Tian Yuan Law Firm HUANG Wei, ZHU Fan, GAO Chang, RUAN Xiumin
The semiconductor industry, undoubtably one of the most critical industries that China aims to protect and promote, is also what China’s antitrust authority - the State Administration for Market Regulation (“SAMR”) has always closely scrutinized on. In light of the recent semiconductor remedy cases, such close scrutiny is expected to continue and even intensify. In this article, we are going to share some of our observations on recent remedy cases in the semiconductor sector and key takeaways from these cases for merger filing with possible remedies in China.
I.   Observations on Recent Remedy Cases in Semiconductor
The most recently three remedy merger decisions published by SAMR all concern the semiconductor industry, which suggests semiconductor continues to be the critical industry that antitrust law enforcement focuses on. Following are some of our observations on the recent remedy cases in semiconductor industry, which may shed some light on SAMR’s enforcement trends.
01
China’s attitude towards semiconductor deals tends to be more cautious
One thing stands out about the recent remedy cases, i.e., AMD/Xilinx, SK hynix/Intel’s NAND and SSD business, NVIDIA/Mellanox, Infineon/Cypress, is that China is the major jurisdiction imposing remedies or raise significant concerns on these deals, while jurisdictions like US and EU tend to approve the deals unconditionally. This shows to some extent a more cautious attitude of China towards semiconductor deals.
Such cautiousness may in part due to the strategic importance of semiconductor sector for industrial and competition policy. At the same time, it reflects that China’s antitrust authority tends to be more attentive to the different competitive dynamics in the China market from those in other major economies, and thus scrutinized more stringently on such cases than its counterparts in other major jurisdictions and imposed remedies to safeguard the competition in the relevant markets.
02
Longer review time with possible “pull-and-refile” requirement
Evidently, as China more often being the major jurisdiction imposing remedies or raise significant concerns on the semiconductor deals, the time-span from the date of first submission by the filing parties to the date getting the final official approval from the authority might be long.
Based on a preliminary count, 6 out of the 14 semiconductor remedy cases published took more than a year (pre-notification period included) to get the final approval. The most recent four cases, namely, AMD/Xilinx, Globalwafers/Siltronic, SK hynix/Intel’s NAND and SSD business, Cisco/Arcacia, all lasted more than a year and were required to “pull-and-refile” to restart the statutory review period (maximum 180 days) which allowed the authority more time to review the case.
03
Competition concerns likely be in narrowly-defined product markets
Not only the review period is likely to be long viewing from the outset, the fight on the technicalities from the inside, such as the market definition, are also likely to be challenging.
Observing the recent cases, competition concerns are usually found in further segments of the markets. In the recent Globalwafers/Siltronic, the relevant markets defined are segmented by the size (6-inch and below, 8-inch, and 12-inch) as well as the manufacturing method (Czochralski vs Float Zone) of wafers, and the authority found competition concerns in the specific 8-inch Float Zone wafer market; also, in SK hynix/Intel’s NAND and SSD business, the authority found competition concerns in the PCIe eSSD market and SATA eSSD market which are eSSD market further segmented by different interfaces.
Whiles other antitrust authorities, such as the European Commission in SK hynix/Intel’s NAND and SSD business[1]   and Bundeskartellamt-Germany’s antitrust regulator in Globalwafers/Siltronic[2],   although recognizing further segmentation could be possible, left open the question whether further segmentation of the market is to be defined. It may suggest that the competition authorities in these other jurisdictions did not insist on defining the further segmented relevant markets, and did not express competition concerns in those segment.
04
Geographic market being worldwide with more emphasis on China
Due to the industry features, the geographic market in semiconductor mergers are often defined as worldwide. Nevertheless, a closer look at the competition landscape of the local market, which is China in this case, would always be necessary, similar to the approach taken by authorities in other jurisdictions. In such a situation, if the competition concerns mainly arise in the China market, it is possible to have tailored-made remedies combining local factors to address these concerns.
05
Possible to face more types of behavioral remedies in vertical/conglomerate mergers, and divestment remedy in horizontal mergers
Viewed from the recent cases on semiconductor deals, in addition to the common behavioral remedies such as no-bundling and FRAND dealing requirements in vertical/conglomerate cases, other kinds of remedies have also come into the authority’s sight. For example, the parties would be required to keep price below a certain historical level (SK hynix/Intel’s NAND and SSD business), to renew the contracts as long as the customers wish to (Globalwafers/Siltronic), or to help a third-party competitor enter the market (SK hynix/Intel’s NAND and SSD business), etc. While in horizontal mergers, more severe structural remedy such as divestment appears again (Globalwafers/Siltronic), ringing a bell for other horizontal mergers with significant competition concerns in the industry. Particularly, stakeholders usually would first request the parties to divest, then use it as leverage to bargain for the behavioral remedies they desire.
It is worth to note that ideas of these remedies not only reflect the competition concerns from the legal side, but they also reflect the bargains from various stakeholders including the industry authorities, relevant trade associations, competitors as well as upstream/downstream players. The solicitation of the stakeholders’ opinions often started early, when the deal was officially filed or sometimes as early as when the deal has just announced, and such solicitation would usually last throughout the entire review process.
