China s New Anti-Monopoly Law: Principles and Challenges

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1 China s New Anti-Monopoly Law: Principles and Challenges Background: On 30 August 2007, the Standing Committee of the National People s Congress adopted the Anti- Monopoly Law of the People s Republic of China (the Anti-Monopoly Law ), which enters into force on 1 August The Anti-Monopoly Law provides a framework only, its application and enforcement will depend on implementing rules yet to be adopted. This Links to China provides an overview of the new framework. Vigorous enforcement of anti-cartel and abuse of dominance legislation, as well as prohibitions on large mergers and acquisitions, have spurred companies around the globe to place competition law compliance high on their agenda. In the future, and specifically from 1 August 2008, it will be critical for all companies doing business in China to include the Anti-Monopoly Law in their compliance efforts. Failure to do so will entail risks of severe financial penalties as well as significant transactional risks. The Anti-Monopoly Law lays down two broad prohibitions applicable to business conduct with effects in China a prohibition on monopolistic agreements and a prohibition on abuses of dominant market positions. These are similar to those in, to use an example, EU competition law. They will undoubtedly involve challenges for agencies and businesses alike in terms of finding the right enforcement compliance balance. The law also contains provisions on merger control. Such rules have existed in China with regard to foreign acquisitions since 2003, but the Anti-Monopoly Law introduces a refreshed framework. If companies experiences with the current merger control system are anything to go by, one can expect the Anti-Monopoly Law to be rigorously enforced. This should give pause for thought. Enforcement agencies will have broad powers of investigation, including the power to conduct dawn raids. Infringements of the law may attract fines of up to 10 per cent of a company s total sales volume in a relevant market in the previous financial year. In addition, agencies are also granted powers to confiscate illegal gains. These are far-reaching sanctions, not least in the context of a competition law system being introduced in one of the world s most dynamic and fastgrowing economies. The Anti-Monopoly Law also demonstrates the determination and efforts of the Chinese Government to curb administrative monopoly. This is a unique feature of China s Anti-Monopoly Law. In particular, administrative authorities and organisations in charge of public affairs in China are prohibited by the Anti-Monopoly Law from abusing their administrative powers to, among other conducts, limit commodity trading, impede inter-regional commodity circulation, and exclude or restrict out-of-region business operators participation in local tenders and biddings or investment in local industries. Monopoly Agreements: Within the meaning of the Anti-Monopoly Law, the term monopoly agreements covers agreements, decisions or other concerted behaviour that precludes or restricts competition. The Anti-Monopoly Law lists, non-exhaustively, prohibited horizontal agreements, for instance price fixing agreements, agreements limiting production or sales volumes, market allocation agreements and the joint boycotting of transactions. Similarly, a prohibition on vertical agreements that fix resale prices or minimum resale prices are familiar features. Such hard-core agreements are also prohibited by most competition laws. 1

2 Interestingly, agreements restricting the purchase of new technology or new equipment are also prohibited by the Anti-Monopoly Law. Although such agreements are capable of influencing free and fair competition, many such agreements are typically not deemed to be anticompetitive in other jurisdictions. For example, field-of-use demarcations in licensing agreements, whereby a licensor of a technology or the holder of certain intellectual property rights agree with a licensee to limit the scope of a licence to a certain field of use, are normally not taken to be anticompetitive. If applied to that effect, the Anti-Monopoly Law could in fact impede the development and exploitation of new technology by start-up companies. Moreover, the Anti-Monopoly Law also contains a catch-all category of prohibited agreements, namely other monopoly agreements as recognised by the Anti-Monopoly Enforcement Authorities. The fact that the law prohibits certain categories of agreements may suggest that it will be applied in a form-based, rather than an effects-oriented, approach. It is hoped that this clause will be clarified in the implementing regulations. Prohibited agreements may be exempted, provided that they meet certain specified criteria. For instance, agreements that improve technology or R&D, improve product quality or efficiency, reduce costs, unify product specifications or standards or enhance the competitiveness of small and medium-sized operators, are exempted. However, it is up to the companies to prove that these agreements will not substantially restrict competition and that consumers will share in the benefits of the agreements, except for the exemption to safeguard foreign trade and foreign economic cooperation. Additionally, agreements that are beneficial to the public interest, that safeguard foreign trade and foreign economic cooperation and that are intended to mitigate the effects of economic recession may also be exempted. With this last provision, the Chinese antitrust system might leave the door open to so-called crisis cartels, which is a serious departure from the systems of the more developed antitrust jurisdictions. Abuse of Dominance: The prohibition on abuses of a dominant market position centres on a definition of a dominant undertaking as one capable of controlling the price or quantity of products or services or other trading terms in the relevant market or restricting or affecting other undertakings entry into the relevant market. Several factors are to be considered when one evaluates whether a company holds such a position, including: the market share of the company and the competitive situations in the relevant market; the ability to control the market; the financial and technical capabilities of the company; whether other companies are dependent on the allegedly dominant company; the presence of barriers to entry; and other factors relevant to the company s dominant market position. In addition, the Anti-Monopoly Law embraces a rebuttable statutory dominance presumption based on market share alone. According to this presumption: a company with a market share of 50 per cent or more will be presumed to be dominant on its own; and 2

