September 28, 2007 After more than thirteen years of debate, China adopted its first Antitrust Law (the “ATL”) on August 30, 2007. This landmark legislation will take effect on August 1, 2008. The legislation reflects elements of existing antitrust laws around the world, particularly those of the United States and European Union. This is not surprising in as much as the drafters of the legislation sought the input of antitrust authorities in those and other countries.
Before the effective date, it is expected that detailed regulations will be promulgated which, among other things, will shed light on the formation of the State Antitrust Commission and the designation of the enforcement agency, both of which are called for under the ATL.
This memorandum provides a summary of the highlights of the new law, and also a brief analysis of key issues that remain to be addressed, presumably by regulations to be promulgated by the State Council.
I. Summary of Key Provisions of the New Antitrust Law
China’s ATL has eight chapters, which include 57 articles. Consistent with international practice, three types of monopolistic acts are dealt with in the ATL: (i) monopolistic agreements; (ii) abuse of dominant market positions; and (iii) concentration of undertakings. In addition, as a reflection of China’s unique economic system where government or administrative agencies still play an important role in the Chinese economic system, one chapter is devoted to abuse of administrative power to eliminate or restrict competition.
1. Key Definitions
The ATL defines monopolistic conduct as (i) monopolistic agreements reached among undertakings; (ii) abuse of dominant market positions by undertakings; or (iii) concentration of undertakings that eliminates or restricts, or potentially eliminates or restricts, effectiveness of competition. Undertakings include natural persons, legal persons, and other organizations that engage in production of products or provide services. And the relevant market is defined as a category of products and territorial area in which undertakings compete for certain products or services within a specified time period.
2. Two Government Organizations
(a) Antitrust Commission
The ATL calls for the establishment of an Antitrust Commission by the State Council (the “AT Commission”), whose mandate is to organize, coordinate, and guide the antitrust work in China. Specifically, the AT Commission is responsible for setting policy; investigating and assessing the general competition conditions in the market and issuing assessment reports; developing and publishing guidelines for antitrust; coordinating antitrust enforcement work; and carrying out other tasks as determined by the State Council.
(b) Antitrust Enforcement Agency
The ATL also calls for the establishment of an Antitrust Enforcement Agency (the “AT Agency”). The AT Agency is responsible for the enforcement of the ATL.
3. Monopolistic Agreements Are Prohibited
The ATL prohibits certain horizontal and vertical agreements. It prohibits the following horizontal agreements among competitors: price fixing; restricting output or sales; allocating markets (sales and raw material supply markets); restricting the purchase or development of new technology or equipment; group boycotting; and other agreements as determined by the AT Agency. In addition, the ATL prohibits the following vertical agreements with counterparties to a transaction: fixing the resale price; minimum resale price maintenance; and other monopolistic agreements as determined by the AT Agency.
These prohibitions, however, do not apply if undertakings can prove that the agreements are procompetitive. Procompetitive justifications include (i) improving technology or developing new products; (ii) improving product quality or efficiency; (iii) improving the competitiveness of small- or meduim-sized undertakings; (iv) achieving the public interest (including saving energy, protecting the environment, and disaster relief); (v) alleviating a sharp decline in sales or production surplus during an economic recession; (vi) protecting a legitimate interest in foreign trade or foreign economic cooperation; and (vii) other situations as determined by the State Council. In addition, if a business operator offers procompetitive justifications (i) through (v), the ATL provides that the undertaking must also prove that the agreement does not substantially restrict competition in the relevant market and that consumers will share the benefits of the agreement.
4. It Is Illegal to Abuse One’s Dominant Market Position
The ATL also prohibits a firm from abusing its dominant market position. The ATL defines a dominant market position as “having the ability to control the price, quantity or other trading conditions in the relevant market, or to hinder or affect market access by other undertakings to enter the relevant market.” Factors that help to determine whether an undertaking has a dominant market position include market share, market characteristics, the ability to control sales-markets or raw-materials-purchasing markets, the financial and technical status of the undertaking, the dependence of other firms on the undertaking, and ease of entry into the relevant market.
