At the beginning of August 2008, after more than 10 years of discussion, the new People's Republic of China Anti-Monopoly Law (AML) came into force. The AML introduces into China similar competition law principles to those found in the other major jurisdictions of the world, including the EU and the US. The AML regulates all three main areas of competition law, namely: (i) monopolistic/anticompetitive agreements; (ii) abuses of a dominant position; and (iii) mergers/concentrations. In addition, it contains specific provisions relating to the abuse of administrative powers to prevent or restrict competition and the abuse of intellectual property rights.
The AML provides only the legislative skeleton of China's new competition law. It is intended that, as in other jurisdictions such as the EU, the AML will be supplemented by further guidance in the form of implementing regulations and, ultimately, published details of decisions made by the relevant Chinese authorities. Unfortunately, with one exception relating to concentrations, no further guidance is available at the time of writing. As a result, many questions remain about the scope and application of the new law in practice.
Scope of the AML
Purpose
Article 1 of the AML sets out the specific aims of the law, which include the prevention and deterrence of monopolistic practices in order to safeguard fair market competition, an increase in economic efficiency and the protection of the interests of the public and consumers. These underlying aims of the AML will be applied within the general political and cultural contexts of China, and will affect the practical application of the AML by the Chinese authorities to an extent that is not yet clear. In this respect, it is perhaps significant that it has recently been reported that China intends to join the International Competition Network (ICN), a body that aims to achieve a convergence of competition law policy by different competition authorities worldwide.
Application
The AML applies to all "business operators". This is given a wide meaning that includes both natural and legal persons and any other entities that either sell goods or supply services. The AML applies to all industries (with the exception of certain agricultural producers and rural organisations) and to both domestic and foreign-owned enterprises.
Geographical scope
The AML applies to any monopolistic practice relating to an economic activity within the PRC, or one outside of the PRC but which has the effect of excluding or restricting competition within the PRC. This latter provision has the effect of making the AML extra-territorial in scope, in common with, for example, the competition regimes of both the EU and the US.
SOEs
It is not clear whether and, if so, to what extent the AML may apply to Chinese state-owned enterprises (SOEs). Article 7 of the AML provides that the "State protects the lawful economic activities" of certain SOEs. However, there is no definition of an SOE, nor is there any further explanation of the meaning of Article 7. It is possible that it may be used by the authorities to exempt SOEs from the scope of the AML, thus potentially significantly reducing the scope of the AML and its overall effectiveness.
Monopolistic agreements
Monopolistic agreements are defined in the AML as being any agreements, decisions or actions that "exclude or restrict competition" (anticompetitive agreements). This wide definition is aimed at preventing businesses from circumventing the rules by entering into arrangements other than by formal agreement. EC competition law requires that there must be "an appreciable effect" on competition, but there is no such equivalent provision in the AML, with the result that any exclusionary or restrictive effect on competition may be caught by the AML, no matter how insignificant.
The AML specifically prohibits certain types of agreements between competitors, including agreements that:
- fix or change the price of products/services;
- restrict production/sales volumes of products/services;
- divide up sales territories/raw material procurement territories;
- restrict the purchase or development of new technology/equipment; and/or
- involve collective boycotts of certain transactions.
In addition, other types of agreement are generally prohibited (not only between competing business operators), including agreements that:
- fix the price of products/services on resale to third parties; and/or
- impose restrictions on the minimum prices of products/services on their resale to third parties.
Accordingly, for non-horizontal agreements, the focus is clearly on price-related provisions.
Finally, there is also a general catch-all provision for "other forms of monopolistic agreements", thus giving the authorities flexibility to apply the prohibition to agreements containing a wide range of unidentified restrictions.
The AML also provides for an exception to the prohibition for certain types of agreement whose benefits outweigh any anticompetitive effects: for example, agreements that result in efficiencies/improvements in technology or that are necessary in the light of the public interest. There are two interesting exceptions. First, agreements whose purpose is "to protect legitimate interests in relation to foreign trade and foreign-related economic cooperation activities": no explanation of this clause is provided, but there is a concern that it may be used to protect domestic businesses to the detriment of foreign businesses, e.g. by making an international natural resources contract entered into by a Chinese company immune from challenge under the AML. Secondly, "other circumstances prescribed by law or by the State Council", which appears to leave open the possibility of further exceptions in the future, including perhaps the introduction of EU-style block exemptions for certain general categories of agreement.
