11 September, 2018
On 26 July 2018, Qualcomm announced to abort the USD 44 billion takeover of Dutch chip maker NXP as it failed to obtain antitrust approval from China’s State Administration for Market Regulation (“SAMR ”)1 . Around the same time, SAMR announced its conditional approval on the merger between Essilor and Luxottica2 , being the only competition authority around the globe to have imposed remedies on this case. The two cases stirred wide-spread speculation that the Chinese merger control regime has been politicized and worries among companies that their contemplated deals would be affected.
This note discusses whether Qualcomm/NXP and Essilor/Luxottica reflect a change in enforcement climate against the background of ongoing geo-political and trade disputes. As detailed below, our observations are that overall the Chinese merger control review remains “business as usual”, in particular for straightforward cases without competition or policy concerns; it is advisable to plan for the unique features of the Chinese review (e.g. recognition of the conglomerate effect theory of harm); to what extent a specific case would be influenced by noncompetition factors would require a case-by-case analysis but the majority of the filings should remain unaffected.
Chinese merger control under the spotlight
Overview
At the 10th anniversary of Chin’s Anti-Monopoly Law (“AML ”) coming into effect, China has firmly established its position one of the major merger control jurisdiction alongside the EU and the US.
Its prominence can be demonstrated by the soaring caseload over the past few years. For example, in 2017 MOFCOM received 400 merger filings and concluded the review of 344. In the first half of 2018, SAMR set a new record by receiving 248 and concluded 218 filings, which reflect a 23% and 40% increase respectively compared to the same period in 2017. It is note-worthy that the number of high-profile cases has increased, with the transactions with a deal value exceeding RMB 10 billion accounting for more than 20% in 2017.3
In the meantime, SAMR also appears to be taking an increasingly interventionist approach to complex deals. In 2017 alone, MOFCOM cleared seven cases subject to remedies, a record high since the AML took effect in 2008. All these seven cases involved multinational firms. Further, these cases were all approved only after an extended review process (312 days on average). In each case, the notifying parties had “pulled and refiled” the notification to allow more review time beyond the standard 180-day review period. Four out of the seven conditional approval cases involved structural remedies. Unlike in prior cases, the Dow/Dupont decision even required an upfront buyer approval.
Amid the recent fast-changing geo-political climate, the recent termination of the Qualcomm/NXP deal and the Essilor/Luxottica remedy decision have drawn wide speculation on the Chinese merger review process. We discuss Qualcomm/NXP and Essilor/Luxottica in more detail below.
Qualcomm/NXP
On 26 July 2018, Qualcomm announced that it would no longer seek another extension of its offer to acquire NXP, putting an end to the globally eye-catching transaction. Qualcomm announced the deal in October 2016; it initially notified the transaction to the Chinese authority in February 2017 and since went through a lengthy review process. Qualcomm withdrew and refiled twice in October 2017 and April 2018 to restart the official review procedure with a view to buying more time for review. However, the proposed deal eventually fell apart 20 months after it was announced.
Following Qualcomm’s announcement to drop the deal, there has been wide speculation that SAMR’s review of Qualcomm/NXP was politicised and the review procedure was prolonged indefinitely by the ongoing Sino-US trade dispute. SAMR has expressed its “regret” at Qualcomm’s decision to terminate the transaction and withdraw the filing. The agency emphasized that its review was still within the statutory timeframe and there had been “rounds of negotiation” on remedies and “good communication”.4
Essilor/Luxottica
SAMR recently also announced its conditional clearance on the merger between Essilor and Luxottica, following a 429-day lengthy review from initial submission. SAMR is the only jurisdiction in the world to have imposed remedies on the transaction to date, despite unconditional approval from the EC and the US Federal Trade Commission (“FTC ”) several months before. The divergence in the outcome again attracted attention to SAMR’s approach to mega mergers in today’s world of global coordination.
In Essilor/Luxottica, SAMR considered that the merged entity would have market power in the Chinese wholesales markets for optical lenses (mid-high/low end), optical frames (low end) and sunglasses (mid-high end). 5 SAMR further opined that the merged entity would have the incentive and ability to engage in tie-in or bundled sales in the upstream wholesales markets for optical lenses, optical frames and sunglasses, and to impose unreasonable trading conditions on competing retailers in the downstream market for glasses retail.
To address these concerns, SAMR required the merged entity to refrain from, vis-a-vis Chinese retailers, (a) engaging in tie-in sales, (b) imposing exclusivity requirements, (c) refusing to supply products or grant trademark licenses on fair, reasonable, and non-discriminatory terms, or (d) supplying glasses products at below-cost prices. SAMR also required the merged entity to report any future acquisitions of Chinese targets.
Observations on recent decisional practice
Review of no-issue cases remains largely unaffected
Our observation of the recent practice is that, in general, the majority of the transactions notified are reviewed and cleared in the ordinary course. There do not appear to be any indication of undue delays or complications for no-issue, straightforward cases.
Statistically, approximately 200 cases were cleared by the authority in the first half of 2018, the vast majority of which continued to be cleared under the simplified procedure without delays.
Notably, such a record was achieved during the institutional reshuffle, which had been wildly anticipated to slow down the review process.
