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Chinese antitrust enforcer fines two companies for failure to notify an offshore JV

China’s antitrust authority, the State Administration for Market Regulation (SAMR), recently fined Taiwan Cement and Ordu Yardimlasma Kurumu (OYAK), a Turkish group active in, amongst others, cement, for failure to notify the setting up of their joint venture (Dutch Oyak TCC Holdings B.V.) in the Netherlands in 2018. This marks the first time that SAMR has penalised companies for failure to file an offshore joint venture with seemingly no nexus to China.

OYAK transferred its existing Turkish cement business and assets to the joint venture in exchange for a 60 per cent stake, and Taiwan Cement contributed cash in exchange for a 40 per cent interest. SAMR considered this transaction to be notifiable as Taiwan Cement and OYAK both had joint control over the joint venture and met the turnover thresholds. While the China filing thresholds were technically triggered, this joint venture seemed not to have a clear nexus to China as it was mainly engaged in the cement business in Turkey. Given that the geographic market for cement is usually very narrowly defined in China, the joint venture’s cement business in Turkey was not likely to impact the China market indirectly either (such as via imports or exports).

It is not clear how SAMR uncovered this offshore transaction. In practice, SAMR has tended to intervene following a third-party complaint or based on disclosures made in the notification form for a notified deal. When submitting a China merger filing, parties are required to disclose deals in the three years preceding a notified transaction, if the prior deal(s) involve the same market. The latter has become more common now, given SAMR officials are more likely to proactively investigate whether the disclosed prior deal(s) required notification in China and, if so, whether it was indeed filed. In this case, it’s likely to have been prompted by a complaint as there is no clear indication of other filings involving these parties where they had to disclose this transaction.

This decision may not necessarily mean that this type of transaction has become an enforcement priority for SAMR, in particular given the limited number of officials (less than five) in the bureau in charge of gun jumping enforcement, amongst other responsibilities. That said, we anticipate that SAMR may investigate more such cases, if brought to SAMR’s attention.

The fine imposed on each of Taiwan Cement and OYAK was modest at RMB300,000 (c. US$43,000). Although such monetary fines are still limited for now with maximum fines being RMB500,000 (c. US$72,000), the draft amendment to China’s Anti-Monopoly Law released earlier this year proposed to increase the fine to up to 10 per cent of a company’s turnover. 

Finally, the formal investigation lasted for more than ten months. Had this transaction been filed to SAMR initially, the simplified procedure would likely have applied. The simplified procedure is available in cases where a joint venture has no nexus to China. In our experience, this type of filing usually can be cleared within 1.5 to 2 months.

“New Normal”: more aggressive gun jumping enforcement since establishment of SAMR 

This case is another example of SAMR getting increasingly aggressive in terms of antitrust enforcement. This is a consistent trend we have seen since the creation of the integrated Anti-Monopoly Bureau under SAMR in 2018. SAMR has been actively pursuing failure to notify cases and has also started to probe into transactions that had not, or rarely, been caught by the Ministry of Commerce (MOFCOM, the former antitrust authority in charge of merger review). Set forth below are a few recent trends in relation to SAMR’s gun jumping enforcement record:

  • Significant increase in the number of cases. Since 2018, the number of failure-to-notify cases has significantly increased, from 6 in 2017 to 15 and 18 in 2018 and 2019 respectively. SAMR did not slow down enforcement despite the Covid-19 pandemic and has already completed four such investigations since January. It is worth noting that the fines imposed in general are also higher compared with the MOFCOM days, with fines typically almost doubled.
  • Wide range of sectors, players and types of transactions targeted. No companies and sectors or types of notifiable transactions are immune from SAMR’s enforcement – multinational companies, Chinese SOEs and domestic private firms have all been investigated and fined. Enforcement spans a broad range of industries including consumer-facing sectors (such as pharma retail or beauty chains) as well as business-to-business areas (such as ports, construction or industrial products). Both the establishment of joint ventures and share acquisitions are routinely captured, with the latter accounting for roughly two thirds of total cases since 2019 (15 out of 22 cases).
  • Lengthy investigations. The investigation of failure-to-file cases continues to be time-consuming, with an average of about 250 days for wrapping up the process. The longest investigation since 2019 took 474 days (involving the establishment of joint ventures by two Chinese companies). This does not take into account the time taken by SAMR to conduct a preliminary assessment on whether to initiate a formal investigation in the first place, which could cost extra time.
  • Minority acquisition by PE houses. SAMR has also stepped up scrutiny of minority stake acquisitions by PE houses. In December 2019, MBK Partners, a private equity fund with a focus on North Asia, was fined by SAMR for failing to notify its acquisition of a 23.53 per cent stake in Shanghai Siyanli, a nationwide beauty salon chain in China. Control is currently not defined under China’s Anti-Monopoly Law, and SAMR usually interprets control broadly to include certain transactions that would otherwise not be notifiable in other jurisdictions, such as the EU.
  • VIE structure no longer a shelter for not filing. Earlier this year, SAMR for the first time accepted a merger filing involving a filing party with a “variable interest entity (VIE)” structure, and publicly acknowledged the existence of such a structure. Historically, SAMR has been reluctant to penalise failure to notify cases involving a VIE structure. With this development, the risks for not filing a transaction with a VIE structure may significantly increase.
  • Early implementation of reportable deals. The merger control regime in China is suspensory, and as in other major jurisdictions, merging parties may not implement a reportable deal prior to regulatory clearance. Enforcement against early implementation is not common, and SAMR’s cases have tended to focus on failure to file. However, in December 2019, SAMR fined New Hope Investment for unlawfully implementing its acquisition of a 23.6 per cent stake in Xingyuan Environment Technology, a player in environmental protection. New Hope filed in China, but proceeded to register the change in shareholding before obtaining clearance from SAMR. It is worth noting that SAMR imposed a fine of RMB400,000 (c. US$57,500), typically reserved for serious cases (such as a failure to file recidivist) and indicates that SAMR is unlikely to tolerate companies that implement reportable deals before approval.

The uptick in enforcement shows SAMR’s appetite to investigate and fine companies for failure to file and for early implementation going forward. With the prospect of significant fines for failure to file and early termination in the future, the risk of non-compliance with China’s merger control rules will increase for deal makers. We are closely monitoring SAMR’s enforcement trends and will provide further updates.