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17 February, 2017
We witnessed continued enforcement activity by the Chinese antitrust agencies during the year of the Monkey, which marked the eighth anniversary of the coming into force of the PRC Anti-monopoly Law (AML). The three primary antitrust regulators: the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC), and the State Administration for Industry and Commerce (SAIC), together imposed CNY1.03 billion (approximately USD150 million) in fines in 2016. More importantly, a number of high profile cases were published, providing useful guidance on the application of competition law in China.
We set out below some of the main highlights of the year:
SAIC fined Tetra Pak CNY667.7 million for abuse of dominance
The SAIC concluded its four-year abuse of dominance investigation into Tetra Pak International SA and five of its Chinese subsidiaries (together, Tetra Pak). This was one of the most high profile cases tackled under the AML, and Tetra Pak was found by the SAIC to have abused its market dominance by:
Tying and bundling: requiring customers to use “Tetra Pak approved cartons”;
Restriction of trade: requiring its carton paper supplier (the sole manufacturer of that material) to deal exclusively with Tetra Pak; and
Loyalty discounts: retroactive rebates and customized volume target discounts.
The SAIC imposed a fine of CNY667.7 million, which represented 7% of Tetra Pak's PRC turnover in 2011. In its decision, the SAIC noted that during the course of the investigation, Tetra Pak had ceased some of the conduct described above and had cooperated throughout. Tetra Pak also actively offered a remediation plan prior to the conclusion of the investigation. For more details, please see our previous e-bulletin on the Tetra Pak case here.
This fine was the largest ever imposed by the SAIC for antitrust violations, and serves as a powerful reminder that all three PRC antitrust regulators are prepared to take a hard line on foreign companies engaging in anti-competitive behaviour in China. In fact, foreign firms accounted for 96% of the CNY1.03 billion antitrust fines imposed in 2016, and it is widely expected that this trend will continue.
NDRC fined Medtronic CNY118.5 million for Resale Price Maintenance
In April 2016, the NDRC commenced its investigation into Medtronic (Shanghai) Management Co., Ltd., a Chinese unit of the European-headquartered medical device company. In this first PRC price fixing case involving a medical device maker, Medtronic was found by the NDRC to have:
- Issued price lists to distributors;
- Set fixed profit margins for distributors; and
- Set minimum tendering prices for dealers: distribution agreements provided that dealers should "strictly follow the guidance tendering price in any tender, and any deviations require written confirmation”.
The NDRC imposed a fine of CNY118.5 million, representing 4% of Medtronic's PRC turnover generated from the relevant products in 2015. This case confirms that, in line with the approach taken by the European Commission, resale price maintenance is considered one of the most serious types of antitrust infringements in China. To avoid being penalised, companies doing business in China should refrain from any arrangement or conduct which serves to undermine third party distributors' or retailers' pricing freedom.
MOFCOM fined Canon CNY300,000 for gun-jumping
In January 2017, MOFCOM fined Canon CNY300,000 for implementing its "two-step" acquisition of Toshiba Medical Systems (TMS) from Toshiba before obtaining the necessary merger control approval.
At the time of the transaction, Toshiba was said to be in financial distress. In order for Toshiba to obtain the proceeds of the sale quickly, the transaction was structured in two steps, as follows:
Step 1: three natural persons established a "special purpose vehicle" company (SPV). Shortly thereafter, Toshiba converted all of TMS's ordinary shares into three categories of equity: (i) 20 A-class shares with voting rights; (ii) 1 B-class share with no voting rights; and (iii) 100 warrants. SPV purchased the 20 A-class shares, while Canon purchased the 1 B-class share and the 100 warrants.
Step 2: pursuant to the share transfer agreement, upon obtaining the necessary antitrust clearance, Canon would exercise its subscription right to convert the warrants into ordinary shares (with voting rights) at a nominal price (JPY 100, approximately RMB 5.76). TMS would then buy back and void all the A-class and B-class shares from the SPV and Canon respectively, resulting in Canon holding 100% of the ordinary shares of TMS.
A merger control filing was made following Step 1, but prior to Step 2. However, MOFCOM found that, even though Step 2 had not occurred and the transaction had not yet “completed” when the filing was made, the two steps were so “closely connected” that Step 1 formed an “integral” part of the overall transaction. The parties had therefore already begun the “implementation” of the overall transaction prior to filing, and had therefore engaged in illegal gun-jumping.
Although it is understood that Canon is considering an appeal, this decision is a stern warning from MOFCOM that transaction structures will be closely scrutinized.
New Draft Guidelines and State Council Opinion
On the legislation front, a number of draft antitrust guidelines were published for public comments:
- Draft Guidelines on Abuse of Intellectual Property (December 2015);
- Draft Guidelines for the Application of the Leniency Program to Cases Involving Horizontal Monopoly Agreements (February 2016);
- Draft Guidelines on Operator Commitment in Anti-Monopoly Cases (February 2016);
- Draft Antitrust Guidelines for the Automotive Industry (March 2016);
- Draft Guidelines on the General Conditions and Procedure for Exemption of Monopoly Agreements (May 2016); and
- Draft Guidelines on the Identification of Illegal Proceeds Derived by Operators from Monopolistic Practices and the Determination of Fines (June 2016).
In addition, the State Council published its Opinion on Establishing a Fair Competition Review System in Building a Market System (the Opinion) in June 2016. According to the Opinion, each governmental entity is required to conduct a self-review when formulating new business-related rules or policies, in order to check whether they may give rise to anti-competitive effects. The Opinion is the latest step of the State Council's push to ensure that the AML is observed not only by private entities, but also by public bodies.
Things to look out for in the year of the Rooster
A key highlight in the year of the Rooster is expected to be the long-awaited revision to the Anti-Unfair Competition Law, the current version of which has been in place since 1993. Key changes are expected to include: (i) clarifying its relationship with the AML; (ii) introducing new types of infringing behaviour; and (iii) introducing a more severe “basis” for the calculation of fines (the change from “illegal gain” to “illegal turnover”). These draft revisions were approved by the State Council in November 2016, and will be submitted to the legislature for review at some point in 2017.
On the enforcement front, the antitrust regulators will likely continue their efforts in investigating anti-competitive conduct. We expect to see more high-profile and complex cases being tackled, ranging from cartels to abuse of dominance to gun-jumping. We also expect that foreign firms which engage in anti-competitive conduct will come under just as much scrutiny as their Chinese counterparts. In addition, MOFCOM's newly appointed director-general, Mr Zhenguo Wu, is expected to further streamline the simple case review procedure, increase the number of staff, and develop sector expertise. This will be a welcome step, and will build on the great strides in efficiency and timing of reviews already achieved at the Anti-Monopoly Bureau of MOFCOM.
Finally, in January 2017 the State Council stated that it intends to step up its enforcement in the areas of: (i) healthcare; (ii) public utilities; and (iii) intellectual property rights. Although no sector is safe from antitrust scrutiny, these three sectors are the prime candidates to look out for in an exciting and eventful year of the Rooster.
For further information, please contact:
Mark Jephcott, Partner, Herbert Smith Freehills
mark.jephcott@hsf.com