In order to benefit from an exception, the business operator must prove both that the agreement will "not materially restrict competition in the relevant market" and that consumers will "enjoy the benefits" arising from the agreement. Unlike EC competition law, there is no requirement to show the indispensibility of the restriction.
The AML also specifically recognises the role that trade associations may play in anticompetitive conduct by providing that they must not facilitate any prohibited monopolistic practices and setting out financial penalties for any such breach of its provisions.
Abuses of a dominant market position
The AML provides that business operators occupying a dominant market position must not abuse this position to exclude or restrict competition. Accordingly, as in other jurisdictions, additional responsibilities to maintain competition are placed on dominant companies. This prohibition relates to unilateral conduct and is only relevant where a business operator has a dominant position.
Dominance
The AML provides for a rebuttable presumption of dominance where:
- the business operator has a market share of 50%;
- two business operators have an aggregate market share of 66%; or
- three business operators have an aggregate market share of 75%.
Presumptions (b) and (c) above concern collective dominance, though there is no guidance on when it will be appropriate to consider the market shares of two or more business operators together. The AML provides that in such circumstances, any of the relevant business operators that have an individual share of less than 10% will not be presumed dominant. All of the above presumptions of dominance may be rebutted by the business operator(s) concerned presenting evidence to the contrary. The type and level of proof required is not clear, but, in practice, it likely amounts to showing that despite high market shares, there is an absence of market power.
It is possible for a business operator to be considered dominant outside of the presumptions listed above, for example where it has market power despite a low market share, and the AML contains guidance on the various factors that will be taken into account when considering whether a business operator holds a dominant position, including financial/technological strength, ability to control markets and barriers to market entry.
Abuse
The AML prohibits only the abuse of a dominant position. It contains a non-exhaustive list of acts which will constitute such an abuse, including:
- bundling of products/services;
- imposing unreasonable trading conditions;
- discriminating between counterparties; and
- refusing to deal/supply.
Again, there is also a general catch all provision of "others".
The AML provides that where valid reasons exist, certain otherwise abusive activities may be permitted. No guidance is provided either as to the required level of proof, or what may constitute a valid reason. In addition, there are two main exceptions to the possibility of arguing valid reasons, namely:
- selling commodities at unfairly high prices, or purchasing commodities at unfairly low prices; and
- other acts prescribed by the Anti-Monopoly Enforcement Agency (AMEA) as abuses of a dominant market position.
The consequences of these exceptions remain unclear, though it may mean that certain types of abuse may be considered per se abuses of a dominant position regardless of whether there are legitimate business reasons to justify the conduct.
Article 55 of the AML provides for a general prohibition on the abuse of intellectual property rights (IPR). No definition of abuse in this context is provided, and it is unclear whether this provision merely clarifies the application of the general prohibitions of the AML to IPR, or creates a separate, wider prohibition.
Concentrations
The AML confirms that business operators are permitted to enter into concentrations, but also provides that concentrations meeting the relevant thresholds must be filed with the AMEA in advance and must not be implemented before clearance. There is no provision for any derogation from the obligation to suspend the transaction pending clearance.
The AML itself does not provide details of the relevant jurisdictional thresholds. However, on August 3 2008, the State Council of China passed the Implementing Regulations on the Notification of Business Operators' Concentrations (Implementing Regulations). The key provision of the Implementing Regulations is Article 3, which sets out the thresholds for the notification of concentrations. The thresholds are confirmed as follows.
- The aggregate global turnover of all business operators involved in the concentration for the preceding financial year is in excess of Rmb10 billion ($1.5 billion), and there are at least two business operators each of whose turnover in China for the preceding financial year was in excess of Rmb400 million.
- The aggregate turnover in China of all business operators to the concentration for the preceding financial year is in excess of Rmb2 billion, and there were at least two business operators each of whose turnover in China for the preceding financial year was in excess of Rmb400 million.
In cases falling outside (a) and (b) above, the AMEA may still investigate where the facts and evidence show that the concentration has, or may have the effect of eliminating or restricting competition (Article 4). No guidance is provided about the circumstances in which this provision may apply.
