On 2 January 2020, China’s State Administration for Market Regulation launched a public consultation on proposed amendments to China’s Anti-Monopoly Law. This signals the dawn of “Version 2.0” of China’s competition law, which has been on China’s legislative agenda since 2015. The proposed draft reflects a more aggressive enforcement policy, with the most significant amendments in the area of merger control. Our briefing examines the potential impications of the ammendments.
On 2 January 2020, China’s State Administration for Market Regulation (the “SAMR”) launched a public consultation on proposed amendments to China’s Anti-Monopoly Law (the “AML”). This signals the dawn of “Version 2.0” of China’s competition law, which has been on China’s legislative agenda since 2015.
The proposed draft reflects a more aggressive enforcement policy, with the most significant amendments in the area of merger control, where the authority has been most active since the AML came into force over ten years ago. The key proposed changes are:
- Significant increase in fines for merger control violations. The fining cap for merger control violations will significantly increase from RMB 500,000 (ca. EUR 65,000 or USD 72,000), a level which has been criticised for not providing a sufficient deterrence effect, to 10% of the relevant undertaking’s turnover in the previous year. This will apply to the following violations: (i) failure to notify, (ii) implementing a transaction before clearance, (iii) breach of remedies and (iv) breach of prohibition decisions. While silent on this point, it is possible that the 10% turnover threshold may be interpreted by the SAMR as being an undertaking’s global group turnover, and not just its PRC turnover. If adopted, this proposal will bring China’s fining powers in line with those in other jurisdictions such as the EU and the US, and send a strong message to companies who fail to notify their merger in China.
- “Stop the clock” during merger review. The proposed draft introduces a “stop the clock” mechanism for future merger reviews. The SAMR will “stop the clock” when (i) the SAMR awaits an RFI response; (ii) the SAMR and the parties engage in remedy negotiations; or (iii) the notifying party so applies. Meanwhile, the SAMR has not proposed any amendment to the current total statutory review period of 180 calendar days.1 The proposal appears aimed at addressing the current practice of “pull-and-refile” in the most complex cases that run out of time. As a result, we are cautiously optimistic that this mechanism will not substantially impact the timelines for simple cases or normal cases without competition concerns, which have been significantly speeded up during the past few years. However, for complex deals or transactions involving strategic or sensitive sectors, the mechanism could potentially result in the timing of merger reviews becoming even longer and more unpredictable unless deadlines are introduced.
- Potential flexibility to revise filing thresholds. In the proposed draft, the authority to design and amend the filing thresholds is delegated from the State Council to the SAMR. The current turnover thresholds have remained unchanged ever since the AML was promulgated more than 10 years ago and have been criticized for being too low and outdated.2 The proposed change will simplify the procedure for the SAMR to amend the turnover thresholds or introduce new threshold, as necessary.
- Transactions falling under the filing thresholds. Relatedly, the proposed draft clarifies – and arguably encourages - the SAMR’s ability to investigate transactions falling under the turnover thresholds but which have or are likely to have the effect of restricting competition. It also clarifies that the SAMR is entitled to impose conditions or prohibit such transactions, or in case the transaction has been closed, request the parties to unwind the transaction. The amendment suggests that instead of introducing a new filing threshold, such as the transaction value threshold adopted by several jurisdictions (such as the US and Germany), the SAMR is likely to rely on this mechanism to intervene in “killer acquisitions” that fall under the turnover thresholds.
- Introduction of definition of control. The proposed draft includes a definition for the concept of control which is stated as “the right or actual status to, directly or indirectly, solely or jointly, decisively influence or potentially decisively influence another undertaking’s operations or other key decisions”. While this will be the first time control is defined in the AML itself (there have only been definitions in various regulations previously) and is therefore to be welcomed, it is very broad and would likely capture a wider range of transactions than is currently the case. It remains to be seen whether this will be tightened as the revision develops. Still, the message is clear: the concept of control is broader in China than in other jurisdictions such as the EU. Specific China analysis should continue to be undertaken to ensure consistency with China’s competition regime.
Outside of merger control, the substantive provisions on cartels, vertical restrictions and abuse of dominance remain largely unchanged. However, the draft does include a number of significant amendments to the sanctions for anticompetitive conduct. It also, rather unusually, includes a sector-specific amendment in relation to innovation and the internet:
- Initial references to criminal sanctions. Whereas the current AML only provides for criminal sanctions for serious obstruction of an investigation (e.g., use of violence or threats during a dawn raid), the proposed draft suggests that where anticompetitive conduct amounts to a crime, criminal sanctions could be imposed. Although the formal introduction of criminal liabilities would require amendment of China’s Criminal Law (and we have seen no sign of this yet), this proposal sends a clear signal that the Chinese government is contemplating the introduction of criminal sanctions for antitrust violations. This would be in line with other major jurisdictions such as the US, and certain jurisdictions in the EU (e.g., UK), and would be a game changer in terms of companies’ compliance with antitrust in China in the future. The proposal coincides with the SAMR’s call to companies to enhance internal compliance processes and culture, as signalled in draft compliance guidelines published late last year for public comment.
- Increased penalties for conduct violations. Similar to merger control, the proposed draft also seeks to increase penalties for conduct violations. To summarize:
- Penalties for facilitators. The current AML only captures undertakings that “enter into monopoly agreements”, and is silent on undertakings that do not enter into the agreement themselves, but organise or facilitate the conclusion of such agreements. The proposed draft introduces an explicit prohibition for such undertakings, subjecting them to the same penalties as the undertakings that actually concluded the relevant anticompetitive agreement. It is expected that the new provision will strengthen the SAMR’s capability to capture not only the main participants in anticompetitive conduct, but also third party undertakings involved in facilitating such conduct.
- Emphasis on innovation and the Internet space. Finally, the proposed draft suggests that “encouraging innovation”, platform competition and competition in new economy sectors such as the Internet will be key enforcement priorities. The draft also introduces additional factors for finding dominance in the Internet space, including network effects, economies of scale, lock-in effects and the ability to possess and process relevant data, in line with similar considerations introduced in SAMR’s implementing regulations prohibiting abuse of dominance practices (which came into effect in September 2019 (see our client briefing). These sector specific additions at the AML level reflect the SAMR’s clear interest and focus on competition issues concerning innovation and the Internet space. The heightened focus on this sector is consistent with the significant uptick in regulatory scrutiny of the sector around the world.
The public consultation will run until 31 January 2020, after which we expect further revisions to the draft. We are closely monitoring what may be the most important development in China’s competition regime since the introduction of the AML more than ten years ago following the recent merger of China’s antitrust authorities, and will provide further updates.