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The coming wave of stringent enforcement actions in China

On 12 March 2021, China's State Administration for Market Regulation (SAMR) published 10 penalty decisions concerning failure to notify transactions in the Internet sector and imposed the maximum fine of RMB500,000 currently permissible under the Anti-Monopoly Law (AML) on 12 companies including Tencent Holdings, Baidu Holdings, Didi Mobility and companies ultimately controlled by Alibaba Group, Bytedance, and Meituan. This follows SAMR’s decision to fine other companies in three VIE-related transactions last December and reinforces the authority’s tough stance against noncompliance with the merger control rules in the Internet sector. These fines are likely the beginning of a wave of stringent enforcement actions.

Whilst the decisions are short and lack detail, the following messages are worth highlighting:

Minority stake acquisitions are subject to closer scrutiny

SAMR tends to interpret control broadly and will focus on the governance rights obtained regardless of the equity stake acquired. Three of the ten decisions involved an acquisition of less than 20% shares: Tencent Holdings’ acquisition of a 15.41% stake in Yuan Inc. (an online education business), Chengdu Meigengmei Information Technology’s acquisition of a 11.9% stake in Wanjiahuan Agricultural Products Group (food processing and sales), and Suning Rundong Equity Investment’s acquisition of a 14.08% stake in Shanghai Pateo Electronic Equipment Manufacturing Co.

SAMR has reinforced its position on VIE-linked transactions

As demonstrated by last December’s three decisions and confirmed by the Antitrust Guidelines for the Platform Economy, transactions with VIE-related structures are subject to the same level of scrutiny as other transactions regardless of the party with the VIE structure (the acquirer or the target). For example, in Tencent Holdings’ acquisition of Yuan Inc. and TAL Education’s acquisition of Dada Education, both targets are active in online education via a VIE structure. In addition, many of the transactions completed several years ago, indicating that SAMR will not hesitate to pursue failures to notify VIE-related transactions if such a transaction comes to their attention.

The enforcement risk for offshore joint ventures is rising

Didi Mobility and SoftBank were fined for failing to notify the establishment of their joint venture in Japan active in a domestic car hailing business. This is the second time that SAMR has taken action against an unreported offshore joint venture with ostensibly no nexus to China. The first case concerned an offshore joint venture between Taiwan Cement and OYAK established in Europe and active in a local cement business. Both companies were fined RMB300,000 in July 2020. A lack of China nexus does not appear to play a material role in SAMR’s decision as to whether to initiate an investigation and/or fine companies for failure to notify reportable transactions.

In addition to the 10 Internet-related cases, SAMR also published three failure to notify cases involving other sectors on the same day. One case involved failure to notify the acquisition of control via a multi-step transaction and one case involved failure to notify the acquisition of control via contractual means. This indicates that SAMR is stepping up its enforcement against failure to notify transactions in general. The maximum fine that can be imposed for failure to file is currently RMB500,000. There is a proposal to amend the AML including to increase the maximum fine to 10% of a company’s turnover. 

As far as we know, many investigations remain in the pipeline and more fines are expected.