Anti-monopoly reviews and compliance in M&A transactions

By Chen Hong and Wang Na, East & Concord Partners

The first half of 2021 witnessed a surge in anti-monopoly penalties concerning business operator concentration filings. This article takes in the latest law enforcement practice to offer an outlook on anti-monopoly reviews and compliance.

陈宏, Chen Hong, Partner, East & Concord Partners
Chen Hong
East & Concord Partners

According to the Anti-monopoly Law, when concentration reaches the point at which it must be filed with regulators, operators should pre-emptively file with the anti-monopoly law enforcement agency under the State Council. Without filing, such business concentration is prohibited. Specifically, business operator concentration could refer to a merger; obtaining control by acquiring equity or assets; or obtaining control or exerting decisive influence through contractual or other means.

Judging from the above definition, an M&A transaction, due to its very nature, is likely to be a target for concentration review. We recommend business operators carry out risk assessment for anti-monopoly compliance from the earliest stage. Concentration should be filed if total worldwide turnover from the previous fiscal year of all business operators involved in the concentration exceeds RMB10 billion (USD1.5 billion), or that within China exceeds RMB2 billion, and the turnover within China of at least two of the business operators exceeds RMB400 million, according to article 3 of the Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators.

Also, under article 17 of the Interim Provisions on the Examination of Concentrations of Business Operators, operators may make a simplified case filing if:

(1) In the same relevant market, the combined market share of the operators is less than 15%;

(2) in either the upstream or downstream markets, the combined market share is less than 25%;

(3) or, in other scenarios, if the operators have less than 25% market share in each market related to the transaction. In such cases, regulators will conduct the review in accordance with the simplified procedures.

In an M&A transaction, apart from determining the transaction structure, steps and timetable, operators should promptly assess whether filing for concentration is required, the time and expense it would take and the impact of each review result. This is vital to the success of the transaction. If filing is deemed necessary, it should be made to the State Administration for Market Regulation (SAMR) after the formal signing of the transaction documents but prior to implementing them.

汪娜, Wang Na, Partner, East & Concord Partners
Wang Na
East & Concord Partners

According to SAMR data, from 1 January to 15 June 2021, 232 filings were submitted as simplified cases, an increase of about 32% from a year earlier. On average, the review process for simplified cases takes less than 20 days. During the same period, 242 cases were unconditionally approved, increasing by roughly 33% year-on-year, and two were approved under restrictive conditions. In addition, 23 administrative penalties were handed out for failure to file for concentration, increasing almost eight-fold from the same period of 2020. We noted the following trends demonstrated in the 23 penalties:

Costs of non-compliance are mounting

In 19 cases, operators were subject to the maximum penalty of RMB500,000. Operators under the new JV model were fined RMB500,000 each, which means RMB1 million in penalties for a single transaction. Historically, the penalty for similar cases ranged between RMB150,000 and RMB200,000 prior to the institutional reform of 2018, and between RMB300,000 and RMB400,000 in 2019 and 2020 (except for the penalties for three internet companies in December 2020).

Concentration can occur even without overt changes to capital structure

In practice, investment and M&A transactions are complicated and diverse, which often leaves operators bewildered as to the standards triggering a concentration filing. For this purpose, two recently released penalty cases may shed some light on the issue.

Venture capital: In the case where Shanghai Hantao subscribed for a 6.67% equity interest in Shanghai Linjian in that company’s B+ financing round, the transaction was determined as constituting illegal concentration, even though it involved a relatively unremarkable percentage of equity.

Change of control of a listed company: In the case where Zhongshan Lexing obtained control of Shenzhen Soling via contract, Zhongshan Lexing entered into a framework agreement for change of control with its original controlling shareholder. With this agreement, Zhongshan Lexing became the single largest voting shareholder of Shenzhen Soling, in which capacity it made director and senior management nominations. The court determined that this fell under obtaining control or exerting decisive influence through contract or other means, therefore constituting a breach of the filing obligation.

It can be concluded that even without significant changes to the capital structure, as far as law enforcers are concerned, special control arrangements such as the example above may still lead to concentration. Operators should learn from these cases and strive to identify concentration compliance risks from the outset.

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In summary, business operators ought to be more vigilant with anti-monopoly compliance in M&A transactions. Where concentration is expected, it is absolutely essential to make the due and thorough filings. With future amendments to the Anti-monopoly Law, penalties for undeclared concentration are likely to grow exponentially. We are therefore of the opinion that there is no better time than the present to establish a regular anti-monopoly compliance system for M&A transactions.

Chen Hong and Wang Na are partners at East & Concord Partners


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