On 9 June 2023, the State Administration for Market Regulation (“SAMR”) released the Annual Report on Anti-Monopoly Enforcement in China 2022 (“2022 Report”). Since 2019, SAMR had prepared and published the Annual Report on China’s Anti-Monopoly Law Enforcement for four consecutive years. The 2022 Report systematically shows the progress of China’s anti-monopoly and fair competition policy implementation in 2022. In addition, as of the end of August 2023, according to SAMR’s website, from January 2023 to the end of August, SAMR had conditionally approved/prohibited three cases of concentration of undertakings, 223 concentrations of undertakings under simplified procedure, and more than 400 cases of unconditional approval of concentration of undertakings, this article focuses on the overview and cases of recent reviews and regulations for concentration of undertakings.
1. Anti-monopoly review of concentration of undertakings
According to the 2022 Report published by SAMR, in 2022, SAMR received a total of 867 declarations of concentration of undertakings and concluded 794 cases, representing year-on-year increases of 5.2% and 9.8%, respectively, of which 5 cases were approved with additional restrictive conditions. The parties abandoned two due to the inability to address the competition concerns. SAMR reviewed 5 cases of concentration of undertakings in areas such as the acquisition of Xilinx by AMD with additional restrictive conditions and the new joint venture between Shanghai Airports and China Eastern Airlines Logistics and supervised the cases with other restrictive conditions. In addition, SAMR paid close attention to the competition situation in the areas of high technology and intellectual property rights and conducted in-depth verification of clues in cases in the area of science and technology innovation according to the law in order to protect the dynamics of innovation.
1) Basic facts
Regarding industry distribution, the manufacturing sector accounted for the most significant number of cases disposed of during the year, with 301 cases, or 38 percent. Other industries that accounted for a higher proportion of cases included the electricity, gas, and water supply industry, with 96 cases, accounting for 12%, and the wholesale and retail sector, with 88 cases, accounting for 11%. In terms of transaction types, 376 horizontal concentration cases were concluded, accounting for 48%, an increase of 12% year-on-year; 165 vertical concentration cases were concluded, accounting for 21%, an increase of 42% year-on-year; and 253 mixed concentration cases were concluded, accounting for 32%, a decrease of 6.3% year-on-year. Regarding transaction mode, 484 cases of equity acquisition were concluded, accounting for 61%; 284 cases of establishment of joint ventures, accounting for 36%; and 26 cases of asset acquisition were concluded, accounting for 3%. In terms of transaction scale, the total transaction amount of the cases examined for the year was USD 5630 billion, an increase of 5% year-on-year; among them, 79 cases with a transaction amount of over USD 1.4 billion, a decrease of 5% year-on-year; and 9 cases with a transaction amount of over USD 14 billion, an increase of 125% percent year-on-year.
2) Priority work
a) Critical review of merger and acquisition cases in priority areas
In 2022, SAMR examined merger and acquisition cases in the fields of semiconductors, air transportation, and other areas in strict accordance with the law and imposed restrictive conditions on the acquisition of Siltronic AG by Globalwafers Co., Ltd., the acquisition of Xilinx, Inc. by Advanced Micro Devices, Inc., the purchase of related companies by Coherent Corp., the new joint venture between Shanghai Airports and China Eastern Airline Logistics, and the acquisition of the shareholding of Asiana Airlines by Korean Air. It had vigorously safeguarded the order of fair competition in the market and maintained the legitimate interests of enterprises upstream and downstream of the industrial chain.
b) Enforcement of standing regulations on Internet platforms
In 2022, SAMR received 34 cases involving the declaration of concentration of undertakings of internet platforms, involving logistics, medical care, wholesale and retail, etc., and timely and unconditional approval was given to those concentration acts that did not have the effect of excluding or restricting competition, which firmly stabilized social expectations.
c) Promoting innovative development and upgrading of industrial structure
In 2022, SAMR steadily pushed forward the review of the concentration of undertakings in the field of new energy in response to the significant increase in the situation and concluded 37 cases of concentration related to the new energy automobile batteries and raw materials industry, a year-on-year increase of 236%, to support the green and low-carbon transformation of energy.
3) Related Cases
Among the five cases approved by SAMR in 2022 with additional restrictive conditions, three involved the ICT sector, and the other two involved the civil aviation cargo and airport operations sectors. Among them, the case of the newly established joint venture between Shanghai Airports and China Eastern Airline Logistics is the first case of Anti-monopoly review for a domestic enterprise with restrictive conditions and the first case involving only a state-owned enterprise with restrictive conditions. The case embodies the principle of equality in the “equal treatment of all operators in the conduct of Anti-monopoly review of concentration of undertakings”.
