China’s antitrust law under review – increased clarity, but more uncertainty

Most proposals crystallise the current practices of the Chinese antitrust authority or address some of the frequently aired concerns. Yet some proposals would create substantial uncertainty. This “mixed-bag” of evolutions of the rules increases the need for careful compliance with the Anti-Monopoly Law by companies operating in China, which will need to consider the amended Anti-Monopoly Law once adopted.

2019 has overall been a relatively quiet year on the antitrust front in China: the number of merger clearances where remedies were imposed (five in total) was in line with the historical average and only a few antitrust investigations grabbed the headlines.  As anticipated by multiple market observers, the State Administration for Market Regulation (SAMR), China’s central antitrust agency created after a transformational ministerial reshuffle in 2018, spent quite some time and effort rejigging its teams and processes and strengthening its capabilities.  Taking stock of the first decade of enforcement of the 2008 Anti-Monopoly Law (the AML), SAMR also undertook to modernise the regulatory framework and, on 2 January 2020, SAMR released for public comments the long-awaited draft amendments to the AML (the Draft AML) and, five days later, the draft interim regulation for merger reviews (the Draft Merger Regulation).  While it is unclear if and when these drafts will be adopted, they shed light on numerous points of attention.

Most of the proposed changes in the Draft AML and the Draft Merger Regulation are not ground-breaking; instead, they crystallise SAMR’s current practice and consolidate (with cosmetic revisions) various existing implementing rules.  However, some of the proposed amendments in the Draft AML give rise to substantial concerns.  Even if SAMR’s intention must be commended, the Draft AML may lead to unwanted consequences for companies – Chinese and foreign alike – in all industries.

Merger control: clarity combined with uncertainty

M&A transactions meeting the PRC notification thresholds must be notified and reviewed by SAMR before closing.  If the Draft AML and Draft Merger Regulation are adopted, the key principles of the PRC merger control system would remain, but…

Rocketing Maximum Fines

The most striking change proposed by the Draft AML is the dramatic increase in fines for failure to file, gun-jumping or non-compliance with remedies iposed on a deal.  If the proposal is adopted, the maximum fine would jump from RMB 500,000 (approx. USD 72,000) to up to 10% of the infringer’s annual revenue.

Yet this comes as no real surprise; an increase of the statutory fine cap had been discussed for some time.  It should also be read in conjunction with SAMR’s unabated efforts to tackle failure to file and gun-jumping cases, including in foreign-to-foreign transactions.  In 2019 alone, 18 penalty decisions were issued for such infringements.  In the future, the fines levied are expected to increase exponentially.  This is likely to affect all companies that fail to obtain the necessary approval from SAMR, at least for transactions signed after the adoption of the Draft AML.

No safe harbour for deals below filing thresholds any more

The Draft AML reaffirms SAMR’s power to investigate transactions below the filing thresholds if they restrict competition in the market.  This power had already been the object of draft implementing rules in 2009, and was mentioned in a 2008 State Council Order setting out the notification thresholds; yet it was not recognised as such in the AML itself.  Including a specific provision signals SAMR’s intention to seriously pursue transactions falling below the PRC notification thresholds, prompted by transactions (in particular, in the internet sector) legally allowed to close without any SAMR filing. 

Companies should now be prepared to deal with SAMR for all transactions, in particular those that could raise competition concerns, irrespective of their size.  And one should expect that the monitoring of deal activity will increase at local levels, through SAMR’s provincial and municipal offices, since the Draft Merger Regulation provides that SAMR – a Beijing-based authority – could in the future count on its countless resources at provincial level to investigate mergers that have been “implemented illegally”.

A broader, albeit incomplete, definition of “control”

M&A activities are potentially subject to the AML if they constitute a “concentration” – ie, where there is an acquisition of “control” of a business.

The AML defines “control” by reference to the “ability to exercise decisively influence over other business operators by means of contractual arrangements etc.”, but no specific guidance has ever been officially adopted on this important concept – despite previous attempts to do so.  The Draft AML proposes to clarify this concept slightly, in line with SAMR’s practice, and in a manner seemingly consistent with the concept of “control” in the EU.  Under the Draft AML, control would now be defined as the actual or potential ability to “directly, indirectly or jointly have decisive influence over the business production and operational activities or other significant decisions of another business operator(s)”.

The 2018 Guiding Opinions on the Filing of Concentration of Business confirm that decisive influence may derive from many different means, and the Draft AML now confirms that decisive influence should be over “business production and operational activities” or “significant decisions”, but the Opinions and the Draft AML do not define these parameters.  Until this definition is provided, companies will need to assume that “decisive influence” over another undertaking’s business plan, budget or appointment of senior management will amount to control of that undertaking.  This is understood to be SAMR’s current practice, which is closely aligned with the practices in other jurisdictions, such as the EU – but a clear confirmation would remain useful.

Revisable filing thresholds

In some jurisdictions, notification thresholds are not regularly reviewed as is the case in China.  The Draft AML now proposes that filing thresholds be reviewed and adjusted regularly “according to the appropriate level for economic development”.

However, details on this adjustment mechanism have not been published.  The mechanism is likely to be subject to future SAMR regulations, and it cannot be excluded that filing thresholds based on criteria other than the parties’ turnover will be adopted in the future.  Companies will need to monitor these developments closely.

Remaining uncertainty on intra-group transactions

Under the AML, an intra-group transaction does not need to be approved by SAMR if one of the undertakings, whether or not directly involved in the transaction, holds more than 50% of the voting shares of each of the undertakings involved in the concentration.

