17 October 2008
Eleven months after it was promulgated, China’s new Anti-Monopoly Law (AML) officially came into force on 1 August 2008.
The AML is China’s first comprehensive competition law, and promises to dramatically alter the antitrust landscape in the PRC. For those companies that conduct business in, sell into, purchase from or have strategic investments in China, it is essential to understand the effects of this new law.
Although China has previously had a range of operative competition provisions scattered throughout existing legislation, many of these provisions have been chronically under-enforced. Now, however, China appears to be on the verge of a new dawn in antitrust enforcement. The Chinese government is throwing considerable resources behind the several institutions that will be responsible for administering and enforcing the AML, and it is clear that there is great potential for the law to be used to thwart and penalize many anti-competitive practices that have previously been common in China.
This article will outline key aspects of the AML and highlight some of the ongoing uncertainties regarding the legislation and how it will be enforced.
Enforcement and Scope of the AML
The AML does not precisely allocate enforcement responsibilities. Instead, it provides that the State Council will authorize relevant government agencies to act as anti-monopoly enforcement authorities (collectively, the AMEA) with responsibility for the day-to-day administration of the law.
Since promulgation of the AML, it has been widely expected that the AMEA responsibilities would be divided between three existing governmental agencies — the State Administration of Industry and Commerce (SAIC), the Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC). This expectation was partially met on 25 July 2008, when the Anti-trust and Anti-unfair Competition Enforcement Bureau under the SAIC was established. According to relevant provisions issued by SAIC, the new Bureau is responsible for enforcement of AML provisions relating to unfair-competition conduct.
Relevant departments under MOFCOM and NDRC are expected to be set up shortly, and to be charged with merger control and pricing-related matters respectively.
The law also provides for the establishment of an Anti-Monopoly Commission (AMC), which will be primarily responsible for formulating anti-monopoly policies, providing guidance on the application of the AML and organising and coordinating the enforcement of the law. It also is expected that the AMC will have a role in harmonizing enforcement of the AML by the three enforcement agencies mentioned above — which could prove particularly challenging in light of widespread reports that these agencies have been endeavouring to maximise the scope of their responsibilities under the law, and given that antitrust matters may regularly straddle the agreed demarcation lines between them.
In terms of the law’s scope, it is stated in Article 2 of the AML that the law applies both to monopolistic conduct in economic activities within China and to monopolistic conduct outside of China that negatively impacts competition in a domestic-China market. Three primary types of conduct are regulated: monopolistic agreements, abuse of a dominant market position and concentrations of business operators. The impact of the AML on these activities is explained further below.
Monopoly agreements are effectively defined as agreements, decisions or other coordinated conduct between business operators that eliminate or restrict competition. Interestingly, the AML does not specify any particular threshold level of competition-restriction that will be required to be achieved (or intended) before monopoly agreements are unlawful. Accordingly, it is not only agreements that have a “substantial” or “appreciable” impact on competition that may be caught under this conduct prohibition. Agreements with only a very small restrictive impact on competition in a market in China may conceivably fall foul of the prohibition if subsequent guidelines or implementation regulations do not impose a higher substantive threshold for unlawful anti-competitive impact or purpose.
The monopoly agreements prohibited by the AML can be divided into two types: horizontal monopoly agreements and vertical monopoly agreements. Several examples of each are stipulated in the AML, and the relevant enforcement authority also is empowered to identify other activities as falling within the scope of the prohibition.
Horizontal monopolistic agreements are stated to include agreements to:
- Fix or change prices of goods or services;
- Limit output or sales of goods or services;
- Divide or allocate markets;
- Restrict the purchase of new technology or new equipment, or the development of new technology or new products; or
- Jointly undertake a boycott.
Vertical monopolistic agreements include agreements to fix the price at which goods or services are to be resold to third parties, and those setting a minimum price for which goods or services can to be resold to third parties.
Concern has been expressed about the broad wording of several of the specified examples of monopoly agreements. In particular, it has been noted that the wording “restricting the purchase of new technology or new equipment, or the development of new technology or new products” could potentially be applied to a wide array of arrangements not typically deemed anti-competitive in more mature antitrust jurisdictions. Examples include certain technology and intellectual property licensing agreements, which often include “field-of-use restrictions.”
