China Introduces Rules for Antitrust Review of Non-Reportable Transactions and Other Antitrust Regulations

In Short 

The Development: China's State Administration for Market Regulation ("SAMR") recently released four regulations ("Regulations") that implement 2022 amendments to the Anti-Monopoly Law of China ("AML"). The most significant changes address "hub-and-spoke" agreements, antitrust leniency applications for individuals, SAMR's review of non-reportable M&A deals, and gun jumping. 

The Result: Regulations that encourage individual employees (even if the employee is culpable) to seek leniency for "monopolistic agreements"—China's analog to the United States' Sherman Act Section 1—are likely to prompt more antitrust investigations. In M&A, the Regulations explain how SAMR may investigate, suspend, block, or unwind non-reportable deals that harm competition. 

Looking Ahead: SAMR joins the growing list of antitrust enforcers globally focused on non-reportable acquisitions, but what will matter more is how SAMR implements the Regulations from here. For example, expanded authority to review non-reportable deals in Europe has not yet led to a flood of those reviews but, in a limited number of cases, has led to long, disruptive investigations. There are also more implementing regulations ahead. Companies should expect SAMR to significantly increase the monetary thresholds for M&A filings and issue "safe harbor" guidelines for certain agreements in the vertical supply chain.

"Hub-and-Spoke" Agreements 

Hub-and-spoke agreements refer to a series of agreements in the vertical supply chain that achieve anticompetitive horizontal effects. Under this theory, a buyer or supplier at one level of the supply chain ("hub") enters into agreements up or down the supply chain with suppliers or customers ("spokes"). The alleged aim of such a conspiracy is to eliminate competition among the spokes, i.e., horizontal agreement among the spokes that forms a "rim" of the wheel. In some circumstances, the vertical agreement exists to enforce the horizontal agreement (or punish cheaters), reducing the need for horizontal coordination. 

As detailed in our White Paper "China Amends Anti-Monopoly Law: What You Need to Know" (July 2022), Article 19 of the amended AML prohibits one business from organizing others "to reach monopolistic agreements or offer substantive assistance" to reach such an agreement. The Regulations explain what it means to "organize" and provide "substantive assistance."  

  • Under the Regulations, a business or individual has "organized" a hub-and-spoke agreement if it "play[s] a decisive or leading role in determining the parties, contents, and terms and conditions of the agreement," or agrees with multiple counterparties that are competitors, allowing them to "communicate or exchange information with each other" through the organizer and "reach horizontal monopolistic agreements." An earlier draft of the Regulations included a qualifier left out of the final Regulations that the hub must "willfully" facilitate the information exchange. That change implies SAMR will disregard the organizer's intent and focus only on the results.
  • "Substantive assistance" refers to "major assistance" such as "offering necessary support" and "creating crucial convenience" to the "spokes." However, the Regulations do not further define those terms.  

SAMR and its predecessor agencies historically have raised concerns about competitors' use of third-party intermediaries, e.g., providers of market intelligence, as conduits for exchanging competitively sensitive information. However, there is no published precedent on the issue. The AML amendments and implementing Regulations provide more clarity about how SAMR might target such conduct and subject both hubs and spokes to substantial penalties (e.g., Article 56 of the amended AML clarifies that both hubs and spokes are subject to the same fines of up to 10% of annual sales).  

Companies operating in China involved with industry benchmarking, marketplace intelligence, or trade or industry associations should revisit their practices to confirm compliance with the new rules. In addition, businesses should ensure that their employees who work with third parties in the vertical supply chain, e.g., suppliers or distributors, are educated about how to avoid even the appearance of organizing a horizontal agreement. 

Leniency Program for Individuals 

Antitrust enforcers offer leniency to corporations and/or individuals, which reduces or eliminates penalties or fines for antitrust violations and encourages reporting to the authorities. Leniency has not been a significant source of antitrust investigations in China compared to other major antitrust jurisdictions that offer leniency, such as the United States. SAMR's Regulations are likely to change that trend. 

The amended AML provides new penalties of up to ¥1 million (about $150,000) for individual "legal representatives, major responsible persons, and persons with direct liability" who are culpable for reaching monopolistic agreements. In addition, the Regulations establish a new leniency program to encourage individuals to report illegal conduct and provide key evidence to SAMR in exchange for a 50% discount or full exemption from any personal fines. 

Companies that have uncovered evidence of monopolistic agreements may face more complex decisions about whether and when to seek leniency in China because the law now incentivizes culpable employees to act as whistleblowers. Only the first leniency applicant may benefit from a full exemption from fines, and the Regulations do not explain whether a company could qualify for reduced fines as the second or third leniency applicant if its employee is the first such applicant.  