The interpretation of this exemption is not clear, in part because it does not refer to the concept of “control” (but only to the shareholding).  This means that transactions between undertakings “controlled” by the same group (as defined in the Draft AML, albeit through indirect means), would still fall under the AML unless more than 50% of their voting shares are controlled by the same group.

“Stopping the clock” in merger control review but a risk of unlimited extensions

A significant evolution proposed by the Draft AML is the adoption of a “stop-the-clock” mechanism.  This mechanism is – to some extent – consistent with international practice.  It aims to grant SAMR and the parties more flexibility by giving them the opportunity to extend the review period, if necessary.

On paper, this is a welcome development: SAMR has indeed struggled to conclude its reviews of complex cases (in particular those with remedies) within the statutory timeframe in recent years.  Notifying parties have therefore often been forced to withdraw and refile at the end of the review period, thereby restarting the clock from the very beginning.

“Stopping the clock” should thus give SAMR more time to review complex deals, but the proposed mechanism also raises substantial concerns:

• The mechanism could be used as soon as SAMR issues any request for information, which means that all proceedings, even simplified ones, could – at least theoretically – last indefinitely if SAMR keeps requesting information from the parties.  This clearly conflicts with recent years’ successes in streamlining the review of simplified cases – nearly all of which are currently cleared within 30 days after the formal acceptance of the filing form.
• The Draft AML suggests that the review period could be suspended as soon as SAMR informs the parties that remedies must be discussed, causing the review period in principle to last indefinitely.

Without a reasonable limit, the proposed “stop-the-clock” mechanism will create substantial uncertainties for deals’ timetables.  Unless limitations are built in, merger control in China could become totally unpredictable.

Antitrust enforcement

Cartels, resale price maintenance, abuses of dominance, and abuses of IP rights are covered by the Draft AML.  All Chinese authorities will continue to safeguard fair market competition, improve economic efficiency, protect consumers and the public interest, promote the healthy development of the socialist market economy, and now also “encourage innovation” – a hot topic in other mature antitrust regimes.  This is a positive development as innovation must be protected.

But some proposed amendments may raise some concerns.

Increased level of fines

Under the Draft AML, SAMR would be empowered to impose much higher fines:

• For antitrust infringements by parties that had no revenues in the last financial year or for entering into monopoly agreements that have never been implemented, the maximum fine would increase from RMB 500,000 (approx. USD 72,000) to RMB 50 million (approx. USD 7.2 million).
• For antitrust infringements by trade associations, the maximum fine would increase from RMB 500,000 (approx. USD 72,000) to RMB 5 million (approx. USD 720,000).

However, the Draft AML does not address the longstanding question of the basis for the calculation of fines.  The general rule is that fines should amount to a range from 1% to 10% of the annual revenues of the infringer, but the concept of “revenues” is not defined.  In most cases SAMR only takes into account the revenues derived from the sale in China by the undertaking concerned (or its group) of the products or services concerned by the infringement; however, SAMR may adopt a more aggressive approach and take into account all Chinese revenues (irrespective of the products or services concerned) and possibly all revenue generated worldwide.

This method of calculating antitrust fines is consistent with the draft regulation on fines published in 2016 (not yet in force) and is allegedly already applied by SAMR.  It is unfortunate that the Draft AML does not tackle this crucial point for the companies’ right of defence.

Obstructing antitrust investigations?  Not worth it

Fines for obstructing antitrust investigations are currently limited to RMB 100,000 (approx. USD 14,400) on individuals and to RMB 1 million (approx. USD 144,000) on companies.  The Draft AML proposes to replace these symbolic sanctions by severe and dissuasive sanctions both on individuals (up to RMB 1 million or approx. USD 144,000) and business operators (up to 1% of revenues).

They would cover all sorts of obstructing behaviours, from concealing or refusing to submit information to submitting fraudulent information, destroying or displacing the evidence, physically opposing an inspection, or even threatening SAMR’s agents (which is new), as may have happened in the past.

This is somewhat similar to the “facilitator” concept in the EU, Australia and other legal systems, but the concepts of “organising” or “aiding” are broad and undefined.  This new provision is also likely to catch “hub-and-spoke” arrangements that go beyond the SAMR’s current sanctioning of trade associations for organising a cartel between members.

Catching up with economic realities

Antitrust regimes struggle to evolve as quickly as economic realities.  The Draft AML goes some way to addressing the challenges faced by SAMR in this respect:

• It proposes to add a policy-type statement, according to which China aims to “strengthen the fundamental status” of competition policy.  This seemingly minor revision demonstrates the legislators’ intention to put an end to the long-running debate on the interplay between industrial policy and competition policy in China.  If adopted, the Draft AML would probably confirm the status of competition as of equal importance with any other industrial policy. 
• The Draft AML also touches on the issue of the “new economy” by adding new factors that could be used in establishing market dominance for companies active in the internet sector, including “network effects, economies of scale, lock-in effects and data collection and processing”.  This shows that China is willing to recognise the importance and specificity of new technologies in its assessments: a very welcome development.

Conclusion

The Draft AML clarifies a few long-debated issues and sheds some light on SAMR’s intentions for the future.  However, it also leaves many questions unanswered, creates further uncertainty, and may have a far-reaching impact on the enforcement of the AML.  Antitrust in China, as is the case in many countries, has not yet landed, but rather is still in the take-off phase.  Watch this space over the coming years.

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