06
Possible to face longer remedy period and non-automatic expiration
It can also be noted that, the most recent 3 semiconductor remedy decisions issued by the authority were all imposed longer (5 even 6 years of) remedy period, compared with the often shorter (3 years of) remedy period for cases in other industries.
Besides, the remedy period cannot expire automatically. The parties need to apply for lifting the remedies at the end of the period, and the lift will be granted after the authority’s review and reassessment based on the competition landscape at that future time.
II.Key Takeaways for Semiconductor Companies Facing Merger Control
In light of the above observations and our recent experience dealing with latest remedy cases in the semiconductor industry, we would like to share the following key takeaways with companies facing merger control in China.
01
Prepare China to be one of the main battlefields for global merger filings
Considering China’s tighter scrutiny on deals in the semiconductor industry, if facing merger control in China, companies are suggested to attach sufficient importance to it and make adequate preparations as early as possible.
Specifically, it is suggested convening a case team for handling the merger filing in China. The case team could gather personnel from business, legal, government affairs, as well as outside counsels, etc., within which the case information shall be fully aligned. Also, while considering keeping in tune the filings in multiple jurisdictions, the complexity of merger filing in China shall be fully considered and planned ahead.
02
Keep effective and timely interaction with relevant stakeholders to fully grasp and address the potential concerns
For cases that may raise significant competition concerns, the authority would solicit opinions from various stakeholders. Thus, in addition to sufficient communication with the antitrust authority, industry authority, and industry association from official channels, the understanding of the industry stakeholders’ concerns are also crucial. Industry stakeholders, i.e., competitors, upstream players, downstream customers, and even potential entrants, may express their concerns or even objections to the deal also through other non-official channels, such as their own business teams, the media, government relations, etc.
Given the complexity and tacit nature of the stakeholders’ expressing of concerns, there would need to be experienced antitrust lawyer to analyze, predict and understand these concerns. The antitrust lawyer would need to work together with the company’s business, PR and other teams to identify the commercial interests behind, and work out a multi-level and flexible negotiation strategy.
03
Negotiate adequately to strive for behavioral rather than structural remedies
Structural remedies, such as hold-separate and divestment, which are more often imposed in horizontal cases, would have significant and enormous effects on the business of the parties, and undermine the very purpose of the merger itself. As far as the remedy cases in the semiconductor industry are concerned, although it seems that the antitrust authority has preferred to adopt behavioral remedies to address the competition concerns in recent years, the most severe structural remedy, divestiture, nevertheless, was imposed on the recent Globalwafers/Siltroni deal, which deserves high attention.
Surely, not all horizontal cases with competition concerns will be imposed structural remedies. For example, in SK hynix/Intel’s NAND and SSD business, no structural but only behavioral remedies were imposed in the end. In another horizontal case with competition concerns that we represented, unconditional approval was strived to be obtained ultimately. Thus, adequate and strategic negotiation is extremely important for striving for behavioral rather than structural remedies, and the company could work closely with the antitrust lawyers to strive hard for such preferred result.
In addition, if it is expected that structural remedies is likely to be imposed, while there is great difficulty for the company to divest or to maintain the competitiveness and marketability of the divested business before divestiture, or the identity of the buyer would have substantial impact on whether the divested business can still operate competitively in the market, etc., the company may also consider proposing specific buyer and timing of the divestiture in the remedy proposal to maximize efforts to secure a remedy favorable to the deal.
04
Negotiate the remedies and detailed implementation plan at a pace to maximize the protection of business interests
The remedies imposed would have significant impact on the business operation of the company, and the progress of negotiation on the remedies directly affects whether and when the deal will be approved. However, the negotiation is bound to be a process of pulling back and forth, and affected by numerous stakeholders.
Thus, in addition to the issue of structural or behavioral remedies, the issues of how, at what pace, and at what stage to propose remedies, which remedies are appropriate to be raised early in order to accelerate the review and which shall be raised later in order to best assure the business interests, which remedies are appropriate to be included in the remedy proposal and which should to be left to the detailed implementation plan and so on, are also issues that need to be thoroughly assessed and prepared as they are very crucial for the negotiation of remedies. The company really needs to negotiate step-by-step and strategically to take the initiative and strive for the best result.
Well-handling of such negotiation process requires not only a high degree of professionalism and acumen, but also profound knowledge of the industry and a clear understanding of the companys business objectives. To achieve this, the company need to work closely with antitrust lawyers in order to pace the negotiation well to protect its business interests to greatest extent possible.
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注释：
[1] Commission Decision of Case M.10059 – SK hynix/Intel’s NAND and SSD business, official website of the European Commission, available at: https://ec.europa.eu/competition/mergers/cases1/202138/m10059_322_3.pdf.
[2] GlobalWafers’ acquisition of silicon wafer manufacturer Siltronic cleared, official website of Bundeskartellamt, available at: https://www.bundeskartellamt.de/SharedDocs/Entscheidung/EN/Fallberichte/Fusionskontrolle/2021/B8-25-21.pdf?__blob=publicationFile&v=3.
However, the Globalwafers/Siltronic deal unfortunately failed in the end because the German Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz), the German authority for investment review, did not clear the deal before the deadline, available at: https://offer-globalwafers-siltronic.com/download/companies/ma1055/10551press/2022-02-01_Globe_Press_Release_ENG.pdf.