Highlights Of China’s First Horizontal Merger Review Guidelines.

On 10 December 2024, the State Administration for Market Regulation (“SAMR”) released the Guidelines for Review of Horizontal Concentration of Undertakings (“Guidelines”). It is the first time that China publishes guidelines to display the detailed analytical framework, review approach and key considerations in the merger review procedure. The Guidelines were based on years of review experience accumulated in China and also reflects the most updated global economic dynamics and features. 

The Guidelines embody 87 articles in total distributed in 12 chapters, covering all the core aspects such as evidence materials, market definition, market share and concentration degree, unilateral and coordinative effects, potential competition, market entry, buyer power and efficiency. 

This article extracts and highlights those contents that have most practical significance for the merger filing, with the view to updating multinationals with the latest development in China’s merger review regime. 

I. Crucial Principles Underlined

The Guidelines lay out a few key principles in the opening chapter that SAMR will usually stick to in its merger review. Particularly, it is underlined that the competition concerns that SAMR cares about in the merger review are those incurred specifically due to the concentration. It implicates that competition issues existing already before the concentration are not focus of the antitrust review. 

Furthermore, the counterfactual analytical approach is stressed as one instrument of the merger review toolkit. Specifically, SAMR could compare the hypothetical market competition situation ex post the concentration, either with the competition situation ex ante the concentration, or alternatively with the foreseeable or possible market competition situation ex post the concentration with the assumption of no concentration. Whether or not a significant lessening of market competition would happen in the end through the counterfactual analysis matters for SAMR to issue its decision. 

II. Consideration of Evidence Materials 

The Guidelines are particularly beneficial in terms of explaining from what channels SAMR could collect evidence and how much importance that different types of evidence materials may carry. Specifically, China’s merger review agency (“agency”) may obtain evidence materials from concentration parties (“parties”), upstream suppliers, downstream customers or end consumers, relevant government departments, industry associations, competitors, and etc. They may also engage experts, scholars, third-party consulting agencies, who have no conflict of interest in the reviewed concentration, to provide specific opinions.

The formality to obtain evidence materials include but not limited to requesting stakeholders to assist in the merge review investigation, soliciting opinions in writing, sending questionnaires, surveys, symposiums, argumentation meetings, commissioned consultations, on-site research, etc.

The evidence materials related to the merger review mainly include:

• commercial documents and records prepared by the parties;
• transaction documents with binding effects, such as memorandums of understanding and share purchase agreement;
• documents explaining the transaction purpose or efficiency that may arise from the concentration;
• information and materials on the market competition and future development trends, such as market analysis or research reports, forecasts, consumer survey reports made by the parties or independent third parties;
• information on how the parties and other stakeholders view competitors, such as internal documents evaluating or describing competitors, regular reports on business performance, including but not limited to monthly sales reports and other documents that can explain their business performance;
• materials reflecting preferences and behaviors of customers, such as bidding records, actual customer conversions between suppliers, and relevant customer survey reports;
• strategic documents and financial information, such as research and development plans, investment proposals, commercial feasibility analysis, financial reports;
• materials on pricing strategies of the parties, such as price lists, sales forecasts and analysis, discount or rebate policies, past price fluctuations, and their influencing factors.

The agency will comprehensively evaluate all relevant evidence materials to determine their authenticity, relevance and probative value. The role of each evidence material may vary depending on their types, sources, collection methods, as well as significance on competition analysis elements and competition issues arising from the concentration. In general, evidence materials formed by the parties during the business operation are more persuasive than documents and materials specially produced for the concentration. Compared to the views of upstream suppliers and the parties, the opinions of downstream customers on concentration are more important in the eyes of the agency. The agency usually will not evaluate the competitive effects solely based on the views of an individual competitor.

III．Analysis From Perspectives of Market Share and Market Concentration

One instructive breakthrough is that the Guidelines clarify SAMR’s general approach to evaluating horizontal merger from the perspective of market share, which is summarized below:

• for combined market share exceeding 50% post-transaction, anticompetitive effects would usually be presumed by SAMR unless the parties could provide evidence to rebut this presumption (“presumption of anticompetitive effects”). 
• for combined market share ranging from 25% to 50%, SAMR tends to scrutinize the transaction closely (“close scrutiny”); in particular, where the combined market shares fall between 35% and 50%, SAMR tends to consider anticompetitive effects likely (“likely anticompetitive effects”). 
• where combined market share ranges from 15% to 25%, SAMR usually would not find anticompetitive effects (“likely no anticompetitive effects”).
• where the combined market share is below 15%, SAMR could presume no anticompetitive effects after ensuring the reasonableness of market definition and accuracy of market share data (“presumption of no anticompetitive effects”).

Market concentration is another crucial factor that SAMR looks into when reviewing a transaction. CRn and HHI are two commonly used indicators that SAMR often looks into when evaluating the market concentration degree and its changes incurred by the concentration, with the latter one is employed in practice more often and widely. The agency generally divided the market into three types:

• low concentration market: HHI below 1000;
• moderately concentrated market: HHI ranges from 1000 to 1800;
• highly concentrated market: HHI above 1800.

