On January 2, 2020, the State Administration of Market Regulation (the “SAMR”, the current antimonopoly enforcement authority in the People’s Republic of China) published proposed revisions to the Antimonopoly Law for public consultation.1 If adopted, these would be the first revisions since the law was enacted in 2007. The public consultation period ended on January 31, 2020. The SAMR will now consider the public feedback received, and submit a final version for further review and enactment by the National People’s Congress.
The SAMR proposes light-touch revisions, leaving the key features of the Antimonopoly Law intact, with only a limited expansion in the scope of the law:
- Most of the proposed revisions are of limited scope, seeking to clarify matters of procedure or of substance, or to slightly expand the law’s ambit. More significant proposals are however made in relation to liability. First, parties that facilitate or induce third parties to engage in certain infringements can now expressly be found liable. Second, while provisions governing penalties would remain largely unchanged, the SAMR proposes to significantly increase the maximum amount of fines for noncompliance with the merger control regime.
- The proposed revisions do not change the main substantive rules under the law. The law if amended would still rely on the existing four pillars, i.e. (i) conduct rules prohibiting restrictive agreements (Chapter II of the law); (ii) conduct rules prohibiting the abuse of a dominant market position (Chapter III of the law); (iii) merger rules controlling merger and acquisition activity (Chapter IV of the law); and (iv) rules prohibiting the abuse of administrative power that leads to restrictions of competition (Chapter V of the law).
- The proposals would not change the enforcement model, the law being enforced both by an administrative antimonopoly enforcement authority (public enforcement) and by the general courts (private enforcement), with an Antimonopoly Commission tasked with coordinating and guiding enforcement.
- The SAMR proposes to include an express legal basis in the Antimonopoly Law for the fair competition review policy that had been introduced by the State Council in 2016, expanding the scope of the law to mandate a systematic competition impact assessment by administrative agencies when introducing new market regulations.
The proposed revisions also do not alter the general drafting of the Antimonopoly Law’s provisions. Contrary to the approach in the competition statutes of many other Asian jurisdictions, but consistent with statues in the EU and US, the law would continue to set out general principles, leaving a considerable margin for interpretation and discretion to the antimonopoly enforcement authority and the courts when enforcing its provisions.
The SAMR proposes to retain the institutional setup
The Antimonopoly Law contains few details regarding the institutional set up of the enforcement authorities. It however contains comprehensive rules regarding their powers to investigate and sanction, and allows for the possibility of private enforcement.
The SAMR does not propose to substantially amend any of the relevant provisions in the law, keeping the institutional arrangements and enforcement powers largely as they are. Under its proposals, the SAMR and the courts would thus continue to enjoy the same broad enforcement powers. The only significant amendment that is proposed relates to penalties that may be imposed in the context of SAMR investigations.
No major change to public enforcement regime, although the SAMR’s role would now be enshrined in the law. Article 10 of the Antimonopoly Law leaves it to the State Council to establish a central enforcement authority, which can delegate enforcement to local authorities at provincial, regional or municipal level. The authority is vested with significant powers to investigate and sanction Antimonopoly Law infringements. Shortly before the Antimonopoly Law entered into force in 2008, the State Council had decided to split enforcement across three central authorities, i.e.:
- the National Development and Reform Commission (the “NDRC”, which had set up a dedicated Price Supervision and Antimonopoly Bureau), responsible for enforcement of the conduct rules and the prohibition on the abuse of administrative power in price-related matters;
- the State Administration for Industry and Commerce (the “SAIC”, which had set up a dedicated Antimonopoly and Unfair Competition Enforcement Bureau), responsible for the enforcement of the conduct rules and the prohibition on the abuse of administrative power in relation to non-price related matters; and
- the Ministry of Commerce (“MOFCOM”, which had created a dedicated Antimonopoly Bureau), with responsibility to administer and enforce the merger control rules.
Main SAMR proposals regarding the institutional setup
- Enshrines its own role as the designated antimonopoly enforcement authority directly in the Antimonopoly Law.
- More stringent consequences for provision of inaccurate information.
- Otherwise largely retains existing public and private enforcement model.
While the NDRC and the SAIC had authorised authorities at local level to enforce the Antimonopoly Law (with some of these authorities becoming very active over the years), merger control remained centralised within MOFCOM. Following the institutional reform of the Chinese government in 2018, the enforcement responsibilities of the three authorities were consolidated and vested on the then newly established Antimonopoly Bureau of the SAMR.