In addition, on 26 July 2023, SAMR approved the acquisition of the equity interest of Silicon Motion Technology by MaxLinear, Inc. with additional restrictive conditions. The concentration of undertakings in the semiconductor and chip industry (“chip industry”) has always been a critical area of concern for the SAMR. The characteristics of the industry had led to a market pattern in the chip industry that is difficult to change once formed, and competition is inherently insufficient. In recent years, the chip industry has seen frequent mergers and acquisitions, and the market concentration of the industry has been increasing, attracting the attention of antitrust enforcement agencies. By reviewing the concentration of undertakings in the chip industry, SAMR protects fair market competition and enhances the industry’s innovation power.
a) The acquisition of Xilinx, Inc. by Advanced Micro Devices, Inc.
On 19 January 2021, the SAMR received the Anti-monopoly filing of the concentration of undertakings in the case of the acquisition of Xilinx, Inc. (“Xilinx”) by Advanced Micro Devices, Inc.(“Advanced Micro”), which was filed for review by the SAMR on 7 April 2021. It was a record-sized deal in the chip industry, valued at USD 49.8 billion. On 5 August 2021, with the consent of the filing parties, SAMR decided to extend the deadline for further review. On 30 September 2021, before the expiration of the extension period for further review, the filing party applied to withdraw the case and was granted by SAMR. On 7 April 2021, SAMR filed a case for review. On 30 September 2021, SAMR filed a case for review of the filing party’s re-filing, and on 21 January 2022, after almost 12 months long, SAMR decided to approve the concentration with additional restrictive conditions.
After examination, this case had or was likely to have the effect of excluding or restricting competition in the global and Chinese markets for CPUs, GPU gas pedals, and FPGAs: First, the post-concentration entities could exclude or restrict competition in the markets for CPUs, GPU gas pedals, and FPGAs; Second, the post-concentration entities had an incentive to exclude or restrict competition in the CPU, GPU gas pedal, and FPGA markets; Third, the concentration might have the effect of excluding or restricting competition in the CPU, GPU gas pedal, and FPGA markets; Fourth, the market had high barriers to entry, making it difficult for new effective competitors to emerge in the short term.
SAMR had approved this concentration with restrictive conditions following the law, including the following: First, when selling Advanced Micro CPUs, Advanced Micro GPUs, and Xilinx FPGAs to the market in China, the company should not be compelled to engage in tying sales in any way or attach any other unreasonable trading conditions; Second, based on the existing cooperation with enterprises in China, filing parties will further promote the relevant cooperation and continue to supply Advanced Micro CPUs, Advanced Micro GPUs, Xilinx FPGAs, and related software and accessories to the market in China under the principles of fairness, reasonableness, and non-discrimination; Third, to ensure the flexibility and programmability of Xilinx FPGAs, to continue to develop and ensure the availability of the Xilinx FPGA product line, and to ensure that the development method was compatible with ARM-based processors and in line with Xilinx’s pre-transaction plans. Fourth, continue to provide that the level of interoperability of Advanced Micro CPUs, Advanced Micro GPUs, and Xilinx FPGAs sold into the Chinese market with third-party CPUs, GPUs, and FPGAs was no less than the level of interoperability of Advanced Micro CPUs, Advanced Micro GPUs and Xilinx FPGAs. Fifth, protect the information of third-party CPU, GPU, and FPGA manufacturers. Six years after the effective date of the restrictive conditions, the post-concentration entity might apply to SAMR to lift the restrictive conditions. SAMR will decide whether to lift the restrictive conditions based on the application and the competition situation in the market. Post-concentration entities should continue to comply with the restrictive conditions before the lifting.
b) New Joint Venture between Shanghai Airports and China Eastern Airline Logistics
On 21 October 2021, SAMR received an anti-monopoly declaration of a new joint venture between Shanghai Airports and China Eastern Airline Logistics and filed a case for examination on 8 November 2021. On 13 September 2022, SAMR approved the concentration with restrictive conditions.
This case involved the airport cargo terminal and air cargo services market and was subject to non-simplified proceedings. After reviewing the case, the SAMR believed that the concentration had or might have the effect of excluding or restricting competition in the market for cargo terminal services at Shanghai Pudong Airport and in the market for international/domestic air cargo services with Pudong Airport as the point of origin or destination: firstly, the entity after the concentration had a dominant market position in the market for cargo terminal services at Shanghai Pudong Airport; Secondly, the post-concentration entity might use its market control to reduce the quality of services and increase the price of services to exclude or restrict competition in the market for cargo terminal services at Shanghai Pudong Airport; Thirdly, post-concentration entities had the ability and incentive to exclude or restrict competition in the market for international/domestic air cargo services originating or destined for Pudong Airport.
