Behavioural Remedies vs Structural Remedies in AML Decisions: Which Competition Law Approach?

Introduction

When the State Administration for Market Regulation (SAMR) determines that a notified concentration under China’s Anti-Monopoly Law (AML) raises competition concerns, it has the authority to impose conditions or remedies to address those concerns while allowing the transaction to proceed. These remedies fall into two broad categories: structural remedies, which alter the ownership structure of the merged entity, and behavioural remedies, which regulate the conduct of the merged entity going forward. The choice between these two types of remedies, and the specific design of the remedy package, has profound implications for merging parties, their competitors, and the broader market.

This comparison provides a detailed analysis of structural versus behavioural remedies in SAMR’s merger control decisions, examining the legal framework, enforcement practice, advantages and disadvantages of each approach, and practical guidance for foreign businesses navigating SAMR’s remedy process. Understanding SAMR’s preferences and the strategic implications of each remedy type is essential for designing effective remedy proposals that address competition concerns while preserving the commercial rationale of the transaction.

Legal framework for remedies under the AML

Article 34 of China’s AML provides the legal basis for imposing conditions on concentrations: “Where a concentration has or may have the effect of eliminating or restricting competition, SAMR shall make a decision prohibiting the concentration, except where SAMR decides that the concentration may have the effect of improving competition conditions, increasing economic efficiency, or protecting the public interest.” Article 35 further provides that SAMR may attach restrictive conditions to its clearance decisions to address competition concerns.

SAMR’s Guiding Opinions on the Attachment of Restrictive Conditions to Concentrations of Undertakings (revised in December 2023) provide detailed guidance on the types of remedies available, the criteria for selecting between them, and the procedures for their implementation, monitoring, and modification. The Guiding Opinions establish a clear preference for structural remedies, stating that divestiture of a business or assets is the most effective remedy for addressing horizontal competition concerns, as it directly addresses the market structure that gives rise to the competitive harm.

The guiding principles for remedy design under SAMR’s framework include:

• Effectiveness: The remedy must be capable of effectively eliminating the competition concerns identified.
• Proportionality: The remedy must be proportionate to the competition concerns and must not impose unnecessary burdens on the parties.
• Timeliness: The remedy must be capable of implementation within a reasonable timeframe.
• Enforceability: The remedy must be capable of effective monitoring and enforcement by SAMR.
• Non-reversibility: Structural remedies are preferred where behavioural remedies would require ongoing monitoring and may be circumvented.

Structural remedies under China’s AML

Structural remedies involve the divestiture of assets, businesses, or ownership interests by the merged entity to preserve or restore competition in the affected market. The most common structural remedy is a divestiture package, under which the merged entity sells a defined business or set of assets to a purchaser approved by SAMR. Structural remedies are designed to address competition concerns at their source by creating a new competitive force in the market or strengthening an existing competitor.

Common types of structural remedies in SAMR decisions include:

• Full or partial divestiture of a business: The merged entity must sell a specific business unit, subsidiary, or set of assets to a SAMR-approved purchaser. The divestiture may cover manufacturing facilities, research and development capabilities, distribution networks, or intellectual property rights.
• Divestiture of ownership interests: In cases involving joint ventures or minority shareholdings, the parties may be required to divest their ownership interests in competing entities.
• Divestiture of exclusive rights or licenses: The merged entity may be required to license intellectual property, brands, or distribution rights to third parties to create new competition.
• Crown jewel provisions: If the primary divestiture assets are not sold within a specified timeframe, the parties must divest additional assets (the “crown jewels”) to make the package more attractive to potential purchasers.

SAMR has shown a strong preference for structural remedies in horizontal merger cases, consistent with its Guiding Opinions. In significant transactions such as the Marubeni/Gavilon grain trading merger, the NXP/Freescale semiconductor merger, and the Bayer/Monsanto agricultural merger, SAMR imposed comprehensive structural remedies that required divestiture of overlapping businesses or assets. These decisions demonstrate that SAMR is willing to require substantial divestitures to address competition concerns, even in cross-border transactions where the primary competitive effects are felt in China.

