The Antimonopoly Law Takes Effect
August 7, 2008
On August 1, 2008, the Antimonopoly Law of the People's Republic of China (AML) took effect.
[1] Although most substantive provisions of the AML are modeled on foreign competition laws, the extent to which Chinese antitrust policy will actually converge with prevailing international practices remains to be seen. When the Standing Committee of the National People's Congress enacted the AML on August 30, 2007, it deferred many pivotal and controversial issues to future implementing measures and enforcement actions. Most of these questions remain unanswered. Nevertheless, the first concrete steps now have been taken to flesh out China's new competition regime-and the first claims under the AML have reportedly been filed.
Administrative Enforcement Recent media reports and official pronouncements indicate that authority to enforce the AML will be divided between the Ministry of Commerce (MOFCOM), the State Administration of Industry and Commerce (SAIC), and the National Development and Reform Commission (NDRC).
- MOFCOM will be responsible for merger review, building on its experience reviewing mergers reported under the Regulations on the Mergers & Acquisitions of Domestic Enterprises by Foreign Investors.
- The SAIC will be responsible for enforcing the rules against monopoly agreements and abuse of dominance—except for price-related behaviors. The SAIC's new Antimonopoly and Anti-Unfair Competition Enforcement Bureau is expected to build on the SAIC's current program for enforcing the Anti-Unfair Competition Law.
The NDRC will be responsible for enforcing the rules against monopoly agreements and abuse of dominance with respect to price-related conduct, dovetailing with the NDRC's enforcement of the Price Law. Media reports suggest that the NDRC has already drafted implementing measures addressing price-related violations of the AML.
This division of authority raises concerns about inconsistent enforcement and policy coordination. The MOFCOM, SAIC, and NDRC may embrace divergent views of the proper goals of antirust and its role in the Chinese government's overall agenda. Different approaches to defining markets, gauging market power, and balancing policy goals when applying the many "public interest" exceptions of the AML may lead to inconsistent, if not contradictory results. The distinction between "price-related" violations and "non-price" violations with equivalent economic effects may prove unworkable, as may the handling of mixed price and non-price conduct. Overlaps between the Anti-Unfair Competition Law, the Price Law, and other measures compound these risks.
The AML calls for the establishment of a new interagency Antimonopoly Commission to coordinate policymaking. With robust political support, it might mitigate the risks of inconsistent enforcement. The State Council formally announced the Antimonopoly Commission's formation on August 1, 2008, but the Commission's composition and leadership have not been formally announced.
Notification Thresholds For many multinational corporations (and increasing numbers of Chinese companies), merger control presents the most immediate and substantial compliance burden under the AML. The AML requires the advance reporting of all concentrations that satisfy the applicable notification thresholds, and it prohibits the consummation of unreported concentrations. Where deals are consummated in violation of the AML, the enforcement authorities may order corrective measures to restore pre-transaction conditions and impose fines up to RMB 500,000 (roughly US$73,000).
On August 1, 2008, the State Council adopted the Rules of the State Council on Notification Thresholds for Concentrations of Undertakings (Notification Threshold Rules).
[2] Even though many questions remain, the new Notification Threshold Rules bring China's merger review scheme closer to the international mainstream. The final Notification Threshold Rules requires notification where:
- the combined global sales turnover of all parties exceeded RMB 10 billion (approximately US$1.46 billion) and the turnover from within China of at least two parties each exceeded RMB 400 million (approximately US$58 million) during the previous year; or
- the combined sales turnover from within China of all parties exceeded RMB 2 billion (approximately US$292 million) and the turnover from within China of at least two parties each exceeded RMB 400 million (approximately US$58 million) during the previous year.
A "Q&A" released by the Legislative Affairs of the State Council (SCLAO) explained that these revenue thresholds were based on a comparative survey of the notification criteria and economic indicators of foreign jurisdictions conducted by the Quantitative and Technical Economics Institute of the Chinese Academy of Social Sciences and on the 2006 revenues of Chinese enterprises as reported by the National Bureau of Statistics. The SCLAO described the thresholds as commensurate with the scale of China's economy and with "industrial policies aimed at encouraging enterprises to be stronger and bigger."