In addition to the above factors, there is a rebuttable presumption that a business undertaking(s) has a dominant market position if (i) it accounts for at least 1/2 of the relevant market; (ii) two undertakings account for at least 2/3 of the relevant market; or (iii) three undertakings account for at least 3/4 of the relevant market. But under (ii) and (iii) above, if one of the undertakings accounts for less than 1/10 of the relevant market, that undertaking is not deemed to have a dominant market position.
The ATL prohibits undertakings with a dominant market position from the following: (i) selling products at an unfairly high price, or purchasing products at an unfairly low price; (ii) selling products below cost without a legitimate reason; (iii) refusing to trade with a counterparty without a legitimate reason; (iv) requiring a counterparty to trade exclusively with oneself without a legitimate reason; (v) tying products or adding unreasonable conditions to a trade without a legitimate reason; (vi) applying different prices or other transaction conditions to the same counterparty without a legitimate reason; or (vii) other conduct as determined by the AT Agency.
5. Concentration of Undertakings
The ATL also regulates concentration of undertakings. Concentration refers to mergers, acquisitions of equity and assets, and gaining control of other undertakings or having the ability to influence their decision making by way of agreement or otherwise. When concentrations meet the reporting thresholds set by the State Council, the undertakings must file an antitrust report to the AT Agency before the concentration is implemented. However, a filing is not required if one of the undertakings involved in the concentration owns more than 50% of the voting equity or assets of each of the other undertakings involved in the concentration (e.g., a parent merging with its subsidiary), or if more than 50% of the voting equity or assets of each of the undertakings involved in the concentration is owned by a single undertaking not involved in the concentration (e.g., two subsidiaries of a single parent merging).
In its antitrust report, a undertaking must include an application letter, a statement regarding the competitive effects of the concentration, the concentration agreement, recent financial reports, and any other documents that the AT agency requires.
After the filing of the antitrust report, the AT Agency has 30 days to review the antitrust report and determine whether additional review is needed. If the AT Agency determines that additional review is needed, it has 90 days to complete the additional review. After the additional 90 day review, the review can be further extended for an additional 60 days, if the filer agrees, if the documents filed are not accurate and further verification is needed, or if there is a material change after the filing of the report.
In conducting its review, factors that the AT Agency will look at include the market shares of the undertakings; levels of concentration in the relevant market; and the concentration’s effect on entry and innovation, on consumers and competitors, and on national economic development. The AT Agency will deny the concentration if it eliminates or restricts competition. The Agency may however, allow such a concentration if the undertakings can demonstrate that the concentration will have a net positive effect on competition or that the concentration is in the public interest. Additionally, the AT Agency can impose restrictive conditions on concentrations to lessen their negative effect on competition in the relevant market. The AT Agency must publish its decisions denying and imposing conditions on concentrations in a timely fashion.
6. Abuse of Administrative Power
The ATL also prohibits Chinese administrative authorities from abusing their administrative power to restrict or eliminate competition. Specifically, the ATL prohibits the authorities from hindering the free flow of goods among China’s different regions. The authorities may not discriminate against non-local goods or services, require non-local goods or services to adhere to a different technical standards, conduct repeated investigations or other measures to restrict non-local goods from entering the local market, or engage in any conduct that hinders the free flow of goods and services across regions.
7. Investigation of Monopolistic Conduct
The AT Agency is empowered to investigate undertakings that may be involved in monopolistic conduct. In connection with such investigations, the AT Agency may conduct on-site investigations, interview relevant persons, review and copy relevant records and documents, seal or seize relevant evidence, and make inquiries about the bank accounts of the relevant undertakings. The AT Agency is obligated to keep any business secrets it learns in the process of enforcement of the ATL confidential. If after an investigation the AT Agency determines that an undertaking engaged in monopolistic conduct, the AT Agency must make its decision in accordance with the provisions of the ATL and announce its decision to the public.