SAMR had approved this concentration with additional restrictive conditions by the law. Specific conditions include: First, maintaining the mutual independence of the Shanghai Pudong Airport cargo terminal business of the Airport Group and China Eastern Airlines Logistics; the Airport Group and China Eastern Airlines Logistics will continue to independently engage in fair competition in the Shanghai Pudong Airport cargo terminal service market, and they should not exchange competitively sensitive information, or enter into or carry out monopolistic acts prohibited by the Anti-Monopoly Law; Second, to ensure that Airport Group, China Eastern Airlines Logistics and the joint venture are independent of and compete with each other, with specific measures including no part-time employment of personnel, restrictions on shareholders’ rights, stipulation of non-competition periods, maintenance of segregation of office premises and information systems, and restrictions on the rights of users of office systems; Third, to ensure that no competitive sensitive information is exchanged directly or indirectly between the Airport Group, China Eastern Airlines Logistics and the joint venture. The joint venture should operate independently, including but not limited to financial independence, personnel independence, production service independence, procurement independence, research and development independence, pricing independence, and sales independence; Fourthly, Airport Group and China Eastern Airlines Logistics will continue to fulfill the Shanghai Pudong Airport Cargo Terminal Service Contract already signed with the relevant customer. Upon expiration of the contract, if the relevant customer wishes to renew the contract, Airport Group and Donghang Logistics should not refuse, and the renewal conditions should not be lower than the service level before this transaction. This commitment is valid for 5 years. Fifthly, Airport Group, China Eastern Airlines Logistics, and the Joint Venture should provide airport cargo terminal services at Shanghai Pudong Airport following fairness, reasonableness, and non-discrimination principles. Under the same conditions, they should not apply differential treatment to downstream customers concerning prices, quantities, and other trading conditions, should not apply unreasonably high prices, and should not unreasonably limit the total amount of airport cargo terminal services provided at Shanghai Pudong Airport. Sixthly, in addition to supervising the trustee, the Joint Venture undertakes to invite the China Air Transportation Association (“CATA”) annually to supervise and guide the Joint Venture in fulfilling its commitments.
c) The equity interest of Silicon Motion Technology by MaxLinear, Inc.
On 15 September 2022, SAMR received the anti-monopoly declaration of the concentration of undertakings of the acquisition of the equity interest in Silicon Motion Technology by MaxLinear, Inc., the total deal size of approximately USD 3.8 billion . On 28 October 2022, SAMR accepted the declaration of the concentration of undertakings and started the preliminary examination. On 25 November 2023, SAMR decided to conduct further review, and on 26 July 2023, SAMR approved the concentration by attaching the restrictive conditions. The review took up to 10 months.
This case involves the third-party NAND flash master chip market, customer SSD, and enterprise SSD markets. After reviewing the case, SAMR believes that the concentration had or was likely to have the effect of excluding or restricting competition in the third-party NAND flash memory master controller market in China.
In accordance with the law, SAMR approved this concentration with additional restrictive conditions. Specific conditions include: Firstly, to continue to supply NAND flash host chips to China in a fair, reasonable, and non-discriminatory manner; Secondly, not to materially change the existing business model and operations of Wisers Technology; Thirdly, retaining Silicon Motion Technology’s research and development related to NAND flash host chips in Taiwan, China; Fifthly, Retaining Wisers Technology’s on-site application engineers in China as part of the research and development resources to support Wisers Technology’s customers of NAND flash host chips; Sixthly, for NAND flash host controller chips sold in China, no malicious code should be included in their design.
d) The acquisition of Tower Semiconductor by Intel Corporation
Intel Corporation initially announced its acquisition of Tower Semiconductor in February 2022, with an overall deal value of approximately USD 5.4 billion, and planned to complete the transaction within 12 months, i.e. by 15 February 2023. However, SAMR did not approve the deal, so the two companies extended the deadline for the transaction several times, first to mid-June and then again to 15 August. On 16 August, the transaction was still not approved or conditionally approved by SARM, so Intel abandoned the acquisition of Tower Semiconductor and paid Tower USD 353 million as compensation for the termination of the transaction in accordance with the prior agreement.
After Article 32 of the Anti-monopoly Law (2022 Amendment) introduced the so-called “stop the clock” mechanism for the anti-monopoly review of Undertakings, the acquisition of Tower by Intel is likely to be another “stopped clock” case after the acquisition of Silicon Motion Technology by MaxLinear.
According to reports, Tower was in direct competition with Chinese foundries such as SMIC and Huahong in mature manufacturing processes, so once Tower becomes part of Intel, the new company will be a strong competitor for Chinese chipmakers. That seems like a slap in the face to China if it agrees to the merger, given China’s current policy of fostering the development of mature processes by local foundries. As a result, SARM had been slow to move forward with the approval of the merger, even though the acquisition would not create any form of monopoly.
