Horizontal competition in IPOs and ‘relevant market’ in anti-monopoly

By Pan Bo, Grandway Law Offices

In the course of an IPO, financing or restructuring of an enterprise, whether there is horizontal competition between the issuer and other companies controlled by its actual controller is among the key issues for review. Likewise, in the course of a business operator concentration filing and review, the scope of the relevant market of the business operators involved in the concentration is a focal point of the review.

During a regulatory review, if a material acquisition occurs that also involves an anti-monopoly review of business operator concentration, such as a material equity merger or acquisition during an IPO issuer’s reporting period or a material asset restructuring of the listed company, a simultaneous determination of horizontal competition and definition of the relevant market may become necessary.


Pan Bo
Grandway Law Offices

“‘Horizontal competition’ refers to the scenario where the competitor engages in a business identical or similar to the main business of the issuer,” according to the Answers to Several Questions on Matters Relating to Initial Public Offerings (Revised in June 2020) – or the Answers.

“Relevant market” means the scope of products and territory within which businesses compete during a defined period with respect to specific goods and services, according to the Guidelines for Defining Relevant Markets issued by the Anti-monopoly Committee of the State Council – or the Guidelines.

Accordingly, at the core of determining both horizontal competition in IPOs and the scope for relevant market in anti-monopoly reviews is whether a competitive relationship exists between the relevant businesses or markets, but the two have different targets in mind. In the former, the focus is the business of the competitor and the issuer, mainly examined from the micro perspective of the market participants; with the latter, the focus is the market in which the business operator’s goods (territory) are found, mainly examined from the macro perspective of the market.

Competitive relationship

The absence of horizontal competition is one of the substantive conditions for an offering, especially as the registration system forbids any horizontal competition that would have a material adverse impact. This was originally set out in the hope that an issuer will list its identical or similar businesses as a whole. Accordingly, the review of IPO horizontal competition focuses on the businesses of wholly owned or majority-owned enterprises of the controlling shareholder (or actual controller) and of his or her close relatives.

According to the Answers, when verifying and determining whether any identical or similar business “competes” with that of the issuer, it is necessary to perform, based on the principle of “substance over form”, fact finding on the relationship between such entities and the issuer in terms of historical development, assets, personnel and main business (including the specific features of the goods or services, technologies, trademarks, trade names, customers and suppliers). The less connected, the more distant and the more independent such relationships are, the smaller the likelihood for a competitive relationship, and vice versa. Additionally, it is necessary to demonstrate whether the business is substitutable or competitive, whether there are conflicts of interest, whether sales take place in the same market, etc. On the other hand, while differences in territories or class of product may be considered as a basis for determining horizontal competition, it cannot be the sole or main foundation for making a judgement.

As the scope of the relevant market is significant for the calculation of business operators’ market share and the determination of concentration in the relevant market, the anti-monopoly review authority mainly focuses on the product and territorial market. The higher the substitutability between relevant markets, the stronger is their competitive relationship and the more likely they constitute the same relevant market.

Pursuant to the guidelines, the size of the relevant market scope depends mainly on the degree of substitutability of the products (territories), which in turn depends mainly on whether there are products in the market that purchasers consider strongly substitutable, or alternative territories that can provide such products.

However, supply-side substitution should also be considered when the competitive constraints it brings to the business operator are similar to those of demand substitution. In contrast with horizontal competition, a difference in territorial market is an important aspect in determining relevant market, but a rigorous substitution analysis still needs to be carried out.

Common methods

Currently, the Shanghai and Shenzhen main boards, the Star Market and ChiNext all subsume the horizontal competition requirement under independence. The scope of such a requirement includes the same factors considered by the regulators in determining horizontal competition, namely understanding the business and industry of the issuer and the competitors and then conducting a comprehensive analysis by additionally considering the independence of the issuer’s assets, personnel, organisation and financial affairs.

When defining the relevant market under the Guidelines, a demand substitution analysis may be conducted based on such factors as the features, purpose, and price of the product. When necessary, a supply substitution analysis may additionally be carried out. Regardless of method, it is imperative to always grasp the basic attribute of a product to satisfy consumer demand. Therefore, it is necessary to first and foremost understand the relevant product and market, and then analyse substitutability by applying assumption or other methods, mainly from the perspective of purchasers in the market.

In summary, determination of horizontal competition mainly analyses the business logic from an operations standpoint, while definition of the scope of relevant market mainly analyses the supply and demand from an economic perspective. The former is determined based on comprehensive due diligence by intermediary firms and full information disclosure by the issuer, while the latter is determined based on true and authoritative bases and data sources.

Although the two differ in disclosure approaches (e.g. the scope of the businesses in competition and the relevant market) due to the different perspectives and methods of analysis, they nevertheless converge when analysing the competitive relationship or substitutability.

Pan Bo is a salariedpartner at Grandway Law Offices

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