On August 30, 2007, the National People’s Congress passed China’s long anticipated Anti-Monopoly Law of the People’s Republic of China (the “anti-monopoly law”). China’s new antitrust law, which will come into force on August 1, 2008, is the result of thirteen years of drafting and debate and closely follows the announcement earlier this year that Hong Kong will also introduce comprehensive competition law.

The anti-monopoly law prohibits monopoly agreements, abuse of dominant market position and concentrations that “eliminate or restrict market competition.”

A new antitrust enforcement agency, the Anti-Monopoly Enforcement Authority (“AMEA”), has been given the responsibility for enforcement, while the new Anti-Monopoly Committee under the State Council will be responsible for formulating competition policies and publishing interpretation guidelines. It is not yet clear, however, what the priority will be between the new and pre-existing antitrust enforcement agencies in China – for example, whether primary responsibility for enforcement will be given to one of the new agencies or will be undertaken by an existing agency such as the Ministry of Commerce (“MOC”).

China’s new anti-monopoly law may have a number of significant impacts on foreign companies doing business in China, including altering the landscape for pre-merger notification and review of Chinese transactions, requiring a review of existing product distribution policies and determining whether other commercial activities in China may raise issues under the new anti-monopoly provisions.

Legislative Background

Competition law is not entirely new in China. China has had competition rules since 1980 (the Interim provisions on carrying out and protecting socialist competition). It also enacted the Anti-Unfair Competition Law in 1993 which, although primarily consumer protection law, also contained monopoly and administrative monopoly provisions (a Chinese concept, where prohibitions issued by one part of government prevent other parts of the same government from abusing their administrative powers).

China’s existing competition law has, however, been frequently criticized as lacking the scope and clarity to address many common forms of anti-competitive behaviour, notably abuse of dominance and cartels, and for being ineffectively or unevenly enforced.

In 1994, to address concerns aimed at China’s existing competition law regime, the Chinese central government established a working group to study the need to adopt a comprehensive competition policy as part of China’s continuing economic reform program. The working group decided that comprehensive competition law was needed to facilitate the establishment of the socialist market economy and to align China with international best practices.

Adoption of the new law was repeatedly delayed, however, in part as a result of a division within government between those who advocated that open competition and free markets in the Chinese marketplace would modernize Chinese industry and result in benefits to consumers, and others who preferred a more interventionist policy to protect and promote national champions.

Monopoly Agreements

The new anti-monopoly law prohibits monopoly agreements between competing undertakings (i.e., horizontal cartel type behaviour) to fix the price of products, restrict output, divide markets or jointly boycott transactions. “Monopoly agreements” are defined as agreements, decisions or other concerted behaviour that eliminate or restrict competition.

On the face of these provisions, it appears that no substantial anti-competitive effects in a relevant market are required to contravene the law (e.g., a price fixing agreement between competing undertakings with relatively minor competitive effects may, at least on the face of the new provisions, be caught). The new law does, however, contain a number of exemptions from the horizontal (cartel) and vertical (price maintenance) monopoly agreement provisions, including exemptions for agreements to improve products or achieve efficiencies (e.g., where an agreement is entered into to improve operational efficiency and enhance the competitiveness of small and medium-sized enterprises). It remains to be seen whether enforcement of the new monopoly agreement provisions will be limited to agreements that have or are likely to have some meaningful market effects – e.g., a substantial lessening of competition – or whether guidelines interpreting the requisite anti-competitive effects required to establish an offence will be issued.

Unlike the approach adopted in some other major jurisdictions such as the United States and Canada, which have adopted general prohibitions on cartel activities with the types of prohibited agreements established by case law, China’s new cartel rules explicitly set out the types of anti-competitive agreements that are prohibited. While expressly codifying “hard core” types of anti-competitive agreements may seem an intuitive approach to enacting cartel rules, there has been an ongoing debate, including in Canada, on the difficulty of accurately and comprehensively covering all possible forms of agreements that may contravene cartel or conspiracy prohibitions. Canada has, as a result, to date retained a general criminal conspiracy provision, with case law amplifying the types of agreements that are prohibited.

