15 January 2021
Late last year the Chinese competition authority (SAMR) published its draft Platform Economy Antitrust Guidelines for public consultation. This signalled that SAMR is poised to take a hard stance on antitrust and merger control enforcement in the digital space.
Indeed, about six weeks after publication of the Guidelines, SAMR launched an antitrust investigation into Chinese technology platform Alibaba over alleged monopolistic behaviour. The alleged behaviour reportedly includes forcing merchants to exclusively use the platform to distribute their products.
It is clear that China is stepping up its scrutiny of major Chinese technology companies. And, in doing so, SAMR is joining ranks with other prominent antitrust authorities across the globe including the European Commission and the U.S. agencies.
Impact for companies doing business in China
Although the Guidelines do not change the rules substantively, they do provide important clarifications on how SAMR will interpret or implement existing antitrust rules – both for conduct investigations and for merger control.
Following publication of the Guidelines, we expect to see an increase in the number of behavioural investigations in the digital sphere.
And we expect to see SAMR using its powers to intervene in digital mergers which had previously not (or had rarely) been on its radar. This includes acquisitions based on variable interest entity structures and transactions which fall below the merger control thresholds, but may give rise to anti-competitive effects (e.g. killer acquisitions).
This will impact the conduct of big tech and other platforms doing business in China. But will also be relevant to dealmakers and all other participants in the Chinese digital economy.
Broadening the Practical Scope of Merger Control
Killer acquisitions
The draft Guidelines reaffirm the existing position that so-called killer acquisitions are not beyond the reach of SAMR’s jurisdiction. This refers largely to the practice by big tech of buying up innovative start-up players with low (or no) turnover. The authority can proactively investigate mergers and acquisitions which may have anti-competitive effects, but which fall below the turnover thresholds.
To date, SAMR has never used its power to review transactions which fall below the turnover thresholds. The fact that the Guidelines specifically reaffirm its power to do so indicates that such cases may be pursued going forward, in particular, in the digital sector.
But, absent precedents and implementation rules, it remains to be seen how SAMR will investigate and handle such cases. And to what extent the change will impact dealmakers in terms of legal certainty, sell-side risk and timing, etc.
Variable interest entity (VIE) structures
VIE refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. Typically, investors’ controlling interest in such structure is realised by a series of complicated contracts. VIEs became common in China in many instances as a mechanism to circumvent foreign investment control.
Previously, there was a perception that SAMR (and its predecessor MOFCOM) were reluctant to take on filings involving VIE structures. Because merger control approval could be seen as an implicit endorsement of legality of VIE structures and, if applicable, the circumvention of foreign investment control behind the structures.
The draft Guidelines make it clear that transactions involving VIE structures are reportable as long as they meet the notification thresholds. This confirms a change in practice by SAMR to review VIE-related filings, which started earlier this year.
Notably, about a month after publication of the Guidelines, SAMR issued three penalty decisions for failure-to-notify, all of which involved VIE structures. These transactions concerned Alibaba and Tencent, two major Chinese technology platform operators, as well as SF Express, a leading Chinese courier company.
More antitrust investigations?
In the past, alleged antitrust violations by China’s major technology companies were mostly handled through private litigation. And the courts rarely ruled in favour of plaintiffs in such cases.
The publication of the Guidelines and the recent SAMR investigation into Alibaba send a strong signal that SAMR intends to ramp up its enforcement activity in the digital economy.
Some further detail on the Guidelines
The draft Guidelines focus on anti-competitive conduct facilitated by technology. Specifically:
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Horizontal anti-competitive agreements or hub-and-spoke arrangements which use platforms, algorithms or data to gather or exchange competitively sensitive information, communicate, or facilitate concerted actions.
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Vertical anti-competitive agreements on automated price setting, unifying prices via platform rules, using data and algorithms to fix prices, or otherwise restricting other trading conditions
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Indirect means of abuse of dominance: technological bundling, discrimination or refusal to supply (e.g. bundled sales, search results downgrades, data allowance reductions, refusals to provide application programming interfaces, interoperability reductions).
Guidance on certain controversial practices
More detail is provided on certain controversial types of conduct by platform operators. These are not per se illegal but should be assessed under the existing effects-based analytical framework.
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Exclusivity restrictions imposed by a platform operator upon merchants can be assessed either as a vertical anti-competitive agreement or an abuse of dominance. Importantly, this means that SAMR does not need proof of dominance, which gives it more flexibility in enforcement.
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Algorithm or data enabled discrimination may constitute an abuse of dominance in the form of discriminatory treatment. Treating like-for-like platform users differently is generally discriminatory. Notably, the draft Guidelines specify that users may still be found to be like-for-like despite differences in privacy information, transaction history, individual preferences and shopping habits obtained by the platform through past dealings.
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Data harvesting (excessive data collection) may be considered an unfair trading condition, if implemented by a dominant company.
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Cross-subsidisation by a dominant company could amount to predatory pricing, if it leads to below cost pricing and the company is able to foreclose competitors and recoup costs afterwards.
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Refusal to deal by a dominant platform may be qualified as an abuse of dominance, even if the platform is not indispensable or an “essential facility”.
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Platform and data can constitute an “essential facility”, after a holistic review of the relevant factors such as whether there are substitutable competing platforms or alternative channels to access data, whether it is feasible to open the platform or data in question, etc.
The global context
In December last year, the European Commission proposed an ambitious legislative reform of the EU digital economy, to make “Europe fit for the digital age” (see our Insights). And, earlier in 2020, the EC indicated that it intends to use existing merger control tools to address so-called killer acquisitions (see LinkingCompetition).
In October last year, the U.S. Department of Justice, Antitrust Division, filed a lawsuit accusing Google of illegally maintaining a search monopoly. And, in December, the U.S. Federal Trade Commission and 48 state and territorial attorneys general filed lawsuits aimed, among other things, at unwinding Facebook’s acquisition of Instagram and WhatsApp. The FTC also launched a market study on killer acquisitions in the tech sector in early 2020.
The UK’s Competition and Markets Authority is another important agency to keep watch on. Its digital markets taskforce has recently issued advice to the UK Government on the design of a new regulatory regime for the digital sector which includes proposals for a regime to regulate digital platforms with “strategic market status”. The CMA can also be expected to be interventionist in digital mergers (see our Insights).
For further information, please contact:
Vivian Cao, Linklaters
vivian.cao@linklaterszs.com