The situation is not helped by the ambiguous wording of Article 52 of the AML, which provides that the law does not apply to businesses “exercising their intellectual property rights in accordance with the provisions of relevant laws and administrative regulations relating to intellectual property,” but then also states that the law is applicable where a business “abuses its intellectual property rights in order to prevent or restrict competition.” The precise meaning of this Article is unclear, and commentators have speculated that it might be used as a basis for limiting the extent to which foreign intellectual property rights holders can enforce their rights in the PRC. Hopefully, the Article will have application only where the holders of IP rights seek to leverage those rights in a manner exceeding their proper scope — consistent with the approach taken in more mature competition law regimes.
The AML exempts certain agreements from the definition of monopoly agreements if the parties to those agreements prove that the agreements achieve one of the following objectives:
- Improving technology or promoting research and development of new products;
- Improving product quality, lowering costs, enhancing efficiency, achieving uniformity in product specifications or standards or achieving division of labour based on professional specialization;
- Increasing operating efficiency or strengthening competitiveness of small and medium- sized enterprises;
- Promoting social and public interests, such as energy conservation, environmental protection and disaster relief;
- Protecting legitimate interests in foreign trade and economic cooperation; and
- Alleviating sharp decline in sales or apparent production surpluses during periods of economic depression.
When endeavouring to prove that an agreement achieves any of the first five objectives listed above, the relevant business operators also must prove that the agreement will not substantially restrict competition in the relevant market and will enable consumers to share in the benefits resulting from the agreement. The interpretation of these objectives by the relevant authorities and the evidentiary standard that is required to prove the existence of these objectives will be critical to the implementation of the prohibition on monopolistic agreements.
It is expected that the China authorities may in time establish a notification system under which it can be confirmed that relevant agreements fall within one of the available exceptions.
Abuse of a Dominant Market Position
A dominant market position under the AML refers to a market position held by a business operator that enables the business operator to control the price, quantity or other trading terms in the relevant market, or to block or affect access to the relevant market by other business operators. The relevant enforcement authority is required to consider the following factors in determining whether a business operator has a dominant market position under the AML:
- The market share of the business operator and the competitive conditions in the relevant market;
- The business operator’s ability to control the market for sale of goods or services or for procurement of raw materials;
- The business operator’s financial and technological standing;
- The extent of reliance on the subject business operator by other business operators;
- The degree of difficulty for other business operators to enter the relevant market; and
- Other factors relevant to the determination of a dominant market position.
The AML also establishes certain presumptions of dominance based on market share. A business operator whose market share is 50 percent or more may be presumed to have a dominant market position. A joint dominant market position may be presumed to exist when two business operators jointly account for two-thirds of sales in the relevant market or three business operators jointly account for three-quarters of sales in the relevant market. Thus, two or more business operators could be presumed to be in a dominant market position even if there is no evidence of coordination of their activities.
However, if a business operator’s market share is less than 10 percent of the relevant market, that business operator is presumed not to have a dominant market position. The presumptions of market dominance are rebuttable.
The AML sets forth a number of activities considered to be abuses of a dominant market position. These include selling goods or services at prices that are unfairly high or procuring goods or services at prices that are unfairly low, and engaging in the following conduct “without justification”:
- Refusing to enter into transactions with third parties;
- Requiring counterparties to enter into transactions only with the dominant business operator or his designees;
- Requiring purchases of other goods or services along with the desired goods or services or attaching other unreasonable conditions to transactions; and
- Treating comparable counterparties in a discriminatory manner with respect to price or other terms of business.
Several of these characterizations of “abuse” conduct raise interesting questions. For example, determining when a dominant firm’s pricing terms are “unfairly high” or “unfairly low” in relevant circumstances will prove problematic unless some clear guidelines are published to set objective assessment standards. Similar issues arise in relation to the use of broad language such as “without justification.” For example, it remains to be seen whether it will be “valid” for a dominant business in the PRC to offer supply discounts to related companies but not to other trading partners (who may be deemed “equivalent trading partners”), or whether a business may refuse to sell a product to a reseller whose activities may be believed to “devalue” the relevant brand.
