China Anti-Monopoly Law & Its Increasing Impacts on International Business

By Ken Dai, Partner, Dacheng Law Offices

Posted: 26th April 2013 10:17

Preface
 
After almost ten-years’ of legislative efforts, the China’s National People’s Congress finally enacted the new Anti-Monopoly Law of China (the “AML”) as the China’s first comprehensive competition law on 30 August 2007 and came into effect on 1 August 2008. With the increasingly positive application and active enforcement, AML is having more and more significant impacts on international business.
 
Overview of the AML
 
Similar to the competition legal frameworks in other jurisdictions, the AML mainly deals with four areas:

1.) The prohibition of anti-competitive monopoly agreements;
2.) The prohibition of certain behaviours classified as abuse of a dominant market position;
3.) The concentration control; and
4.) The prohibition of the abuse of the government administrative powers restraining competition.
 
Generally speaking, most provisions of the AML derive from European or U.S. antecedents and are basically in line with international practice.  For instance, Article 9 of Regulation (EC) No. 1/2003 provides for formal settlements of investigations by the EC into suspected infringement of Articles 101 or 102 of the Treaty on the Functioning of European Union (the “TFEU”).  The similar investigation suspension rule is stipulated in Article 45 of the AML.
 
However, a number of provisions in the AML differ in small or large ways from typical competition laws.  Such provisions have been with generally distinctive “China’s characteristics”.  For illustration, Article 4 of the AML provides that “the State shall formulate and implement competition rules compatible with the socialist economy, and shall perfect the macro control regulation, and shall complete a unified, open, competitive and orderly market system.”  It shall be advisable to note how these provisions will manifest themselves in the implementation and enforcement of the AML.
 
Suggestion: As China has been regarded as one of the most important emerging markets, the foreign companies having business in China need pay more attention to the compliance of the AML in order to avoid the risk of the potential adverse consequences to their business arising from a failure to comply with the AML.  It would be advisable to establish a  tailor-made antitrust compliance program in China.
 
Arrangement of Enforcement Authorities
 
The arrangement for the Anti-monopoly Enforcement Authorities (the “AMEAs”) demonstrates a three-way division of the authorities’ functions among the Ministry of Commerce of China (the “MOFCOM”), National Development and Reform Commission (the “NDRC”) and State Administration of Industry and Commerce (the “SAIC”).  The MOFCOM has established the Bureau of Anti-monopoly Investigation that will solely have the authority to conduct the antitrust review of concentration of undertakings.  In the meantime, the SAIC has set up the Anti-monopoly and Anti-unfair Competition Enforcement Bureau as its department, which will be in charge of investigating anti-monopoly agreement, abuse of market dominance by business operators, and abuse of administrative power that restrict or eliminate competition (excluding pricing-related agreements or abuses).  The Price Department and the Price Supervision Department within the NDRC will have the powers to handle investigations on pricing-related agreements or abuses.
 
Concentration of Undertakings
 
Chapter 4 of the AML set outs the concentration of undertakings (namely merger control) provisions.  Under the AML, a transaction will be required to make notification before MOFCOM provide that; (1) the transaction fall into the scope of concentration of undertakings; and (2) the relevant parties’ turnovers meet with the threshold.
 
Categories of Concentration of Undertakings: The following types of transaction qualify as concentration under the AML:(a) the merger of two or more independent undertakings; or (b) an acquisition by one undertaking of control over another undertaking via either share or asset purchase; or (c) an acquisition of control or the ability to exert decisive influence over another undertaking by contract or other means.  The definition of control and decisive influence is currently uncertain and can be decided by MOFCOM on a case-by-case basis.  Actually, MOFCOM largely refers to the notion of such concepts adhering to the international competition practices, particularly EU, mainly focusing on the elements of the influence over management and operation decision making of an undertaking.   Besides, although there is no explicit provision involving the establishment of joint ventures by two (or even more) undertakings under the AML, it is generally attributed by MOFCOM to the regime of merger control in practice.  Till 20 March 2013, MOFCOM has totally issued three conditional clearance decisions pertain to the establishment of joint ventures.  Moreover, according to the recently released data on the unconditional approvals by MOFCOM since the enactment of the AML, a number of the approved transactions are the establishment of joint venture.  Further, it should be noted that currently MOFCOM has not differentiated the full-functional joint venture, which is the only kind of joint venture subject to the notification in EU.
 