Article 9 of the law requires the State Council to establish an Antimonopoly Commission in charge of organising, coordinating and guiding antimonopoly work.
While the Antimonopoly Commission did formulate guidance on the definition of the relevant market, the successive antimonopoly enforcement authorities adopted a substantial body of implementing regulations and guidelines, providing guidance on substantive and procedural aspects of the Antimonopoly Law. The Antimonopoly Law being a principles-based legislation, these regulations and guidelines significantly contribute to legal certainty. Since its establishment in 2018, the SAMR’s Antimonopoly Bureau has largely endorsed guidance issued by the predecessor authorities, and continues to formulate new rules. This appears to be an effective enforcement model, explaining that the SAMR does not propose any amendments in this respect – other than replacing the words “antimonopoly enforcement authority” with its own name in the relevant provision, enshrining its role in the law.
Private enforcement model retained. The Antimonopoly Law also provides for a private enforcement regime in relation to civil liabilities, at Article 50. The judiciary decided that the adjudication of antimonopoly cases would fall under the jurisdiction of the intermediate people’s courts. Cases have typically been handled by the courts’ intellectual property divisions, and appeals are now being heard by the intellectual property division of the Supreme People’s Court. The law has led to a significant number of private enforcement cases – according to the Supreme People’s Court, by the end of 2017, there had been 700 first-instance private antimonopoly litigation cases before the courts.2 There is now a significant body of case law providing insight on how the courts interpret the Antimonopoly Law’s provisions. There have been some differences in approach as regards the prohibition on resale price maintenance under Article 14 of the law, but overall the parallel public and private enforcement regimes have worked well, which may explain the lack of proposals for reform from the SAMR.
Proposed increase in sanctions applicable in the context of investigations. In addition to the significant increase in penalties for noncompliance with the merger control regime discussed below, the proposed revisions if adopted would increase maximum penalties that can be imposed for the provision of false or inaccurate information or for obstructing investigations (increasing the maximum of RMB1 million for companies and RMB100,000 for individuals to one per cent of the revenue during the preceding year for companies and RMB1 million for individuals). As discussed below, the provision of inaccurate information in merger procedures would also lead to a possible revocation of merger approvals.
Proposed changes regarding the prohibitions on monopoly agreements
Subject to the possibility of exceptions set forth under Article 15, Articles 13 and 14 of the Antimonopoly Law prohibit horizontal (i.e. between competitors) and vertical (i.e. between a supplier and a customer) “monopoly agreements” respectively.3 The only significant change proposed by the SAMR relates to the expansion of the scope of persons that can be found liable for infringing these prohibitions. It also proposes some more minor amendments to the sanctions regime.
Substantial public enforcement to date. Since the Antimonopoly Law came into force in 2008, the antimonopoly enforcement authorities adopted over 100 enforcement decisions relating to monopoly agreements, imposing total pecuniary sanctions of around RMB6 billion (around $860 million). In line with international practice, hardcore cartels (such as price-fixing and market allocation) account for a majority of the sanctions. It is however noteworthy that very significant fines have been imposed against vertical practices (totaling around RMB2.6 billion (around $378 million), accounting for over 40 per cent of the total fines imposed against monopoly agreements in China), which shows a comparatively greater interest for vertical restrictions in China than in other jurisdictions. This reveals very active and successful enforcement by administrative authorities (private enforcement is much more limited, with only less than ten per cent of court cases relating to monopoly agreements),4 which may explain why the SAMR wishes to be prudent in its proposals for reform. The law is also enforced in a manner that is largely consistent with international practice, and the vast majority of parties sanctioned for conclusion of monopoly agreements are domestic Chinese companies.
Expansion of liability for monopoly agreements to facilitators and increase in fines in some cases. Both prohibitions (horizontal and vertical) relate to “monopoly agreements,” which are defined in Article 13 as any agreement, decision or concerted practice that eliminates or restricts competition. The elimination or restriction of competition needs not be actual, as a potential effect to restrict competition is sufficient to find an agreement to constitute a “monopoly agreement.”5 The law applies to formal agreements as well as informal arrangements or understandings (concerted practices), which is consistent with international practice. Similarly, the law is in line with widely accepted international practice to find trade associations liable where their decisions restrict competition (Article 16 of the law prohibits trade associations from organising undertakings within their respective industry to engage in monopolistic practices). Infringements can arise even where a monopoly agreement has not been implemented. Fines ranging from one to ten per cent of an undertaking’s turnover during the preceding year can be imposed.