The agency typically uses the following criteria to examine potential effects of concentration on competition:

• where the HHI post concentration is lower than 1000 or Δ HHI is lower than 100, the agency generally does not consider that the concentration has or may have anticompetitive effects;
• where the HHI post concentration ranges from 1000 to 1800, and Δ HHI is higher than 100, the agency tends to believe that the concentration has or may have anticompetitive effects, thus a comprehensive review is necessary;
• where the HHI post concentration is higher than 1800, and the Δ HHI is between 100 and 200, the agency is more inclined to believe that the concentration has or may have anticompetitive effects, thus a comprehensive review is necessary. 
• where the HHI index post concentration is higher than 1800 and the Δ HHI is higher than 200, the agency usually presumes that the concentration has or may have anticompetitive effects, unless the parties can prove otherwise.

IV．Unilateral and Coordinative Effects

Economic analysis tools are suggested when screening if unilateral effects may occur, such as quantitative analysis methods of the Upward Pricing Pressure (UPP), Gross Upward Pricing Pressure Index (GUPPI), and Merger Simulation. 

For coordinative effects, if any of the following situations happens, the agency will tend to consider that the concentration is likely to produce coordination effects:

• post concentration, the combined market share of the parties and another business operator in the relevant market reaches two-thirds, and each has a market share exceeding one tenth;
• post concentration, the combined market share of the parties and two other business operators in the relevant market reaches three-quarters, and each has a market share exceeding one tenth;
• the concentration will eliminate a business operator who may hinder market coordination or substantially eliminates that operator’s motivation to hinder market coordination.

V. Counteracting Factors

When anticompetitive effects are identified in the review of a concentration, SAMR usually will also look into whether any counteracting factors may exist, such as constraints from potential competition, easy market entry and buyer power. In practice, market entry can only effectively prevent or offset the potential adverse effects of a concentration on competition if the entry is possible, timely and sufficient.

The possibility of market entry refers to the chance that business operators can enter the relevant market and successfully impose competitive constraints on the concentrated entity after entry. When evaluating the possibility of market entry, factors such as market entry barriers, market operating conditions, and market development expectations should be considered.

The standard for determining the timeliness of market entry depends on the characteristics and dynamics of the market, as well as the specific production capacity of potential entrants. Normally, the agency believes it timely if market entry can be completed within two years.

The sufficiency of market entry means the ability of entrants to impose sufficient and effective competitive constraints on the concentrated entity. When conducting the evaluation, factors such as size, business scope and product substitutability will be considered overall. Usually, only when the entrant reaches a certain scale will it pose effective competitive constraints. 

When determining whether market entry is possible, timely and sufficient, the agency can usually collect information and evidence materials from the following aspects:

• past market entry and exit cases in relevant or similar markets;
• plans for other competitors to enter the relevant market, and expansion plans of existing competitors; if there is any potential market entrant with necessary assets or motivations to enter the relevant market;
• direct statistical data or information on market entry barriers, such as the financing scale, R&D investment and output needed for entering;
• if scale economy is relevant, it is necessary to consider whether new entrants can reach sufficient scale in a timely manner to form effective competitive constraints, as well as the cost disadvantage when the minimum scale cannot be achieved;
• the time required to recoup investment costs after entering the market;
• the cost of exiting the market;
• the impact of technological progress on market entry;
• whether existing competitors in the market sign long-term contracts with downstream customers;
• whether downstream customers have the ability and willingness to assist in entering new markets;
• possible imported products or supply substitutes;
• if the relevant regional market is the domestic market in China, the possibility of foreign suppliers entering the domestic market in China needs to be considered.

Having buyer power alone does not guarantee that anticompetitive influence can be effectively offset. When evaluating the buyer power, the agency usually focuses on the following three latitudes:

• can business operators with buyer power exercise their buyer power to benefit other customers without buyer power as well;
• when the business operator with buyer power is not the end consumer, can the benefits obtained through exercising buyer power be passed on to the end consumer;
• do business operators with buyer power have sufficient motivation and willingness to exercise their buyer power.

The Guidelines also stress that the buyer power that existed before concentration may not necessarily continue after concentration, as concentration may lead to increased market control of the entity after concentration, or may eliminate important alternative suppliers. Therefore, the agency usually evaluates buyer power after concentration rather than before concentration.

VI. Failing Firm Defense and Government Subsidies 

The failing firm theory is provided in the Guidelines for the first time, in line with the practice of key antitrust jurisdictions worldwide. When analyzing if the failing firm defense could be accepted, the agency will check whether the following three conditions are simultaneously met:

• the business operator being acquired or merged is facing operational difficulties, and if not acquired or merged, it will exit the market in the short term;
• there is no alternative solution that would cause less damages to competition than this concentration to prevent the aforementioned operators from exiting the market;
• compared to the market exit, the potential anticompetitive effects that the concerned concentration may bring are weaker.

Responding to the EU FSR regulation, the Guidelines also touch upon the public subsidy in one provision generally. Specifically, if there is evidence to prove that domestic and foreign government subsidies obtained by the concentration parties may have adverse effects on competition in the relevant market, the agency may require the concentration parties to provide information on the government subsidies obtained and consider their adverse effects on fair competition.

VII. Conclusion

Notably, introduction of the Guidelines possesses appreciable practical significance for companies, which could enhance the review transparency, facilitate substantive self-assessment of businesses and improve predictability of the review decision. Companies that engage with complex and difficult deals are suggested to conduct a prior self-assessment based on the Guidelines.