In addition to prohibitions on horizontal cartel behaviour, the new anti-monopoly law also prohibits undertakings from fixing or setting minimum resale prices where such agreements “eliminate or restrict” competition. China’s new resale price maintenance provisions, which may have a number of potential impacts on foreign companies supplying products to Chinese distributors or retailers, are similar to the approach taken in the recent judgment of the U.S. Supreme Court which held, acknowledging growing economic thinking that resale price maintenance activity can be pro-competitive or anti-competitive depending on the circumstances, that such conduct is not per se unlawful, but rather should be examined pursuant to the rule of reason (and in so doing, overturning nearly a century of established precedent).¹ This is, however, in contrast with Canada, which retains a per se approach to price maintenance activities.

The new anti-monopoly law also contains a specific provision, added as a last minute amendment, prohibiting industry associations from organizing undertakings to engage in monopoly agreements prohibited by the new legislation. This provision, which is rather novel in that trade association activities are typically dealt with by general cartel provisions in most other major jurisdictions, appears to be the result of recent price fixing activities of the China arm of the International Ramen Manufacturer’s Association, which China’s National Development and Reform Commission recently found guilty of breaching China’s existing price law legislation.

Abuse of Dominant Market Position

The new anti-monopoly law also prohibits undertakings from abusing their dominant market position. “Dominant market position” is defined as an undertaking that can control the price or quantity of products or block or affect the access of other undertakings into the relevant market. In this regard, the approach to dominance adopted in the new legislation appears generally consistent with conventional economic theory (i.e., the ability of a firm to exercise market power or foreclose entry).

As in Canada and the European Union, China’s new abuse of dominance provisions set out illustrative examples of conduct that may be considered abusive when engaged in by a dominant undertaking. These include selling products at unfairly high prices and exclusive dealing, tying or price discrimination “without any justification."

The new abuse of dominance provisions also set out presumptive thresholds for when a firm will be considered to be dominant, which include where an undertaking has a 50% market share or where the combined market share of two undertakings accounts for two-thirds of a relevant market. These thresholds appear to be rebuttable, as the new law also provides that undertakings construed to be dominant based on the above thresholds “shall not be considered to have dominant market position provided that there is opposite evidence.”

As a practical matter, these market share presumptions for dominance may mean that foreign firms with large market shares in China potentially face a higher burden if their activities are challenged. These presumptions were also criticized prior to the passing of the new law. For example, the U.S. Department of Justice noted that it did not believe that any presumption of monopoly power based solely on the market share of the firm was appropriate, since any alleged monopolization analysis necessarily depends on the unique factors present in a particular relevant market.² Similarly, in Canada, while the Competition Bureau has suggested that a firm may be dominant with a market share as low as 35%, the Competition Tribunal has indicated that a significantly higher market share (in the 80% range) would be necessary to presume that a firm possesses market power.³ In any event, the extent to which China’s new enforcement authorities will be willing to consider factors other than market share in assessing dominance remains to be seen.

Concentrations

The new anti-monopoly law also introduces a new pre-merger notification and review regime for concentrations that exceed certain thresholds. While merger review was first introduced in China in 2003 with the issuance of the Interim Rules on Mergers and Acquisition of Domestic Enterprises by Foreign Investors and replaced in 2006 by the Rules on Mergers and Acquisition of Domestic Enterprises by Foreign Investors (the “M&A rules”),4 the new law establishes a merger control regime that applies to both domestic and foreign transactions (whereas the current M&A rules do not apply to purely domestic transactions).

A concentration is defined to include mergers between undertakings and share and asset acquisitions resulting in an acquisition of control (though the term “control” is not defined), as well as transactions in which de facto control is acquired (i.e., the ability to “exercise decisive influence” over another undertaking is acquired).