While the thresholds have been increased from earlier drafts, they do remain relatively low, particularly when compared to the equivalent notification thresholds in jurisdictions such as the EU, and there remains a concern that too many relatively insignificant transactions will be caught by the notification obligations.
Legal uncertainties do, however, remain in relation to the turnover thresholds. For example, it is not clear whether "all business operators involved in the concentration" includes the seller, or only the buyer and the target company. It is also unclear clear what exactly is meant by turnover. For instance, does it include the turnover of the entire group of each of the Business Operators involved in the concentration? The Implementing Regulations provide simply that turnover will be calculated "taking into consideration the characteristics and actual conditions of the banking, insurance, securities, futures and other special sectors": it is unclear why these specific sectors have been highlighted.
The Implementing Regulations clarify that mergers, obtaining control either by way of shares or assets and obtaining the power to exercise decisive influence will all be considered a concentration.
One significant issue that is not addressed in the Implementing Regulations is whether the establishment of a joint venture may ever constitute a notifiable concentration. This leaves considerable uncertainty for business operators as to the scope of the obligation to notify.
The AML does, however, provide for certain circumstances when a concentration will not be notifiable. In summary, intra-group reorganisations are generally exempted from the obligation to notify.
A concentration must be notified together with all supporting documentation, to the AMEA. Pre-notification consultations with the AMEA are provided for, but no indication of the extent, nature or consequences of these is given. The statutory deadlines will not start to run until the AMEA has declared that the notification submission material are complete. In summary, the AMEA has 30 days within which to conduct its preliminary examination and a further 90 days within which to carry out further investigations. The AMEA may also extend the timetable by up to a further 60 days in certain circumstances.
China already has an existing merger notification procedure contained in the Provisions on the Acquisition of Domestic Enterprises by Foreign Investors (M&A Regulations). Though there are no express provisions in the AML on the relationship between the existing and new merger filing obligations, it is likely that the filing obligations under the AML will take precedence.
Abuse of administrative powers to prevent or restrict competition
The AML prohibits the abuse of administrative powers by administrative authorities and statutory bodies, including compelling any business operator to engage in prohibited monopolistic practices or formulating stipulations that exclude or restrict competition. This is designed to address issues of local protectionism by government bodies in China which prevent companies from outside the locality doing business within it.
Where any administrative or statutory body is found to have engaged in any prohibited act, it may be ordered to rectify the situation and punish the relevant officers.
Penalties
The AML provides for various penalties that may be imposed on Business Operators for breach of its provisions, as set out below. No criminal penalties are provided for, although there is provision for civil liability to third parties who suffer harm as a result of the illegal activity.
Monopolistic agreements:
- cease and desist orders;
- implemented agreement: fines of 1%-10% of total turnover for the previous year; or
- non-implemented agreement: fines of up to Rmb500,000.
Provision is made for a leniency programme whereby reductions in, or waivers of, fines may be granted if the parties voluntarily report the agreement(s) to the authorities. However, the benefits of such a leniency system are unclear, as no details are provided about the circumstances in which leniency will be granted.
Abuses of a dominant position:
- cease and desist orders; and/or
- fines of 1%-10% of total sales turnover for the previous year.
Concentrations:
- order to terminate/unwind implementation;
- other orders; and/or
- fines of up to Rmb500,000.
Investigations
The AMEA is responsible for enforcement actions under the AML and has wide powers to enter business premises to conduct investigations, question business operators, inspect/copy relevant documents, seal/seize evidence and make enquiries into bank accounts. The AML provides for fines for various acts that may be considered as non-cooperation with such investigations.
It has recently been confirmed that, at least for an initial period, three existing government agencies will share responsibility for the enforcement of the AML, as below.
- The Ministry of Commerce (Mofcom) continues to be responsible for merger control filings.
- The National Development and Reform Commission (NDRC), the central planning authority is responsible for price monopoly-related cases. The NDRC has reportedly prepared draft Provisions for Anti-Price Monopoly is (not yet published), which will provide implementing regulations for the anti-price monopoly provisions of the AML.
- The State Administration for Industry and Commerce (SAIC), which acts as the enforcement body for the existing Anti-Unfair Competition Law is responsible for issues relating to abuses of a dominant market position, non-price related monopolistic agreements and abuses of administrative powers to prevent or restrict competition. The State Council of China recently approved the SAIC to set up an antimonopoly and anti-unfair competition executive bureau to undertake these functions.
