On July 26, 2018, Qualcomm announced the termination of the acquisition of NXP following its inability to obtain antitrust clearance from China’s State Administration for Market Regulation (SAMR) prior to the transaction’s termination date. Questions have arisen as to whether the current trade tensions between the United States and China contributed to this outcome, and whether transactions requiring antitrust clearance in China may now face enhanced risk. In brief, while most transactions are unlikely to face increased risk in securing antitrust clearance in China, mega deals involving US companies may face enhanced scrutiny, particularly where legitimate competition issues present or sensitive industries are involved. Parties to transactions fitting this profile can take steps to help reduce risks associated with obtaining antitrust clearance in China in the current geopolitical environment.
This China Law Alert includes contributions from Alex An from MWE China Law Offices.
On July 26, 2018, Qualcomm announced the termination of its approximately US$40 billion acquisition of NXP following its inability to obtain SAMR’s approval prior to the end date of July 25, 2018, resulting in Qualcomm being obliged to pay NXP US$2 billion as termination compensation. Although SAMR did not prohibit the transaction, its failure to approve the transaction effectively blocked it. It appears to mark the first time that China’s antitrust regulators have not approved a global transaction that was approved by other global regulators—and, at least potentially, on non-competition grounds. Indeed, the US Federal Trade Commission gave its green light to Qualcomm/NXP without a second request, and the European Commission issued a conditional clearance early on January 18, 2018.
The fact that SAMR did not approve Qualcomm/NXP prior to the longstop date came as a surprise to many. Since China instituted the Antimonopoly Law in 2008, China has generally followed the lead of other major antitrust regulators, particularly the European Union. Where the EU and US antitrust regulators have imposed remedies, China has often imposed similar remedies, or in some cases imposed remedies designed specifically for the Chinese market. SAMR’s failure to approve prior to the longstop date thus appears to mark a departure from the typical convergence—at least at a high level—in merger outcomes that has been prevalent over the past 10 years.
Questions have thus arisen as to whether SAMR’s decision not to approve was due to legitimate antitrust issues or should be seen in the context of the current trade tensions between the United States and China. In a statement issued on July 27, 2018, SAMR indicated that the remedies proposed by Qualcomm had yet to address SAMR’s competition concerns, and expressed regret that the parties had terminated the deal. Although SAMR’s statement suggests that its actions were based solely on antitrust concerns, it appears plausible that geopolitical tensions between the United States and China contributed to the outcome. Notably, the Ministry of Commerce (MOFCOM), the predecessor to SAMR, had recently approved transactions in the semiconductor industry, in some cases conditioned upon remedies similar to those accepted by other global antitrust regulators. The questions, therefore, are: what made the Qualcomm/NXP deal different, and was antitrust solely to blame or were other issues at play?
The acquisition of NXP by Qualcomm reportedly led to competition concerns relating to Qualcomm’s baseband chipsets, NXP’s NFC and SE chips, MIFARE technology and NFC technology. These concerns appeared to be resolvable through remedies, and public reports suggested that Qualcomm may have been close to resolving the issues during the course of SAMR’s antitrust review. However, after the Trump administration threatened to impose significant tariffs on Chinese products in early July 2018, SAMR’s review of Qualcomm/NXP appeared to encounter difficulties, which ultimately were unresolved. Indeed, almost two years after Qualcomm’s agreement with NXP was signed, it is questionable whether Qualcomm would have been able to negotiate a remedy with SAMR in the current environment, even if the parties had decided to further extend the termination date. This may suggest that politics were a factor.
WHAT THIS MEANS
The possibility that SAMR’s effective “block” of Qualcomm/NXP could be—at least in part—politically motivated has given rise to general concerns about China’s antitrust review of mergers in the current political environment, particularly those involving US companies.
While politics may have played a part in SAMR’s actions vis-à-vis Qualcomm/NXP, this case is likely an outlier. Qualcomm/NXP was a high-profile transaction involving a sensitive industry (semiconductors), a major US company and some legitimate antitrust issues, and was thus a good candidate to use in retaliation for the tariffs imposed by the Trump administration. The measure may have been particularly symbolic given the importance the Trump administration has placed on Qualcomm and its 5G technology. Only recently, the Trump administration used the US Committee on Foreign Investment in the United States process to block Broadcom’s attempt to take board control over Qualcomm partly because of concerns that Broadcom would not invest in or develop 5G like Qualcomm. As a result, Qualcomm was a strong candidate to send a message to the Trump administration concerning current trade tensions. Moreover, the fact that SAMR (and before it, MOFCOM) has granted antitrust approval to several transactions involving US firms lends support to the view that any political influence that was brought to bear in Qualcomm/NXP is an exception, rather than a “new normal.”Although the political situation remains fluid, at present it appears likely that only high-profile transactions involving US firms that have legitimate antitrust issues in sensitive industries are likely to be affected by the political tensions between the United States and China. Parties to such transactions may experience longer delays in obtaining antitrust approval, and possibly higher degrees of risk. Parties to such transactions can take steps to reduce potential risks, including for example the following:
- Set a flexible termination date. It is highly likely that the transaction may not be approved before the expiration of the longest review period, i.e., 180 days. The parties should bear in mind that the review period could be further extended by means of withdrawal and refiling in practice. Introducing flexibility can help accommodate lengthened reviews and provide sufficient time to negotiate remedies.
- Provide a reasonable termination fee in the event that SAMR fails to act.
- Be flexible with remedies. It is not uncommon for the China antitrust review authority to require further commitments specific to the China market. Introducing flexibility into what the parties consider to be reasonable remedies can also help accommodate the wider ranging requirements they may face in the current political environment.
- Maintain clear and frequent communication with the concerned authorities that have a say in the deal, not limited to SAMR.
- Companies should also stay attuned to developments affecting the trade dispute, as the political environment may become less predictable if the trade dispute escalates. Conversely, in the event that the trade dispute is resolved, the risks described in this article may dissipate.