The SAMR proposes some limited drafting changes as well as a potentially significant expansion to the scope of persons that can be found liable and the sanctions that can be imposed:
- The proposed revisions put the definition of “monopoly agreement” in a new standalone article, clarifying that it applies equally to the prohibition on horizontal and vertical agreements, whereas under the current law the definition is found under Article 13 which prohibits horizontal monopoly agreements. This proposal essentially confirms court interpretations of the current statutory provisions.6
- A more ambitious proposal relates to a potentially significant expansion of the scope of the prohibitions on monopoly agreements. If adopted, a new article would be introduced in the law to expressly prohibit undertakings from organising or helping other undertakings in concluding monopoly agreements. This would provide a clear statutory basis to attribute liability to undertakings that facilitate or otherwise organise the conclusion of monopoly agreements by third parties, such as in “hub-and-spoke” arrangements. This has been a controversial aspect of the law overseas, with cases in the EU, the UK and Hong Kong being heavily fought in the courts. The SAMR also proposes a related revision to the provision that specifically prohibits trade associations from “organising” restrictive practices by removing the words “within their respective trades” from the current provision, thus prohibiting trade associations from organising not only members activities within their industry but any undertakings to engage in prohibited conduct under the proposed Article 19.
- Finally, the SAMR proposes adjustments to the penalty regime. Sanctions for the conclusion of monopoly agreements (fines ranging from one to ten per cent of an undertaking’s turnover during the preceding year) would now also be applicable to facilitators. In addition, parties that had no turnover in the preceding year would now face fines of up to RMB50 million. The SAMR also proposes an increase to maximum fines that can be imposed on parties that concluded a monopoly agreement without implementing it (increasing the maximum from RMB500,000 to RMB50 million) and on trade associations (the maximum would be increased from RMB500,000 to RMB5 million). Finally, while the SAMR does not propose the introduction of specific sanctions for individuals or of specific criminal sanctions, under its proposed revisions the law would confirm that criminal liability can be pursued where the conduct that infringes the Antimonopoly Law also constitutes a criminal offense.
Cartels and other horizontal practices: limited substantive changes but increased prospect of penalties. Horizontal agreements involve undertakings that are active at the same level of trade and compete with one another. Article 13 of the law provides a list of horizontal monopoly agreements that are prohibited when entered into among competing undertakings: (i) agreements to fix prices; (ii) agreements to limit supply; (iii) agreements to divide (downstream) sales market or (upstream) raw materials procurement markets; (iv) agreements to limit the purchase or development of new technology or equipment; and (v) joint boycott agreements. In addition, Article 13 prohibits (vi) any other monopoly agreements as determined by the antimonopoly authorities, effectively granting a wide discretion to the antimonopoly enforcement authorities to prohibit other types of agreements and arrangements that eliminate or restrict competition.
The SAMR’s proposed revisions do not entail any substantive changes, other than the extraction of the definition of the notion of “monopoly agreement” discussed above. Also, the proposed new prohibition on facilitators would apply to horizontal monopoly agreements, allowing authorities to seek enforcement against third parties even where these are not competitors. The main change for cartel participants relates to the possibility of sanctions: Article 45 of the Antimonopoly Law allows the antimonopoly enforcement authority to suspend an investigation against monopolistic conduct without imposing sanctions if the subject of the investigation commits to adopt specific remedial measures. Under the SAMR’s proposals, this possibility of settling cases without imposing sanctions would be expressly excluded where the infringements involve hardcore cartel conduct, i.e. agreements that fix prices, limit supply, or allocate markets.
Distribution: no changes to the provisions prohibiting vertical monopoly agreements. Under Article 14 of the law, vertical monopoly agreements – i.e. agreements between undertakings active at different levels of the supply chain – that fix resale prices or fix minimum resale prices are prohibited. While these two express prohibitions only relate to pricing restrictions (in the form of resale price maintenance), Article 14 empowers the antimonopoly enforcement authorities to prohibit any other vertical agreements that eliminate or restrict competition, suggesting that these authorities could also prohibit non-price restrictions such as exclusivities and non-competes.