The fact that the review of this case had been suspended reflects the uncertainty of the anti-monopoly review of the concentration of undertakings on sensitive industries such as the semiconductor industry might continue.
e) The acquisition of VMware, Inc. by Broadcom Inc.
In May 2022, Broadcom announced that it would acquire VMware for USD 69 billion and that it would assume USD 8 billion of VMware’s debt. Broadcom was a world-renowned Fabless semiconductor company with products for wired and wireless communications semiconductors, and had a total market capitalisation of USD 367.3 billion. VMware, was a pioneer in the server virtualisation market and had maintained a close collaboration with Amazon for seven years after transforming into a private cloud giant. Currently, VMware had entered into partnerships with Amazon AWS, IBM, AliCloud, Tencent Cloud and other public cloud vendors. Upon completion of the acquisition, Broadcom shareholders will own approximately 88% of VMware and existing VMware shareholders will own 12%.
As of 21 August 2013, Broadcom’s acquisition of VMware had received approvals from the United Kingdom, the European Union, Australia, Brazil, Canada, Israel, South Africa and Taiwan. The acquisition agreement is also subject to approval by the U.S. Federal Trade Commission (FTC) and Chinese regulators. Besides, Broadcom said the regulatory waiting period under the U.S. Hart-Scott Rodino (HSR) Act had ended, and there are no legal obstacles to the completion of the transaction under U.S. merger regulations. Broadcom plans to close the deal on 30 October. This could mean that the results of the SARM review will be announced in mid-September.
Besides, in accordance with the Article 19 and 20 of the Anti-Monopoly Law, SARM’s review of the transaction may adopt a simplified procedure.
2. Compliance regulation for concentration of undertakings
1) Priority work
In 2022, SAMR strengthened the normalized supervision of concentration of undertakings in accordance with the law, including publicly imposing administrative penalties on 27 cases of failure to declare in accordance with the law in the internet sector and publicly investigating and handling 5 cases of failure to declare in accordance with the law in the real economy sector, such as real estate, electric power, and manufacturing.
In addition, SAMR has continued to pay attention to the progress of critical cases, strengthened the supervision and implementation of Tencent’s acquisition of China Music, and strictly urged Tencent, in accordance with the law, to fully fulfill its obligations to release exclusive music copyrights and other responsibilities, to promote the revitalization of the competitive dynamics of the internet music market. It is strengthening the supervision and implementation of the additional restrictive conditions in the case of the absorption and merger of Uralkali’s merger with Silvinit, urging Uralkali to fulfill the relevant restrictive conditions and take measures to safeguard the supply of potash fertilizer to China, strictly verifying the fulfillment of obligations by the parties in the cases of Microsoft’s acquisition of Nokia’s equipment and services business and Nokia’s acquisition of a stake in Alcatel-Lucent, and completing the work of lifting them when they are due.
2) Related Cases
Alibaba Investment Limited’s Acquisition of Equity Interests in Best Group Limited is Suspected of Illegal Implementation of Concentration of Undertakings without Declaration According to Law
On 19 September 2017, Alibaba Investment Limited (“Alibaba Investment”) subscribed for 10,000,000 newly issued shares of Best Group Limited (“Best Group”) and acquired super-voting shares of Best Group. On 22 September 2017, the transaction was completed and settled. Alibaba Investment’s main businesses include e-tailing platform services, retail and wholesale commerce, logistics services, lifestyle services, cloud computing, digital media and entertainment, and innovation businesses. The Best Group was principally engaged in express delivery services.
After the transaction, Alibaba Investment and its related parties acquired joint control, a concentration of undertakings under Article 20 of the Prior Anti-Monopoly Law. In 2016, the global and Chinese domestic turnover of Alibaba Investment and Best Group reached the reporting standards outlined in Article 3 of the Provisions of the State Council on the Reporting Standards for Concentration of Undertakings. However, it failed to declare a concentration of undertakings, violating Article 21 of the prior Anti-Monopoly Law, constituting a concentration of undertakings that were not declared in accordance with the law. It was assessed that the concentration would not have the effect of excluding or restricting competition. Following Articles 48 and 49 of the prior Anti-Monopoly Law, SAMR imposed an administrative penalty of a fine of USD 71,428 on Alibaba Investment.
From 2022, the regulation of declaration of concentration of undertakings has entered normalization, and the number of cases of illegal implementation of concentration of undertakings penalties has dropped. In 2023, SAMR will continue to intensify its efforts to investigate and deal with the unlawful performance of concentration of undertakings without a declaration by the law and may publish a more significant number of penalty cases. Enterprises need to continue to pay attention to the published cases to understand the enforcement trends, especially in the context of the new law to increase the ceiling of fines, should timely analyze the necessity of the declaration of the proposed transactions, fully consider the risks and impact of potential historical legacy issues that may be involved in the filing process, and confirm the compliance regulation for a concentration of undertakings is well made.