In relation to monopoly agreements or the abuse of a dominant market position, the enforcement authorities have the power to make “cease and desist” orders, to confiscate illegal gains and to impose fines. In most cases, the fines can be between 0 and 10 percent of total turnover in the preceding year (although it is not clear whether this is based on China or worldwide turnover, and whether it is limited to turnover generated from the relevant product or market in question). Where the fine relates to a monopoly agreement that has not been implemented, a fine up to an amount below RMB 500,000 may be imposed.
The AML allows for leniency to be exercised where companies “own up” to participation in prohibited conduct and cooperate in investigations. The law also contemplates that parties who suffer loss as a result of the monopolistic conduct of others can institute a civil action for recovery of loss.
Concentrations of Business Operators
A merger control regime has existed in the PRC since 2003 under the Regulations on the Acquisition of Domestic Enterprises by Foreign Investors (M&A Regulations). The M&A Regulations prohibit merger and acquisition activities that cause “excessive concentration” or “impede fair competition” in a market in the PRC. Notifications are required to be filed with PRC government bodies regarding certain acquisitions of PRC targets by foreign investors as well as certain “offshore” acquisitions having a PRC nexus.
The AML establishes new procedures for prior notification and clearance of certain types of transactions that are deemed to constitute “concentrations” under the law. As the AML is a national law, this regime is expected to effectively replace the regime under the “lower level” M&A Regulations.
Specifically, the AML prohibits participation in a “concentration” that has the effect, or likely effect, of “eliminating or restricting competition.” Each of the following types of transactions constitutes a concentration under the law:
- Mergers or consolidations between business operators;
- Acquisitions of control over another business operator through the acquisition of equity interests or assets; or
- Acquisitions of control over another business operator, or other acquisitions of ability to exercise a decisive influence over another business operator, through contracts or other means.
The AML provides that concentrations must be notified to the relevant AMEA if the transaction meets certain filing threshold tests. These filing threshold tests were introduced in new regulations published by China’s State Council on 3 August 2008 (Concentration Regulations), and specify that a concentration must be notified if either:
- The worldwide turnover over the last accounting year of all parties to the concentration exceeds RMB 10 billion (approx. US$1.46 billion), and turnover within China of each of at least two of those parties exceeds RMB 400 million (approx. US$58.6 million) over the last accounting year; or
- The turnover within China over the last accounting year of all parties to the concentration exceeds RMB 2 billion (approx. US$293 million), and turnover in China of each of at least two of those parties exceeds RMB 400 million (approx. US$58.6 million) over the last accounting year.
The decision to remove a controversial “market share” based notification threshold, which had been included in an earlier draft of the Concentration Regulations, has been well-received by the legal and business communities. However, some concerns remain.
For one, the remaining turnover threshold tests are clearly very low, and accordingly will require a large number of transactions to be notified to the China authorities.
Further, a number of matters still need to be clarified. In particular, the circumstances in which the PRC authorities may deem that a business has acquired “control” or “determinative influence” over another entity remain unclear. A previous draft of the Concentrations Regulations provided some additional provisions and definitions relevant to this assessment; however, these were removed from the final promulgated document.
Additionally, it is noted that the AML and Concentration Regulations are silent on key issues such as:
- How to calculate turnover for the purposes of applying the turnover-based notification thresholds (and, in particular, the extent to which turnover of affiliates of both the purchaser and target need to be included in the relevant assessment); and
- The deadline, and process, for submission of a notification.
Therefore, it seems that the relevant enforcement authority (likely to be MOFCOM, which has had analogous responsibilities under the M&A Regulations) will retain a very broad discretion to examine transactions on a case-by-case basis, to determine whether they may properly qualify as notifiable concentrations under the AML. This will make pre-notification consultation with PRC authorities a key step in respect of many transactions, in order to clarify what steps may be required for compliance with the AML’s concentration notification provisions.
Until further implementing regulations are promulgated to clarify such issues, it is widely assumed that guidance should be taken from existing requirements and approaches (as directed by MOFCOM) under the M&A Regulations.
The relevant review body is required to make a preliminary decision as to whether to conduct a further review of a notified transaction within 30 days after the receipt of a complete notification. Any such further review must be completed within 90 days following the date of the preliminary decision, with a possible extension of up to another 60 days. The parties may not consummate the transaction unless the review body either decides not to conduct a further review or approves the notified concentration after such further review.
