Without the fanfare accompanying the Olympics Games in Beijing, China’s Anti-Monopoly Law (AML) quietly came into force on August 1, 2008 after fifteen years of debate and redrafting (after “2008”). While the games will soon fade into memory, the AML will not, as it makes China one of the most important antitrust regimes faced by multinational corporations, along with the US and the EU.
The AML is China’s first comprehensive and unified legislation regulating competition. It borrows from EU and US law and practice, but also has concepts that are unique to China. The AML applies to acts committed within China, as well as those that have an anticompetitive effect in China. As China’s economy continues to grow in size and importance, this law will have broad implications for businesses operating in China or transacting with vendors or customers here.
The AML targets three general categories of prohibited behavior:
- Monopoly Agreements. The AML prohibits agreements or concerted actions among competitors or counterparties that eliminate or restrict competition. For example, agreements between competing businesses to fix prices, limit production or sales, or divide markets, or agreements between trade counterparties to set minimum resale prices, are prohibited by the AML. These so-called “monopoly agreements” may be exempted in certain circumstances, such as where the agreement is entered into to improve technology or product quality and it does not materially restrict competition.
- Abuse of Dominant Market Position. The AML prohibits abuse of market power by “dominant” firms. A firm may be presumed dominant under the AML if its market share meets or exceeds certain thresholds. Under the AML, acts such as tying, exclusive dealing, refusal to deal, price discrimination and predatory pricing, among others, are considered abusive and thus prohibited, unless otherwise “justified.” The possibility of justification suggests that a US-style rule of reason analysis may apply.
- Anticompetitive “Concentrations.” The AML is formulated to prohibit mergers and acquisitions that eliminate or restrict competition. It also provides for pre-merger notification and review, as discussed below.
As is generally the case with legislation in China, the AML contains broad language and concepts and leaves details to implementing rules and agency practice. For multinationals who must comply with the new law, this translates into large pockets of uncertainty as the relevant authorities decide upon their enforcement policies and requirements. For instance, the AML provides that the exercise of legitimate IPR rights is exempt from enforcement actions, but also prohibits abuse of IPR rights. One question that will be followed with much trepidation is how aggressively the authorities will interpret the latter prohibition, particularly against multinational companies with IPR rights coveted by local competitors. Indeed, a July 31, 2008 article in the China Business Newswire reflects a widely held view that “the Anti-Monopoly Law. . . will help prevent foreign companies from using IPR violations as a reason to keep out competition in Chinese markets, but will have little impact on state-controlled” enterprises. Another example of uncertainty in the law is whether the AML will be enforced against state-owned businesses and joint ventures in which they participate.
- The Law. The AML mandates that transactions exceeding certain thresholds be reported to the relevant authorities in advance. Reportable transactions include: (i) mergers between firms; (ii) the acquisition of control of another firm through purchase of shares/equity or assets; and (iii) the acquisition of the ability to exert decisive influence over another firm through contractual or other means.
- Implementing Rules. On August 4, 2008, the State Council released the first implementing regulations, the Rules on the Notification of Concentration of Business Operators (the “Notification Rules”), which are effective as of August 1.
The Notification Rules provide that a notification must be filed if a transaction meets either of the following thresholds:
- The global turnover in the preceding accounting year of all parties to the concentration exceeds RMB 10 billion (roughly $1.4 billion as of August 1) and the turnover within China of each of at least two of those parties exceeds RMB 400 million (roughly $58 million) over the preceding accounting year.
- The turnover within China in the preceding accounting year of all parties to the concentration exceeds RMB 2 billion (roughly $290 million) and the turnover within China of each of at least two of those parties exceeds RMB 400 million over the preceding accounting year.
The Notification Rules provide little additional detail and are a stripped-down version of the draft rules circulated for public comment in March 2008. These Rules eliminated from the draft version the much-criticized filing thresholds based on market share or change in largest shareholder, but they also dropped many other provisions of the draft rules, some instructive, presumably to avoid controversy. The resulting brevity of the Rules leaves the specifics to actual practice or future regulations and will create uncertainty for multinationals seeking to comply. Examples of such uncertainty include the particulars of how turnover will be calculated, whether affiliate operations must be included and coverage of joint ventures.
The Enforcement Structure
- The Enforcing Agencies. The AML contemplates a dualtiered enforcement regime. At the working level, enforcement authority will be allocated among three different agencies: (i) The Ministry of Commerce (MOFCOM) will handle merger notifications and review; (ii) The State Administration for Industry and Commerce (SAIC) will enforce prohibitions against monopoly agreements and abuses of market dominance, save any aspects that involve pricing; and (iii) The National Development and Reform Commission (NDRC) will deal with price abuses by dominant firms and related issues under the AML. This division of authority reflects the historical responsibility of these agencies and is perceived to be a balance-preserving political compromise after years of wrangling among the agencies.
- The AMC. At the top, an Anti-Monopoly Committee (AMC) is to be established directly under the State Council and will formulate overall policies and act as an overseer of AML administration.
In another important recent development, the State Council announced last week that the administrative office of the new and powerful AMC will be located at MOFCOM. This no doubt will enhance the importance of MOFCOM in the enforcement process. Vice Premier Wang Qishan, whose policy portfolio includes finance and foreign trade, reportedly will chair the AMC.
- Jurisdiction. Unfortunately, it is probable that there will be some overlap in the jurisdiction of the agencies and consequently multinationals under investigation may need to deal with more than one authority. For example, monopoly agreements and abuses of market dominance often involve pricing issues and accordingly a company under investigation may need to deal with both the NDRC and SAIC in such circumstances. Although the merger review authority of MOFCOM is more clear-cut, its role as home to the oversight AMC may expand its involvement into other areas of AML enforcement. Over time and practice, it will hopefully become clearer how the agencies will divide their tasks or collaborate.
- Internal Changes. Over the past week, the enforcing agencies have announced internal reorganizations and measures to prepare for the enhanced importance of their roles under the AML. MOFCOM announced the creation of a department-level Anti-Monopoly Bureau last week. Likewise, SAIC has also announced the creation of an Anti-Monopoly and Anti-Unfair Competition Bureau. The NDRC stated that it has recently completed a set of draft rules on implementing the AML’s prohibition against price abuses by dominant firms.
The AML also, for the first time, expressly grants the enforcement authorities the power to penalize violations. It does not impose criminal liability for violations, although there is some interest in amending the law to do so. Nonetheless, the AML does provide for substantial monetary and injunctive penalties, including fines of one to ten percent of an offender’s revenue from the preceding year. It also allows for civil actions by private third parties.