Notification of Below-Threshold Deals  

Parties to an M&A transaction must submit a premerger notification to SAMR and suspend closing until they receive clearance from SAMR, if either: 

  • The parties' combined global revenue exceeds CNY 10 billion (approximately $1.4 billion) and at least two parties to the transaction have revenue in China that exceeds CNY 400 million (approximately $59 million); or 
  • The parties' combined revenue in China exceeds CNY 2 billion (approximately $290 million) and at least two parties to the transaction have revenue in China that exceeds CNY 400 million (approximately $59 million). 

The June 2022 AML amendments authorized SAMR to review non-reportable transactions, but until SAMR issued the Regulations, there was no guidance about what types of deals SAMR could review, or how those investigations might proceed.  

The new rules permit SAMR to review deals involving so-called "killer acquisitions," consistent with a trend among antitrust enforcers globally. A killer acquisition occurs when a company acquires a product in development or with little revenue that could compete with its own product and then terminates development or sale of the newly acquired product to prevent competition with its existing product. (See our Commentary on EU Article 22 referrals (April 2022), article regarding U.S. enforcer challenges to deals involving "nascent" or "potential" competitors (March 2023), and Commentary on the EU Court of Justice's revival of long-dormant "abuse of dominance" challenges to non-reportable M&A deals (March 2023). 

Under the Regulations, if there is evidence that a non-reportable transaction may give rise to anticompetitive effects, SAMR may request that the parties notify the transaction. SAMR may do so before or after closing, and there is no statute of limitations on SAMR's ability to initiate a post-closing investigation.  

If the parties have not closed the deal and SAMR initiates an investigation, SAMR can issue an official notice that prevents the parties from closing pending the outcome of SAMR's investigation. If SAMR initiates an investigation post-closing, the parties must, within 120 days of notice from SAMR, "take necessary measures such as suspending implementation of the concentration" to mitigate any anticompetitive effects. SAMR's review of non-reportable transactions is likely to follow the same regulatory timetable used with reportable transactions; however, the Regulations do not address that issue. 

The Regulations reduce deal certainty, particularly because SAMR could open a suspensory investigation long after parties have submitted mandatory filings, undergone or completed reviews, and achieved clearances in other countries. The rules also could be disruptive to parties who have closed transactions and integrated or partially integrated the target business—there is no guidance about how parties can or should suspend implementation of already "implemented" transactions.  

Parties to high-profile transactions not reportable in China should consider at least a preliminary analysis of antitrust risk in China to assess the likelihood of a SAMR investigation. Buyers and sellers also will need to consider how to account for the risk of a late-breaking SAMR investigation in the deal documents, including the effect on the deal timeline.  

Gun Jumping  

Although parties to a deal may carry out due diligence and plan for integration, they may not begin to coordinate their current business activities prior to receiving mandatory approvals from antitrust enforcers—a practice known as "gun jumping." The Regulations introduce the first guidance about what conduct crosses the line into prohibited gun jumping. The non-exhaustive list of prohibited conduct in the Regulations includes:  

  • Completing registrations of the entities or changes of rights; 
  • Designating senior management; 
  • Involvement in business decisions and management; 
  • Exchanging competitively sensitive information with the other parties to the transaction; and 
  • Substantively integrating the businesses.  

The obligations related to involvement in business decisions and management and information sharing may create complications in transaction planning. Most M&A agreements include both interim operating covenants—negative limitations that oblige the target to run the business in the ordinary course of business, consistent with past practice, and information-sharing requirements to update the buyer on the target's continued operations and help the buyer plan for post-closing operations. Although SAMR's gun jumping Regulation should not disrupt the way that parties conduct due diligence and integration planning in most deals, in some cases, parties may need additional "clean team" safeguards to mitigate gun jumping risk in China.

Three Key Takeaways 

  1. The "Hub-and-Spoke" Regulations provide SAMR with more guidance about how to penalize participants in such agreements. In particular, companies should expect SAMR to focus on investigating industry benchmarking, third-party market intelligence, and trade associations. Although those activities may be perfectly lawful, it is worth revisiting your practices in China and reminding local employees about the antitrust rules. 
  2. SAMR's Regulations encourage individual employees—even culpable employees—to seek leniency for monopolistic agreements. Companies that uncover questionable conduct will need to take that incentive into account when considering whether or when to seek leniency in China, among other factors. 
  3. SAMR's Regulations permit it to investigate, prevent closing of, and unwind non-reportable transactions that harm competition. That Regulation may alter antitrust risk and closing timeline for deals involving a high-profile acquisition of a low-revenue, high-value target that is not reportable in China. Companies involved in such a deal should consider a preliminary risk analysis to determine the likelihood of a SAMR investigation, and consider the effect on deal documents and timeline.
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