Annual Review of China's Anti-Monopoly Law Enforcement - Part Ⅲ

安杰世泽律师事务所

2017-04-19

导读：Compared with 2015, the caseload of MOFCOM increased significantly.

Annual Review of Public Enforcement of China's Anti-monopoly Law (2017) Part Ⅲ - Merger Review

By Michael Gu / Sun Sihui

MERGER REVIEW

Compared with 2015, the caseload of MOFCOM increased significantly. In 2016, MOFCOM received 378 cases, up 7.4 per cent from 2015’s total of 352 cases. Also, the number of cases accepted (360) and concluded (395) have both reached new heights –each had an increase of 6.5 per cent and 19 per cent from the last year. This year only saw two conditionally approved cases and this might indicate that remedy cases are still relatively rare in China. It’s notable that an upfront buyer was required in both of these cases for the structural remedies. There were no prohibition cases in 2016.

The overall review period continued to reduce and about 82 per cent of the cases (342 cases) were concluded in the Phase I (30 days) in 2016, while 74 per cent of cases concluded in Phase I in 2015. The efficiency of MOFCOM’s merger review has been improved due to the proficiency of the officials and the developments of simple case review mechanism. 273 cases were filed under the simple case review procedure with an average review period of around 24 days –slightly faster on average than last year (28 days in 2015). Furthermore, approximately 98.6 per cent of simple cases were cleared in Phase I.

Moreover, MOFCOM has strengthened its antitrust enforcement efforts in relation to the non-filers that should have notified MOFCOM of their concentrations.

i. Significant cases

Penalties for non-filers

On 4 May 2016, MOFCOM issued three penalty decisions against parties involved in three merger cases that failed to fulfill their notification obligations under the Anti-monopoly Law. The three non-filing penalty decisions published by MOFCOM were:

(1)Biggain Holdings/ Jilin Sichang Pharmaceutical: Biggain Holdings was fined 150,000 yuan for its failure to notify its acquisition of a 50 per cent stake in Jilin Sichang Pharmaceutical;

(2)New United Group/ Bombardier Transportation Sweden: New United Group and Bombardier Transportation Sweden were fined 300,000 and 400,000 yuan respectively for their failure to notify before establishing a joint venture; and

(3)Beijing CNR Investment/ Securities Investment: Beijing CNR Investment (now CRRC Financial and Securities Investment) and Hitachi were each fined 150,000 yuan for their failure to notify a proposed joint venture before establishing it.

The published decisions have significantly deterrent effect on non-filing parties. Although the monetary value of each penalty is much lower compared with the transaction value, the reputational damage is relatively high due to the public disclosure of the penalty decisions.

AB InBev’s acquisition of SABMiller

On 29 July 2016, MOFCOM conditionally approved the proposed acquisition of SABMiller Plc (SABMiller) by Anheuser-Busch InBev NV (AB InBev). The conditions included: (1) the divestiture of SABMiller’s 49 per cent stake in China Resources Snow Breweries Limited (CR Snow, a joint venture established by SABMiller and China Resources Beer (Holdings) Co.); and (2) such divesture shall be completed within 24 hours upon the equity transfer of the SABMiller/AB InBev deal.

AB InBev and SABMiller mainly engaged in the production and sale of beer. MOFCOM subdivided the beer market into the low-end ordinary beer market and high-end premium/super-premium beer market based on the price and consumer preference and other factors. As to the geographical market, MOFCOM considered the relevant market in accordance with the 24 overlapped provincial administrative regions as well as the national market as a whole, rather than a single Chinese market.

MOFCOM conducts in-depth analysis of the concentration’s effect on the market, taking into account the concentration status of the relevant market, the market share and control power of the parties, the difficulty of market entry, the effect on the consumers and other business operators, etc. MOFCOM found that:

(1) there were limited competitors in the Chinese beer market, which had a relatively high degree of concentration;

(2) In 2014’s Chinese low-end beer market, CR Snow and AB InBev were the first– and the third–largest competitors in terms of market share, and their combined market share would be 41 per cent after concentration. In 2014’s high-end beer market, AB InBev was the biggest player while CR Snow was the second biggest and their combined market share would be 52 per cent;

(3) According to MOFCOM’s findings, AB InBev and CR Snow were the closest rivals in each of the relevant market. The deal will reduce the competition between the two close competitors in the market. MOFCOM concluded that the leading position of the combined entity would be significantly enhanced by the merger; and

(4) The deal would harm the interests of the downstream distributors as well as customers eventually.

In anticipation of MOFCOM’s competition concerns, within one week of submission of merger notification, AB InBev voluntarily submitted a remedy plan to sell the 49per cent stake in CR Snow owned by SABMiller. MOFCOM believed the sale of the CR Snow shares to China Resources Beer (Holdings) Co could eliminate the potential anti-competitive impact of the acquisition and therefore approved the case with such divesture remedy.

This is the first conditional case approved by MOFCOM with its geographical market subdivided in accordance with provincial regions since the implementation of the Anti-monopoly Law. Such market division led to speculations as to whether MOFCOM had tightened its review standards, particularly with regard to concerns raised by the overseas companies. In fact, it is not uncommon for MOFCOM to define a local market based on administrative regions (e.g., province or city) in the merger cases. As these cases did not exclude or restrict competition, and MOFCOM did not disclose the detailed process in defining the geographical market in such cases, therefore, these cases did not cause much attention. More significantly, this case is one of the few cases in China that has used an upfront buyer strategy to secure timely approval from MOFCOM.