So far, while there have been proposals by the NDRC to apply Article 14 to non-price restrictions in the automotive sector,7 to our knowledge there have been no cases where the antimonopoly enforcement authorities found non-price vertical restrictions in breach of Article 14. As regards the prohibition on vertical price restrictions (i.e. resale price maintenance), the public announcements made by the NDRC regarding its decisions to sanction such practices suggested that the authority considers that all agreements on a fixed or minimum resale price would immediately violate Article 14, irrespective of whether these agreements had the (actual or potential) effect of restricting or eliminating competition.8 Judgments from the courts in private litigation had suggested a different approach, with judges requiring – at least in some cases – evidence that resale price maintenance arrangements had the effect of restricting or eliminating competition before an infringement could be established.9 The apparent difference in approach was resolved by the Supreme People’s Court in 2018, in a judgment where it held that the standard of proof in a civil litigation setting differs from the standard of proof in an administrative enforcement setting. Accordingly, whereas in civil cases plaintiffs must prove anticompetitive effects, in administrative enforcement the antimonopoly enforcement authority can rely on a rebuttable presumption that monopoly agreements (including resale price maintenance agreements) eliminate or restrict competition.10
Main SAMR proposals regarding monopoly agreements
- Imposes liability on facilitators
- Increases maximum fines and expressly confirms the possibility of criminal sanctions.
The SAMR’s proposals do not include any attempt to formally expand the scope of the prohibition on vertical monopoly agreements to non-price restrictions, nor to expressly incorporate into the law the findings of the Supreme People’s Court. As mentioned, the only changes of relevance to the prohibition on vertical monopoly agreements are the clarification that the notion of “monopoly agreement” is the same under both prohibitions, and the addition of a new prohibition on undertakings organising or assisting other undertakings that would conclude vertical monopoly agreements. Note however that the SAMR’s proposed revisions would not leave distribution practices entirely unaffected, as changes are proposed to the abuse of dominance regime, as discussed below.
Limited changes to the exceptions regime. Article 15 of the Antimonopoly Law provides for an exception regime whereby monopoly agreements with certain specific redeeming benefits are nevertheless permissible. In line with overseas antitrust legislation, eligible redeeming benefits include contribution to quality, technological and other efficiencies. In addition, Chinese law allows for the possibility of exception where the otherwise restrictive agreements contribute to protecting the environment, mitigate a serious market downturn or promote foreign sales. This exception regime is of immediate application, i.e. parties can rely directly on the statutory provisions without having to seek a decision from the courts or the antimonopoly enforcement authority that the exception applies. In addition to redeeming benefits, parties must show that their monopoly agreements do not seriously restrict competition in the relevant market and that consumers will share in the resulting benefits.
The exceptions regime is an area of the law where the guidance issued by the successive antimonopoly enforcement authorities has been very limited, despite more ambitious draft proposals being published by the NDRC in 2016.11 Administrative decisions and court judgments also rarely discuss these exceptions in any detail.
The SAMR does not propose to provide more details in the statute, except for the addition of a new indispensability requirement. If its proposed revisions become law, parties would now have to prove that the conclusion of the monopoly agreement is indispensable to achieve the claimed benefits. This would bring the Antimonopoly Law in line with the requirement in similar exemption regimes available in other jurisdictions.
SAMR proposals regarding the prohibition on the abuse of dominance
Articles 17 to 19 of the Antimonopoly Law prohibit any undertaking that is dominant on the relevant market from abusing its position of dominance. The SAMR proposes only minimal changes in respect of the notion of market dominance.
Main SAMR proposals regarding abuse of dominance
- Adds factors for considering dominance in digital economy
- Expressly confirms the possibility of criminal sanctions.
Enforcement to date. Enforcement of the abuse of dominance regime since 2008 has been markedly different from the enforcement of the prohibitions on monopoly agreements. As at the end of 2017, more than 90 per cent of all private antimonopoly disputes related to alleged abuses of dominance, with many cases involving large domestic Chinese companies active in the digital economy.12 These disputes often involved alleged abusive IP licensing practices, particularly in respect of technology patents. In contrast to these hundreds of civil cases, there have been much fewer – around 30 – known instances of public enforcement. These few administrative cases however led to the imposition of very significant sanctions, including on foreign companies such as Qualcomm (which faced a fine of close to RMB7 billion – around $1 billion, the highest fine imposed to date on a single undertaking under the Antimonopoly Law) and Tetra Pak (which was fined RMB667 million, or around $100 million). Consistent with private enforcement trends, the antimonopoly enforcement authorities were particularly concerned with abusive licensing practices regarding technology patents. There were also several cases where regional or provincial authorities sanctioned local utility companies for abusive practices.
