出海经纬 | Antitrust Compliance Arising from Going Abroad

There are various ways for companies to expand globally, including cross-border mergers and acquisitions (M&A), which include equity acquisitions and asset acquisitions, greenfield investments, and the establishment of joint ventures with local companies. Greenfield investment refers to the situation where an outbound enterprise sets up a new subsidiary in the target country to engage in overseas business. This scenario usually does not involve merger control filing obligation. However, in the cases of cross-border M&A and the establishment of new joint ventures, it is necessary to consider the merger control filing requirements of the target country.

Most jurisdictions have a merger control filing system, and when companies engage in mergers, acquisitions, or the establishment of joint ventures on a global scale, the same transaction may be notified in multiple jurisdictions. This is because, similar to the extraterritorial jurisdiction principle of China's Antitrust Law, most jurisdictions' antitrust laws also stipulate extraterritorial jurisdiction. This means that even if the monopolistic behavior occurs outside the jurisdiction, the antitrust laws of that jurisdiction will still apply if it affects competition within the market in that jurisdiction.

Although there are differences in detail, the principles for setting filing thresholds in most jurisdictions are consistent, namely: (1) whether the transaction constitutes a concentration of undertakings, and (2) revenue/market share thresholds. Some jurisdictions set filing thresholds based on revenue. For example, most jurisdictions, such as China and the European Union, currently use revenue thresholds as the "filing threshold," which refers to the revenue generated by the undertakings involved in the concentration during the previous fiscal year on a global scale or within the jurisdiction. Other jurisdictions use multiple indicators, such as transaction value or the assets of the parties to determine whether the filing threshold is met. Some jurisdictions use market share as a preliminary criterion on whether to file. Companies should thoroughly understand the filing requirements of the relevant jurisdictions before conducting transactions, fully utilize the pre-consultation mechanisms of foreign antitrust enforcement agencies, assess filing obligations, and file promptly in accordance with the laws and regulations. Moreover, during the due diligence process of acquiring an overseas target company, companies should pay attention to whether the target company is involved in antitrust liabilities or is under antitrust investigation and evaluate whether these liabilities could be transferred to the parent company or the buyer after the acquisition.

The timing of merger control filing also varies across jurisdictions. Most jurisdictions require that concentrations meeting the filing threshold must be reported to the antitrust enforcement agency before implementation; otherwise, they cannot proceed. This is the case in China, the United States, and the European Union. Some jurisdictions determine different filing times based on the type of concentration, the size of the company, and the size of the transaction. Some jurisdictions (e.g., Singapore) have a voluntary filing system, while others require companies to file no later than a certain period after the concentration is implemented. Some jurisdictions may investigate transactions that do not meet the filing threshold under certain circumstances. In jurisdictions with mandatory pre-filing requirements, concentrations implemented without filing in advance or clearance typically constitute illegal conduct and may result in severe legal consequences, such as fines, suspension of the transaction, or restoration to the status quo. In jurisdictions with voluntary filing or post-filing systems, if the transaction negatively impacts competition, the antitrust enforcement agency may require the company to suspend the transaction, restore the status quo, or impose restrictive conditions.

For Chinese companies going global, merger control review^[1] is one of the critical hurdles in M&A transactions and has become a focal point and a challenging issue in their overseas investments. Firstly, the transaction may be notified in multiple jurisdictions. For example, the acquisition of Syngenta by China National Chemical Corporation, which closed in June 2017, involved merger control filings in 20 different jurisdictions. Secondly, for transactions that may raise competition concerns, antitrust review may take a long run, leading the parties to abandon the transaction. For instance, on August 17, 2023, Intel announced the termination of its acquisition of Tower Semiconductor, an Israeli semiconductor foundry, due to the inability to obtain the required regulatory approval in time. It was reported that the transaction had received clearance in all jurisdictions except China. Additionally, if a transaction is deemed likely to exclude or restrict competition, it may face the risk of being subject to restrictive conditions or even being directly prohibited, which would undoubtedly have a significant impact on the rights and expectations of the parties involved and could impede the objective of the transaction.

Another path for companies expanding globally is to sign joint research and development (R&D) agreements with foreign research institutions or companies in the same industry to jointly develop new technologies and products. This is particularly relevant in fields such as pharmaceuticals, healthcare, semiconductors, and artificial intelligence. Joint R&D can effectively pool resources, reduce R&D costs, and increase efficiency. However, it may also have the effect of excluding or restricting competition in the relevant market. This is because joint R&D agreements may contain restrictions or limitations that go beyond what is necessary for collaborative R&D, or may be used to disguise cartel behavior. In such scenario, joint R&D agreements may pose a certain risk of violating antitrust laws.

