Australia is not the only jurisdiction undergoing review of its merger processes. Our colleagues at KWM China have prepared this alert about a review being undertaken by the Chinese regulator.
On 17 June 2024, the State Administration for Market Regulation (SAMR) released the “Horizontal Merger Review Guidelines” (the Draft Guidelines) for public comment. The Draft Guidelines are designed to provide a comprehensive framework for the review of horizontal mergers, addressing both procedural and substantive aspects of the review process. Although these Draft Guidelines are intended to provide clearer legal expectations for companies involved in horizontal mergers and acquisitions, it also sheds light on analytical frames for vertical mergers or conglomerate mergers.
In this blog, we highlight eight key points and what businesses should be aware of.
Key point 1: Internal documents relevant to the transaction are subject to review to determine market effects
Article 11 of the Draft Guidelines stipulates:
“If there is evidence indicating that the main purpose of the business operators’ concentration is to eliminate or restrict competition, the antitrust enforcement agency tends to consider that the concentration has or may have the effect of eliminating or restricting competition, unless the operators can prove that the concentration does not have such effects.”
An example is provided: in a hypothetical transaction, when the acquirer’s internal documents states that, “through this acquisition, we can eliminate the competitive threat from the target’s product and gradually phase out the product from the market after the transaction”, the enforcement agency will tend to consider that the transaction may have the effect of eliminating or restricting competition.
In the current regulatory approach, the enforcement agency has on some occasions required the parties to submit internal documents generated during the deal-making process. This provision highlights that the enforcement agency regards internal documents as important and sometimes conclusive to the analysis of market effects.
Key point 2: Specifies the criteria for the enforcement agency to require companies to define the relevant markets encompassing all their business activities
Article 16 of the Draft Guidelines stipulates:
“If the proportion of business operators’ revenue from the relevant market defined in accordance with the provisions of Article 15 of these guidelines is relatively low (less than 50%) and does not sufficiently reflect the impact of the concentration on market competition, the antitrust enforcement agency may require the business operators involved in the concentration to define the relevant market for all their businesses.”
In the current regulatory approach, there have been instances where the enforcement agency has demanded the relevant market definitions to include non-transaction-specific businesses of the parties. This provision identifies two key criteria for the enforcement agency to require companies to define the relevant markets encompassing all their business activities, revenue ratio and competitive effects. In light of the provision, companies should pay attention to the transaction-specific businesses as well as non-transaction-specific businesses in the filing preparation phase.
Key point 3: Specifies the criteria for simplifying relevant market definition and competitive analysis
Article 16 of the Draft Guidelines stipulates:
“For a business operator’s non-core operations, where the relevant revenue constitutes less than 5% of its total turnover and holds less than a 5% market share in a reasonably delineated relevant market, a precise definition of the relevant market and a competitive analysis may be deemed unnecessary.”
In the current regulatory approach, the enforcement agency in certain instances requests a detailed breakdown of a company’s various businesses and their respective contributions to total revenue. This provision clarifies that for non-primary business activities with a revenue contribution of less than 5% and a market share under 5% in reasonably-defined relevant markets, there is no mandatory requirement for a precise market definition or competitive analysis. This clarification can potentially reduce the workload for companies with multiple business lines when making merger control filings, as it recognises that not all aspects of a company’s operations warrant the same level of scrutiny.
Key Point 4: Specifies a “left open” approach in defining relevant markets in some cases.
Article 19 of the Draft Guidelines states:
“When a concentration presents multiple possibilities for defining the relevant market, the antitrust enforcement agency may take an open approach to market definition by considering the concentration’s circumstances and the requirements of competition analysis, and by comprehensively evaluating the scenarios under different market definitions.”
In the current regulatory approach, the enforcement agency typically arrives at a definitive conclusion regarding the definition of the relevant market. This provision introduces a “left open” approach, which offers a more adaptable framework for market definition when multiple plausible interpretations exist. This approach prioritises addressing competition concerns over strictly defining the market, providing the enforcement agency with greater flexibility in its decision-making process. Although similar approaches have been adopted by competition authorities in the European Union and other jurisdictions, there are uncertainties about how the “left open” method will be applied by SAMR in practice.
