With just a few days left before the Anti-Monopoly Law (AML) takes effect on August 1, 2008, China’s State Council finally designated the regulatory and enforcement authorities responsible for the AML’s administration. The State Council also issued the Provisions of the State Council on Pre-Concentration Notification Criteria of Business Operators (Notification Criteria Provisions) regarding the implementation of the AML’s pre-concentration notification requirement.

Background

China’s AML sets up the Anti-Monopoly Commission under the State Council and the antimonopoly enforcement authorities designated by the State Council (Anti-Monopoly Enforcement Authorities or AMEA) as the authorities to govern monopolistic conduct. The Anti-Monopoly Commission will be in charge of general policy, organization, and regulatory and coordination tasks, while the AMEA will deal with day-to-day enforcement.

The AML does not define which specific government authorities will be designated as the Anti- Monopoly Enforcement Authorities. There are three major authorities already involved in antimonopoly activities that have been negotiating how to enforce the AML since it was passed on August 30, 2007. Unsurprisingly, these three major authorities are keenly interested in the delegation of powers involved in the formation and composition of the AMEA. China’s State Council finally decided on a three-pronged structure for the AMEA, with each of the authorities retaining significant powers.

China’s AML requires that when a proposed concentration of business operators reaches a certain threshold prescribed by the State Council, the business operators must file for approval with the anti-monopoly enforcement authority (the Reviewing Authority) in advance in order to continue with the concentration. This is known as a notification requirement. China’s Legislative Affairs Office of the State Council (LAO) created an internal working draft of the Notification Criteria Provisions (Internal Draft) in February 2008, and later revised the Internal Draft to provide a version for comments (Draft for Comments). The LAO gathered comments from certain entities and the public before putting together the Notification Criteria Provisions.

The Notification Criteria Provisions only contain five provisions, down from the 19 provisions in the Draft for Comments. The Notification Criteria Provisions define the thresholds that trigger the notification requirement, and authorize the Reviewing Authority to investigate any concentration that may create anti-competition even without meeting specific thresholds.

The Notification Criteria Provisions will come into effect on the same date as the AML becomes effective, on August 1, 2008. Compared with the Draft for Comments, the Notification Criteria Provisions are silent on the specific procedures and detailed rules needed for such notifications, such as the definition of “control” of one operator by another, the notifying party, the notification materials, the confidentiality requirement, and so on. The provisions leave these issues for the Reviewing Authority and other competent authorities under the State Council to address at a later stage, indicating the government is still exploring different approaches to best address such issues.

Regulatory and Enforcement Powers, and Notification Thresholds

The structure for the AMEA involves a three-way split of the authorities’ functions among the Ministry of Commerce (MOFCOM), National Development and Reform Commission (NDRC), and State Administration of Industry and Commerce (SAIC). MOFCOM will establish the Bureau of Anti- Monopoly Investigation and will be solely in charge of pre-concentration review. The Anti-Monopoly and Anti-Unfair Competition Enforcement Bureau, a department within SAIC, will have the authority to investigate anti-monopoly agreements, abuses of market dominance by business operators, and abuses of administrative power that restrict or eliminate competition (excluding pricing-related agreements or abuses). The Price Department and the Price Supervision Department within NDRC will handle investigations on pricing-related agreements or abuses.

The Anti-Monopoly Commission will be headed by a State Council vice premier who oversees trade and investment policy. The deputies of the Anti-Monopoly Commission will be officials from MOFCOM, SAIC, and NDRC. The Anti-Monopoly Commission will supervise the AMEA, and the Commission will operate from a separate working office that will be located within MOFCOM and headed by a vice minister of MOFCOM. The deputy of the working office of the Anti-Monopoly Commission will be the director-general of the Bureau of Anti-Monopoly Investigation in MOFCOM. The Anti-Monopoly Commission will be an ad hoc organization of the three separate ministries’ specific departments, rather than a separate entity.

