Review of innovation market merger remedies in China

By Roger Zhang, East & Concord Partners
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Compared with concentrations in traditional industries, mergers in innovation markets have unique features. On the one hand, these mergers can harm competition to a greater extent by eliminating nascent competition in the relevant markets; and on the other hand, the merging parties sometimes have complementary technologies and therefore will create greater welfare post-transaction.

张昕 Roger Zhang 天达共和律师事务所 顾问 Counsel  East & Concord Partners
Roger Zhang
East & Concord Partners
Counsel

Remedies are imposed on mergers to solve competition concerns. Therefore, designing remedies for mergers in innovative markets is challenging for competition authorities. In the past 10 years, China’s competition authorities (MOFCOM and SAMR) has reviewed 2,283 transactions, among which 38 were approved with conditions and two were blocked. Eighteen out of 38 conditional approvals were in innovative markets. In this article, the author looks at the remedies imposed on the 18 innovative mergers and provides some insights on the future trends of remedy design in innovative markets in China.

It is universally true that remedy design should strictly follow competition concerns. Therefore, remedies imposed on transactions in innovative markets are a reflection of the concerns raised by these mergers. Taking one merger transaction as an example, Dow/Du Pont (2017) is a “concentration of equals” and its competition concern focused on the potential negative impact on technology development post-transaction. The competition authorities believed that competition in research and development (R&D) for future products between the merging parties would be eliminated and, therefore, innovation competition concerns were raised in this case. To solve this concern, the divestment included the overlapping products and the related R&D organizations to make sure that the divested business had the matched R&D capabilities to ensure viability in the future.

From published decisions it can be seen that a key concern for remedies in innovative markets is the scope to ensure viability. The features of these remedies could be summarized as following: (1) structural remedies with divestiture must ensure that the divested business will maintain the capability to provide competition restraints in the long run. As a result, it is observed that in these remedies, unlike in traditional industries, tangible and intangible assets were often requested to be divested together. R&D capabilities will be divested to ensure the future competitive strength of the divested business, and sometimes technical staff and technical support will also be imposed as part of the remedy; (2) long-term hold-separate is a popular behavioural remedy in innovative markets; and (3) access to essential inputs was emphasized in these remedies. FRAND (fair, reasonable and non-discriminatory) commitments were used to guarantee access in some circumstances.

We looked at remedies imposed by China’s competition authority on mergers in innovation markets since 2009, including a total of 18 cases such as Bayer/Monsanto (2018), Becton-Dickinson/CR Bard (2017), ASE/SPIL (2017), Dow/Du Pont (2017) and NXP/Freescale (2015).

These cases show that the scope of these remedies is wider, compared with ones in traditional markets. Since there have been more and more innovation mergers in China in recent years, it is important for us to review the remedies with the expectation of facilitating future remedy design.

Our Suggestions

  1. Considering the wider concerns in innovative industries, it is better to include the R&D capabilities divestiture to structural remedies.
  2. Compared with traditional mergers, it is more challenging to predict future competition for innovative markets. Companies should be aware that remedy discussion may take longer than in traditional markets.
  3. In China, it is likely to encounter more behavioural remedies in innovative markets. If there are standard essential patents (SEPs), non-SEP popular patent technology, or a useful database/platform, it is likely that access remedies could be imposed. Hold-separate remedies have been frequently used in these mergers as well.
  4. Some remedies that China competition authorities have imposed do not have sunset clauses, especially the FRAND behavioural remedies. This may cause confusion for future implementation of the commitment. Negotiation with the agency on remedy design is therefore very important for merging parties.
  5. There is an increasing need for international collaboration on remedies. It is beneficial to all parties to have the same buyer selected if different jurisdictions have the same divestments. It is easier to appoint the same trustee for the same remedy plans from different jurisdictions. International collaboration is necessary for mergers that critically depend on IP rights, since they may have international repercussions. The establishment of a clearer collaboration framework between different jurisdictions is beneficial to both competition authorities and merging parties.
  6. Although behavioural remedies are necessary when divestiture alone is not enough to solve the competition concerns in innovative industries, it is fair to say that China has a much stronger preference for behavioural remedies, compared with foreign jurisdictions. Out of the 18 cases, 12 were imposed with behavioural remedies. If we could make full use of structural remedies, probably we would not be relying on behavioural remedies that much in the future.

The three Chinese antitrust agencies this year merged into the newly established State Administration for Market Regulation (SAMR). The new anti-monopoly bureau of the SAMR will continue its review of concentrations in accordance with the Anti-Monopoly Law. We expect that a better level playing field will be provided accordingly.

Roger Zhang is a counsel at East & Concord Partners. East & Concord associates Wang Yinuo and Nicole Sun also contributed to the article

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