Merger review process in Asia expected to become increasingly challenging
August 2021 | SPECIAL REPORT: COMPETITION & ANTITRUST
Financier Worldwide Magazine
August 2021 Issue
Over the last decade, international trade and political tensions have regularly led to concerns that the antitrust merger control review process would be used as a tool to derail M&A transactions. There has been a particular concern with the Chinese merger review process under the Antimonopoly Law, which involves an assessment of transactions both from a competition and an industrial policy perspective.
Similar concerns were at times raised in respect of other jurisdictions in Asia, including Japan and Korea, which have also generally become more aggressive in their scrutiny of global M&A transactions that affect their markets, with their competition authorities increasingly asserting jurisdiction over foreign transactions and sometimes seeking remedies.
While these concerns are particularly acute for significant transactions involving sensitive technologies or commodities, the public record shows, however, that the antitrust review process in China, and more generally in Asia, has to a large extent not hindered global M&A activity, including in more sensitive sectors. For the most part, market nervousness concerning political intervention has proven unwarranted.
The advent of new competition law regimes across Asia over the last 10 years has led to a proliferation of merger control regimes, with competition authorities in most Asian countries now having broad M&A review powers. This has led to a significant increase in clearance requirements for M&A transactions that have an impact on Asian markets.
In recent years, authorities in the region have conducted more than 1500 merger review procedures each year. Reflecting the broad scope of application of their competition rules, China, Japan and Korea together account for a significant proportion of all these procedures. M&A antitrust review rules in other countries in the region are less expansive in their scope, but still give rise to many transactions being reviewed in India, Indonesia, the Philippines or Taiwan.
The overwhelming majority of reviewed transactions are approved without conditions. The proportion fluctuates across time and jurisdictions, but generally well exceeds 95 percent, with parties facing remedies or other conditions in only a few transactions each year. Outright prohibitions are extremely rare, although parties have been known to abandon their transaction in the face of regulatory opposition in a handful of cases.
The clearance process requires significant disclosures, with parties having to carefully prepare application materials in the various local languages. This is certainly taxing on transaction parties, and often leads to a delay in the implementation of the transaction as parties must suspend closing pending antitrust review. Competition authorities in Asia have, however, sought to significantly streamline the process, with the introduction of simplified procedures leading to prompt approval in many cases.
In China, around 80 percent of all transactions are now cleared using a simple case procedure, with clearance granted on average in less than 15 days (coming down from an average of 17 days in 2018 and 2019, and 25 days in 2017). Other Asian jurisdictions have had similar success in shortening the review process. In India, for example, the public record shows that all transactions reviewed since 2018 have been cleared within 18 working days on average. Even accounting for preparation time and discussions with authorities ahead of the start of the formal procedure, this reveals a remarkably efficient merger review process.
There remain cases in sensitive sectors – such as semiconductors, minerals or staple food items – that will attract higher scrutiny and face longer procedures, but the degree of scrutiny will ultimately depend on the specifics of each transaction. By way of example, the majority of transactions in the semiconductor industry that were reviewed in China since 2017 were cleared unconditionally, with a large proportion benefitting from expedited treatment under the simple case procedure. The efficiency of the Chinse process is particularly relevant to parties involved in global M&A transactions, as China tends to review a proportionally higher number of global deals than its peers in Asia.
While more than 80 percent of all merger reviews in Japan and Korea relate to purely domestic transactions, with global transactions or foreign investment transactions accounting for only a minority of all cases, the caseload of China’s State Administration for Market Regulation, which is responsible for antitrust merger review, features many global transactions and foreign investment deals – 57 percent in 2020 and 64 percent in 2019, a proportion that is slightly lower than previous years, but still much higher than in other Asian jurisdictions.
From an overall deal flow perspective, most foreign companies (including multinational oil majors, US private equity and pension funds and European industrial companies, among others) have not faced any significant change in the Chinese approval process in recent years, trade and political tensions notwithstanding. Despite this reassuring news, the merger review process in Asia is being increasingly affected by trade tensions and recent disruptions of supply chains resulting from the pandemic. New tariffs and increasing restrictions on the supply of technology are leading to market changes that do present competition issues, particularly for Chinese customers that are highly dependent on foreign supply sources.
The road to clearance was already very long for those few large transactions that gave rise to significant competition concerns, and the above market changes may well lead to more transactions presenting competition issues in Asia. It is not rare for the clearance process to require more than a year for these transactions, with the process being particularly long in China, in view of the many stakeholders that tend to be consulted by the Chinese competition authorities. In some cases, parties will abandon the transaction in the face of regulatory opposition or simply because the economic rationale no longer justifies the transaction after many months of regulatory delays.
Even smaller transactions sometimes face unforeseen hurdles. For example, authorities may take interest in deals that were too small to require mandatory notification, particularly in the technology or data-heavy sectors, leading to formal ex officio reviews and sometimes – as shown in a recent Japan Fair Trade Commission involving Google’s acquisition of Fitbit – the imposition of remedies. In addition, unexpected changes in market circumstances may sometimes lead third parties to complain or even one of the parties to the transaction to lose appetite for the transaction, relying on the competition review process to delay and ultimately frustrate its consummation.
Against this background, parties have become very attentive to the terms governing conditions to closing and the merger approvals process in their deal documentation. It is increasingly common for sellers to push for strong provisions on long-stop dates and break-up fees. Sellers also tend to negotiate tighter provisions giving them more visibility on regulatory progress, as well as more control over the substance, such as more rights to vet submissions, more detailed arrangements on the offer of commitments or remedies. They would also increasingly attempt to negotiate ‘hell or high water’ clauses putting all of the regulatory risk on the buyer.
Anticipating possible long merger review processes, sellers will seek covenants from the buyer on its own market behaviour pending approval, such as a covenant not to make another acquisition that would make approval more challenging or a covenant not to adopt certain commercial policies having the same effect. Finally, while the trend has yet to reach China, in view of the increasing risk of ex officio review by authorities in Asia, leading to possible challenges of deals that do not fall within the conditions for mandatory pre-clearance, parties will now sometimes seek to include provisions governing risk allocation in case this were to occur.
While trade tensions have not so far led to a significant politicisation of the antitrust review of M&A deals in Asia, they have induced significant market changes that make obtaining merger clearance more challenging, particularly in these industries where Asian, and particularly Chinese, businesses heavily depend on foreign supply.
Marc Waha is foreign legal consultant at Norton Rose Fulbright. He can be contacted on +852 3405 2508 or by email: marc.waha@nortonrosefulbright.com.
© Financier Worldwide
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Marc Waha
Norton Rose Fulbright
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