China's New Merger Rules Streamline Process but May Extend Some Reviews
The Development: China's antitrust authority, the State Administration for Market Regulation ("SAMR"), published new rules related to antitrust merger reviews—the Interim Rules on the Review of Concentrations of Undertakings ("Interim Rules").
The Result: The most significant changes involve which authorities—local or national—review merger filings, which transactions qualify for expedited review, timing for remedy proposals, and the length of certain investigations. The Interim Rules also consolidate existing rules related to filing thresholds, filing process, substantive review, remedies, and penalties.
Looking Ahead: The Interim Rules continue SAMR's efforts to streamline its merger reviews and merger-related investigations involving failure to file a notifiable transaction and "gun jumping." The changes are unlikely to meaningfully affect the outcome or timing of most transactions. For more-complex transactions, however, SAMR's elimination of the deadline for merging parties to propose a remedy at the end of its second-phase review could result in longer merger reviews.
Delegation of Merger Review Authority
Since China enacted the Anti-Monopoly Law ("AML") in 2008, the government has centralized merger review authority at the national level. By comparison, SAMR delegated investigations of non-merger antitrust conduct (e.g., cartels and abuse of dominance) to provincial-level agencies, reserving only cases with national significance for itself. SAMR's Interim Rules now extend review of certain mergers to local authorities due to SAMR's workload and limited staff resources.
This new division of labor raises a number of questions. Local offices will need to develop greater experience with merger reviews, and it is not yet clear how they will develop those skills, whether SAMR will supervise their decision-making, or which mergers will be subject to local review. Initially, it is likely that SAMR will delegate the review of simple filing cases to local authorities with more-experienced antitrust enforcement teams, for example, in Shanghai, to test the delegation procedure.
Exceptions to Simple Case Qualifications
Consistent with existing practice, certain merger filings may qualify for an expedited ("simple case") review procedure if:
- The parties' combined market share is less than 15% in horizontal relevant markets and less than 25% in any vertical or conglomerate relevant markets.
- The transaction is an offshore joint venture ("JV") with no business in China.
- The target has no business in China.
- A co-controlling JV partner(s) exits a JV, in certain circumstances. The Interim Rules introduce a new requirement that the remaining sole-controlling partner and the JV have a combined market share of no more than 15% in any horizontal relevant market(s).
Qualifying for a simple case review is a significant advantage for merging parties because SAMR typically clears those matters within one to two months of the filing. Review of "normal" case filings can take four to six months (or longer). The accelerated review provides a strong incentive for qualifying parties to file for a simple review.
Even if the parties believe a transaction meets the simple case criteria, SAMR has discretion to reject a simple case filing. The parties must then make a normal filing and the review period restarts without credit for time incurred during the simple filing period. SAMR may reject a simple filing for a number of reasons, including:
- Difficulties assessing relevant market shares (market definition).
- Adverse impact of the transaction on market entry.
- Important technological developments or national economic priorities.
- Complaints from marketplace participants.
No Deadline to Propose Remedies
Under the prior rules, merging parties had to submit any final remedy proposal at least 20 days before the end of SAMR's Phase II review, suggesting that the agency should have articulated its views of the transaction prior to this time. In practice, SAMR did not strictly enforce this deadline because the agency could inform the parties about its concerns at any time, including later than that deadline. The Interim Rules eliminate the 20-day requirement.
Elimination of the deadline offers potential advantages and disadvantages for merging parties. The parties will have more time to propose remedies later in the review process. However, it also may alleviate pressure on SAMR to articulate its concerns before the end of Phase II. As a result, merging parties may not have enough time to propose, negotiate, and finalize a remedy during the Phase III review, which lasts just two months. Therefore, delaying the start point of remedy negotiations may increase the likelihood that parties have to refile in cases with remedies.
Formalizing Divestiture Buyer Process
The Interim Rules codify SAMR's existing practice of requiring an upfront buyer or fix-it-first in certain cases involving a divestiture remedy. For example, in the Dow Chemical/DuPont (2017) transaction, SAMR requested the parties not close the main transaction until it approved the buyer and the definitive agreement for the divested businesses.
Under the Interim Rules, SAMR may ask the parties to identify the buyer, enter into a definitive agreement, and potentially even close the divesture transaction either before SAMR clearance or before closing the primary transaction.
Shortened Timeline for Investigations of Nonfiling and Gun Jumping
In recent years, SAMR has adopted an increasingly aggressive enforcement policy concerning companies' merger filing obligations, imposing penalties in approximately 10–20 cases each year for failure-to-file or closing a notifiable transaction pending SAMR clearance.
In the past, failure-to-file and gun-jumping investigations followed a "30+60+30+180 days" timeline. After SAMR initiated an investigation, the investigated parties had 30 days to submit information and documents to SAMR for the purpose of assessing whether the transaction was notifiable and had been "implemented." SAMR then had 60 days to decide whether there was a violation. If so, SAMR required the parties to make a merger filing within 30 days. SAMR then had 180 days to conduct its substantive review to determine whether the transaction eliminated or restricted competition.
The Interim Rules shorten SAMR's investigation to a "30+30+30+120 days" period. Now, SAMR must decide whether the parties failed to file or implemented a transaction pending SAMR approval in just 30 days (down from 60 days), and SAMR has only 120 days (down from 180 days) to complete its substantive review.
Four Key Takeaways
- For the first time, China's national antitrust authority, SAMR, may delegate some merger review to provincial SAMR branch offices. Although SAMR has not yet identified how it will select cases to delegate, we expect that SAMR will first delegate less-complicated transactions that raise no or relatively straightforward competitive or industrial policy concerns.
- The Interim Rules are unlikely to change the timing or outcome of most merger investigations compared to SAMR's existing practices.
- For complex transactions that require remedies, the new rules could inject incremental delay. SAMR eliminated a deadline on merging parties to propose remedies at the end of Phase II. In practice, SAMR might feel less pressure to disclose concerns early, pushing remedy discussions further into the short two-month Phase III review. This may lead to more refilings given the time necessary to propose, negotiate, and finalize a remedy.
- SAMR will accelerate its investigation and review of failure-to-file and gun-jumping violations from 300 days to 210 days.
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