable merger remedies plan with relatively short duration whenever possible.
Compliance Suggestions
In light of recent practice, for those transactions that have been imposed with merger remedies, we suggest the obligated parties to engage professional antitrust counsel:
- to ensure compliance with the commitments of the imposed merger remedies and relevant reporting requirements, which will help alleviate competition concerns from the antitrust authority; and
- to promptly seek professional evaluation on the possibility to apply for amendments or removal of the imposed merger remedies. China’s antitrust authority may decide to amend or remove the imposed merger remedies, considering the following factors including whether there has been any substantial change to the competition situation in the relevant markets, whether there has been any material change to the parties and whether it is unnecessary or impossible to implement such merger remedies.
For those transactions where the parties may have relatively high market shares and the transactions may have material impact on the competition of relevant markets, especially for those in advanced technology fields, we suggest the transaction parties to consider engaging professional antitrust counsel as early as possible:
- to prudently assess the competition impact that the transaction may have and the possibility of being imposed with merger remedies, and to consider at an early stage comprehensive filing strategy and response measures.
- to assess any potential negative impact that a transaction may have on competition in the relevant Chinese markets, even if the transaction does not raise competition concerns in other jurisdictions. China’s antitrust authority will independently assess the competition impact on Chinese markets and Chinese customers. For instance, in the FPGA Case, while other jurisdictions unconditionally cleared the transaction, China’s antitrust authority identified that the transaction may cause leverage effect and foreclosure effect in mainland China.
- to expedite the approval process with preparatory measures. Conditional approval cases often come with lengthy review periods, and valuable business opportunities may be time sensitive. To secure timely clearance, notifying parties may consider preparing not only the notification materials but also a proposed commitment plan of merger remedies, if the transaction is possible to be imposed with merger remedies upon assessment. It is also advisable to consult with the antitrust authority in advance regarding the commitment plan.