Declaration of Concentration of Business Operators in Enterprise Mergers and Acquisitions: A Case Study of the Medical Industry

With the acceleration of consolidation in the pharmaceutical industry, anti-monopoly review has become a key link in the merger and acquisition process. Especially after the implementation of the new declaration standards, whether to declare, how to declare, and what regulatory risks may be faced have become issues that the legal and investment teams of enterprises must consider in advance. This article, in combination with the latest regulations and recent practical experience, systematically sorts out the reporting requirements for business concentration in the pharmaceutical industry and provides it for your reference.

PART.01 The legal circumstances that trigger anti-monopoly review (declaration threshold)

Whether a concentration of business operators needs to be declared mainly depends on whether the global turnover and domestic turnover of all the business operators involved in the concentration meet the legal standards. According to Article 26 of the Anti-Monopoly Law of the People's Republic of China and the new standards set by the "Regulations of The State Council on the Reporting Standards for Concentration of Business Operators" which came into effect on January 22, 2024, enterprises must report to the State Administration for Market Regulation as long as they meet any of the following standards:

1. Global turnover standard

All the operators involved in the concentration (including the acquirer and the target company, as well as their ultimately controlled parent company) had a combined global turnover of over 12 billion yuan (approximately 1.7 billion US dollars, based on official exchange rates) in the previous fiscal year, and at least two of these operators had a turnover of over 800 million yuan in China in the previous fiscal year.

2. Business turnover standards within China

The combined turnover of all the business operators involved in the concentration within the territory of China in the previous fiscal year exceeded 4 billion yuan, and the turnover of at least two of them within the territory exceeded 800 million yuan each.

3. Domestic impact standards

Even if the above two standards are not fully met, if the concentration has the effect of excluding or restricting competition, the State Administration for Market Regulation also has the right to conduct an investigation in accordance with the law. In practice, meeting the first two criteria is the direct and primary situation that triggers a declaration.

PART.02 Special considerations for the pharmaceutical industry

The pharmaceutical industry is a key area for anti-monopoly law enforcement. Even if the turnover just reaches the threshold, the State Administration for Market Regulation will pay close attention as the transaction may have a significant impact on drug prices, supply, and innovative research and development. Furthermore, according to Article 26, Paragraph 2 of the Anti-Monopoly Law, if a transaction involves a specific niche market (such as a certain rare disease drug or an innovative biopharmaceutical market), even if the overall turnover is not high, if it may have the effect of excluding or restricting competition within the niche market, there is still a need to be required to report or to report voluntarily.

The "Guidance Manual for Anti-Monopoly Declaration of Business Concentration" issued by the State Administration for Market Regulation points out that when assessing the competitive impact of business concentration, it is possible to examine the ability, motivation and possibility of the relevant business operators to independently or jointly exclude or restrict competition. Where the concentration involves upstream and downstream markets or related markets, it is possible to examine the ability, motivation and possibility of the relevant operators to use their control over one or more markets to exclude or restrict competition in other markets.

Therefore, we suggest that at the very beginning of the planned acquisition, the global and domestic Chinese turnover data of the acquirer and the target company for the previous fiscal year be collected for a preliminary calculation. This is the first and most crucial step in determining whether a declaration is required. As regulatory authorities not only focus on the filing threshold itself but also pay close attention to the potential impact of transactions on the competitive landscape of niche markets (including price, supply and innovation capabilities), the operating data of both the acquiring parties often directly determine whether the filing obligation is violated and whether there is a need for active filing. Based on this, we suggest that in the early stage of transaction planning, in addition to systematically collecting the global and domestic Chinese turnover data of the acquirer and the target company in the previous fiscal year, it is also necessary to assess their market share in each product line, R&D pipeline and upstream and downstream links. The calculation results of business turnover and market influence are important bases for determining whether to declare and whether it may be subject to regulatory attention, and they are also key links in the subsequent design of declaration strategies.