Key Point 5: Proposes numerical metrics for assessing competitive impact based on market share and market concentration
Article 23 and Article 30 of the Draft Guidelines respectively propose numerical metrics for assessing the competitive impact through market share and market concentration, summarized as follows:
| Market Share Matrices | Conclusion of the Enforcement Agency |
| Combined Market Share of All Parties Involved ≥ 50% | Presumed to have the effect of restricting competition, unless there is rebuttal evidence. |
| 25% ≤ Combined Market Share of All Parties Involved < 50% | Given special attention |
| 35% ≤ Combined Market Share of All Parties Involved < 50% | Inclined to consider that the concentration may have the effect of restricting competition. |
| 15% ≤ Combined Market Share of All Parties Involved < 25% | Generally not considered to have the effect of restricting competition, but based on the competitive conditions of the specific markets, it is necessary to analyze whether the concentration will produce unilateral effects or coordinated effects. |
| Combined Market Share of All Parties Involved < 15% | After the enforcement agency determines the rationality of market definition and the accuracy of market share, it is usually presumed that the concentration does not have the effect of restricting competition, unless there is contrary evidence. |
| Market Concentration Matrices | Conclusion of the Enforcement Agency |
| HHI < 1000 (Low Concentration Market) or HHI ≤ 100 |
Generally not considered to have the effect of restricting competition. |
| 1000 ≤ HHI ≤ 1800 (Moderate Concentration Market) and HHI > 100 |
Inclined to consider that it may have the effect of restricting competition. |
| HHI > 1800 (High Concentration Market) and 100≤ HHI ≤ 200 |
More inclined to believe it has the effect of restricting competition, requiring comprehensive review. |
| HHI > 1800 (Very High Concentration Market) and HHI > 200 |
Usually presumed to have the effect of restricting competition, unless there is rebuttal evidence. |
This provision provides that market share and market concentration are crucial metrics for evaluating the impact on competition. Previously, the standards for determining competitive impacts were not well-defined. By providing clear numerical standards, the Draft Guidelines can enhance the predictability of the review process. It also provide companies with a clearer framework to assess the competitive impact of their transactions and engage with regulatory authorities in a more informed manner.
Key point 6: Provides clarification on competition harms from horizontal mergers
The Draft Guidelines explicitly outlines two primary forms of competition harm resulting from horizontal mergers and acquisitions: unilateral effects and coordinated effects.
Unilateral effects
The Draft Guidelines provide a detailed framework for assessing whether a horizontal merger might generate unilateral effects. Key considerations include:
- Changes in the number of competitors in the market before and after the transaction.
- Shifts in market shares held by the merging entities and other players.
- Variations in market concentration levels post-merger.
- Whether the merging parties were close competitors prior to the transaction.
- The ability of remaining competitors to impose effective competitive constraints.
- Market entry barriers and buyer power dynamics.
Coordinated Effects
The Draft Guidelines establish a framework for evaluating the potential for coordinated effects. This involves assessing:
- Whether the merger facilitates coordinated behaviour among remaining firms in the market.
- Whether the merger strengthens pre-existing coordination among competitors.
In the current regulatory approach, the enforcement agencies have focused on analysing unilateral effects and coordinated effects when assessing competitive harms in a horizontal merger and acquisition. The relevant provisions offer a more detailed framework for analysing these two types of competition harm, providing clearer guidance on how the enforcement agencies will assess them.
Key point 7: Government subsidies may be scrutinised
Article 83 of the Draft Guidelines states:
“When antitrust enforcement agencies assess data-driven horizontal mergers and acquisitions, the level of data privacy protection may become one of the factors considered in evaluating the impact of the transaction on product quality. If a merger or acquisition eliminates a competitor with higher data privacy protection standards, it could lead to an overall decline in the quality of data-related products in the relevant market, thereby harming consumer welfare.”
In the current regulatory approach, the enforcement agencies have seldom asked the parties to provide information on government subsidies. This provision is designed to tackle market distortions caused by government subsidies, ensuring a level playing field for all companies operating within China. However, there are several uncertainties regarding how this provision will be applied in practice, including the conditions that would trigger a review of government subsidies, how this review on subsidy will interface with the merger process, and how to address competition issues arising from government subsidies, etc. Therefore, it will be important to monitor if further refined rules will be established in future legislative actions or any enforcement action taken should this provision be retained in the final draft.
Key point 8: Privacy protection is taken into account when analysing competitive concerns
Article 84 of the Draft Guidelines states:
“When antitrust enforcement agencies assess data-driven horizontal mergers and acquisitions, the level of data privacy protection may become one of the factors considered in evaluating the impact of the transaction on product quality. If a merger or acquisition eliminates a competitor with higher data privacy protection standards, it could lead to an overall decline in the quality of data-related products in the relevant market, thereby harming consumer welfare.”
In the current regulatory approach, the enforcement agencies have seldom asked the parties to provide information on privacy protection in the process of merger review. Nevertheless, this provision reflects the growing recognition of data privacy as a critical component of product quality, especially in industries heavily reliant on data processing and management. It also further underscores the integration between data protection laws and antitrust laws in today’s digital economy. Thus, companies involved in data-driven horizontal mergers and acquisitions should be aware that their data privacy practices could become a point of inquiry during the merger review process.
Changes are ongoing
In summary, the Draft Guidelines, which in total consist of 12 chapters and 87 provisions in its current form, provides a detailed outline of SAMR’s enforcement policy and analytical framework for horizontal mergers and acquisitions. The Draft Guidelines were open for public comment and it is anticipated that they will undergo revisions based on feedback received.
Let us know if we can put you in touch with our KWM China colleagues, for more information!
