On 14 December 2020, China’s State Administration for Market Regulation (SAMR) imposed fines against three internet based companies Alibaba Investment Limited, China Literature Limited and Shenzhen Hive-box Network Technology for respective failures to notify past transactions under the merger control regime in breach of the Anti-Monopoly Law (AML). China Literature and Shenzhen Hive-box are affiliates of the Tencent group and the SF Express group, respectively.

The fact that these three decisions against tech companies have been announced simultaneously is no coincidence, and they come hot on the heels of the recently published consultation draft of the Antitrust Guidelines for the Platform Economy Sector (Guidelines). In its press conference, SAMR stated that it hopes these decisions will sound a clear warning to the digital sector of the importance of antitrust compliance.

VIE structures targeted

According to SAMR’s press conference, each of the penalised transactions involved the use of “contractual control structures”. This is broadly understood to refer to the variable interest entity, or “VIE”, structures that are common in industries where foreign ownership is restricted, including internet companies. Historically, there was considerable uncertainty as to whether VIE structures were notifiable and until recently, had not been recognised formally by the Chinese regulators.

However, SAMR took a much clearer stance on VIE structures earlier this year when it accepted (and publicised) a merger control filing involving a VIE structure for the first time. It also explicitly addressed VIE structures in the recent draft Guidelines. It is now clear that VIE structures do fall within the scope of the merger control regime and should be filed for review.

The present fines represent the first such actions against VIE structures. Although the maximum administrative penalty under the AML for failure to file is currently set at only RMB500,000, each company was fined to this maximum amount and it is likely that SAMR will double down on its efforts to push through its proposed increase of maximum fines in upcoming legislative changes.In light of this, companies that use VIE structures may want to consider auditing their past transactions to assess whether there are any past irregularities that may warrant further action. It will also be essential to ensure compliance in future deals.

Antitrust Guidelines for the Platform Economy Sector expected to make waves

The Guidelines represent SAMR’s first formal guidance note focusing on platform operators, as well as the digital sector more broadly. They come at a time when a number of prevalent practices within the sector are drawing more widespread attention in China, and indeed around the world.

The Guidelines follow the framework of the AML and provide guidance in each of the key aspects of the law: defining the relevant market, prohibition of anti-competitive agreements (known as “monopoly agreements” under the AML), prohibition of abuses of dominance, merger control and abuses of administrative power. In each area, SAMR seeks to provide commentary on relevant factors to be taken into account that are unique to platform economies, such as the impact of network effects, multi-sided markets and control over vast amounts of data.

SAMR is now finalising the Guidelines following the conclusion of its public consultation. In light of the mounting public interest in antitrust enforcement in the digital sector, it is expected that SAMR will soon publish a formal version of the Guidelines.