Certain intra-group transactions are exempt from the notification requirement, however. Specifically, the exemption applies where either one party already holds more than 50 percent of the voting securities or assets of each of the other parties to the concentration, or more than 50 percent of voting securities or assets of each party to the concentration are owned by the same person who is not a party to the concentration.
The factors that the enforcement authorities are mandated to consider when reviewing concentrations include the following:
- The market share of the business operators involved in the concentration in the relevant market and their ability to control the market;
- The degree of concentration in the relevant market;
- The impact of the concentration on market access and technological advancement;
- The impact of the concentration on consumers and other business operators;
- The impact of the concentration on national economic development; and
- Other factors as determined by the relevant review body.
In addition to prohibiting or unconditionally approving a concentration, the review body may decide, following their review, to impose conditions in relation to the concentration. Where a concentration proceeds in contravention of the AML’s notification requirements, a fine at any level below RMB 500,000 may be imposed.
Relevant transactions involving foreign investors must also undergo a process of “national security review” if the transaction is deemed to have a potentially detrimental impact on China’s national security. However, the AML is silent on the criteria that will be applied to identify transactions raising such concerns.
It should be noted that the M&A Regulations impose a similar (and perhaps broader) reporting obligation in respect of transactions that are deemed to have the potential to adversely impact national economic security interests in China, relate to an “important industry” in China’s economy, or transfer the controlling power of a famous China trademark or “time-honoured” China brand. This reporting obligation rarely has been invoked; however, the potentially broad scope of both “review” processes has raised concerns about the prospect of foreign acquisitions of China companies being blocked on spurious grounds.
It remains to be seen whether additional regulations will be promulgated to clarify the nature, scope and procedures of a national security review under the AML.
Other Key Aspects of the AML
The AML also targets another type of monopolistic conduct: the anti-competitive misuse of government power. This type of activity has come to be commonly termed “administrative monopoly,” and is perceived as being a significant issue in China due to the tendency of regional governments to confer competitive advantages on favoured local companies and to create entry-barriers or “raised costs” for their competitors.
Under Chapter 5 of the AML, government departments and authorized organizations are prohibited from abusing their administrative powers to curb competition. Offending agencies may be ordered to correct their abuses by superior authorities, and individuals directly responsible for such abuses may be given a disciplinary sanction. However, it has been noted that reliance on self-correction and review by “parent” agencies may diminish the impact of this aspect of the AML.
The uncertain status of SOEs under the AML
Article 7 of the AML appears to allow for differentiated treatment of State Owned Enterprises (SOEs) under the AML. As SOEs control many key business sectors in China, and often are criticised for engaging in anti-competitive practices, the impact of the law may be substantially diluted if this is the case.
The 57-article AML provides a standardized set of guidelines on competition. However, a lot of ambiguities have been left to be dealt with in implementation rules, which are expected to clarify certain unresolved matters and provide further detail and guidance on how the broadly worded prohibitions will be applied.
It had been widely hoped that many clarifying implementation regulations would be published by 1 August 2008; however, to date only the Concentration Regulations have been finalised. Meanwhile, up to 40 new implementation regulations are reported to be in planning.
Additionally, it is understood that the NDRC has concluded preparation of draft Provisions on Anti-Price Monopoly, while draft-working rules of the AMC are pending approval by China’s State Council.
In the interim, there is much speculation about how the law may be administered going forward, and the types of industries that may be the target of investigation as the relevant enforcement agencies ramp up their investigation and enforcement activities. Industry sectors such as telecommunications, automobile sales and railway operation have been oft-cited examples of potentially productive antitrust investigation areas, and commentators have also raised the prospect that the AMEA may wish to leverage off the learnings from antitrust investigations in more mature antitrust jurisdictions, and therefore may seek to target “familiar” antitrust targets with a substantial China presence — such as Microsoft.
For now, the conspicuous absence of detailed implementation regulations suggests that the apparent “soft launch” phase of the AML may continue for some time yet, although there is also some expectation that a small number of “high profile” investigations may be commenced by authorities keen to advertise China’s renewed focus on antitrust matters. Accordingly, both domestic and foreign businesses should be moving quickly to ensure their China-related operations are AML-compliant.