After 13 years of drafting, the Standing Committee of the National People’s Congress enacted China’s first comprehensive competition statute on Aug. 30, 2007. The Anti-Monopoly Law (“AML”) will take effect Aug. 1 of this year. The one-year grace period was intended to provide time for the State Council to prepare for enforcement, to establish the new Antimonopoly Commission, and to develop implementing rules and guidelines. While some of the issues created by the sometimes vague statutory language will be resolved through the implementation of the anticipated regulations and guidelines, uncertainties will undoubtedly persist. Moreover, as written, the key provisions of the AML are apparently inconsistent with existing U.S. and EU law. While some of the issues created by the statutory language will be immediately apparent, this article is not intended to identify and/or address all of them. Instead, it is intended to provide a high-level overview of the AML as it is currently written.
Prohibition Against “Monopoly Agreements”
Articles 13, 14 and 15 address prohibited “monopoly agreements.” Article 13 sets forth specific prohibited horizontal conduct:
- Price fixing
- Market allocations
- Group boycott
- Output limitations
- Agreements restricting the purchase of new technology or new equipment, or restricting the development of new products
- Catch-all: Other Monopoly Agreements in the discretion of the Anti-Monopoly Law Enforcement under the State Council
- Specific prohibited vertical conduct is set forth in Article 14
- Minimum and maximum resale price maintenance
Article 15 establishes what looks like a rule of reason standard for the illegality of conduct set forth in Articles 13 and 14. Thus, hardcore conduct, such as price fixing, that is generally treated as per se illegal under the U.S. and EU enforcement scheme, appear to be subject to justification under the AML.
Abuse of Dominant Market Position
Articles 17, 18 and 19 prohibit “undertakings” from abusing a position of “dominance.” “Dominance” is statutorily defined as: “undertakings who are able to control the price or quantity of commodities, or other transaction terms in the Relevant Market or to block or affect the entry of other undertakings into the Relevant Market.” Article 19 presumes “dominance” if:
- A single undertaking has a market share of 50 percent or more
- Two undertakings have combined market share of 66.6 percent or more
- Three undertakings have combined market share of 75 percent or more Article 19 does provide a safe-harbor for undertakings holding less than 10 percent of the relevant market. But, for example, two undertakings with 17.6 percent and 49 percent of the relevant market respectively could be found to be collectively “dominant” when individually they would not be. “Dominant” undertakings are prohibited from:
- Selling commodities at unfair high or low prices
- Predatory pricing
- Unilateral refusal to deal
- Exclusive dealing
- Price discrimination
The chapter of the AML dealing with vertical conduct does not contain a provision similar to Article 15, which creates a rule of reason-type analysis for horizontal conduct. Thus, as written, the AML appears to subject vertical conduct to per se illegality.
Merger enforcement in China is currently governed by the M&A Rules. The AML expands the scope of the current rules, but what is unclear is whether the AML will supersede the existing laws or whether companies will have to comply with both. The anticipated regulations may provide clarification, but until they are released, the merger enforcement rules of the AML are as follows.
A. What are the Notification Requirements?
i. What triggers notification?
A “concentration” that meets an undisclosed concentration threshold. Article 21 requires an undertaking to notify the authorities of “concentrations,” defined as a merger, acquisition through equity or assets or acquisition of control, that meet specified thresholds. There is currently no set notification threshold and no deadline for notification. However, Article 25 does state that a “concentration” cannot be completed until it receives approval.
ii. Who must notify?
The “relevant undertakings” must notify the Authority. A “relevant undertaking” includes both the acquiring and acquired undertaking. Notice is not required if:
- A participating undertaking owns more than half of the voting rights or assets of each of the other participating undertakings.
- A participating undertaking holds more than half of the voting rights or assets of every other participating undertaking.
iii. When is notification required?
When the concentration thresholds are met. As noted, there is no specific notification deadline, but the transaction cannot close without notification or while the concentration is under review.
iv. What must you submit?
Article 23 sets forth a list of boilerplate information: as a notification form, the operative agreement, a competitive impact statement, audited financials, and “other information” required by the Authority. The Authority can require supplemental filings if the initial filing is incomplete. As of this writing, no official form of filing exists, and “other documents” remain undefined.
B. What is the Review Process and the Waiting Periods?
i. How is the waiting period structured? The total waiting period can be up to 180 days, broken down as follows:
- Phase 1 review: 30 days. If no action is taken within 30 days, the transaction can close. Art. 26.
- Phase 2 review: (if required) Up to 90 days, which can then be extended another 60 days under certain circumstances.
C. What are the substantive review criteria?
The substantive test is whether the concentration eliminates or restricts competition in the relevant market. Art. 21. The “relevant market” includes both the product and geographic market. Art. 12. Once the relevant market is determined, the Authority will review the following:
- Market share
- Degree of concentration
- Effect on market access and technological progress
- Effect on consumers and other undertakings
- Effects on national economic development
- Other factors that affect market competition thought worthy of Authority consideration
D. What is the Authority’s authority? The Authority may allow the concentration, block the concentration or allow the concentration with conditions. Art. 28, 29. The Authority is required to publicize in writing all decisions to block or conditionally allow a concentration. Art. 30.