In addition to general enforcement guidance issued by the successive authorities,13 the two predecessor antimonopoly enforcement authorities spent several years developing regulations specifically considering abusive practices related to intellectual property rights.14
Against this background, it is no surprise that the very few amendments proposed by the SAMR relate to the digital economy.
Changes to the factors indicative of dominance in the digital economy. Article 17 of the Antimonopoly Law defines “dominance” as “a market position where an undertaking has the ability to control the price or quantity of goods or other trading conditions in the relevant market or to prevent or affect entry of other undertakings on the relevant market”. Article 18 lists the factors which must be taken into account for purposes of determining a dominant market position, including the market share and competitive conditions in the relevant market, the ability to control the (downstream) sales market or (upstream) raw materials procurement market, available financial and technological resources, the degree of reliance of other undertakings on the allegedly dominant undertaking, barriers to entry, and other factors indicating dominance.15 A presumption of dominance is provided under Article 19 if certain market share thresholds are met, which can be rebutted with evidence showing the lack of market power.
While the proposed revisions do not amend existing factors that must be considered in determining whether an undertaking holds a dominant position, they propose new factors that are specific to the internet industry. These factors include the presence of network effects, economies of scale, lock-in effects as well as the ability to control and process relevant data. As explained above, the lack of factors in the current law that are specific to the digital economy has not prevented vigorous enforcement of the abuse of dominance regime by courts and antimonopoly authorities alike. The SAMR however appears to consider that these additions are necessary. This contrasts with the experience overseas.16
No changes to the provisions governing abusive conduct. It is clear under the law that, consistent with overseas practice, simply having a dominant position or market power will not in itself amount to an infringement. The law identifies, under Article 17, a list of abusive conduct that dominant undertakings are prohibited from engaging in, including: (i) selling or buying goods at unfairly high or low prices; (ii) below-cost pricing; (iii) refusal to deal; (iv) exclusive dealing; (v) tying; and (vi) discriminatory practices. Article 17 further empowers the antimonopoly authorities to prohibit any other abuses they may identify.17 All of these principles would remain unchanged under the SAMR’s proposals.
No changes to the liability regime. The SAMR proposes to leave the current regime untouched. Undertakings found in breach of the prohibition on the abuse of dominance will thus continue facing sanctions ranging between one and ten per cent of their turnover during the preceding year. No changes are proposed that would update the regime in line with the proposals for the prohibition on monopoly agreements. In particular no provisions would govern the situation where an undertaking had no sales in the previous year, and “accessory” or “facilitator” liability is not contemplated. The only small amendment of relevance to the abuse of market dominance regime is the proposed introduction of a provision expressly confirm that criminal liability can be pursued where the conduct that infringes the Antimonopoly Law also constitutes a criminal offense.
SAMR proposals regarding the mergers and acquisitions regime
The Antimonopoly Law’s application to M&A activity has played a significant and very visible role since the law came into force in 2008. The statutory provisions governing mergers are comparatively more detailed (with 12 articles, more than double the number of provisions governing the other prohibitions) than those governing the other prohibitions under the law. Many more regulations and guidelines have been issued by the successive antimonopoly enforcement authorities in respect of M&A activity than of any other aspect of the law. With close to 3,000 decisions adopted since 2008 (as at the end of 2019), the merger regime has by far been the most active enforcement area under the law. Finally, this is also the area of the Antimonopoly Law that has seen the most significant change in the way the law was enforced: the introduction of a simple case review procedure in 2014 has led to a substantial improvement in the merger review process, with more than 80 per cent of transactions now benefitting from this procedure. Overall, the regime largely operates according to international standards and delivers substantially similar outcomes, with more than 98 per cent of all transactions cleared unconditionally, and only two prohibited transactions since 2008. A particular feature of Chinese enforcement is the comparatively large number of decisions – 50 had been published as at the end of 2019 – sanctioning parties for noncompliance with mandatory clearance requirements, suggesting that a significant number of transactions went unnotified in breach of the Antimonopoly Law’s procedural requirements. Noncompliance with remedies that had been imposed as a condition for a transaction’s approval was also sanctioned on several occasions.