Transactions involving “strategic” sectors or competition concerns continue to draw close scrutiny
Notwithstanding the continued predictability, uncertainty still remains when it comes to cases that involve strategically important and sensitive sectors and/or give rise to plausible competition concerns. There is no clearly defined scope of “strategic” sectors; rather, it is dynamic and may change depending on the circumstances. Currently, information technology, agriculture and commodities tend to draw close scrutiny, entail a longer review timeline, or even ultimately require remedies.6
There is speculation that the Qualcomm/NXP deal was collateral damage of the ongoing Sino-US trade dispute. While it cannot be excluded that political factors have added further complications to and/or caused delays, completely attributing the deal abortion to political factors may have overlooked the merits of the case. The European Commission (“EC ”) required Qualcomm to, among others, divest certain patents and ensure interoperability due to the parties’ high combined share in NFC technologies and MIFARE technology.7 As regards China, while there is a lack of official information on the substance, Chinese stakeholders (including competitors and customers) reportedly complained that the merger would expand Qualcomm’s patent licen sing business into areas such as mobile payment and autonomous driving and that the remedies Qualcomm had offered to the EC were not sufficient address the particular competition issues in China. Following Nokia/Alcatel-Lucent, NXP/Freescale and other remedies cases where the parties undertook to grant licenses, the Qualcomm case again underlines the broader policy goal of ensuring that domestic companies operating at the downstream level have access to intellectual property rights on reasonable terms.
SAMR’s particular areas of concern
In parallel with frequent cooperation and increasing convergence at a global level, the merger control regime in different jurisdictions present unique features. Just as the EU and the US diverge in their approach to certain theories of harm, the Chinese authority has become increasingly confident in charting an independent course in the review of the same transaction. SAMR’s approach can be seen particularly in its focus on conglomerate theories of harm and its use of behavioural remedies.
In Essilor/Luxottica, the Chinese agency continued to apply the “conglomerate effect” theory of harm, which it has long recognised. While the authorities in other jurisdictions (in particular the US) generally consider conglomerate effects unlikely, the Chinese authority has required remedies in several cases on these grounds to date.8 Under the same approach, SAMR in the latest Essilor/Luxottica concluded that the merged entity would have the incentive and ability to engage in unfair tie-in or bundled sales in the neighbouring markets for lenses, frame and sunglasses.
Moreover, the Chinese authority in its decisional practice has shown a preference over behavioural remedies as compared to its counterparts in other jurisdictions. To date, more than half of the conditional approval decisions require behavioural remedies. Similarly, SAMR in Essilor/Luxottica imposed various behavioural remedies, including undertakings not to engage in tie-in sales, impose exclusivity requirements, supply products or grant trademark licenses not on FRAND terms, or below-cost sales.
Takeaways for future cases
In light of the latest decisional practice, companies are advised to bear in mind the following when planning future deals:
- Overall, the Chinese merger control review remains “business as usual”. Most cases are reviewed in the ordinary course and straightforward cases without competition or policy concerns are expected to be cleared under the simplified procedure under usual timetable.
- When assessing whether there are potential competition issues, it is important to watch out SAMR’s particular areas of concern (e.g. conglomerate effect by way of tie-in and bundled sales) or any disproportionate impact in China. For transactions involving a “strategic” sector and/or complaints from stakeholders (e.g. sectoral regulators, customers/suppliers, competitors), the bar for SAMR raising competition concerns could be lower.
- To what extent a specific case could be subject to political considerations would require a case-by-case analysis in the context of the current Sino-US trade dispute. In the absence of competition concerns, if only one party to the transaction is a US company (in particular if the target company is not based in the US), the Chinese review process is less likely to be affected by political factors. In the meantime, if both sides of the deal are American firms or there is a US buyer, a more careful analysis as regards the potential impact would be required. In particular, cases involving “strategic” sector and stakeholder objections would be more sensitive to political scrutiny and at a minimum require further diligence on potential competition concerns
For further information, please contact:
Fay Zhou, Partner, Linklaters
fay.zhou@linklaters.com
1 According to the government restructuring plan, starting from April 2018, SAMR became the unified competition law enforcement authority and took over the merger review jurisdiction (including ongoing cases) from the Ministry of Commerce (“MOFCOM”).
2 See the full decision of the SAMR (in Chinese) at: http://samr.saic.gov.cn/gg/201807/t20180726_275250.html
3 See MOFCOM’s annual summary on merger control, available in Chinese at:
http://www.mofcom.gov.cn/article/zt_qgswgzhh2017/gzzs/
4 See SAMR’s news release on Qualcomm dropping from the NXP deal, available in Chinese at:
http://samr.saic.gov.cn/xw/yw/zj/201807/t20180726_275245.html
5 Specifically, SAMR found that (a) the merged entity would be the largest player in each such market (with a combined market share exceeding 30%), far exceeding all other competitors’ market shares. For example, in the Chinese low end optical lenses wholesale market, the other top five competitors only held a market share below 10% in the aggregate; (b) the parties’ optical lenses and sunglasses products are the “must-have” brands that optical retailers carry; and (c) the parties are each other’s potential competitor despite limited market share increments in the above markets.
6 For example, among the conditional clearance cases in recent years, a significant portion relates to information technology (e.g., Seagate/Samsung, West Digital/Hitachi, MediaTek/Mstar, Merck/AZ Electronics, Microsoft/Nokia, NXP/Freescale, Nokia/Alcatel-Lucent, HP/Samsung and Google/Motorola) and agriculture (e.g., Dow/Dupont, Bayer/Monsanto, Agrium/PotashCorp).
7 The European Commission’s press release on this case is available at:
http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=2_M_8394
8 In 2009 when the AML enforcement was still in its infancy, MOFCOM already sought to blocked Coca Cola’s proposed acquisition of Huiyuan based on the concern that Coca Cola could leverage its market power in the market for carbonated soft drinks to the neighbouring market for fruit juice, thereby foreclosing Chinese domestic juice manufacturers. In the subsequent years, MOFCOM imposed remedies on the ground of conglomerate effect in Walmart/Yihaodian, Merck/AZ Electronic and HP/Samsung.