PART.03 A list of legal materials to be prepared

If, after calculation, this transaction meets the above-mentioned declaration standards, detailed declaration materials need to be prepared. According to the "Regulations on the Declaration of Concentration of Business Operators" (MR/T 0002-2025), the "Regulations on the Review of Concentration of Business Operators" and the "Guiding Opinions on the Declaration of Concentration of Business Operators", the declaration materials mainly include but are not limited to the following contents:

Part One: Core Declaration Documents

1. Application form

As an official declaration letter to the State Administration for Market Regulation, the declaration form should specify the names, addresses, business scopes of the operators participating in the concentration, and the planned date for the implementation of the concentration. It should also be accompanied by the identity documents or registration documents of the declarants. For overseas declarants, notarized documents from the local notary office and relevant certification documents must also be submitted. Where the declaration is made by an agent, a power of attorney shall be submitted. In short, it is necessary to explain the transaction overview, information of all parties involved in the transaction, the concentration method, the expected implementation time, etc. It is clearly stated that this collection has met the declaration standards stipulated by The State Council.

2. Focus on the explanation of the impact on the relevant market competition situation

This is the core document of the anti-monopoly review. It is necessary to conduct a detailed analysis of the impact of the transaction on the competition in the relevant market and demonstrate that it will not have the effect of excluding or restricting competition. The content includes: Overview of centralized trading; Relevant market definition; The market share of the operators participating in the concentration in the relevant market and their control over the market; Main competitors and their market shares; Market concentration Market entry The current situation of industry development; Concentrate on the impact on the market competition structure, industry development, technological progress, national economic development, consumers and other business operators; Concentrate on the effect assessment and basis of the impact on relevant market competition.

· Relevant market definition: Clearly define the commodity market involved in this transaction (such as: chemical drugs, traditional Chinese medicine, biological drugs, and can be further subdivided into cardiovascular drugs, anti-tumor drugs, etc.) and the regional market (usually the Chinese market).

· Market Share and Market concentration (HHI Index) analysis: Provide the changes in market share, ranking and HHI index in the relevant market before and after the transaction, and prove that the changes in market concentration are not significant or will not lead to unilateral or coordinated effects.

· Market entry analysis: Analyze the entry barriers of the relevant market to prove that potential competitors can easily enter, thereby imposing competitive constraints on the merged entity. This includes the market entry situation over the past five years, potential entrants, and the difficulty of entering the market (analyzing the difficulty from five aspects: total entry cost, legal or policy restrictions, restrictions arising from intellectual property rights, the importance of economies of scale in product production and distribution, and the availability of raw materials and infrastructure, etc.).

· Competitive landscape analysis: Analyze the situation of major competitors to prove that there is still effective competition in the post-transaction market.

· Buyer power analysis: Analyze the bargaining power of downstream customers (such as hospitals and pharmaceutical distribution enterprises).

· Efficiency defense: Elaborate on the potential efficiencies that may arise from this concentration (such as R&D collaboration, cost reduction), and prove that such efficiencies can benefit consumers.

3. Centralized protocol

This includes various forms of centralized agreement documents, such as agreements, contracts, and corresponding supplementary documents, etc. Submit the final acquisition agreement, joint venture contract, articles of association and all other legally binding documents related to this concentration.

4. The audited financial accounting reports of the operators involved in the concentration shall be submitted to the acquirer and the target company for the financial statements of the previous fiscal year to verify the authenticity of the turnover data.

5. Other documents and materials required to be submitted by the State Administration for Market Regulation shall be subject to the actual situation.

Part Two: Supporting Documents and Basic Information

1. Basic information of all parties involved in the transaction

Business license, company registration certificate, articles of association, equity structure chart (traced back to the ultimate controller).

2. Information on related entities of all parties

Provide information on all affiliated companies of each party engaged in business within the relevant market.

3. Market share proof information

We can provide market data reports issued by third-party institutions (such as IQVIA, Minet, etc.) and internal sales data of the company to support the accuracy of the market share statement.

4. Information on major upstream and downstream operators

Provide the list and contact information of major suppliers and key customers for verification by the State Administration for Market Regulation.

5. Power of Attorney

If you entrust a lawyer or other agent to handle the declaration matters, a valid power of attorney must be provided.

PART.04 Key legal risks and strategic recommendations

1. "Gun Jumping" risk

Article 58 of the Anti-Monopoly Law stipulates: Where an operator violates the provisions of this Law by implementing concentration and such implementation has or may have the effect of excluding or restricting competition, the anti-monopoly law enforcement agency of The State Council shall order it to stop implementing concentration, dispose of its shares or assets within a prescribed time limit, transfer its business within a prescribed time limit, and take other necessary measures to restore it to the state before concentration, and impose a fine of not more than 10% of its sales revenue of the previous year. If it does not have the effect of excluding or restricting competition, a fine of not more than five million yuan shall be imposed.