Behavioural remedies under China’s AML

Behavioural remedies (also called conduct remedies or non-structural remedies) impose ongoing obligations on the merged entity to regulate its conduct in the market. Unlike structural remedies, behavioural remedies do not change the ownership structure of the merged entity but instead govern how it may exercise its market power. Behavioural remedies are typically used in vertical merger cases, conglomerate merger cases, or horizontal cases where the competition concerns are narrow and can be addressed through specific conduct commitments.

Common types of behavioural remedies in SAMR decisions include:

• Non-discrimination obligations: The merged entity must supply products or services to third parties on fair, reasonable, and non-discriminatory (FRAND) terms. This is common in technology, telecommunications, and infrastructure markets where the merged entity controls essential inputs or platforms.
• Firewall requirements: The merged entity must implement information barriers between different business units to prevent the sharing of competitively sensitive information. This is common in vertical mergers where the merged entity could gain access to competitors’ confidential information through its upstream or downstream operations.
• Continuity of supply obligations: The merged entity must continue to supply products or services to existing customers on pre-transaction terms for a specified period. This protects customers from supply disruptions during the post-merger transition period.
• Access commitments: The merged entity must provide competitors with access to essential infrastructure, platforms, or intellectual property on specified terms. This is common in mergers involving essential facilities or technology platforms.
• Reporting and monitoring obligations: The merged entity must submit periodic reports to SAMR on its compliance with the remedy conditions, and SAMR may appoint an independent monitoring trustee to oversee compliance.
• Non-acquisition commitments: The merged entity agrees not to acquire additional interests in competitors or related businesses for a specified period.

SAMR has been increasingly willing to accept behavioural remedies, particularly in vertical merger cases and in transactions where the parties can demonstrate that structural remedies would disproportionately harm the efficiencies and synergies that justified the transaction. In the Qualcomm/NXP merger (2018), SAMR imposed primarily behavioural remedies, requiring Qualcomm to maintain certain licensing practices and to ensure non-discriminatory access to its technology for competitors. This decision demonstrated that SAMR is willing to tailor remedy packages to the specific competitive dynamics of technology markets.

Comparative analysis: When does SAMR prefer each type?

The choice between structural and behavioural remedies depends on several factors, including the nature of the competition concern, the structure of the affected market, and the characteristics of the merging parties. SAMR’s practice reveals discernible patterns in remedy selection.

In practice, SAMR often imposes a hybrid package that combines structural and behavioural elements. For example, in a horizontal merger with vertical elements, SAMR may require a divestiture to address the horizontal overlap (structural) and impose non-discrimination and firewall obligations to address vertical concerns (behavioural). The 2022 amendments to the AML confirmed SAMR’s authority to impose both types of remedies and to modify or withdraw remedies when circumstances change.

Implementation, monitoring, and enforcement

The implementation of remedies is a critical phase that determines whether the remedy achieves its intended competitive outcome. SAMR’s remedy framework includes several mechanisms to ensure effective implementation.

For structural remedies, the key implementation mechanism is the divestiture trustee. SAMR requires the parties to appoint a divestiture trustee (subject to SAMR’s approval) to oversee the divestiture process and to ensure that the divested business is transferred to a suitable purchaser. The trustee’s responsibilities include preparing the divestiture business for sale, identifying and vetting potential purchasers, negotiating the sale agreement, and reporting to SAMR on progress. If the parties fail to complete the divestiture within a specified period (typically three to six months), the trustee may be granted a mandate to sell the business at no minimum price.

For behavioural remedies, the monitoring mechanisms include periodic reporting obligations, appointment of a monitoring trustee, and SAMR’s right to inspect the merged entity’s premises and records to verify compliance. Monitoring trustees are independent third parties, typically accounting or consulting firms, that are appointed to oversee the merged entity’s compliance with behavioural commitments and to report to SAMR on any instances of non-compliance.

The 2022 amendments to the AML strengthened SAMR’s enforcement powers with respect to remedy compliance. SAMR now has the authority to impose fines of up to 10 percent of annual turnover for non-compliance with remedy conditions, to revoke clearance decisions in cases of serious non-compliance, and to require the parties to modify their remedies if the original conditions prove ineffective. These enhanced enforcement powers have increased the stakes for parties that fail to comply with their remedy commitments.