3 two companies having a combined market share of at least two thirds, or three companies having a combined market share of more than three quarters, will be presumed to be collectively dominant (although companies with less than a 10 per cent market share will not be presumed collectively dominant). Structural tests of this kind are not relied upon in many competition law systems. Their practical value is questionable, since the application can lead to unreasonable results and uncertainties. For instance, two companies that have very different market share (not to mention overall size or competitive strengths more generally) would be presumed to be collectively dominant as long as their combined share exceeds two thirds. It is hoped that the practical application of the law will, in fact, be more effects-oriented than form-based. As in the case of monopoly agreements, the Anti-Monopoly Law prohibits as abusive, certain specified classes of conduct by dominant firms. Prohibited conduct includes predatory pricing, excessive pricing, price discrimination, refusal to deal, exclusive dealing and tying. This prohibition also contains a catch-all clause prohibiting activities that abuse the dominant market position as recognised by the Anti-Monopoly Enforcement Authorities. The law expressly includes a rule of reason which states that such conduct will only be regarded as abusive if there is no reasonable justification for it. Merger Control: Since 2003, Chinese law has included a system of merger control applicable to certain foreign acquisitions of Chinese targets as well as certain offshore acquisitions having a China nexus. The relevant rules are set out in the Provisions Concerning the Acquisition of Domestic Enterprises by Foreign Investors (the M&A Provisions ) and in guidelines issued by the Ministry of Commerce (respectively, MOFCOM and the MOFCOM Guidelines ). By August 2007, MOFCOM had reportedly received more than 380 merger control filings. The Chinese authorities review of mergers undoubtedly constitutes an important introduction to competition law enforcement. Companies having experience of Chinese merger control filings report that officials scrutinise filings more and more closely and with increasing rigour. The Anti-Monopoly Law will bring about some significant changes to the current merger control regime. In particular: the obligation to notify transactions will be included in national law as opposed to lower-level ministerial regulations; merger control will apply to foreign acquisitions in China (and certain offshore transactions with a China nexus) as well as purely domestic acquisitions and in all sectors of the economy; notification and clearance before closing become compulsory for all transactions that meet the criteria for notification; and notifying parties will receive written confirmation of decisions adopted in merger cases. Prohibition or conditional clearance decisions must be published. The merger control rules will apply to concentrations of business operators, a concept defined to include (1) mergers of business operators; (2) a business operator s acquisition of the right of control of any other business operator(s) by way of an acquisition of equity interests or assets; or (3) a business operator s acquisition of the right of control of, or its exertion of a decisive influence on, any other business operator(s) by way of a contract or other means. 3

4 The Anti-Monopoly Law does not establish any notification thresholds: these are expressly required to be included in implementing regulations. However, notification will be mandatory for all concentrations that satisfy the notification criteria, and the closing of such transactions will need to be suspended until clearance has been obtained. The current M&A Provisions bring within Chinese jurisdiction, transactions that only have even a weak connection with the Chinese economy. It is hoped that the implementing rules will set notification thresholds which incorporate a clear and material nexus to the Chinese economy. Overly broad thresholds risk imposing significant unnecessary costs and burdens on the administration and companies alike. The substantive test will be whether a concentration will or may preclude or restrict market competition. Such concentrations are to be prohibited unless the parties are able to prove that the favourable impact of such concentration on competition obviously outweighs the adverse impact, or that such concentration conforms to the requirements of social and public interests. The Anti-Monopoly Enforcement Authority may also impose restrictive conditions to any concentration of business operators that are allowed to proceed to reduce any adverse effect to competition that may result from the concentration. Procedurally, the review may be conducted in two phases. An initial Phase I review must be completed within 30 days after a complete notification has been filed. At this stage, a decision will be made whether to launch a substantive, Phase II, review. The Phase II review may last for another 90 days, unless extended by up to 60 days. It is reported that the Chinese Government is currently drafting a number of guidelines regarding the merger review process, including guidelines on filing procedures, market definition, substantive review and procedures on the conditional approval of mergers. These guidelines are expected to be adopted prior to or on 1 August 2008, when the new Anti-Monopoly Law comes into effect. Before then, merger filings and reviews regarding onshore and offshore transactions involving foreign investors will, arguably, continue to be governed by the M&A Provisions and the relevant MOFCOM Guidelines. National Security Review: One aspect of the Anti-Monopoly Law that has attracted considerable attention is the national security review of the acquisition of domestic enterprises by foreign investors or foreign participation in the concentration of business operators by other methods. Such transactions will be subject to an additional review, besides the merger control procedure described above. It should be noted that the concept of national security review is not entirely new. The M&A Provisions impose a similar reporting obligation in certain circumstances. Although no formal procedures have been promulgated so far in relation to the conduct of a national economic security review under the M&A Provisions, it is understood that, in practice, reports of this kind have been made to MOFCOM by the parties to the relevant transactions. However, unlike the M&A Provisions which impose a reporting obligation for national economic security reasons, the Anti-Monopoly Law applies the broader term national security. It is anticipated that separate legislation will be adopted to establish the nature, scope and procedures of this review before the Anti-Monopoly Law becomes effective. Enforcement: The Anti-Monopoly Law introduces a new central agency to take charge of organising, coordinating and guiding competition law enforcement in China. This will be known as the Anti- 4