Abbott’s acquisition of St. Jude

On 30 December 2016, MOFCOM conditionally cleared the proposed US$25 billion acquisition of St. Jude Medical Inc. (St. Jude) by Abbott Laboratories (Abbott). MOFCOM was concerned that the transaction might eliminate or restrict competition in the market of small vascular closure devices in China. MOFCOM reviewed the competition impacts from the perspective of the market concentration, market share, market entry and the interests of the consumers, etc. MOFCOM found that:

(1) Abbott and St. Jude had a 71.3 per cent and 23.9 per cent market share respectively before the concentration. They were the first - and second -largest undertakings in the small vascular closure device market in China, and the combined market share would exceed 95 per cent;

(2) this merger would eliminate the competition between the two leading players; and

(3) from the perspective of market entry, it will be difficult to have new competitive participants in the Chinese market in short term given the technical requirement of small vascular closure devices is high and the obtaining market access permission from the relevant regulatory authorities takes a long time.

MOFCOM concluded that after the completion of the deal, Abbott may have the incentive and ability to raise the price of related commodities, or slow down the price decline, or reduce the service quality, and ultimately resulting in damage to the interests of consumers.

To address MOFCOM’s competition concerns, Abbott voluntarily proposed a remedy to MOFCOM that St. Jude would divest its vascular closure products business after several rounds of discussions between MOFCOM and Abbott. In accordance with the proposed remedy, St. Jude would sell its vascular closure products business to Terumo Corporation (Terumo) in compliance with the purchase agreements concluded among Abbott, St. Jude and Terumo. MOFCOM believed the remedy proposed by Abbott could reduce the impact of competition and approved the case conditional on the divesture remedy proposed by Abbott.

Again, MOFCOM accepted the divesture remedy with an upfront buyer in this case. As indicated in this case and the AB InBev/SABMiller case, MOFCOM seems to have embraced upfront buyer remedies in the structural cases. For those transactions with potential competition harm, the parties may obtain a quicker approval or avoid a block if they can offer an upfront buyer structural remedy at the early stage of the notification. From MOFCOM’s perspective, this approach would reduce the significant cost of supervision of the implementation of the divesture plan and ensure the certainty of implementation.

ii. Trends, developments and strategies

MOFCOM has accumulated extensive experience after eight years of continuous efforts and is establishing its reputation as an important antitrust agency in the world. Moreover, MOFCOM continuously strengthens its cooperation with antitrust agencies in other jurisdiction in relation to the conditionally approved case, such as Abbott’s acquisition of St. Jude involving remedial measures. Also, MOFCOM is not as interventionist as some in the West might have perceived in the sense there have only been two remedy cases each year and no block deals in the past two years. The review standard is relatively stable and basically in line with the international practice.

iii. Outlook

In 2017, MOFCOM is committed to further improve its review process and reduce the review period. MOFCOM will also continue to monitor merger controls and is determined to enhance law enforcement. Undertakings are advised to be cautions in fulfilling their pre-merger notification obligations to avoid penalty, and in particular, reputational damage. Although MOFCOM is not aggressive in terms of interference the merger transactions, MOFCOM is quite independent and confident in rendering their remedy decisions. Parties with leading market positions shall carefully assess the competition impact in planning a big merger transaction and a proactive remedy proposal such as the upfront buyer divestiture might be an effective strategy.

CONCLUSIONS

i. Pending cases and legislation

Proposed guidelines pending before the AMC include:

(1) Anti-Monopoly Guidelines on Abuse of Intellectual Property Rights;

(2) Guidelines for Applying Leniency Program to Horizontal Monopoly Agreements;

(3) Guidelines on Undertakings’ Commitments in Anti-Monopoly Cases;

(4) Guidelines on Procedural Rules for Exemption Application with respect to Monopoly Agreements;

(5) Guidelines on Calculation of Illegal Gains and Fines; and

(6) Antitrust Guidelines in the Automotive Industry.

MOFCOM is also engaged in legislative work. On the basis of the increasingly mature practice, MOFCOM is stepping up to revise the Measures for the Filing of Concentration of Business Undertakings and the Measures for the Review of Concentration of Business Undertakings to provide guidance for business operators.

In addition to legislation, the SAIC’s investigation into Microsoft is still ongoing.The outcome of the investigation of Microsoft is expected to be more prominent than the Tetra Pak decision given its complicated and controversial nature of the alleged monopolistic conduct.

ii. Analysis

The Chinese antitrust legislative work is gradually developing and the AMC is expected to approve the long-awaited six antitrust guidelines in 2017. These guidelines set out detailed guidance on the practical issues and procedural rules with respect to the application of the Anti-monopoly Law. Both the SAIC and the NDRC are demonstrating an appetite for substantial fines and aggressive enforcement. In 2017 we are likely to see an increased number of investigations and more high-profile decisions. In addition to the ongoing antitrust investigations in the healthcare and automotive industries, the competition agencies may focus on the consumer goods, financial service, public utilities and other industries that have a particular effect on quality of life. As demonstrated in the Tetra Pak and Southwest No.2 refusal-to-deal cases, the Chinese competition authorities are not afraid to use their discretionary power to determine an unspecified monopolistic behavior under the Anti-monopoly Law. Active companies in China, even without a leading market position, should carefully review their business practices in China to ensure full compliance with the China’s increasingly challenging antitrust enforcement regime.

(This article was originally published in the book entitled 'The Public Competition Enforcement Review (Nineth Edition)' by Law Business Research Ltd, London )