Threshold: According to the AML and the Provisions of the State Council on Notification Standards of Concentration of Undertakings, the transactions that belong to concentration of undertakings shall be notified before A MOFCOM only if notification threshold stipulated in Threshold Provisions are met.  A concentration of undertakings shall be subject to notification upon satisfying one of the following thresholds: (a) the combined global turnover of all undertakings concerned in the last fiscal year exceeding RMB 10 billion, and the China-wide turnover of at least two undertakings respectively exceeding RMB 400 million during the last fiscal year; or (b) the combined China-wide turnover of all undertakings concerned in the last fiscal year exceeding RMB 2 billion, and the China-wide turnover of at least two undertakings respectively exceeding RMB 400 million during the last fiscal year.
 
Timeframe: There are potentially two formal stages to any review of a transaction under the merger control regime (in addition to informal pre-notification contact): the initial review of the concentration is known as Phase I, while any further in-depth investigation is known as Phase II.  Phase I: Following receipt of the formal notification, subject to the confirmation by MOFCOM that it considers the notification to be complete, MOFCOM has an initial period of 30 calendar days to undertake a first-stage review.  Phase II: MOFCOM has the authority to conduct a further in-depth investigation, which must be completed within 90 calendar days from the decision date.  Such period can be further extended by 60 calendar days if (a) the filing parties consent to such extension; (b) documents and other materials previously submitted are inaccurate and further verification are required; (c) a material change in the relevant circumstances has occurred after the phase I review was made.  Basically, the merge control regulatory process in China is similar to other jurisdictions, such as the EU merger control procedure.  Parties to a transaction involving multi-jurisdictions notification requirements may find that addition of a filing burden in China does not significantly lengthen the timetable for closing.
 
Merger Remedies: Currently, under the AML, MOFCOM has the authority to impose restrict conditions on a concentration of undertakings, such as the Google/Motorola case.  In practice, MOFCOM may impose three types of restrictive conditions on a transaction: (a) structural remedies, i.e., requirements that the parties divest specific assets or businesses; (b) behavioural remedies, i.e., requirement that parties provide the use of the network or essential facilities to other parties; (c) combinations of structural and behavioural remedies.  Hence, if investors determine that it is likely you deal will fall within the scope of the AML, it should be advisable not only to begin the notification preparation, but also to have the deal reviewed by external antitrust counsel to identify any possible antitrust concerns at the earliest possible stage.  If the deal is likely to raise serious competition concerns that could lead to divestitures or imposition of other restrictive conditions, investors will want to know this fact as soon as possible because it might have significant implications for the deal structure and valuation of the deal.
 
Suggestion: M&A transactions or establishment of joint ventures can be subject to concentration review and can be blocked on antitrust grounds or approved subject to restrictive conditions in China.  Hence, it will be critical to seek legal counsel’s view on the competition aspects of a transaction at the earliest stage in the deal negotiation process.
 
Monopoly Agreements
 
Similar to the legal structures under the Section 1 of the Sherman Act of the United States and the Article 81 of the TFEU, the monopoly agreements under the AML are categorised into the horizontal monopoly agreements and the vertical monopoly agreements.
 
According to the Article 13 of the AML, the prohibited horizontal monopoly agreements include without limitation the agreements that (1) fix or change prices of products, (2) limit the production or sales volume of products, (3) allocate the sales markets or the raw material sourcing markets, (4) restrict the purchase of new technology or new equipment or restrict the development of new technology or new products, (5) joint boycott transactions, or (6) other monopoly agreements determined by the AMEAs.  Currently, NDRC and SAIC has initiated a number of investigation against various companies and has imposed significant fines on certain undertakings.  In a monopoly agreement case in the field of medicine in 2011, NDRC imposed fines two domestic pharmaceutical distribution companies, up to RMB 7 million. 
 
