Recent trends in Chinese merger filing: Why does it take so long?

Since the enactment of Chinese Anti-Monopoly Law (“AML”) in 2008, merger filings in China have become a common bottleneck for global M&A transactions due to the long time required for review and the difficulty in predicting the prospects for clearance. The implementation in 2014 of a simplified procedure available to transactions that satisfy certain market share thresholds or fall within certain circumstances, as well as the accumulation of experience by the State Administration for Market Regulation (“SAMR”), the Chinese antitrust authority, led to an overall improvement. However, in the past few years, several high-profile M&A transactions still needed significant time to obtain merger filing clearance in China despite utilizing the simplified procedure and having a relatively small impact on the Chinese market.

Well known examples include the acquisition of Kioxia (formerly Toshiba Memory) by a consortium of Japanese, US, and Korean funds in 2018 and the acquisition of Hitachi Metals by a consortium of Japanese and US funds in 2021, which only received clearance from SMAR in September of this year. Many companies are concerned that the prolonged review of these deals reflects the tense international environment and are looking for guidance on what type of M&A transaction is more likely to face delays.

Recent Trends in Merger Filings in China

The length of time required for SAMR’s review of the merger filings is typically longer in when “sensitive” industrial fields are involved. Generally speaking, SAMR tends to regard the following as “sensitive”: (a) industries that can be affected by volatility in international relationships such as tension between the U.S. and China, and (b) industries related to the infrastructure or energy fields that are considered to be important from an economic or national security perspective. While these are not well-defined criteria, an example of each would be semiconductors and rare-earth elements, respectively.

There are two possible reasons for SAMR’s lengthy review:

1. When SAMR examines a filing related to a sensitive field, other relevant authorities are also likely to factor in SAMR’s review of the transaction, which introduces additional complexity and delays the overall process. For example, if the buyer is a U.S.-affiliated company or investment fund, SAMR tends to consider political implications in addition to competition concerns.
2. Even if a filing is subject to the simplified procedure due to a lack of overlap or small market share, a simplified filing needs to go through a ten-day public comment period. If a third party raises competition concerns, the review process will be paused until those concerns have been resolved. In practice, the more sensitive the industry involved in the filing, the more likely it is that a third party will raise an objection.

On the other hand, there are some circumstances where SAMR’s review is likely to be lengthy regardless of the sensitivity of the relevant industries:

1. Many M&A parties believe that their transaction would only have a minor impact because of the overall size of the Chinese market and the low market share of their products in China. However, SAMR tends to divide each product into ‘high-end’ and ‘low-end’ product markets and classifies foreign products as ‘high-end’. This leads many foreign products to have a higher market share than the M&A parties may have originally thought.
2. If multiple M&A transactions occur in the same or adjacent industrial fields around the same time, SAMR will consider changes in the competitive environment caused by the multiple parallel transactions. In the semiconductor field, this point appears to have greatly contributed to the delay of the review process
3. When merger filings for the same transaction are made in multiple jurisdictions, SAMR tends to closely follow the review progress of the other antitrust authorities (especially in the EU, where competition laws are similar) and usually does not issue its clearance until other jurisdictions’ clearances have been issued. This is particularly common in large M&A deals that require multiple global filings.

Impact of the Revised Chinese AML

Under the previous Chinese AML, the review period for a merger filing was divided into first review (30 days), a second review (90 days), and a third review (60 days). Once the review had begun, SAMR would not stop the clock, which meant that the maximum review period was up to 180 days.

Under the amended Chinese AML, however, which came into force on August 1, 2022, SAMR may suspend the review period in certain circumstances. Namely, (i) if a party fails to submit documents and materials requested by SAMR; (ii) new facts or circumstances arise that have a significant impact on SAMR’s review; or (iii) further consideration of remedial measures is required.

Although this amendment gives SAMR the explicit power to stop the clock, previously, when more time was required to complete the review, SAMR frequently required the parties to pull the application and refile (i.e. withdraw and resubmit the filing). Thus, in practical terms, the amendment is unlikely to significantly change the likelihood or duration of SAMR’s review.

Simultaneously with the revised AML entering into force, SAMR began outsourcing simplified reviews to the local SAMR branch offices relevant to the particular M&A transaction. It is thought that this move may affect the length of the review process negatively in the short term, but positively in the long run. Until now, local SAMR branch offices have been responsible for the investigation and penalty of cartels and abuse of market dominant power in antitrust enforcement but lack experience in conducting merger filing examinations, which has been the cause of additional delay. Nevertheless, in the long run, outsourcing simplified reviews to local branch offices may have the positive effect of addressing the manpower shortage of the central SAMR, which is another often cited reason for the prolonged review process.

Conclusion

In summary, Chinese merger filing review process is not as mysterious and unreasonable as one might think, but there are still many unique aspects of the review approach and process. In addition to the above, finding reliable and experienced local lawyers (as Chinese authorities, including SAMR, generally are not willing to directly consult or communicate with foreign based law firms, even with their China branch office) is also an important factor in whether the antitrust review can be shortened. In this regard, it is worth noting that antitrust law practice in China has only had a brief history and has evolved uniquely. Thus the level of local antitrust lawyers is quite varied, which often leads to miscommunication and even strategic miscalculations. Therefore, it is important for companies as well as main counsels outside of China to take a greater role in merger filing process.

Haseru Roku, Partner

+81-3-6889-7676  haseru_roku@noandt.com

Haseru Roku’s practice focuses on complex cross border activity, including M&A, international trade and economic security related matters. Based on his strong in-bound and out-bound experience as well as his work at top tier law firms in the U.S. and China, his expertise also lies in trade friction, cross-border transactional disputes, and negotiations for acquisitions and joint ventures with companies in the Greater China area (mainland China, Singapore, Hong Kong and Taiwan).

December 15, 2022

https://www.noandt.com/en/publications/publication20221215-1/