According to the Notification Criteria Provisions, a pre-concentration notification must be filed with the Reviewing Authority if a concentration meets any of the following criteria:

  1. During the previous fiscal year, the total global turnover of all business operators participating in the concentration exceeded RMB 10 billion, and at least two of these business operators each had a turnover of more than RMB 400 million within China; or
  2. During the previous fiscal year, the total turnover within China of all the business operators participating in the concentration was more than RMB 2 billion, and at least two of these business operators each had a turnover of more than RMB 400 million within China.

The Notification Criteria Provisions provide that even if a concentration does not fall under any of the above criteria, the Reviewing Authority may conduct investigations in accordance with the law if the concentration may eliminate or restrict competition.

Comments

The effective enforcement of the AML may be even more important than the law itself. Therefore, the selection of a competent anti-monopoly enforcement authority is critical. The government authorities that conducted anti-monopoly related functions before the issuance of the AML (MOFCOM, SAIC and NDRC) will jointly form the AMEA, a decision long discussed during the AML’s legislative process and finally accepted by the government. To many observers, this decision sounds like a recipe for trouble. Indeed, it is preferable not to follow such an approach, considering the conflicts, inefficiencies, and other problems which may arise from such a multiauthority regime without powerful court supervision.

Criticisms aside, if from a realistic perspective the abovementioned structure is unavoidable, at least for a certain period of time, it is strongly advised that the government clearly classify the respective power, scope, and relationship among such AML enforcement authorities. It is a positive development that MOFCOM will be solely in charge of concentration control. In other words, SAIC will not conduct the pre-concentration review when the AML comes into force. It is notable that it might be difficult to establish a clear-cut division between “pricing-related” and “non-pricing-related” forms of anti-competitive activities and avoid overlapping or conflicting regulatory authorities (SAIC and NDRC).

The adoption of a turnover criteria that incorporates the “local nexus” requirement under the Notification Criteria Provisions is a positive development. Since turnover can objectively reflect the relationship between business operators and the market, as well as the business operators’ competitive strength, competition authorities around the world accept this criterion for notification. In addition to the general turnover criteria, the Notification Criteria Provisions provide a “local nexus” requirement by addressing situations in which at least two of each of the business operators participating in a concentration has a minimum turnover within China during the previous fiscal year. This differs from the current anti-monopoly notification rules, in which the pre-concentration notification thresholds can be triggered by only one of the business operators (usually the acquiring party). The adoption of the turnover standard that incorporates the local nexus requirement ensures that the notification review process will consider the foreseeable effects on both competition in the Chinese market and the conditions of the business operators party to a concentration.

The Notification Criteria Provisions eliminate the “market share” criteria contained in the Internal Draft of the AML and the Draft for Comments, which would require pre-concentration filings if the concentration will cause the business operators participating in the concentration to possess more than 25% of an industry’s market share in China. This elimination improves the AML because notification thresholds are supposed to be based on objectively quantifiable criteria, while the market share criteria is determined by the definition of “relevant market,” which invites subjective judgment and is difficult to apply in practice. Further, it is not only difficult to define the relevant market, but also to measure and assess the actual or potential competitive positions of various industry participants and calculate the specific market shares of competitors; this is because relevant evidence is challenging to find, if available at all, and the required analysis is often complex.

As a consequence of these difficulties, the ultimate assessment on what constitutes market share is often indeterminate. Tests based on market shares may be appropriate for later stages of the concentration control process, such as determining the amount of information required in a notification and the ultimate legality of the transaction, but such tests are inappropriate for determining whether a transaction requires notification. The deletion of the “market share” criteria will prevent uncertainty in determining whether business operators need to notify the authorities about a concentration.