The AT Agency may decide to suspend its investigation if the undertakings being investigated promise to correct their conduct within a specified period of time. The investigation, however, may be resumed by the AT Agency if the undertakings do not keep their promise, provide false or incomplete information, or if a material change occurs.
8. Legal Liabilities
The ATL imposes the following legal liabilities on undertakings who violate the ATL:
(a) For monopolistic agreements
For those who have reached and implemented a monopolistic agreement, the AT Agency shall (i) order the undertakings to cease the illegal conducts; (ii) confiscate the illegal income; and (iii) impose a fine of 1% - 10% of the sales revenue of the previous year. For undertakings who have reached a monopolistic agreement, but have not implemented such agreement, the AT Agency may impose a fine not exceeding RMB 500,000. The AT Agency may impose reduced penalties for undertakings who voluntarily report monopolistic agreements and provide important evidence to the AT Agency.
(b) For abuse of dominant market position
For those who abuse their dominant market position, the AT Agency shall (i) order the undertakings to cease the illegal conduct, (ii) confiscate the illegal income, (iii) and impose a fine of 1% - 10% of the sales revenue of the previous year.
(c) For illegal concentration
For those who have completed an illegal concentration, the AT Agency shall (i) order the undertakings to cease concentration, (ii) order the undertakings to dispose of the equity or assets and transfer the business within a specified time period, and (iii) impose a fine not exceeding RMB 500,000.
(d) For government abuse of administrative power
For those government agencies which have abused their administrative power, such government agencies’ upper management organization shall order the agency to cease the abusive conduct and punish the responsible person(s) in accordance with the law.
(e) Additional civil and criminal liability
The ATL also provides that undertakings who engage in monopolistic conduct and who inflict losses on other people shall be civilly liable. Additionally, during the antitrust review or investigation by the AT Agency, for undertakings that refuse to provide required materials or information, provide false materials or information, conceal, destroy or move evidence, or otherwise refuse or obstruct AT Agency’s investigation, the AT Agency may order such undertakings to cease such conduct. The AT Agency may also impose a maximum fine of RMB 20,000 for individual violators, and RMB 200,000 for organizations. For serious violators, the maximum fine will be increased to RMB 100,000 for individuals, and RMB 1,000,000 for organizations. For conduct that breaks the criminal law, criminal liability will be imposed. Government officials who abuse their power, neglect their jobs, or disclose business secrets learned through enforcement of law may also be criminally liable.
9. Disagreement with AT Agency’s Decisions
Undertakings that disagree with the AT Agency’s decisions with regard to concentration review can apply for administrative review, and if they are still not satisfied with the result of the administrative review, the undertakings may resort to administrative litigation. Undertakings who disagree with the AT Agency’s decisions regarding matters other than concentration review can either apply for administrative review or proceed to administrative litigation directly.
10. Conduct Not Covered by the ATL
The ATL does not apply to undertakings who excise their intellectual property rights in accordance with other applicable laws or regulations. But the ATL is applicable if the undertakings abuse their intellectual property rights to eliminate or restrict competition. The ATL also does not apply to farmers or agricultural economic organizations’ concerted efforts in production, sales, transportation, storage or other activities.
II. Key Issues That Remain To Be Addressed
Before the effective date, it is expected that new regulations will be promulgated by the State Council, which will address the issues that are left open in the provisions of the ATL.
1. The AT Commission
Although the ATL calls for the establishment of a new national antitrust commission, the AT Commission, it does not provide details about the size of the AT Commission, or the qualification for AT Commission membership. Instead, the ATL designates the State Council to promulgate regulations about the formation and day-to-day functioning of the AT Commission.
2. The AT Agency
The ATL provides that the enforcement agency designated by the State Council as the antitrust agency shall carry out the antitrust enforcement responsibility in accordance with the ATL. Currently, three Chinese government organizations are responsible for different aspects of antitrust law enforcement jobs. The National Development and Reform Commission (“NDRC”) is responsible for setting up policies regulating the price of products or services in China. The Ministry of Commerce (“MOFCOM”) is responsible for reviews of mergers or acquisitions. The State Administration for Industry and Commerce (“SAIC”) is responsible for dealing with unfair competition in China. It is unclear at this point whether one (or two) of the three organizations will be designated by the State Council as the AT Agency.