Despite the guidance found in the more detailed statutory provisions and in the comprehensive implementing regulations and guidelines – as well as to some extent in the few decisions that have been published (less than 100 decisions have been published to date, half of which relating to procedural breaches) – there remains uncertainty on some key procedural and substantive aspects of the law, such as its scope of application and the use of procedures.
Against this background, it comes as no surprise that the most significant amendment proposed by the SAMR is an increase of sanctions for noncompliance with the merger control regime, which could reach up to ten per cent of an undertaking’s global turnover. Other proposed changes if adopted would help address some of the uncertainty – particularly as regards the scope of application of the regime – but remain very light-touch, leaving many substantive and procedural questions unresolved.
SAMR proposes heavy sanctions for noncompliance with procedural requirements. Under the current rules parties can face fines of up to RMB500,000 (around $72,000) for implementing a transaction in breach of the law. In their practice, the successive enforcement authorities (MOFCOM and SAMR) have not hesitated to regularly sanction noncompliance with filing requirements.18 By the time the SAMR’s proposed revisions were issued in early January, the authorities had published 50 decisions, sanctioning 72 parties, for failure to seek clearance before implementing their transaction. A majority of these decisions were published in the last two years, suggesting a recent increase in the enforcement authorities’ vigilance and willingness to publicise their enforcement in this respect. While most breaches were detected and sanctioned within one to two years, the authorities did not hesitate to investigate and impose sanctions long after a transaction had closed, in some cases more than five years (and eight years in one case) after completion. Fines remained modest, at an average of half of the statutory maximum (around RMB250,000 or $36,000 per party). The antimonopoly enforcement authority can also order the unwinding of the transaction, although as a matter of policy it would only do so where the transaction leads to the elimination or restriction of competition.19 There have so far been no published cases where a transaction was ordered to be unwound. Finally, in three cases parties were sanctioned for noncompliance with conditions attached to a clearance condition. Again the fines remained modest, well within the statutory maximum.
In the SAMR’s proposed revisions, the relevant provisions (currently Article 48, which would be replaced by a new, longer, Article 55) would be much more detailed, specifying what specific breaches could attract sanctions, and significantly increasing the maximum fine. The possibility to impose other remedial measures – including unwinding – would remain, although the wording would be slightly updated. The most remarkable aspect of the SAMR’s proposal is the increase of the maximum fine to ten per cent of a party’s global turnover in the previous year, which would allow a drastic increase in penalties. In this context the added detail on what constitutes a breach is welcome – the law if amended would specifically allow for sanctions for (i) the implementation of a transaction without seeking clearance; (ii) the implementation of a transaction after seeking clearance but ahead of receipt of approval; (iii) noncompliance with conditions attached to a clearance decision; and (iv) the implementation of a transaction in violation of a prohibition decision
Proposed refinements to the mandatory pre-merger clearance regime. In common with most modern merger control regimes, the Antimonopoly Law requires certain types of transactions (“concentrations”, defined as “mergers” or the “acquisition of control”) to be subject to prior clearance where certain “threshold levels” are met.
As regards the first condition, the statutory definition in the current Article 20 of the Antimonopoly Law of the notion of “concentration” leaves a lot of room for interpretation, particularly in respect of the key notion of “control” over another undertaking. The successive enforcement authorities have provided some guidance in this respect, most recently in the SAMR’s Guiding opinion on the Notification of concentration of undertakings of September 29, 2018, according to which “control” refers to a situation whereby an undertaking has the legal right or the actual power to exercise a decisive influence over another undertaking’s business. The SAMR now proposes to incorporate some of its guidance in the statutory text, which should help improve legal certainty (see Article 23 of the proposed amended law). Even if adopted, the proposed revisions would still leave a lot of discretion to the enforcement authority in its interpretation of the concept of “control”. Key aspects of the proposed definition, such as the notions of “indirect control” and “joint control” would remain to be clarified by the enforcement authority. Further, some uncertainty would also remain in relation to the possible acquisition of control through minority shareholding stakes – a situation which led to the imposition of sanctions by the SAMR in three recent decisions.20 The proposed amendments also fail to clarify the sometimes vexing question of permissible steps pending the acquisition of control, which arises in the context of creeping share acquisitions but also sometimes in straightforward transactions such as greenfield joint ventures. In several cases parties were sanctioned for early implementation – “jumping the gun” – where they had chosen to take some initial steps (e.g. the transfer of a partial stake) pending receipt of clearance, while waiting for clearance before effectively implementing a change of control.21 These are matters that are also typically left open in other principles-based antitrust statutes (such as under EU law), but which are often being addressed in very detailed guidance issued by foreign enforcement authorities. The adoption of the SAMR’s proposal to amend the Antimonopoly Law would strengthen legal certainty, particularly as the proposed wording is consistent with established concepts under EU law, but more clarity would still be needed by way of comprehensive administrative guidance in view of the SAMR’s proposal for a very significant increase in the sanctions for failure to notify.