Unlike earlier drafts, the new anti-monopoly law does not set out any thresholds for pre-merger notification, providing instead that concentrations exceeding thresholds later stipulated by the State Council will require notification. Previous drafts included merger notification thresholds based solely on turnover (in contrast to the M&A rules, which set out a number of alternate thresholds for notification of onshore and offshore transactions, including turnover and market share and assets in China). As previously drafted, these thresholds could have required acquirers with significant Chinese turnover to pre-notify all worldwide acquisitions in some cases (a test criticized as having an insufficient nexus to China).

The new anti-monopoly law provides for a two-phase review of mergers, similar to the approaches in the United States and European Union. A transaction subject to merger control under the new law may not be completed before AMEA has cleared the transaction or the relevant waiting periods of 30 working days (first phase) or 90 working days (second phase) have expired without AMEA having prohibited the transaction. The new notification procedure also appears to be more lenient than the existing M&A rules, which, at least on some interpretations, require parties to offshore mergers to notify MOC before the merger is announced or a filing is made in the local jurisdiction.

With respect to the substantive review of mergers, the new law provides that concentrations that "eliminate or restrict market competition" (or may have these effects) are prohibited, unless it can be shown that the advantages of the concentration outweigh the disadvantages or the concentration is consistent with the "public interest." Like the provisions prohibiting monopoly agreements, it is not clear what requisite level of competitive harm will be required to be established (i.e., for a concentration to "restrict market competition," which appears on its face to be a relatively low threshold).

National Security Review

The new anti-monopoly law also contains a national security review provision for foreign acquisitions that involve the “acquisition of domestic undertakings by foreign capital” or the “concentration of foreign capital.”

The new national security provision, like the existing provision in the M&A rules, may be criticized because “national security” is not defined, so it is not clear what will be considered a national security issue (i.e., when foreign investors may be subject to a national security review when acquiring domestic Chinese companies).

The adoption of a national security provision coincides with similar recent activities in the United States and Canada. For example, on July 26, 2007, Exon-Florio reform legislation was signed into law in the United States. The Defense Production Act of 1950, commonly known as “Exon-Florio”, gives the President the authority to investigate and block or unwind mergers by foreign persons that may threaten U.S. national security. Exon-Florio activity has been much more extensive over the last few years. Similarly, in Canada, the federal government recently appointed a Competition Policy Review Panel to review key aspects of Canada’s competition and foreign investment laws in response to increasing debate regarding foreign takeovers of established “flagship” Canadian companies. One of the Review Panel’s objectives is to advise on whether Canada’s investment framework should be updated to address national security concerns, with the possibility of adding a national security review clause to Canada’s existing foreign investment rules.

China’s new national security review provision may in reality be the result of political compromise between reformists in China, who support the adoption of competition policy consistent with other major jurisdictions and international best practices, and protectionists, who prefer to protect domestic Chinese businesses from potential new foreign entry (a debate not unlike that currently taking place in Canada in relation to the so-called “hollowing out” of corporate Canada and the sale of corporate crown jewels to foreign acquirers).

Penalties

Potential penalties for contravening the prohibitions on monopoly agreements and abuse of dominant market position include cease and desist orders, the confiscation of “illegal gains” (not defined in the new legislation) and fines ranging from 1% to 10% of the total sales volume in the relevant market in the previous year, which indicates that AMEA may seek fines based on a firm’s worldwide turnover in some cases.

Parties that complete concentrations in contravention of the new merger control provisions are potentially subject to orders to divest assets or shares, fines of up to RMB 500,000 (about US$ 65,000) or orders to adopt other measures to “restore the market situation [existing] before the concentration.” Parties that contravene the new legislation also may be exposed to civil liability.

Future Implications

The introduction of China’s new anti-monopoly law is a highly significant development and the culmination of more than a decade of drafting and debate. It also follows a trend in Asia, as major jurisdictions continue to formulate and adopt comprehensive competition laws. The recent developments in China, as well as the new or proposed competition laws in Singapore and Hong Kong, mean that foreign companies doing business in Asia will face an enhanced regulatory landscape, with potential impacts on business activities ranging from mergers and acquisitions to pricing and distribution practices. Whether the new anti-monopoly law will be effectively or evenly applied by Chinese enforcement authorities, however, and the long-term practical impacts on companies doing business in China, remain to be seen.