A previously proposed third threshold requiring notification of transactions that would "result in one undertaking having a market share of 25% or more within China" was omitted. The SCLAO acknowledged the "common international practice" of relying on revenues rather than market shares in setting notification thresholds.
The Notification Threshold Rules call for eventual formulation of "detailed measures on the calculation of turnover" by the enforcement authorities. Such measures may clarify which entities' revenues should be considered in connection with different types of transactions. MOFCOM has generally accepted the notion of aggregating the turnover of all affiliates subject to common control of a single ultimate parent entity in the merger context, but this practice remains uncodified. It is less clear whether China will follow prevailing international practices with respect to acquisitions by focusing on the revenues of the "target" (i.e., the business being sold) rather than "seller" as a whole.
The Notification Threshold Rules call for the calculation of turnover to "take into account the actual circumstances of such special industries and sectors as banking, insurance, securities, futures, etc." The SCLAO suggested that sector-specific rules would be forthcoming in the future.
The Notification Threshold Rules also empower the enforcement authorities to investigate concentrations which do not otherwise trigger notification if "facts and evidence" indicate that the transaction may eliminate or restrict competition. The SCLAO explained that this power enables the authorities to address scenarios in which undertakings with low revenues nevertheless enjoy high market shares-not uncommon in China's fragmented and stratified markets.
Judicial Enforcement Although the AML focuses on administrative enforcement, it also authorizes judicial enforcement through private actions for damages. The Supreme People's Court (SPC) issued a circular on July 31, 2008 exhorting People's Courts at all levels to study the new AML and stressing the complicated blend of legal and economic issues in competition cases.
[3] The SPC also assigned cases involving claims under the AML to the courts which handle intellectual property cases.
The first lawsuit under the AML was reportedly filed in Beijing on August 1, 2008 by four private technology companies against the General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China (AQSIQ), a governmental body. The plaintiffs allege that AQSIQ abused its administrative power in violation of the AML by requiring companies to pay annual fees to register for an online quality monitoring network administered by a commercial company in which the AQSIQ holds a 30% ownership stake. The case presents novel questions about the amenability of government entities to private lawsuits under the AML.
In the coming months, further implementing measures, enforcement initiatives, and private litigation may all affect the evolution of China's new antitrust regime. The immediate challenge for foreign businesses active in China is to anticipate the future course of PRC antitrust enforcement and position their operations in China to minimize compliance burdens and potential liability.
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Footnotes:
1. See Zhonghua Renmin Gongheguo Fanlongduan Fa [Antimonopoly Law of the People's Republic of China], (promulgated by the Standing Committee of the National People's Congress on Aug. 30, 2007 and effective on Aug. 1, 2008), available at http://www.npc.gov.cn/englishnpc/news/Legislation/2008-08/04/content_1440547.htm (visited Oct. 7, 2007). For commentary on the AML and an unofficial English translation, see The PRC Antimonopoly Law: Unanswered Questions and Challenges Ahead, ANTITRUST SOURCE, Oct. 2007, http://www.abanet.org/antitrust/at-source/07/10/Oct07-Bush10-18f.pdf.
2. See Guowuyuan Guanyu Jingyingzhe Jizhong Shenbao Biaozhun de Guiding [Rules of the State Council on Notification Thresholds for Concentrations of Undertakings], (adopted and effective on August 1, 2008), available at http://www.gov.cn/zwgk/2008-08/04/content_1063769.htm (visited August 4, 2008).
3. See Zuigao Renmin Fayuan Tongzhi Yaoqiu Qieshi Yifa Shenlihao Gelei Fanlongduan Anjian [Circular of Supreme People's Court on Hearing Antimonopoly Cases According to Law], July 31, 2008, available at http://www.chinacourt.org/html/article/200807/31/314776.shtml (visited August 6, 2008).
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