3. No Triggering Threshold for M&A Review Is Set
For review of business concentration, the ATL provides that undertakings must file an antitrust report with the AT Agency when certain thresholds are met. But the ATL does not specify what the thresholds are. It is expected that the State Council will set the reporting threshold. Notably, an early draft of the ATL set the reporting threshold at RMB 12 billion (about USD 1.57 billion) of sales in the previous year for all the undertakings involved in a concentration, and where the sales revenue of one of the undertakings was more than RMB 800 million (about USD 105 million).
4. Current M&A Rules and M&A by Foreign Investors
Before the effective date of the ATL, and until any new regulations are promulgated, the antitrust review of mergers or acquisitions of Chinese companies by foreign investors is governed by the Provisions on Acquisitions of Domestic Enterprises by Foreign Investors promulgated by six PRC government agencies on September 8, 2006 (the “M&A Rules”), and the related Guidelines on Antitrust Filings for Mergers & Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM on March 9, 2007.
The M&A Rules provide two different thresholds that will trigger anti-trust filings in China, one for “Domestic M&A” and the other for “Overseas M&A”. Domestic M&A refers to mergers with and acquisitions of domestic companies. The M&A Rules do not define Overseas M&A, but it is generally understood from the context that Overseas M&A refers to transactions that occur outside China or in which all parties are companies registered in a foreign jurisdiction.
(a) For a Domestic M&A, the acquiror (in most cases) must file an antitrust report to MOFCOM and SAIC if any of the following thresholds is triggered:
(i) the turnover of a party to the mergers and acquisitions in the China market exceeds RMB 1.5 billion in that year;
(ii) more than ten enterprises in related industries have been acquired within one year;
(iii) the market share of a party to the mergers and acquisitions in the China market has reached 20%; or
(iv) the mergers and acquisitions causes the market share of a party to the mergers and acquisitions in the China market to reach 25%.
(b) For an offshore M&A, the parties must file an antitrust report to MOFCOM and SAIC if any of the following thresholds is triggered:
(i) a party to the overseas mergers and acquisitions owns more than RMB 3 billion worth of assets in China;
(ii) the turnover of a party to the overseas mergers and acquisitions in the China market exceeds RMB 1.5 billion in that year;
(iii) the market share of a party to the overseas mergers and acquisitions and its associated enterprises in the China market has reached 20%;
(iv) as a result of the overseas mergers and acquisitions, the market shares of a party to the overseas mergers and acquisitions and its associated enterprises in the China market has reached 25%; or (v) as a result of the overseas mergers and acquisitions, the number of foreign investment enterprises in related industries with direct or indirect equity participation by a party to the overseas mergers and acquisitions will exceed 15.
Under the M&A Rules, the MOFCOM and SAIC will examine the report to see if the mergers and acquisitions plan will result in over-concentration, hinder proper competition in the China market, or harm Chinese consumers’ interests, and make a decision within 30 working days after the receipt of all required documents. If additional review is needed, the time of review may be extended to 90 working days.
5. Review for National Securities Reasons
It should be noted that under Article 31 of the ATL, mergers and acquisitions of Chinese companies by foreign investors are also subject to review for national security reasons, in addition to antitrust review. However, the ATL does not provide any details about the review, such as which governmental agency will conduct the review, the review standard, or the procedure of such a review.
In summary, China has made a big step forward in drafting laws to regulate the rapid development of its economic system by passing the ATL, which has been termed “the constitution of the Chinese economic system.” With the adoption of the ATL, all the major aspects of antitrust, such as pricing regulation, mergers and acquisitions review, and unfair competition are now regulated by one legislation. In addition, the law enforcement agency in the antitrust arena is now given more power to investigate illegal monopolistic conduct, and provided with guidelines for punishing monopolistic conduct. The ATL, however, provides only a general framework for combating monopolistic conduct. More details should be forthcoming once the State Council promulgates the required regulations in the months to come.