SAMR Imposed Penalties on Tencent for Gun Jumping

On 24 July 2021, the State Administration for Market Regulation ("SAMR") issued the Administrative Penalty Decision (Guo Shi Jian Chu [2021] No. 67) ("Decision") on Tencent Holdings Limited ("Tencent") due to that Tencent had implemented the acquisition of China Music Corporation ("CMC") in July 2016 ("Transaction") without conducting prior notification to the SAMR. In the Decision the SAMR imposed penalties on Tencent for gun jumping.

According to the Decision, the SAMR not only imposed on Tencent a fine of RMB 500,000 (approx. EUR 65,000) but also ordered Tencent and its affiliates to take necessary measures to restore market competition status. Since the PRC Anti-Monopoly Law ("AML") took effect in 2008, Tencent case is the first gun jumping case where the concerned undertakings were imposed with both fines and other penalties by the SAMR.

Tencent is listed on the Hong Kong Stock Exchange since June 2004. It controls its main PRC operating entity, i.e., Shenzhen Tencent Computer Systems Company Limited, through a variable interest entity ("VIE") structure. The main business scope of Tencent includes, inter alia, social and communication services, social network platforms, online music platforms, games, online video services and interactive live streaming.

Below is an overview of the case.

1. The SAMR found that Tencent should have notified the Transaction for prior merger control clearance.

a) According to the Decision, on 12 July 2016 Tencent acquired 61.64% of the equity interests in CMC. Before the Transaction, CMC was jointly controlled by several individual shareholders. After the Transaction, CMC was solely controlled by Tencent. On 6 December 2017 the transfer of equity interests was officially registered. The turnover of both Tencent and CMC triggered the notification threshold under the AML.

According to Article 20 of the AML, an acquisition of control of other undertakings through acquisition of shares or assets constitutes a concentration.

According to Article 21 of the AML, undertakings shall notify the SAMR of concentrations reaching the notification threshold ("Pre-merger Notification Obligation"). The notification thresholds are (i) The total worldwide turnover of all the parties to the transaction exceeded RMB 10 billion (around EUR 1.3 billion) in the previous financial year and the turnover in China of each of at least two of the parties to the transaction in the previous financial year exceeded RMB 400 million (around EUR 52 million); or (ii) The combined turnover in China of all the parties to the transaction exceeded RMB 2 billion (around EUR 0.26 billion) in the previous financial year and the turnover in China of each of at least two of the parties to the transaction in the previous financial year exceeded RMB 400 million (around EUR 52 million).

According to Articles 25 and 26 of the AML, before clearance is granted by the SAMR, undertakings shall refrain from implementing concentrations ("Standstill Obligation"). Violations of the Pre-merger Obligation and the Standstill Obligation are commonly called gun jumping ("Gun Jumping").

Since the Transaction fulfilled the requirements of the AML for a concentration and the notification threshold was triggered, Tencent's failure to notify the Transaction to the SAMR for prior clearance constituted Gun Jumping.

b) Consequences of Gun Jumping

(1) According to Articles 48 and 49 of the AML, in the event of Gun Jumping, the SAMR may impose the following administrative sanctions:

• order termination of the concentration;
• order disposal of the relevant shares/assets within the prescribed time limit;
• order assignment of relevant business within the prescribed time limit;
• order adoption of necessary measures to restore the status quo prior to the concentration;
• impose a fine of up to RMB 500,000; and/or
• take other necessary measures.

Before the Tencent case, as to Gun Jumping cases, the SAMR in practice only imposed fines of up to RMB 500,000 (approx. EUR 65,000) at the maximum. In other words, none of the other administrative sanctions mentioned above have been imposed by the SAMR before.                

(2) According to Article 50 of the AML, undertakings that carry out monopolistic conduct and, thus, cause losses to others shall bear civil liability.          

(3) Since the SAMR will publish on its website its administrative decisions on Gun Jumping cases, parties to a concentration may also suffer reputational damages in addition to the economic losses and fines imposed by the SAMR.

