SAMR fines companies for failing to notify VIE-related transactions
On 14 December 2020, the State Administration for Market Regulation (SAMR) published three decisions fining three companies for failing to notify their respective VIE-related transactions. This is the first time that SAMR has done so and the decisions also mark the first time that SAMR has imposed the maximum fine under the Anti-Monopoly Law (the AML) for failure to file.
These decisions crystalize and reinforce SAMR’s position on the treatment of VIE structures in the merger review context. This follows SAMR’s approval in July of the Yum China/Leading Smart deal involving a VIE structure and its publication of draft Antitrust Guidelines for the Platform Economy in November which explained that VIE-related transactions should be filed if the turnover thresholds are met. SAMR imposed a record fine of RMB 500,000 (approx. USD 75,000) respectively on:
- Alibaba Investment Limited (Alibaba Investment), an investment vehicle of Alibaba Group, for its failure to notify its acquisition of Yintai Retails (Group) Co., Ltd. active in department stores and retail;
- China Literature Limited (China Literature), a HK-listed company ultimately controlled by Tencent, for its failure to notify its acquisition of New Classics Media, a company incorporated in the Cayman, which controls a domestic company via a VIE structure that is primarily active in the production and distribution of TV series, films and web series; and
- Shenzhen Hive Box Network Technology Co., Ltd. (Hive Box), an affiliate of SF Express, which operates intelligent terminal service facilities through a subsidiary controlled via a VIE structure, for its failure to notify its acquisition of China Post Smart Express Technology Co., Ltd. active in the same sector as Hive Box.
We set out below the key takeaways from the SAMR decisions:
VIE-related transactions are subject to merger control review regardless of the party with a VIE structure (the acquirer or the target) or the sector subject to foreign investment restrictions (a restricted sector or even a prohibited sector). The Alibaba Investment and Hive Box deals involved acquirers with a VIE structure. The China Literature deal involved an acquirer with a VIE structure and a target active in a sector closed to foreign investment via a VIE-structured subsidiary. The decisions signal that SAMR is willing to review all VIE-related transactions regardless of whether the parties or the transaction itself is subject to other regulatory compliance issues. This is consistent with SAMR’s position that merger control approval is competition-focused and should not be seen as endorsement of VIE structures. However, given the uncertain legal status of VIE structures, it remains to be seen how other Chinese regulators might react to such deals if consulted by SAMR during a standard review procedure – particularly when those VIE-structured entities are ultimately controlled by “true” foreign companies and not by foreign-listed Chinese companies.
Maximum fine signals strict enforcement in the Internet sector including for VIE-structured transactions. Whilst SAMR concluded that the three transactions did not raise substantive competition concerns, it imposed the maximum fine permissible under the AML for the first time ever. It concluded that the parties were influential companies with established legal teams and active in M&A and therefore should have been aware of their merger control obligations. The level of fine imposed highlights SAMR’s enforcement focus on the Internet sector and indicates that at least some of China’s leading tech companies could be subject to even closer scrutiny going forward.
The maximum fine under the AML is still modest, but this will change if SAMR’s proposal to amend the AML to increase the maximum fine that can be imposed for failure to file to 10% of an undertaking’s turnover. In addition, SAMR may unwind a transaction, although it is unlikely to do so unless that transaction gives rise to material competition concerns.
SAMR is also investigating other unreported transactions following complaints and therefore the approach to unnotified prior VIE-related deals needs careful consideration. SAMR typically relies on complaints to detect failures to notify reportable deals and on companies to self-report failures to notify reportable transactions. SAMR initiated its investigations in the three deals following complaints. SAMR has indicated that it is pursuing several other investigations triggered by complaints against Internet companies for failing to notify reportable transactions. SAMR has also asked companies to conduct internal reviews to assess whether any prior transactions should have been notified. While the Internet sector is apparently the priority at the moment, companies active in other sectors would be well advised to conduct an internal review to identify any unreported VIE-related deals. Companies will then need to consider whether to voluntarily report an unnotified deal to SAMR, and factors likely to inform that assessment may include, amongst others, risks of third party complaints, whether the prior deal was high-profile, when the prior deal was closed, and possible reactions of other Chinese regulators (where applicable).
The three decisions are likely the prelude to heightened scrutiny of VIE-linked transactions. Other decisions involving VIE-related transactions are expected to be announced. As noted by an official press release published by SAMR alongside the decisions, SAMR is determined to take a tough stance against the practices of Internet companies including when they fail to notify reportable transactions. More generally, the heightened focus on enforcement is in line with the Chinese government’s call to strengthen antitrust enforcement in China following the meeting of the Politburo of the Communist Party of China on 11 December 2020.