5 Monopoly Commission of the State Council. This Commission will mainly be responsible for formulating competition policies, organising investigations, conducting evaluations and reporting on market competition status in China. It will also formulate anti-monopoly guidelines and coordinate the work of designated anti-monopoly law enforcement authorities under the State Council (the Anti-Monopoly Enforcement Authorities ). Enforcement of the Anti-Monopoly Law will be carried out by several Anti-Monopoly Enforcement Authorities. It is expected that each of these will perform different law enforcement functions. For example: the State Administration for Industry and Commerce is likely to be in charge of enforcement efforts directed at monopoly agreements, abuse of dominant market position as well as abuse of administrative powers precluding or restricting competition; MOFCOM is likely to remain responsible for merger control, as it has been since 2003; and the National Development and Reform Commission may also play a key role in price control issues. Such a division of powers among Anti-Monopoly Enforcement Authorities is largely in line with the enforcement structure under the current Chinese competition legislation. At this stage, it is not clear what role other authorities will play in the enforcement of the Anti-Monopoly Law. However, it is conceivable that, for instance, the Ministry of Information Industry, the General Administration of Civil Aviation, the Ministry of Communications and the financial regulators will also play a role within the industries falling within their specific jurisdiction. At any rate, it is clear that significant enforcement resources will be made available to the Anti-Monopoly Enforcement Authorities. Conclusion: The Anti-Monopoly Law is China s first comprehensive competition law which lays down key principles of competition policy to be supplemented by detailed rules and further guidelines to be issued by the relevant authorities. The Anti-Monopoly Law will impact significantly on all companies doing business in China. Although conceptually the Anti-Monopoly Law bears some resemblance to the competition law regimes of, for instance, the European Union or the United States, several features are uniquely Chinese. Additionally, the practical application and enforcement of the law will greatly depend on implementing rules and guidelines still to be adopted. 5

6 Contacts Linklaters has six offices across Asia. If you would like to discuss anything in this bulletin, you can contact the following members of our China Practice Group or your other regular Linklaters contacts: Competition Contacts: Main Contact - Brussels: Jonas Koponen Tel: (+32 2) jonas.koponen@linklaters.com London: Michael Cutting Tel: (+44) michael.cutting@linklaters.com Lisbon: Carlos Pinto Correia Tel: (00 35) carlos.correia@linklaters.com Stockholm: Kent Karlsson Tel: (00 46) kent.karlsson@linklaters.com Cologne: Wolfgang Deselaers Tel: (00 49) wolfgang.deselaers@linklaters.com Paris: Olivier d Ormesson Tel: (00 33) olivier.dormesson@linklaters.com New York: Tom McGrath Tel: (00 1) thomas.mcgrath@linklaters.com Corporate Contacts: Shanghai: Zili Shao Tel: (86 21) zili.shao@linklaters.com Fang Jian Tel: (86 21) jian.fang@linklaters.com Hong Kong: Simon Poh Tel: (86 21) simon.poh@linklaters.com Betty Yap Tel: (852) betty.yap@linklaters.com Beijing: Celia Lam Tel: (86 10) celia.lam@linklaters.com Paul Chow Tel: (86 10) paul.chow@linklaters.com Singapore: Thomas Ng Tel: (86 10) x thomas.ng@linklaters.com Kevin Wong Tel: (65) kevin.wong@linklaters.com 6

7 Bangkok: Wilailuk Okanurak Tel: (66) Tokyo: Paul McNicholl Tel: (81 3) This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters. Linklaters. All Rights Reserved 2007 Please refer to for important information on the regulatory position of the firm. We currently hold your contact details, which we use to send you special reports such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this special report or other marketing communications, please let us know by ing us at 7