The system of shared responsibility for the enforcement of the AML appears to be a compromise between the relevant agencies and raises a number of potential concerns, in particular in relation to the coordination and consistency of enforcement of the AML.
The AML also provides for the creation of a second authority, the AMC. The AMC will establish a day-to-day office within Mofcom, though it will be independent from the anti-monopoly bureau of Mofcom. The AMC will be responsible for studying/proposing competition policies, investigating/publishing market reports, preparing anti-monopoly guidelines and coordinating enforcement work it has been indicated informally that the AMC will also handle any conflicts that arise between the three AMEA government agencies. However, the relationship between the AMC and the AMEA is not entirely clear from the AML, and there is no mechanism to deal with inconsistencies or conflicts between the two bodies.
According to the Supreme People's Court Circular on Study and Implementation of the AML issued on July 20 2008, the Intellectual Property Civil Division of the Chinese courts will exercise jurisdiction over all antimonopoly-related civil litigation, in relation to both IPR and non-IPR related actions. It is unclear in which division administrative appeals against the decisions of the AMEA will be handled.
| The main provisions of the AML |
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Ensuring compliance
There have not yet been any substantive decision of the AMEA issued under the AML to date. However, there are already two high profile cases before the AMEA: first, the complaint to NDRC / SAIC about the alleged abuse by Microsoft of a dominant position; and secondly, the proposed acquisition by Coca Cola of Huiyuan Juice Group that is notifiable to Mofcom under the merger filing requirements of the AML. These cases may provide some early guidance on the practical application of the AML by the AMEA, assuming that the key elements of the decisions are made public. However, currently, many questions remain about the exact scope and practical application of its provisions, which may make ensuring compliance difficult. That said, some activities, such as price-fixing, are clearly prohibited. For others not expressly set out in the AML, we will have to wait.
It is to be hoped that the current period of ambiguity will be short-lived, particularly given the risk of significant penalties for non-compliance, and that the authorities will soon provide the required further guidance. In the meantime, guidance may be taken from other jurisdictions, such as EC competition law, which seems to have had the most influence on the drafters of the AML.
| Author biographies |
Andrew McGinty
Lovells
Andrew McGinty is a partner in Lovells' Shanghai Office and has broad experience of advising on PRC-related private and public mergers and acquisitions, joint ventures and other foreign investment projects, focusing on real estate, TMT, competition and financial services.
Andrew is recognised for his work relating to the introduction of the Anti-Monopoly Law, and was appointed as a member of the EU Chamber Working Group established to comment on the drafts of the AML. Andrew frequently presents at conferences on competition and anti-monopoly issues in China and has been recognised as a leading lawyer in a number of publications such as Asia-Pacific Legal 500. He is fluent in English, Mandarin, Cantonese and French. He leads the Shanghai-based competition law team and has been responsible for advising on the application of the M&A Regulations to numerous high profile transactions in China, as well as drafting merger control clearance submissions for various international clients of the firm.
Kirstie Nicholson
Lovells
Kirstie Nicholson is of counsel in Lovells' competition and EU law trade practice. After working for a number of years in both Lovells' London and Brussels offices, Kirstie transferred to the Shanghai office in April 2008 to develop the firm's competition practice in China.
Kirstie has experience in a wide range of transactional, advisory and contentious competition law matters relating to various industries, in particular the maritime industry. Her experience includes merger filings, European Commission investigations and litigation before the European Courts. She also advises on the full range of compliance issues, including in particular dominance issues and the relationship between competition law and intellectual property rights.
In China, Kirstie has been helping clients to prepare for the introduction of the new AML. This has included both providing general information about the key provisions of the AML and undertaking reviews of existing agreements and practices to ensure compliance. In addition, she has assisted in the preparation of the EU Chamber of Commerce China's comments on the draft AML implementing regulations on concentrations. Kirstie has also provided clients with information about the recent proposals for a competition law in Hong Kong and has commented upon the content of the proposals. She regularly speaks at both Lovells and external conferences and seminars and has also published a number of articles covering aspects of competition law in Europe, China and Hong Kong. |