Before obtaining approval from the State Administration for Market Regulation, it is strictly prohibited to carry out any integration activities that may affect market competition, such as: exchanging sensitive business information (such as pricing, customer lists), actually taking over the operation and management of the target company, integrating sales teams, etc. Violators will face heavy fines (up to 10% of the previous year's sales).

2. Review period

According to Article 31 of the Anti-Monopoly Law and Articles 22 and 25 of the Regulations on the Review of Business Concentration, the review of business concentration can be divided into two stages.

Phase One (Preliminary review period) : Usually 30 days. Most cases without competition issues can be approved at this stage.

Phase Two (Further Review Period) : If there are competition concerns, it will enter Phase Two, which lasts for a maximum of 90 days and can be extended by another 60 days upon approval. For major mergers and acquisitions in the pharmaceutical industry, the probability of entering the second stage is relatively high, and one needs to be mentally and temporally prepared.

3. The possibility of approval under additional restrictive conditions

If the State Administration for Market Regulation deems that concentration has or may have the effect of excluding or restricting competition, but the solution proposed by the trading parties can eliminate such effect, it may conditionally approve the concentration.

The "Guidance Manual for Anti-Monopoly Declaration of Business Concentration" points out that restrictive conditions can include the following types: (1) Structural conditions such as stripping tangible assets, intangible assets like intellectual property rights and data, or related rights and interests (for example, stripping overlapping businesses or assets, selling a certain product line or production base); (2) Opening up its network or platform and other infrastructure, licensing key technologies (including patents, proprietary technologies or other intellectual property rights), terminating exclusive or monopolistic agreements, maintaining independent operation, modifying platform rules or algorithms, committing to compatibility or not reducing the level of interoperability and other behavioral conditions; (3) Comprehensive conditions that combine structural conditions with behavioral conditions.

The divestiture business generally should possess all the elements necessary for effective competition in the relevant market, including tangible assets, intangible assets, equity, key personnel, and interests such as customer agreements or supply agreements. The objects of divestiture can be subsidiaries, branches or business departments participating in the centralized operator.

4. Communicate in advance

We strongly recommend that you have an informal pre-communication with the Anti-Monopoly Bureau of the State Administration for Market Regulation before formally submitting the application documents. This helps to understand the key concerns of regulatory authorities in advance, adjust the declaration strategy and document content, and improve the declaration efficiency.

5. Anti-monopoly risks of overseas business concentration

More than 130 countries or regions around the world have established concentration of business operators reporting systems. Cross-border transactions often trigger reporting obligations in multiple jurisdictions simultaneously, and there are significant differences among countries in terms of reporting thresholds, determination of control rights, procedures, and review priorities. This has led Chinese enterprises to face major legal risks such as "getting a head start", heavy fines, suspension or cancellation of transactions, and forced divestitures when conducting overseas mergers and acquisitions. In addition, most jurisdictions exercise extraterritorial jurisdiction. Transactions carried out abroad but affecting their domestic markets may also be included in the scope of review. If the target company is under anti-monopoly investigation or liability, it may also be traced back to the parent company after the acquisition. To reduce risks, enterprises should simultaneously review the reporting requirements of multiple countries at the initial stage of transactions, use the pre-negotiation mechanism to identify potential competitive issues, conduct compliance due diligence and global coordinated reporting, and prepare remedial measures in advance if necessary. At the same time, in accordance with the "Guidelines for Enterprises' Overseas Anti-Monopoly Compliance", establish overseas anti-monopoly compliance systems, training and investigation response mechanisms to ensure the smooth progress of cross-border transactions.

PART.05 Summary and Next Steps

To ensure the legal, compliant and smooth progress of the acquisition transaction, we suggest that the following actions should be planned in advance:

Establish an internal working group

Composed of personnel from the legal, financial and business departments, it is responsible for the declaration matters under the guidance of external lawyers.

2. Initiate data collection

Immediately start collecting and verifying the turnover data and other data mentioned in the first and second parts of this analysis to ultimately determine the reporting obligations.

3. Hire professional institutions

Given the professionalism and complexity of pharmaceutical mergers and acquisitions, it is recommended to engage law firms and economic advisors with rich experience in anti-monopoly and pharmaceutical fields to jointly prepare high-quality application documents, especially the "Competitive Analysis Explanation".

4. Make a schedule

Make the anti-monopoly declaration a key node in the transaction schedule to allow sufficient time for the possible second-stage review.