In terms of the regulation of the relevant vertical agreement, the Article 14 of the AML prohibits the following monopoly agreements between undertakings and trading partners: (a) fixing the resale prices of commodities to the third parties; (b) restricting the minimum resale prices of commodities to the third parties; or (3) other monopoly agreements determined by the AMEAs. Just at the beginning of 2013, local counterparts of NDRC fined Moutai and Wuliangye (both of which are the well-know luxurious liquor manufacturers in China) for setting the minimum resale price and the penalties were reaching about 470 million RMB.
 
Article 15 of the AML provides a large number of exemptions to the general prohibition against monopoly agreements.  For instance, if the undertaking can prove that the concluded agreement’s objective is for the purpose of improving technologies or researching and developing new products, and the agreement will not substantially restrict competition in the relevant market and can enable consumers to share the benefits from the agreement, the monopoly agreement shall be exempt from Article 13 and Article 14.
 
Suggestion: With regard to the monopoly agreements, foreign companies need make careful review of their existing commercial agreements that have a Chinese dimension to minimise legal exposure from any non-compliance of the AML.  Such legal review may involve, for instance, considering whether any agreements with their competitors could give rise to any horizontal issues, such as the price fixing or the partitioning the market by territory or customer groups, etc.  In the meantime, importance should be also attached to whether any of the distribution agreement contains provisions contrary or potentially contrary to the AML, such as the maintenance of the resale price and the fixing minimum resale price.
 
Abuse of Dominant Market Position
 
Chapter 3 of the ALM sets out three articles on abuse of market dominance.  Article 17 provides the category of the abusive conducts; Article 18 set outs the basis for determining that an undertaking is in a dominant market position; Article 19 stipulates when market dominance including the collective dominance may be presumed subject to the submission of evidence to the contrary.
 
The classification of the abusive behaviours under Article 17 generally derive from the EU competition law model, mainly including predatory pricing, refusal to deal, exclusive dealing, tie-in deals and price discrimination.  Each of these is qualified by a requirement that the behaviours must be “without justification”.  It shall be noteworthy that dominant undertakings are prohibited from selling at “unfairly high prices” or buying at “unfairly low prices”.  Since the AML does not provide any standard on how to determine what an unfair price is, this leaves considerable room for the ALEA to interpret this conception.
 
By now, most of the cases on abuse of market dominant were initiated by the form of private antitrust litigations (e.g., recently, Huwei has secured a favorable judgment against InterDigital Group for abusing the market dominant position) rather than the public enforcement by NDRC.
 
Suggestion:In terms of the abuse of the dominant market position, the concern about the perceived abuse of dominance by foreign companies has been increasing in China.  Therefore, it shall be advisable for the foreign companies with significant market share in China to have a careful consideration of their relevant market conducts that may be characterised as abusive behaviours, such as the adjustment of the price policy, exclusive dealing and refusal to deal.  Meanwhile, these foreign companies will need to keep close eyes to other categories of the abusive conducts to be defined by the AMEAs.
 
Ken Dai earned his LLB and LLM respectively from the China University of Political Science and Law, and the University of Bristol in United Kingdom.  Currently, Ken Dai is the member of Antitrust Committee of IBA, the Competition Committee of IPBA, the Outbound Investment and Antitrust Committee at the Shanghai Bar Association and Asian Competition Forum.  In addition, Ken Dai is the columnist of Forbes.
 
Ken Dai is specialising in antitrust, competition law compliance, merger control filing and private antitrust litigations.  He is one of the first lawyers to practice antitrust law in China.  He has advised certain multinational companies on establishing antitrust law manuals and compliance program.  He has also advised numerous multinationals on the application of the PRC Anti-monopoly Law and enforcement policies in relation to distribution practices in China.  In addition, he has varied experiences advising both foreign companies and domestic enterprises in making merger filings before Mofcom.  Further, he has regularly assisted and represented certain enterprises in completing and bringing private antitrust litigations in China, He has experience advising companies in handling the legal issues between intellectual property rights and antitrust laws.  He also has written numerous articles on the PRC Anti-monopoly law, including: A great leap forward for definition of the relevant market and Merger Control in China: Perspective of Substantive Assessment.
 
Ken Dai can be contacted via phone on +86 21 5878 1965 or alternatively via email at  jianmin.dai@dachenglaw.com

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