PRIMER: China’s Anti-Monopoly Law Amendment
IFLR’s latest explainer looks at the impact of the amendment and of newly added provisions on M&A and on foreign companies operating in China
First introduced in 2008, China’s Anti-Monopoly Law was amended for the first time in June. The latest amendment incorporates a number of new features, including a so-called “stop-the-clock” mechanism for merger review, a safe harbour for certain vertical agreements, and rules targeting platform economy companies. The new version of the law came into force on August 1.
What are the biggest changes to the Anti-Monopoly Law?
One of the biggest changes is that failure-to-file and gun-jumping fines will be up to 10 times higher than they used to be, and may now reach 10% of an infringer’s group-wide turnover in the preceding year. “The increase in fines is bound to have a big impact,” said Liang Gao, partner at Gaopeng & Partners. “The maximum fine has increased from Rmb 500,000 ($74,764) to Rmb 5 million for unreported mergers without competition issues. But if there are anti-competitive violations, the fine will increase to up to 10% of the firm’s turnover in the previous year.” In cases of severe violation, the State Administration for Market Regulation (SAMR) may increase fines by up to 50% of the firm’s turnover in the previous year. Additionally, criminal liability has been introduced in the amendment, though implementation details for that should be clarified through the Criminal Law at a later stage.
What are the unique aspects of the amendment?
One of the positive effects of the amendment is the introduction of a stop-the-clock mechanism to replace the practice of pulling and refiling in complicated cases. “This mechanism allows for more flexibility when the SAMR is carrying out reviews, which typically need to be carried out within 180 days,” said Gao. “It eliminates the need for firms with high competition concerns, such as those in the semiconductor industry, to have to withdraw and refile their cases.”
It is, however, unclear how the SAMR will apply the stop-the-clock mechanism. “The decision to stop the clock will depend on the SAMR and it may be decided on a case-by-case basis so it’s unclear how the measure will be applied until we see it in practice,” said an in-house counsel at a technology firm. “It will likely be used in cases where remedies are considered in complex transactions.”
Several sources welcomed the new mechanism and said it would be beneficial to those concerned. “This is especially true in the case of complex transactions where the current regime requires a ‘pull-and-refile’ of such transactions if no remedy can be achieved within the prescribed timeframe,” said Adam Au, general counsel at UMP Healthcare Holdings. “It remains unclear how this will play out in practice as the mechanism to suspend is at SAMR’s sole discretion, which adds another layer of uncertainty to the timeline of an M&A process.”
Are there any other silver linings?
Another positive change is the creation of a safe harbour mechanism for vertical agreements. While specific market share thresholds have not been indicated, the amendment provides that as long as market shares are below the standards set by the antitrust authorities, vertical agreements should not be prohibited. A supplementary consultation on implementing rules under the Anti-Monopoly Law amendment has proposed a 15% market share threshold. “Vertical agreements typically don’t cause high competition concerns compared to horizontal agreements,” said Gao. “The provision mirrors that of the vertical block exemption regulation in the EU.”
The amendment also limits the application of safe harbours to vertical agreements, which are usually considered less anti-competitive than horizontal ones. “But this may not necessarily preclude the inclusion of horizontal agreements in the future,” said Au.
How should businesses prepare?
Businesses are advised to prepare particularly for antitrust compliance to avoid harsh penalties and being caught under the SAMR’s increased enforcement power. “Businesses should identify potential risks and consider necessary mitigating measures to avoid exposure to harsh penalties,” said Laura Liu, partner at Baker McKenzie FenXun. “For M&A transactions, parties should plan their deal timetables and conduct a China merger filing assessment at an early stage to ensure the necessary provisions are included in the deal documents – particularly regarding flexibility on closing and long-stop dates, reverse breakup fees, and other risk allocation clauses.”
How are tech companies affected?
In line with the antitrust fines placed on Chinese tech companies found to have breached market competition rules in the past few years, this is further evidence that the tech sector will continue to be targeted. Under the new amendment, agency discretion has been expanded and the sanctions for violations have also significantly increased. “These provisions were already in the previous version and I don’t see any sign of further tightening,” contended Angela Zhang, associate professor at the faculty of law at the University of Hong Kong. “There is an explicit prohibition of online platforms using data and algorithms, technology and platform rules to impose inappropriate constraints on others, signaling that the Anti-Monopoly Law will continue to serve as a major tool to discipline the Chinese tech giants.”
Meanwhile, the in-house counsel at the technology firm said that the amendment has drawn attention to the digital economy sector – particularly companies handling data and digital platforms. “Companies in this sector will need to ensure that they do not abuse their market position in their use of algorithms and data,” he said. “But encouraging innovation remains a key goal for the SAMR and demonstrates its approach in ensuring the stable development of the digital economy.”
Are there other implications for tech companies?
According to Au, the passing of the amendment might muddy the waters and add more legal complications for the growth of tech companies. “Looking ahead, it’s too early to say that the amendment will dent M&A enthusiasm of tech companies for good, but it will add to their ‘to-do’ lists before they take any action,” he said. “We might also see companies ratcheting up their own R&D or focusing on organic growth in the long run.”
The introduction of article 9 of the amended Anti-Monopoly Law specifically references anti-competitive conduct with the use of data, algorithms, and technology. “In some ways, this also echoes China’s stringent control over the internet space through other legal tools such as the Data Security Law, Cybersecurity Law and the Personal Information Protection Law,” said Au. “This coincides with China’s overall policy to rein in domestic tech giants and democratise the internet sector.”
Over the past two years, China has made no secret of its intention to tackle local tech giants. As it expands existing platform guidelines, the Anti-Monopoly Law amendment will further regulate platform-specific conduct on top of the general prohibition clause.
“Tech giants have been relying on M&A as a source of revenue growth in the last two decades,” said Au. “For those who are intimately involved in China’s tech sector, a more downbeat picture will emerge.”