Therefore, for companies going global, it is crucial to conduct an antitrust compliance review of the main terms of joint R&D agreements before execution to ensure that the agreements do not contain clauses with a high risk of violating antitrust laws. The Guidelines of the State Council Anti-Monopoly Commission on Intellectual Property issued and implemented in January 2019 point out that when analyzing the potential exclusionary or restrictive impact on market competition, factors to consider include whether the agreement restricts the parties from independently conducting R&D or collaborating with third parties in areas unrelated to the joint R&D, whether it restricts the parties from engaging in subsequent R&D after the joint R&D is completed, and whether it restricts the ownership and exercise of intellectual property rights related to new technologies or products developed in areas unrelated to the joint R&D. For companies planning to conduct joint R&D in the European Union, special attention should be paid to the Exemption for Research and Development Agreements (the "Exemption Regulation"). This regulation, which applies to R&D activities between companies (including competitors), stipulates that under certain conditions, R&D cooperation between companies will not incur antitrust risk under EU competition rules. Factors to be considered include the ownership of the final R&D results, the method of joint development, and the market share of the R&D participants. The Exemption Regulation also clarifies that core restriction clauses (such as cartels) will not qualify for block exemption. Additionally, on August 16, 2023, the UK's Competition and Markets Authority (CMA) issued the "Guidance on Horizontal Agreements," which provides examples on when collaborative R&D agreements and R&D-focused joint ventures may constitute horizontal antitrust agreements.

Antitrust laws are often referred to as the constitution of the market economy. Over 100 countries have enacted antitrust laws, and their main content is largely consistent, making antitrust law one of the most harmonized legal frameworks worldwide in the context of globalization. The types of conduct regulated and addressed by antitrust laws in major legal jurisdictions are generally the same, primarily covering the regulation of monopoly agreements, the abuse of market dominance, and antitrust review of concentrations of undertakings that meet filing thresholds. During a company's overseas operations, in addition to the potential need to file for merger control due to transactions like mergers and acquisitions, companies should pay greater attention to preventing antitrust risks in their day-to-day operations.

A monopoly agreement generally refers to an agreement or coordinated actions between enterprises that excludes or restricts competition, including horizontal agreements such as price-fixing, production restraint, or market allocation, as well as vertical agreements such as resale price maintenance (RPM), and restrictions on sales territories or customers. In some jurisdictions, the exchange of competitively sensitive information such as pricing and costs are also prohibited by antitrust laws. Horizontal monopoly agreements, particularly those related to pricing, are usually considered severe restrictions on competition and are strictly regulated by almost all jurisdictions. Most jurisdictions also regulate vertical monopoly agreements, such as RPM, which may carry significant legal risks. It is also important to note that monopoly agreements are not limited to written agreements between companies but can include oral agreements and coordinated actions. Specifically, when conducting business abroad, companies should be aware of the following activities that may present risks related to monopoly agreements: 1) Risks related to contact with competitors: for example, interactions between company employees and competitor employees at industry associations, meetings, and other occasions, or the exchange of sensitive information through the same supplier or customer; 2) Risks related to contracts, equity, or other cooperation with competitors: for example, reaching partnerships or cooperation agreements with competitors that may exclude or restrict competition; 3) Risks related to certain types of agreements or actions in daily business activities: for example, signing agreements with customers or suppliers that include exclusive clauses or restrictions on resale prices.

Having market dominance is not illegal in itself; only the abuse of market dominance constitutes a violation of the law. Abuse of market dominance refers to a company with a dominant market position using that position without legitimate reason to engage in behavior that excludes or restricts competition. This typically includes unfairly high or low price in sales or procurement activities, imposing unreasonable trading conditions, refusal to deal, tying, and discriminatory treatment. Companies should evaluate and assess the market in which they operate, their main competitors, and their own market power and assess and regulate their business activities. When a company has a high market share in a particular market, it should be mindful of whether its market behavior is aimed at restricting competition and whether the behavior negatively impacts competition, so as to avoid the risk of abusing market dominance.

Monopolistic behavior can lead to administrative, civil, and criminal liabilities for the companies and individuals involved. Core cartels significantly restrict competition and are explicitly prohibited in most countries. The United States, the United Kingdom, Canada, and other countries also impose criminal liabilities for such conduct^[2]. U.S. antitrust enforcement authorities consider personal criminal sanctions (including imprisonment) as the most effective deterrent against antitrust crimes. According to relevant regulations, companies engaging in horizontal monopoly agreements (including price-fixing and bid-rigging) and directly responsible individuals, particularly senior executives primarily responsible for the illegal conduct, may be subject to criminal liability. This includes dual penalties—fines of up to $100 million for companies and up to 10 years of imprisonment and/or fines of up to $1 million for individuals. Even if criminal liability is not pursued, companies participating in horizontal monopoly agreements are often faced with substantial civil damages.