The elimination of the “market share” criteria and the adoption of the turnover criteria that incorporates the “local nexus” requirement reflect international best practices and will therefore be familiar to anti-monopoly practitioners with international experience. However, certain provisions still remain ambiguous. Accordingly, parties to a concentration need to pay particular attention to the following provisions:

1. Turnover Calculation

The Notification Criteria Provisions do not specify the method for calculating the turnover of business operators participating in a concentration, leaving it to be addressed at a later stage. The 2005 draft of the AML, however, indicated that the calculation also applied to affiliated business operators and business operators under the control of business operators participating in a concentration. The Internal Draft of the AML and the Draft for Comments contained a similar provision. These provisions indicate the Reviewing Authority’s preference for a turnover calculation method for all affiliated business operators and business operators under the control of a business operator participating in a concentration.

In practice, business operators often lack access to information about affiliated companies in which they hold minority ownership interests, or find it difficult or burdensome to calculate the turnover of all of their affiliated or controlled business operators. Many countries and regions with welldeveloped competition laws include only certain types of affiliated business operators when calculating the turnover of business operators participating in a concentration. In such cases, only the affiliates in which the parent company (the main business operator who is participating in a concentration) directly or indirectly owns more than half the capital or business assets or has the power to exercise more than half the voting rights, are used in calculating turnover (herein, these specific affiliated business operators, collectively with the parent company, are considered “business operators participating in a concentration”).

A related issue is the composition of “turnover.” It is unclear under the Notification Criteria Provisions whether sales rebates, value-added taxes, and other taxes that are directly related to turnover should be calculated in “turnover.” Business operators and the Reviewing Authority might have different understandings of the composition of turnover, thus rendering it uncertain whether the business operators participating in a concentration must notify the Reviewing Authority.

2. Subjective and Opaque Notification Thresholds

Article 4 of the Notification Criteria Provisions provides that the Reviewing Authority may investigate a concentration if the concentration may result in the exclusion of or limitations on competition, even if the concentration does not meet the thresholds set forth in Article 3. The Draft for Comments provided that the Reviewing Authority may demand that a business operator file a pre-concentration notification if the Reviewing Authority determines that a concentration may eliminate or restrict competition even though the concentration does not meet the specified thresholds. Provision 4 is softer in tone in that it authorizes the Reviewing Authority to investigate rather than to demand a filing. Provision 4 is also very broad in its language on what will trigger a government investigation because it allows the Reviewing Authority to investigate any concentration that may exclude or limit competition.

Article 4 may pose problems to business operators participating in a concentration for several reasons. First, the standard set forth in Article 4 is subjective and non-transparent, and thus the business operators will find it hard to evaluate its application. Second, competitors, relevant authorities, or industry associations often complain about anti-competition activities, and this provision allows them to ask the Reviewing Authority to consider investigating a transaction via complaining about such activities’ possible negative effect on competition.

The latter issue is especially worrisome, as competitors have the incentive to frequently complain since they may believe that a competitively beneficial transaction would in fact ultimately lead to a reduction in their own profits or in the erosion of their present sales. Therefore, malicious competitors may take advantage of the broad language of Article 4 to burden the business operators participating in a concentration with government investigations. Relevant authorities or industry associations may have incentives to oppose a transaction based on their own agendas, which should be separate from the considerations of competition policy. The Reviewing Authority should be alerted to these possibilities and try to ensure that they make their decisions based on available objective criteria, and that their review is based on competition policy and the broader and long-term public interest rather than any specific, private motives.

Article 4 may also cause further problems by allowing the government’s unchecked discretion in regulating the notification requirements and process. The interpretation of Provision 4 may raise some practical difficulties in China during the initial implementation period, given the Reviewing Authority’s lack of experience in more comprehensive and sophisticated notification review procedures.

Next Steps

The Notification Criteria Provisions will supersede the anti-monopoly notification criteria of the Rules on Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors, which took effect on September 8, 2006 and was jointly issued by the Ministry of Commerce and five other central government authorities. The Guidelines for Antitrust Notification for Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors issued by China’s Antimonopoly Investigation Office in March 2007 will also be revised to reflect the developments. Since many AML issues remain unresolved, further detailed notification provisions or guidelines will be expected.