Ten Things You Should Know About China's New Antitrust Law

On Aug. 30, 2007, China's National People's Congress adopted the Anti-Monopoly Law ('AML'), the first ever comprehensive competition law in the largest emerging market in the world. This was the culmination of 13 years of legislative effort and debate since the first draft of this law was originally conceived. What are the essentials of China's emerging antitrust legal regime? The following are the ten key things that you should know about this area.

One: A Western Style Competition Law with Chinese Characteristics

Similar to the competition law in many other jurisdictions, China's AML primarily addresses issues in three key areas: monopoly agreements, abuse of dominant market position, and merger control. Experts in the international legal and business communities such as the EU Chamber of Commerce and the American Bar Association were invited to submit comments during the drafting and consultation period. As a result, the AML is roughly in line with international competition law standards, and is analogous to the EU model in many aspects.

The AML also includes one chapter to regulate 'administrative monopoly conduct,' which is rare in competition law elsewhere. On one hand, this represents an intention to regulate a long-term problem in China's economy where government power has been used routinely to advance the interests of State-owned business. One the other hand, State control in certain sensitive industries (such as power generation, oil and petrochemicals, telecommunications, coal, aviation, shipping and armaments) has been acknowledged in the AML as crucial to national security. This suggests that it may be optimistic to assume that foreign business will soon be able to compete with their domestic counterparts on a level playing field.

Two: Monopoly Agreements

The AML broadly prohibits competing companies to enter into certain horizontal monopoly agreements to: 1) fix prices; 2) restrict production or sales; 3) allocate or carve up markets; 4) limit the purchase of technology and equipment, or limit the development of new technology or new products; or 5) jointly boycott transactions. Monopoly agreements are not limited to those in writing, but also include any agreements, decisions or concerted activities that eliminate or restrict competition.

Vertical monopoly agreements are also prohibited, including those that fix retail prices or restrict minimum resale prices. It is worth noting that, unlike its previous draft, the final version of the AML makes a distinction between restrictions on minimum resale prices and on maximum resale prices. Under international competition law, minimum prices are inherently anti-competitive while maximum resale prices are often not anti-competitive, particularly if they serve to prevent a retailer with market power in an exclusive territory from raising retail prices. This development suggests that the setting of maximum retail prices by way of vertical agreement will not be considered illegal per se and that a broader reasonableness test will be applied.

Three: Safe Harbors

There are several exemptions, or, as generally known under competition law, 'safe harbors' to monopoly agreements, including agreements for the improvement of technology or product quality, enhancement of efficiency of small or medium sized enterprises, maintenance of public warfare, and crisis cartel, etc.

In an earlier draft of the AML, the conditions for application of safe harbors were loosely drafted. There were concerns that the cartel crisis exception, without being made subject to conditions, would be routinely claimed by hard-core cartels as a convenient defense in such a way that it will undermine the purpose of the safe harbor concept.

The final version of the AML narrows down the circumstances under which safe harbors can be applied. Undertakings are required to demonstrate that such agreements will not 'substantially restrict competition in the relevant market' and can enable consumers to 'share the benefits provided by the agreements.'

Four: Abuse of Dominant Market Position

Enterprises with a dominant market position are prohibited from engaging in certain activities, including: 1) predatory pricing; 2) selling products at an unreasonable high price or purchasing products at an unreasonable low price; 3) refusal to trade; 3) exclusive trade; 4) tying and other unreasonable trading terms; and 5) discriminatory treatment without proper reasons. The criteria to determine such abusive behaviors are to be set out in more detailed AML implementing rules.

A dominant market position under the AML refers to the ability to control the price or quantity of products or other transactional conditions in the relevant market, or the ability to block or impact the entry of its competitors into the relevant market. To determine a dominant market position, the AML will examine various factors including market shares, the ability to control sales or raw materials market, the financial status, reliance of competitors and the level of market entry.