Advantages and disadvantages of each approach

Each type of remedy has distinct advantages and disadvantages that merging parties and their advisors should carefully consider.

Advantages of structural remedies

• Permanent solution: Once the divestiture is completed, the remedy is largely self-executing and does not require ongoing monitoring.
• Clear and enforceable: The divestiture obligation is straightforward to enforce; failure to divest is clear non-compliance.
• Creates competitive structure: Divestiture directly addresses the market structure that gives rise to the competition concern.
• International alignment: Structural remedies are the preferred approach in most major antitrust jurisdictions, creating consistency for cross-border transactions.

Disadvantages of structural remedies

• Irreversible: Once assets are divested, they cannot be recovered. This is a permanent cost of the transaction.
• Loss of synergies: Divestiture may eliminate precisely the synergies that motivated the transaction in the first place.
• Valuation risk: The forced sale of assets may occur at a discount to their fair market value.
• Implementation complexity: Carving out a divestiture business from the merged entity can be operationally complex and time-consuming.

Advantages of behavioural remedies

• Preserve transaction benefits: Behavioural remedies allow the transaction to proceed with its full ownership structure and operational scope, preserving the synergies that motivated the deal.
• Flexibility: Behavioural remedies can be tailored to address specific competition concerns without the blunt instrument of asset divestiture.
• Proportionality: Behavioural remedies can be calibrated to the specific competitive harm identified, avoiding over-correction.
• Adaptability: Behavioural remedies can be modified as market conditions change.

Disadvantages of behavioural remedies

• Ongoing monitoring burden: Behavioural remedies require continuing compliance monitoring, which imposes costs on both the merged entity and SAMR.
• Circumvention risk: The merged entity may find ways to circumvent behavioural commitments that are difficult for regulators to detect.
• Regulatory creep: Behavioural remedies can evolve into ongoing regulatory oversight that effectively turns the competition authority into a sector regulator.
• Enforcement challenges: Proving non-compliance with behavioural remedies often requires detailed evidence and economic analysis.

Practical guidance for foreign businesses

Foreign businesses facing potential remedies in a SAMR merger review should consider the following strategic recommendations:

1. Engage early in remedy analysis. Remedy design should begin early in the merger planning process, not after SAMR identifies competition concerns. Proactive remedy proposals demonstrate good faith and give parties more control over the remedy design.
2. Understand SAMR’s institutional preferences. SAMR has a strong preference for structural remedies in horizontal merger cases. Parties facing horizontal overlaps should prepare a credible divestiture proposal as their primary remedy option.
3. Consider hybrid remedy packages. In complex transactions with both horizontal and vertical competition concerns, a hybrid package that combines structural and behavioural elements may be the most effective approach.
4. Prepare for implementation. The remedy process does not end with the clearance decision. Parties should prepare for the divestiture or monitoring implementation phase, including identifying potential purchasers or monitoring trustees in advance.
5. Build appropriate timelines. Remedy implementation takes time, particularly for structural remedies. Build sufficient time into the transaction timeline for the divestiture process, including the identification of purchasers, negotiation of sale agreements, and SAMR approval.
6. Coordinate with other jurisdictions. Where the same transaction is reviewed by multiple competition authorities, coordinate remedy proposals to avoid conflicting or inconsistent obligations. SAMR has shown willingness to align its remedy requirements with those of other agencies where the competitive conditions are similar.

Conclusion

The choice between behavioural and structural remedies in SAMR merger control decisions is not a binary one, but rather a continuum of options that must be carefully calibrated to the specific competition concerns, market conditions, and transaction characteristics. SAMR’s institutional preference for structural remedies in horizontal merger cases is well established, but the regulator has demonstrated increasing sophistication in designing behavioural remedies for vertical and conglomerate transactions. Foreign businesses facing remedy negotiations with SAMR should approach remedy design as a strategic process that requires early engagement, careful analysis of competitive dynamics, and a willingness to propose credible and enforceable remedy packages. The most successful outcomes are achieved when parties understand SAMR’s priorities, engage constructively with the regulator’s concerns, and design remedies that effectively address competition issues while preserving the commercial value of the transaction.