Chinese Competition Law Up and Running

With the first actions being brought the very first day of the new law coming into force, China is on track to become the third most important competition jurisdiction in the world, following the US and the EU.

After nearly 14 years of preparation, the Chinese Antimonopoly Law (AML) came into force on 1 August 2008. Rules on merger notification thresholds entered into force on the same day. However, in the absence of comprehensive implementing legislation or a history of competition policy, businesses are scrambling to ensure that their operations in China and their mergers and acquisition activities worldwide do not run afoul of the AML’s requirements. Notwithstanding the uncertainties, the passage of the AML is a major legal development and an important milestone for China that has received a warm welcome by the business community operating in China.

Key Provisions

The AML regulates the areas typically found in competition regimes around the world, such as monopoly agreements and abuses of a dominant position.

Monopoly Agreements – The types of behaviour outlawed are similar to those covered by US and EU law, such as price fixing, market sharing, or excessive pricing and refusals to deal. There are a number of exemptions for agreements among competitors, such as monopoly agreements aimed at improving technology, reducing costs or conserving energy and protection of the environment that are similar to agreements that would be allowed in Europe under Article 81(3)of the EC Treaty.

Abuse of dominance – the AML forbids dominant firms engaging in similar activities, e.g., unreasonable pricing, tying arrangements or refusals to deal. There is a presumption of dominance when a single company holds a market share in excess of 50%, when two account for more than two thirds of the relevant market or when three hold a market share in excess of 75%.

Abuse of Administrative Authority

The chapter on abuse of administrative power is unique to China, and has stimulated great interest among businesses in China, given the widespread administrative involvement in the economy. It is therefore not surprising that four Chinese manufactures brought a case under this chapter on the day the AML entered into force. The AML, prohibits administrative authorities from limiting business or individuals to purchasing or using commodities provided by an entity designated by the authority. These provisions principally target regional measures that restrain free circulation of commodities and other distortions of competition between regions and are distinctively reminiscent of the EU’s provisions on free movement of goods and services.

Mergers

The rules on merger control are a vast improvement over the previous Chinese M&A Rules, which required antimonopoly review of foreign-funded acquisitions of Chinese firms which met certain thresholds, or where the parties had a certain market share. Unlike the M&A Rules, the AML provision on merger review cover both foreign and Chinese investors , and eliminate reviews based on market share, using turnover thresholds only. The relevant thresholds were set by the Notification Rules. Mergers will need to be notified if they meet the following thresholds:

Merger Notification Thresholds

(1) Aggregate turnover of all Parties involved

Worldwide

RMB 10 billion

(US$ 1.4 billion)

(€ 1 billion) 

OR

PRC

RMB 2 billion

(US$ 290 million)

(€ 200 million) 

AND

(2) Turnover in the PRC of at least two Parties

RMB 400 million

(US$ 58 million)

(€ 39 million)

The thresholds are set very low and this will have as an effect the multiplication of merger notification filings of global transactions in China1. It must also be noted that turnover figures include the whole seller’s group and not just the turnover of the business being sold. Violation of the reporting rules carries a fine of up to RMB 500,000 (US$ 70,000, € 50,000) and divestiture powers mean that parties can no longer afford not to file in China, as was common practice under the previous M&A rules. The Notification Rules reserve the right for the relevant authority to investigate mergers even when the notification thresholds have not been reached but the merger may have the effect of restricting competition.

Enforcement Authorities and Investigations

Prior to passage of the AML, there were three main government players whose roles overlapped with areas the AML covers: the Ministry of Commerce (MOFCOM), the State Administration of Industry and Commerce (SAIC) and the National Development and Reform Commission (NDRC). These bodies will be enforcement agencies under the AML as well, with MOFCOM responsible for merger review, SAIC for investigation of non-price related monopoly agreements or abuse of dominance and NDRC responsible for investigation of price related monopoly agreements or abuse of dominance. The AML also provides for the establishment of an Antimonopoly Commission, whose functions are limited to policy and co-ordination. There are no implementing regulations providing details on the office structures and responsibilities of the enforcement authorities.

The AML provides for dawn raid style investigations. Some procedural safeguards are in place, such as the need for a written report and authorisation of the investigation and the requirement of a written record of the investigation. The law is however silent on the rights of the entities under investigation, such as on the spot legal representation and access to privileged documents.

Fines and Leniency

Penalties under the AML are high. Fines of between 1% and 10% of the companies’ total turnover may be imposed and the AML also grants the enforcement authority the power to confiscate illegal gains. Offenders may also be subject to private actions by third parties that suffered loss. Obstructing an investigation or providing false or misleading information may attract fines of up to RMB 100,000 (US$ 14,500, € 10,000) for individuals and RMB 1 million (US$ 145,000, € 100,000) for companies. There is however no criminal liability.

Undertakings that come forward and confess their anti-competitive agreements can receive a reduction in fines or total exemption. More importantly, in the course of an investigation, undertakings may offer commitments to eliminate the effect of the alleged conduct and bring the investigation to an end. Offering commitments does not involve the admission of wrongdoing.

Recent Cases

The first lawsuits were filed before the State Council had even designated the relevant enforcement authorities. According to press reports, a lawsuit is pending before the People’s Court in Beijing against Beijing Netcom for abuse of dominant position for reserving certain products and services to residents of Beijing only. In Chongqing, a case has been brought before the People’s Court against the Chongqing Insurance Association for setting the rates for car insurance.

As mentioned above, a case for abuse of administrative power has also been brought before the Beijing First Intermediate Court against the General Administration of Quality, Supervision, Inspection and Quarantine (AQSIQ), a Chinese government department. AQSIQ has designated one entity alone, in which it indirectly holds a 30% interest, to provide electronic supervising codes. These codes are required by law for companies producing and selling certain specified products. The four plaintiffs are all IT firms which would like to provide electronic supervising codes.

Hong Kong Competition Law

Although Hong Kong is a separate jurisdiction, it is following China’s lead in considering the adoption of a competition law. Following a consultation period that ended on 5 August 2008, the Commerce and Economic Development Bureau is in the process of drafting a bill for consideration in the 2008-09 legislative session. In contrast with the current rules in Hong Kong in the telecommunications and broadcasting sectors, the new law will apply to all sectors of the economy. The new law is likely to follow the UK as an example with typical provisions prohibiting anti-competitive agreements, abuse of ‘substantial market power’ and most likely, though not uncontroversially for Hong Kong, a merger control regime. AML

For a more detailed overview of the Chinese AML, please click here for our briefing on the AML.