China issues Anti-Monopoly Guidelines for Platform Economy

SAMR continues to actively regulate China's tech sector by issuing guidelines, after making revisions intended to soften the earlier draft.

On 7 February 2021, China's State Administration for Market Regulation ("SAMR") published the finalised Anti-Monopoly Guidelines for the Platform Economy (the "Guidelines"). The Guidelines cover an extensive range of issues related to both merger control as well as antitrust enforcement. Compared with its November draft, the Guidelines appear to have adopted a more balanced approach, most notably:

  • the Guidelines emphasise that market definition is usually required in assessing all wrongdoings, whereas the draft stated that market definition would be of less importance to horizontal collusion and RPM findings;
  • the Guidelines present a longer list of justifications for abusive conducts, e.g., short term price promotions for predatory pricing; and
  • the Guidelines expressly clarify that parallel behaviour resulting from operators' independent decision-making is not sufficient basis on its own to establish a cartel.

These changes appear to be deliberately designed to respond to (i) concerns that the SAMR should not overregulate the tech sector and (ii) risks which heavy-handed enforcement pose to innovation and development. As seen in other jurisdictions, the challenge is how to effectively advocate to regulators what constitutes pro-competitive and anti-competitive conduct in highly dynamic markets that is driven by innovation. Compared with price effects, the impact of a business conduct on innovation is more difficult to model.

In parallel with the issuance of the Guidelines, China has started to increase enforcement activities against certain strategies long employed by China's Internet platforms/tech companies. As this sector has not been subject to heavy enforcement in the past, platform operators in China should take this opportunity to re-assess and adjust their business models and compliance programs.

For more information, please refer to our client alert (see here).

SAMR continues to strengthen enforcement against failures to notify

This quarter witnessed a record high in both values of fines and the number of cases for procedural violations.

Since January, the SAMR published 15 penalty decisions for failure to notify and gun-jumping. Notably, penalties relating to failure to notify in the internet/online platform sector surged, as the SAMR has cracked down on failure to notify in deals involving VIE structures. In 10 of 15 penalty decisions, the SAMR respectively imposed the maximum fine of RMB 500,000 (approx. USD 77,000) on 12 companies with VIE structures, similar to the penalty decisions imposed on three VIE-related companies in December 2020. Likewise, factors relating to the nature, extent, and duration of the violations were considered when the SAMR imposed the maximum fines.

These penalty decisions make it clear that the SAMR will continue to strengthen its enforcement towards failure to notify/gun-jumping violations. In particular, the SAMR's recent enforcement activities appear to be targeted at companies that fail to notify their transactions only by virtue of their VIE structures. Businesses that have not considered China merger control jurisdiction in respect of their previous or ongoing transactions may re-assess the risks and adopt adequate risk mitigating measures where necessary.

SAMR clarifies rationale behind abusive refusal to deal decision

SAMR sanctioned a Chinese drug maker's refusal to deal, rebutting all of its arguments.

On 22 January 2021, the SAMR imposed a fine amounting to 2% annual sales in 2019 (approx. USD 15.5 million) on a leading Chinese drug maker for its refusal to deal without justifications. A dominant market position was found, given that the drug maker entered into a China-wide exclusive supply arrangement with the sole product supplier and accordingly, acquired all supplies in China. It refused to offer quotations for the product, and proposed to supply the product on the condition that it acquires shares in the downstream companies requesting the supply.

The drug maker tried to justify its conduct by invoking the following reasons, which the SAMR rejected:

  • all products were needed for self-use in its R&D (but the SAMR found that only a small amount was required);
  • sales to third parties were subject to the sole supplier's written approval (but the SAMR found that such statement was untrue as the sole supplier's inventory was adequate and they were willing to supply);
  • the supply was a part of M&A negotiations with downstream companies (but the SAMR viewed this reason as merely a "bargaining chip"); and
  • a downstream company had questionable credit and made the price inquiries during its parent's commercial dispute with the drug maker (but the SAMR held that the drug maker did not presume them to be the real reasons for refusal to deal, as evidence showed that it was aware that these two issues no longer existed).

For more information, please refer to the SAMR's media release (see here).

SAMR fines a cement joint venture for cartel conduct

Seven cement companies were found to have engaged in a “disguised cartel” through a joint venture between them.

On 9 February 2021, Shandong AMR punished seven cement companies for their joint venture with an aggregate fine of RMB 228.29 million (approx. USD 35 million) for cartel activities implemented through the joint venture.

The seven cement companies jointly controlled the joint venture, and appointed all its directors, senior management, and staff. The joint venture formulated internal policies on the price and output, and allocated sales territory among the seven cement companies. The seven cement companies' sales data were also monitored and shared with each other through the joint venture. In addition, all profits of the seven cement companies were collected by the joint venture as an administrative expense. In the SAMR's view, the joint venture functioned as a vehicle to implement its parents' price-fixing, output restriction, and market allocation activities.

Notably, the competition authority conducted the investigation based on media and market reports and other industry intelligence, including by analysing pricing patterns based on tax information shared by the tax bureau. Following this preliminary investigation, the authority initiated dawn raids on the same day it organised a meeting with cement companies in Shangdong province to advocate antitrust compliance requirements.

This marks the first time a China antitrust authority has found that a joint venture constituted a cartel, sending a strong signal that anti-competitive cooperation between joint venture parents is on China's antitrust radar.

For more information, please refer to the SAMR's media release (see here).