Summary of Key Points
This article focuses on the "Substandard Filing System," also known as "Threshold-Based Review," which serves as a crucial tool for addressing mergers and acquisitions (M&A) issues that cannot be addressed by traditional turnover reporting thresholds. It compares the different regulatory systems in the United States and Europe (the U.S.'s ex-post judicial accountability and the EU's administrative summons with limitations), analyzes the current state of China's system, and discusses the risks that these system upgrades pose for Chinese companies' cross-border M&A activities. Finally, it provides specific recommendations for improving China's system.
I. Understanding the "Substandard Filing System"
In simple terms, this system is designed to address situations where the transaction amount or company size does not meet the legal reporting thresholds. For example, in China, some mergers did not previously require prior notification to the anti-monopoly authorities. However, such transactions could potentially conceal issues, such as large companies acquiring smaller competitors (eliminating future competition), splitting large deals into multiple smaller ones to evade regulation, or purchasing small firms in niche markets to create monopolies. In these cases, if the anti-monopoly authorities have preliminary evidence that the merger will harm competition, they can require the companies to file additional reports or conduct ex-post reviews—this is the purpose of the Substandard Filing System, which fills the gaps left by the turnover reporting thresholds.
II. The Different Systems in the U.S. and Europe
- U.S. System: Focuses on ex-post accountability with flexibility.
- M&A reviews in the U.S. are divided into two stages:
- Prior Filing: No filing is required if the company size and transaction amount do not meet the specified thresholds.
- Ex-post Accountability: Even if no filing was made, the anti-monopoly authorities (FTC and DOJ) can file a lawsuit in court several years after the transaction to require the company to divest assets or restore the original situation.
The new "Merger Guidelines" of 2023 have tightened the regulations:
- Lowered the criteria for determining market concentration (making it easier to identify monopolies).
- Include small companies without revenue but with patents or research and development (R&D) capabilities, as they may become competitors in the future.
- Combine multiple smaller transactions for review to prevent them from being split to evade regulation.
Example: Edwards was sued by the FTC for a series of acquisitions of similar medical products; the court prohibited the transactions, and Edwards eventually abandoned them.
- EU System: Initially relied on a "member state referral system," where member states could refer transactions that did not meet EU reporting standards if they believed they harmed competition or affected cross-border trade. Article 22 allowed for the summons of companies to file additional reports. However, after the Illumina-Grail case, European courts ruled that member states must have the authority to review such transactions themselves before referring them to the EU. As a result, the EU can no longer regulate purely cross-border deals with zero revenue that do not meet any member state's standards. Nevertheless, member states can still request additional filings before referral (e.g., Nvidia's acquisition of Run:ai, where Italy requested the filing before referring it to the EU).
III. China's System
China's system is based on Article 26(2) of the Anti-Monopoly Law, which allows the State Administration for Market Regulation to require additional filings if there is evidence that a merger harms competition. Filing is necessary before completion for unfulfilled transactions and within 120 days for completed ones. In 2024, the reporting thresholds were increased (12 billion yuan globally, 4 billion yuan domestically, and 800 million yuan for transactions involving only Chinese parties), making this provision even more important.
Example: The Wuhan Yongtong Group's acquisition of Shandong Huatai Pharmaceutical was prohibited because it created a vertical monopoly that drove up drug prices.
This system is primarily used to:
- Prevent large companies from acquiring small, innovative firms (e.g., in the medical devices or chip industries) and forming oligopolies.
- Crack down on attempts to evade regulation by splitting transactions.
IV. Risks for Chinese Companies Due to System Upgrades in the U.S. and Europe
Chinese companies buying small, innovative companies, AI teams, or R&D assets in the U.S. and Europe previously did not need to file reports due to the low transaction sizes. However, under the new U.S. guidelines, if these acquisitions eliminate potential competitors (e.g., by acquiring firms with R&D capabilities), the FTC can sue several years after the transaction and require asset divestiture. Therefore, the risks for Chinese companies' cross-border M&A have increased, and they must be more cautious about compliance.
V. Recommendations for Improving China's System
1. Clarify the criteria for initiating reviews: Define specific situations that will trigger additional filings (e.g., acquiring the only remaining competitor in a niche market, continuously buying similar innovative companies, splitting transactions to evade regulation), and set a time limit for such actions to avoid indefinite investigations.
2. Multi-dimensional evaluation: Assess not only turnover but also transaction value, innovation capabilities (patents/R&D), and potential competition. For industries like pharmaceuticals and semiconductors, focus on whether the acquirer will eliminate competitors' R&D efforts or raise technical barriers.
3. Thoroughly review related transactions: Combine multiple smaller deals for evaluation (e.g., following EU practices by considering acquisitions of similar companies by the same entity within two years as a single transaction) to prevent evasion of regulation.
4. International cooperation: Collaborate with foreign anti-monopoly authorities to establish consistent standards and ensure mutual supervision. When reviewing foreign M&A, assess the impact on China's core technologies and industrial chains.
By implementing these improvements, both domestic and cross-border M&A activities can be more effectively regulated, protecting market competition while providing companies with clear guidelines for compliance.