When facing potential overseas antitrust legal risks or after such risks have materialized, companies can take appropriate measures based on the relevant jurisdiction’s regulations and the actual situation to minimize risks and negative impacts. These measures include using leniency programs, commitment procedures, and settlement procedures. A leniency program allows antitrust enforcement agencies to reduce or waive penalties for companies that voluntarily report monopoly agreements and provide critical evidence. In handling criminal cases, the U.S. Department of Justice prioritizes the use of the leniency program and may also apply plea bargaining, which is common in other criminal cases, allowing the company and its executives to avoid criminal prosecution. It should be noted that applying for leniency typically requires the company to admit participation in the relevant monopoly agreement, which may serve as unfavorable evidence in subsequent civil litigation. It also requires the company to take on a higher obligation to cooperate with the investigation. In EU law, the commitment system allows companies to stop suspected illegal behavior and commit to taking measures to address the competition concerns expressed by the Commission after a preliminary investigation. The Commission can then issue a decision requiring the company to fulfill the commitment without imposing a penalty. If the commitment is adhered to within a certain period, the Commission will close the investigation ^[3].

Most jurisdictions grant antitrust enforcement agencies powerful and extensive investigative authority. Generally, antitrust agencies can initiate investigations based on complaints, whistleblowing reports, leniency applications, or ex officio. The investigative methods include collecting information, copying documents, interviewing the parties involved and other related persons, conducting on-site inspections, and taking compulsory measures. In some jurisdictions, such as the United States, the European Union, and China, "dawn raids" can be conducted, where agencies visit relevant premises without prior notice and use a variety of investigative methods to conduct a formal antitrust investigation. Additionally, in certain jurisdictions, antitrust enforcement agencies may collaborate with border control authorities to detain and investigate employees of the companies under investigation upon their entry.

During the investigation, the party being investigated is obliged to cooperate with the enforcement agency, and jurisdictions typically impose legal liabilities for non-cooperation. Some jurisdictions stipulate that providing false or misleading information can result in fines of up to 1% of the group's global turnover from the previous fiscal year, and daily fines of up to 5% of the group's global average daily turnover from the previous fiscal year may also be imposed for late payment. If it is ultimately determined that illegal behavior existed, refusal to cooperate may be considered an aggravating factor when imposing fines. In some jurisdictions, failure to cooperate with the investigation may be deemed contempt of court or obstruction of justice, leading to fines, and in severe cases criminal liability. Generally, the degree of cooperation by the company in the antitrust investigation is one of the key factors considered by enforcement agencies when deciding on penalties and leniency.

Companies going abroad should identify the main antitrust risks they face based on the scale of their overseas operations, the characteristics of their industry, market conditions, antitrust laws and regulations in relevant jurisdictions, and the enforcement environment. The companies should clearly define risk levels and design and implement corresponding risk prevention and control systems according to different risk levels.

First, antitrust risks should be considered from the beginning of planning an expansion abroad. Companies should conduct research on antitrust compliance issues in target countries or regions. When conditions permit, companies should establish overseas antitrust compliance management systems based on their business scale, industry, and market conditions.

Second, before conducting relevant transactions, companies should comprehensively assess the potential antitrust compliance risks involved. They should review and evaluate the filing requirements of the relevant jurisdictions, make full use of pre-filing consultation mechanisms, assess filing obligations, and reasonably decide whether to file. When proposed transactions face a high risk of being subject to restrictive conditions or being prohibited, companies should develop strategies during the agreement drafting and negotiation phases. These strategies might include transaction structure adjustments, asset divestiture plans, and the design of "breakup fee/reverse breakup fee" clauses. Additionally, companies should gain a deep understanding of how the relevant jurisdiction defines "implementation of concentration" to avoid the risk of "gun-jumping."

Third, for Chinese companies engaged in international operations, it is essential to maintain antitrust compliance awareness during daily overseas operations. Companies should continuously monitor the latest developments in antitrust legislation, enforcement, and judicial practices in the country or region where they operate. They should regularly review and evaluate their business activities and check the compliance thereof, and promptly correct any non-compliant practices to ensure compliant operations.

Finally, it is recommended that companies develop antitrust investigation response plans based on their specific circumstances and provide training to their employees. When facing antitrust investigations by foreign antitrust enforcement agencies, companies should respond calmly, cooperate with the investigation, and meanwhile, make statements and defenses to protect their legitimate rights and interests in accordance with the relevant jurisdiction's regulations.