After nearly 13 years of drafting, China finally promulgated its first antitrust legislation, the PRC Anti-Monopoly Law (“AML”), which will come into force on August 1, 2008.
The AML promotes fair market competition by prohibiting three major types of monopolistic acts, namely:
I. Monopolistic agreements – The AML prohibits two categories of monopolistic agreements, specifically, agreements among competitors (horizontal agreements), and agreements with trading partners (vertical agreements). The term “monopolistic agreements” is broadly defined to include agreements, decisions, or other concerted behaviors between parties that eliminate or restrict competition. An agreement to fix prices, restrict outputs or allocate markets will generally be regarded as monopolistic.
Exemptions may apply where the purpose of a monopolistic agreement is to improve technologies, enhance efficiency or quality, serve public welfare, or deal with oversupply issues in severe recessionary conditions etc.
For violations, illegal gains may be confiscated and fines between 1% and 10% of prior year's sales turnover can be imposed. A business operator may also be ordered to stop the violations.
II. Abuse of dominant market position – A company is in a “dominant market position” where it has the ability to control prices (or other relevant factors) or to impede or affect entry of other business operators into the market. Examples include: selling or buying products at unfair prices, selling products below cost, unreasonably refusing to deal, tying products, or discriminating between trading partners.
The AML contains a number of presumptions of dominance based on market share in a relevant market. For example, a company is presumed to have a dominant market position if it holds a majority (at least 50%) market share or where two operators jointly account for 2/3 of the market share. For the purpose of the AML, “relevant market” means the spectrum of goods or territorial scope within which the companies compete against each other during a certain period of time for specific goods or services.
For violations, illegal gains may be confiscated and the same fines as provided for entering into monopolistic agreements may be imposed.
III. Anti-competitive concentration – The AML outlines a new pre-merger notification procedure that applies to both foreign and domestic parties. A “concentration” arises in the event of a merger, acquisition of control, or acquisition of an indicia of control such as (re)arrangement of management positions, ownership, and agreements, among others.
Any concentration that reaches certain thresholds must be notified for review, and cannot be implemented until the review process has been completed. Concentrations that are likely to have the effect of eliminating or restricting competition can be prohibited or approved under certain restrictive condition.
The adoption of the AML is an important milestone for China’s socialist market economy. The provisions in the AML are generally in line with international norms. However, many vital details, such as specific concentration review thresholds, remain to be filled in by detailed implementing regulations or guidelines.
Given the continued importance of China as an emerging market, all multinationals doing businesses in China should closely follow the developments relating to the AML and consider reviewing and revising their business practice accordingly.