2. The SAMR is of opinion that the Transaction had or may have the effect of excluding or restricting competition on the relevant market.

According to the Decision, the relevant market in the Tencent case is the online music broadcasting platform market in China. The copyrights of original music works are the core assets and key resources for platform operators.

a) Before the Transaction, the market shares of Tencent and CMC on the relevant market in 2016 were approximately 30% and 40%, respectively. After the Transaction, the merged entity held more than 80% of the exclusive music library resources, etc.

b) Before the Transaction, as two competitors, Tencent and CMC were the top 1 and top 2 competing market players on the relevant market. The number of major competitors was accordingly lowered due to the Transaction. Thus, the competition on the relevant market was weakened.

c) The barriers to market entry could be increased by the Transaction: (i) the barriers to access copyright resources could be increased, thus, market entries by new competitors became more difficult; (ii) the switch costs of users could be increased; and (iii) data showed that the degree of market entry activity underwent an obvious decline after the completion of the Transaction in 2017.

In summary, due to that Tencent might have the capability to cause copyright holders to grant exclusive copyrights to Tencent, to provide more favorable terms and conditions to Tencent than to competitors of Tencent, or to increase market entry barriers by paying higher amounts of prepayments to copyright holders, the SAMR held that the Transaction had or may have the effect of excluding or restricting competition on the relevant market.

3. The Decision of the SAMR

a) The SAMR ordered Tencent and its affiliates to take the following measures in order to restore market competition status:

(1) Tencent and its affiliates shall not enter into exclusive copyright agreements (or exclusive agreements in other form) with upstream copyright holders. The existing exclusive agreements shall be terminated within 30 days upon the issuance of the Decision.

Tencent and its affiliates are allowed to have exclusive cooperation with independent individual copyright holders. However, the period of such exclusive cooperation shall not be more than three years. Tencent and its affiliates are allowed to have exclusive cooperation with copyright holders for the first release of the latter's new songs. However, the exclusive period for the first release of new songs by Tencent and its affiliates shall not be more than 30 days.

(2) Without justifiable reasons, Tencent and its affiliates shall not request copyright holders to provide more favorable terms and conditions to Tencent than to competitors of Tencent. The existing agreements containing those favorable terms and conditions shall be terminated within 30 days upon the issuance of the Decision; and

(3) Tencent and its affiliates shall not increase their competitors' costs in disguised form, eliminate or restrict competition by paying higher amounts of prepayment to copyright holders.

b) Tencent and its affiliates shall formulate a rectification plan within 10 days upon the issuance of the Decision and submit it to the SAMR for review. Further, Tencent shall report annually to the SAMR on its compliance situation for the next three consecutive years. The SAMR will strictly monitor the implementation situation of Tencent.

c) In addition, the SAMR has imposed a fine of RMB 500,000 (approx. EUR 65,000) on Tencent.

According to the SAMR, the measures to restore market competition status imposed on Tencent as stated above will reshape the competition order in the relevant market, lower the barriers to market entry and provide competitors with fair access to upstream copyright resources. Therefore, these measures will be helpful in creating a fairer competitive environment, safeguarding consumers' right to choose, ultimately benefiting the majority of consumers and promoting innovative and healthy development of the online music industry.

4. Conclusion

Before the Tencent case, ever since the AML took effect in 2008 the SAMR only imposed fines for Gun Jumping, i.e., no other administrative penalties have been imposed. In the Tencent case, in addition to imposing fines, Tencent and its affiliates were also ordered to take measures in order to restore market competition status.

From the Tencent case, it can be seen that the SAMR is taking a tougher line on Gun Jumping cases, by imposing not only fines but also other penalties. Therefore, parties to a concentration are well advised to abide by the Pre-merger Notification Obligation and the Standstill Obligation under the AML, if the concerned concentration is notifiable under the AML.