As regards the second condition, under the current regime (Article 21 of the law) it is up to the State Council (i.e. China’s Cabinet) to set thresholds above which a mandatory clearance requirement applies. The Antimonopoly Law affords the State Council a significant latitude in setting these criteria, other than specifying that these must take the form of “threshold levels”. The State Council did set thresholds in 2008, referring to the relevant parties’ sales turnover figures during the previous financial year.22 These thresholds have not been revised since.
MOFCOM, and afterwards the SAMR, have issued useful guidance on the calculation of these figures, contributing to legal certainty. One matter that has however given rise to some uncertainty over the years is the time at which the assessment of relevant turnover must be made. The State Council’s regulation refers to the parties’ turnover in the “previous financial year”. The regulation however does not specify whether this relates to the year that precedes the conclusion of a transaction (i.e. signing), the time of notification or a transaction’s implementation (i.e. closing). While successive MOFCOM and SAMR officials have routinely conducted their assessment on values relating to the year preceding signing, there is some uncertainty where different sales figures become available after signing. This uncertainty is compounded by the reference in several decisions sanctioning noncompliance to the financial year preceding the implementation of the transaction (with various events being referred to as constituting “implementation”), and not that preceding its conclusion.23
At present, the SAMR reform proposals are very limited, suggesting to confer the power to set “notification criteria” to the antimonopoly enforcement authority instead of the State Council. The proposed terminology is potentially much wider than “threshold levels”, suggesting that the SAMR would enjoy more flexibility, for example to capture certain transactions based on the value of the consideration paid or based on market share thresholds. Overall, the delegation of power to the SAMR may well lead to more frequent updates as well as to more detailed rules, which may well pave the way to much needed legal certainty – again against the backdrop of significantly increased sanctions.
Prohibition on all anticompetitive concentrations, even where mandatory clearance is not required. While the question was left open under the Antimonopoly Law, the State Council had made it clear in its 2008 implementing regulation that the antimonopoly enforcement authority can investigate anticompetitive transactions even where the parties fail to reach the turnover thresholds.24 MOFCOM had adopted corresponding implementing measures,25 and the SAMR currently provides for a process of voluntary notification where the thresholds are not met.26 These powers have however not yet led to the adoption of any published decision to date, although there have been press reports over the years of investigations into acquisitions where parties were reportedly below the notification threshold (this was for instance the case with Didi’s acquisition of Uber in 2016).
While controversial as it weakens legal certainty, the possibility to review and prohibit transactions that do not meet mandatory clearance criteria exists in several overseas jurisdictions, including the United States.27 Recently, in response to significant M&A activity in technology markets, in jurisdictions where this right to review is unavailable or its exercise uncertain, competition authorities have sought its introduction, or at least a revision of mandatory review criteria to include a wider range of transactions – including so-called “killer acquisitions” (where incumbent companies acquire small targets with promising technologies before they grow significant sales).28
Against this background, the SAMR proposes to provide for express powers directly in the Antimonopoly Law for the antimonopoly enforcement authority to review transactions that do not meet the notification thresholds but may nonetheless have the effect of restricting competition, and to prohibit or impose conditions on these transactions. Together with the possible introduction of looser “notification criteria”, this would lead to a possible expansion of the scope of merger review under the Antimonopoly Law.
Review procedure: proposal to introduce an express power to “stop the clock”. The merger review procedure and its timetable are broadly set out under Articles 23 to 26 of the current law. Upon receipt of a complete notification, the enforcement authority has an initial period of 30 days to conduct a preliminary review. If a further review is required, it benefits from an additional 90 day period, which can be further extended (with the parties’ consent) up to 150 days. The procedure organised by the Antimonopoly Law therefore lasts between one and six months.
While these provisions are broadly consistent with international best practices, two remarkable features have affected the efficiency of the process over the years. First, periods are calculated in calendar days, with no suspension to accommodate for holidays or for delays in the information gathering process. Second, there is no requirement to justify a decision to make a first extension for “further review,” causing uncertainty for overall transaction planning, with no criteria allowing the parties to determine whether they will face a process lasting one month or up to four months (or more, with their consent).
