China – Highlights Of The Draft Amendment To The AML – What Is The Coming Changes To PRC Competition Law.

 

11 February, 2020

 

 

On January 2, 2020, the State Administration for Market Regulation (“SAMR”) officially published the Draft Amendment to the Anti-Monopoly Law (“Draft Amendment”) in order to solicit public opinions, showing the authority’s sharp claws toward monopoly behaviors. This significant development is based on a 12-year-long experience of antitrust enforcement ever since the Anti-Monopoly Law (“AML”) has been enacted in 2008. The Draft Amendment conveys the signal to the public that the Chinese authority will increasingly strengthen enforcement on monopoly conducts. This article provides a summary of main changes in the Draft Amendment together with some comments, as well some practical implications thereof. 

 

1. Monopoly agreement

 

Article 17 prohibits undertakings from organizing or assisting other undertakings to conclude monopoly agreements.

Article 53 provides that undertakings which (i) have no turnover in the preceding year or (ii) conclude but not implement monopoly agreement can be imposed fines at no more than RMB 50 million. For undertakings which implement monopoly agreements, the authority shall order to cease monopoly conducts, confiscate illegal gains and impose fines at 1%-10% turnover in the preceding year. The foregoing provisions are also applicable to those organizing or assisting other undertakings to conclude monopoly agreements.

 

Comment:

 

First, hub-and-spoke conspiracy has been only implied in the scope of monopoly agreement in the current AML , but now the Draft Amendment provides an explicit legal basis of the “hub”part. It is expected that further provisions on hub-and-spoke conspiracy will be provided in lower-level legislation, such as regulations by SAMR, if this provision is included in the final Amendment.

 

Second, the Draft Amendment increases hundredfold top fines from RMB 500 thousand yuan up to RMB 50 million yuan for punishing those undertaking that concluded but not implements yet the monopoly agreements.

 

Third, according to the Draft Amendment, undertakings with no turnover will also receive the fine. The current AML has no specific wording addressing such scenario. In practice, in some cases in 2019 (e.g. penalties on horizontal monopoly agreements among 3 vehicle safety technology testing companies in Xianning, Hubei Province, and horizontal monopoly agreements among 8 concrete companies in Hengzhou, Zhejiang Province), SAMR confiscated illegal gains and ordered to cease monopoly conducts, but did not impose fines against undertakings which have no turnover in the preceding year. However, the Draft Amendment will retake the exemption of fines from those undertakings with no sales.

 

Fourth, undertakings assisting the conclusion of monopoly agreement are also explicitly prohibited under the Draft Amendment.

 

2. Abuse of market dominance

 

Article 21 of the Draft Amendment provides that network effects, economies of scale, lock-in effects, ability of controlling and processing relevant data and other factors should also be considered in determining market dominance of internet undertakings.

 

Comment:

 

In recent years, competition issues in internet sector have attracted much attention from the antitrust authority. Published on July 1, 2019 and effective on September 1, 2019, the Interim Provisions for Prohibiting Abuse of Market Dominance (the “Interim Provisions”) has embodied a provision specific on internet sector. Specifically, it provides that network effects, economies of scale, lock-in effects, ability of controlling and processing relevant data and other factors should be taken into consideration when determining the market dominance in internet sector, which is consistent with the Draft Amendment.

 

3. Merger control review

 

Article 23 defines “control” as the right or actual status of a business operator that has or may have a decisive influence, directly or indirectly, individually or jointly, on the production and operation activities or other major decisions of other business operators.

 

Article 24 provides that the authority can formulates and updates filing thresholds according to economic development, scale of the industry and other factors and shall make it public in a timely manner.

 

Article 30 provides that the time required under the following circumstances shall not be included in the time limit for the merger review procedures:

 

1. suspension period of merger review procedures upon application or consent of the filing parties;
2. period of submitting supplementary documents and materials by undertakings as required by the authority;
3. period of negotiating restrictive conditions between the authority and the filing parties

 

The specific provisions on stopping the clock of merger review shall be separately formulated by the anti-monopoly authority under the state council.

 

Article 55 Under any of the following circumstances, the anti-monopoly law enforcement agency shall impose a fine of not more than 10% of business operators’ turnover in previous year: (i) implementing a concentration with failure to file, (ii) implementing a concentration after filing but not receiving clearance, (iii) violation of additional restrictive conditions; (iv) implementing a concentration in violation of blocking decision.

 

Comment:

 

First, the Draft Amendment emphasizes that when defining ‘control’, the key point is to assess whether there are controlling/veto rights over the business operations of the target.

 

Second, SAMR might be authorized to update filing thresholds since they have been established in 2008. With no further detailed provisions, some expect that the SAMR might annually adjust the filing thresholds, which would be similar to antitrust authorities in other main jurisdictions.

 

Third, “stop the clock” rule might be introduced in Chinese antitrust legislations for the first time. SAMR would have greater discretion to extend the review period for non-simplified or conditionally-cleared cases. The authority may have less needs to request filing parties to withdraw in order to gain more time to deal with complex and high-profiled cases.

 

Last, for gun-jumping cases, the current AML provides the legal liability could be a fine capped with RMB 500,000 on the party which is obliged to pre-file to SAMR. In the Draft Amendment, SAMR can impose no more than 10% of the sales turnover in the preceding year, which is similar to that for monopoly agreements and abuses of dominance. For those large-scale companies with fully-integrated production lines, the cost of closing without approval from the authority would be extremely high.

 

4. Implications of the Draft Amendment

 

Although the Draft Amendment has not been effective so far, the implications conveyed by the authority is still very impressive. Market players active in China should pay more attention to the development of China anti-monopoly laws, especially given the potential significant changes and lifted liability. The regulation boundaries of anti-monopoly behaviors are increasingly refined.

 

Cooperation with the authority’s investigation will be expected and required more as a legal baseline rather than a simple attitude.

 

Furthermore, the introduction by Draft Amendment of new types of monopoly conduct, such as hub-and-spoke, will urge the market players and their outside and in-house legal counsel to borrow more experience form international precedents like in the EU and U.S. Obviously, the China antitrust legislation and enforcement is expected to be further enhanced in future.