Late in the summer of this year, the National People’s Congress passed China’s long-anticipated Anti-monopoly Law of the People’s Republic of China (the “Anti-monopoly law”). This new antitrust law, which will come into force on August 1, 2008, is the result of thirteen years of drafting and debate and closely follows the announcement earlier this year that Hong Kong will also introduce comprehensive competition law.

The anti-monopoly law prohibits monopoly agreements, abuse of dominant market position and concentrations that “eliminate or restrict market competition.”

China’s new anti-monopoly law may have a number of significant impacts on foreign companies doing business in China, including altering the landscape for pre-merger notification and review of Chinese transactions, requiring a review of existing product distribution policies and determining whether other commercial activities in China may raise issues under the new anti-monopoly provisions.

Monopoly Agreements

The new anti-monopoly law prohibits monopoly agreements between competing undertakings (i.e., horizontal cartel-type behaviour) to fix the price of products, restrict output, divide markets or jointly boycott transactions.

On the face of these provisions, it appears that no substantial anti-competitive effects in a relevant market are required to contravene the law (e.g., a price fixing agreement between competing undertakings with relatively minor competitive effects may, at least on the face of the new provisions, be caught). The new law does, however, contain a number of exemptions from the horizontal (cartel) and vertical (price maintenance) monopoly agreement provisions, including exemptions for agreements to improve products or achieve efficiencies.

Unlike the approach adopted in some other major jurisdictions such as the United States and Canada, which have adopted general prohibitions on cartel activities with the types of prohibited agreements established by case law, China’s new cartel rules explicitly set out the types of anti-competitive agreements that are prohibited. While expressly codifying “hard-core” types of anti-competitive agreements may seem an intuitive approach to enacting cartel rules, there has been an ongoing debate in Canada and elsewhere on the difficulty of accurately and comprehensively covering all possible forms of agreements that may contravene cartel or conspiracy prohibitions. Canada has, as a result, to date retained a general criminal conspiracy provision, with case law amplifying the types of agreements that are prohibited.

In addition to prohibitions on horizontal cartel behaviour, China’s new anti-monopoly law also prohibits undertakings from fixing or setting minimum resale prices where such agreements “eliminate or restrict” competition. The new resale price maintenance provisions, which may have a number of potential impacts on foreign companies supplying products to Chinese distributors or retailers, are similar to the approach taken in the recent judgment of the U.S. Supreme Court, which held (acknowledging growing economic thinking that resale price maintenance activity can be pro-competitive or anti-competitive depending on the circumstances) that such conduct is not per se unlawful, but rather should be examined pursuant to the rule of reason. This is, however, in contrast with Canada, which retains a per se approach to price maintenance activities.

The new anti-monopoly law also contains a specific provision, added as a last minute amendment, prohibiting industry associations from organizing undertakings to engage in monopoly agreements prohibited by the new legislation. This provision, which is rather novel in that trade association activities are typically dealt with by general cartel provisions in most other major jurisdictions, appears to be the result of recent price fixing activities of the China arm of the International Ramen Manufacturer’s Association, which China’s National Development and Reform Commission recently found guilty of breaching China’s existing price law legislation.

Abuse of Dominant Market Position

The new anti-monopoly law also prohibits undertakings from abusing their dominant market position. “Dominant market position” is defined as an undertaking that can control the price or quantity of products or block or affect the access of other undertakings into the relevant market. In that regard, the approach to dominance adopted in the new legislation appears generally consistent with conventional economic theory (i.e., the ability of a firm to exercise market power or foreclose entry).

As in Canada and the European Union, China’s new abuse of dominance provisions set out illustrative examples of conduct that may be considered abusive when engaged in by a dominant undertaking. These include selling products at unfairly high prices and exclusive dealing, tying or price discrimination “without any justification.”

The new abuse of dominance provisions also set out presumptive thresholds for when a firm will be considered to be dominant, which include where an undertaking has a 50% market share or where the combined market share of two undertakings accounts for two-thirds of a relevant market. These thresholds appear to be rebuttable, as the new law also provides that undertakings construed to be dominant based on the above thresholds “shall not be considered to have dominant market position provided that there is opposite evidence.”

As a practical matter, these market share presumptions for dominance may mean that foreign firms with large market shares in China potentially face a higher burden if their activities are challenged. These presumptions were also criticized prior to the passing of the new law.

In any event, the extent to which China’s new enforcement authorities will be willing to consider factors other than market share in assessing dominance remains to be seen.

Concentrations

The new anti-monopoly law also introduces a new pre-merger notification and review regime for concentrations that exceed certain thresholds. While merger review was first introduced in China in 2003 and replaced in 2006 by the Rules on Mergers and Acquisition of Domestic Enterprises by Foreign Investors (the “M&A rules”), the new law establishes a merger control regime that applies to both domestic and foreign transactions (whereas the current M&A rules do not apply to purely domestic transactions).

A concentration is defined to include mergers between undertakings and share and asset acquisitions resulting in an acquisition of control (though the term “control” is not defined), as well as transactions in which de facto control is acquired (i.e., the ability to “exercise decisive influence” over another undertaking is acquired). Unlike earlier drafts, the new anti-monopoly law does not set out any thresholds for pre-merger notification, providing instead that concentrations exceeding thresholds later stipulated by the State Council will require notification.

The new anti-monopoly law provides for a two-phase review of mergers, similar to the approaches in the United States and European Union. A transaction subject to merger control under the new law may not be completed before its new antitrust enforcement agency, the Anti-Monopoly Enforcement Authority (“AMEA”) has cleared the transaction or the relevant waiting periods of 30 working days (first phase) or 90 working days (second phase) have expired without AMEA having prohibited the transaction.

With respect to the substantive review of mergers, the new law provides that concentrations that “eliminate or restrict market competition” (or may have these effects) are prohibited, unless it can be shown that the advantages of the concentration outweigh the disadvantages or the concentration is consistent with the “public interest.” Like the provisions prohibiting monopoly agreements, it is not clear what requisite level of competitive harm will be required to be established (i.e., for a concentration to “restrict market competition,” which appears on its face to be a relatively low threshold).

National Security Review

The new anti-monopoly law also contains a national security review provision for foreign acquisitions that involve the “acquisition of domestic undertakings by foreign capital” or the “concentration of foreign capital.”

The new national security provision, like the existing provision in the M&A rules, may be criticized because “national security” is not defined, so it is not clear what will be considered a national security issue (i.e., when foreign investors may be subject to a national security review when acquiring domestic Chinese companies).

The adoption of a national security provision coincides with similar recent activities in the United States and Canada.

China’s new national security review provision may in reality be the result of political compromise between reformists in China, who support the adoption of competition policy consistent with other major jurisdictions and international best practices, and protectionists, who prefer to protect domestic Chinese businesses from potential new foreign entry. (That debate is not unlike that currently taking place in Canada in relation to the so-called “hollowing out” of corporate Canada and the sale of corporate crown jewels to foreign acquirers).

Future Implications

The introduction of China’s new anti-monopoly law is a highly significant development and the culmination of more than a decade of drafting and debate. It also follows a trend in Asia, as major jurisdictions continue to formulate and adopt comprehensive competition laws. The recent developments in China, as well as the new or proposed competition laws in Singapore and Hong Kong, mean that foreign companies doing business in Asia will face an enhanced regulatory landscape, with potential impacts on business activities ranging from mergers and acquisitions to pricing and distribution practices. Whether the new anti-monopoly law will be effectively or evenly applied by Chinese enforcement authorities, however, and the long-term practical impacts on companies doing business in China, remain to be seen.