The successive enforcement authorities have attempted to address these deficiencies by providing detailed procedural guidance29 and through the introduction of a “simple case procedure” to deal with straightforward transactions.30 This procedure does not guarantee a shorter duration of review but in most cases effectively leads to an approval during the initial 30 day review period. Currently, the average duration required for review of simple cases in China is of around calendar 23 days. This procedure applies to more than 80 per cent of all transactions. While an undeniable success for simple cases, significant procedural uncertainties remain. The inability to suspend the review period once started has led to a very cautious approach in the review of initial notification materials, often delaying the start of the formal procedure by several weeks while officials confirm that they have received sufficient information. Also, in rare cases where transactions raise complex competition law issues and where the statutory timeline does not provide for sufficient time, transaction parties have had to withdraw and refile their application for clearance to “restart the clock” (this is also a practice in overseas jurisdictions where the merger control regime does not provide for a “stop-the-clock” mechanism). Finally, the examination of transactions that do not benefit from the simple case process routinely requires a “further review,” with little visibility on the expected total duration of the procedure.
Against this background, the SAMR proposes to formally introduce a “stop-the-clock” system in a new Article 30 in the Antimonopoly Law, that would provide for the automatic suspension of the statutory review period under the following circumstances: (i) if the notifying party files for or agrees to a suspension; (ii) if a party needs to submit supplementary documents or information upon request by the authority; or (iii) if the regulator and the parties are engaged in discussions for remedies to be imposed on a transaction. While the new provision would provide for some flexibility and avoid “withdraw and refile” situations, it would also contribute to legal uncertainty as it would be straightforward for the authority to cause suspension events, possibly depriving the statutory review deadlines from any real significance.
Main SAMR proposals regarding M&A activity
- Significant increases to maximum fines.
- Elaborates on the notion of “control.”
- Transfers power to set notification criteria from the State Council to the SAMR.
- Confirms the possibility to prohibit transactions falling short of notification thresholds.
- Introduces a “stop-the-clock” system.
Review procedure: proposed added emphasis on accuracy of information provided. The Antimonopoly Law already provides for the possibility of criminal sanctions where false information is provided. The SAMR proposes two changes that would further strengthen the enforcement authority’s ability to obtain accurate information. First, responsibility would now expressly rely on the notifying party for the accuracy of information and documents submitted. Second, a new provision would be introduced (a new Article 51), that would allow antimonopoly authorities to reinvestigate transactions and revoke their review decisions where false or inaccurate information has been provided.
Virtually no changes to substantive assessment criteria. Other than some cosmetic revisions, the SAMR proposes to leave intact the other provisions governing merger and acquisition activity. Particularly the factors used to assess whether a concentration eliminates or restricts competition would remain unchanged. These factors are listed under Article 27 of the current law: (i) the market share of the undertakings involved and their ability to control the relevant market; (ii) the degree of concentration in the relevant market; (iii) the effect of the concentration on market entry and technological progress; (iv) the effect of the concentration consumers and other undertakings; (v) the effect of the concentration on the development of the national economy; and (vi) other elements considered by the antimonopoly authorities to be relevant for the competitive analysis.
Prohibition on the abuse of administrative power
One of the most remarkable features of the Antimonopoly Law is its fourth pillar, i.e. the prohibition made on administrative authorities from abusing their administrative power by eliminating or restricting competition. The current regime puts a particular emphasis on possible administrative abuse at local or provincial level. Articles 33 to 35 of the current law prohibit any exercise of administrative power which hinders (i) the free flow of goods across regions; (ii) participation by parties based elsewhere in China in local tendering processes or (iii) local investment by parties based elsewhere in China. Other provisions prohibit any exercise of administrative power that effectively compels any undertaking to (i) trade; or (ii) to engage in monopolistic conduct. Finally, Article 37 prohibits administrative authorities from formulating anticompetitive regulations.
Proposed expansion of fair competition review mechanism. The SAMR again proposes relatively light-touch amendments to the current statutory provisions, slightly broadening or refining the scope of the various prohibitions. However, a more significant change is the proposal to include an express legal basis in the Antimonopoly Law for the fair competition review policy that had been introduced by the State Council in 2016, expanding the scope of the law to mandate a systematic competition impact assessment by administrative agencies when introducing new market regulations.