As a rule of thumb, undertakings will subject to presumption of dominance if: 1) the market share of one undertaking exceeds 50% or more; 2) the combined market share of two undertakings exceeds 2/3 or more; or 3) the combined market share of three undertakings reach 75% or more in the relevant market. In responding to the concerns from commentaries with regard to this rule of 'presumption of dominance,' the final version of the AML includes a new provision that allows an undertaking with presumed dominance to provide opposite evidence to rebut the presumption.

Five: Concentration Review

The early draft of the AML used a turnover threshold to determine whether statutory merger notification must be made to the antitrust enforcement authority for what is known as a 'concentration' (e.g., acquisitions, mergers, etc). For example, a filing must be made if the worldwide sales volume of all the parties in the concentration for the preceding year exceeds RMB12 billion (approximately U.S. $1.5 billion) and the sales volume for any one of the companies in the concentration in Mainland China for the preceding year exceeds RMB 800 million (approximately U.S. $1 million). The concentration will be rejected if it is deemed to (or is likely to) have the effect of eliminating or limiting competition.

This threshold was heavily debated during the second reading in the Congress. The Standing Committee of the Congress was reportedly concerned that the threshold was too low and could limit the growth of State-owned business, which remains a priority on China's economic agenda. The members of the Standing Committee reportedly were not able to reach agreement on an appropriate threshold, and had therefore suggested that the threshold be removed from the AML and reserved for the State Council to determine in a separate merger filing guidance.

The AML contains more detailed procedures on merger filings and reviews than those in the currently applied 2006 M&A Rules. Under the AML, the antitrust enforcement agency is required to give decisions on merger filings within 30 days. At the sole discretion of the antitrust enforcement agency, this may be extended to 180 days. There are serious legal consequences for failures to make required filings, including fines and orders to unwind offending concentrations. This means that future M&A in China by foreign capital will need to take competition law issues into serious consideration at an early stage.

Six: National Security Scrutiny

In the second reading, there are proposals from the members of the Standing Committee calling for greater regulation of acquisitions of domestic Chinese business by foreigners to ensure the State's economic safety. This arises in the context of rising disquiet within China that foreign companies command too much power in certain sectors of China's economy.

As a result, a new clause 31 has been added to the AML which states that 'where national security is concerned, acquisition of domestic undertakings by foreign capital or other concentrations involving foreign capital shall be examined according to the relevant regulations of the State.'

Many commentators opine that national security may not be an appropriate standard for inclusion in a competition law. This clause may also give rise to questions under China's WTO obligations of non-discrimination and national treatment, given that competition policy with respect to concentrations should universally be applied to all transactions targeted by the AML, regardless of whether foreign capital is involved.

Seven: Penalties

The AML states that companies implementing prohibited monopoly agreements or abusing their dominant market position will have their illegal gains confiscated by the antitrust enforcement agency, and be penalized up to 10% of their sales for the previous year.

Compared with its earlier version, the adopted AML has reduced the penalty against unimplemented monopoly agreements from RMB2 million (approximately U.S. $0.25 million) to RMB 0.2 million (approximately U.S. $25,000). This low penalty amount, together with the removal from the adopted AML of the antitrust enforcement authority's power to freeze a violating company's bank account, is likely to be insufficient to create any real deterrence. The AML does not impose personal criminal sanctions for directors and executives involved in cartels.

Eight: Antitrust Enforcement Agency

The AML provides that a new Anti-Monopoly Commission will be set up under the purview of the State Council, China's highest administrative body. The Commission will only play a coordination and advisory role, with routine responsibilities assumed by an antitrust enforcement agency to be designated by the State Council.

The creation of a single enforcement authority has been one of the most heavily debated issues in the preparation of the AML. The majority commentators are of the view that it is preferable to confer the application of competition law and policy exclusively to a single agency. This will help to promote efficiency, consistency and predictability in enforcement, and will foster the development of institutional knowledge and an unified body of case law in this very complex area.

However, there are presently a number of existing agencies who have the authority to regulate national or sector-wide competition issues including the Ministry of Commerce, the State Admin- istration of Industry & Commerce, and the National Development and Reform Commission. Some of them have a very strong interest in the plenary regulatory power to be offered by the new antitrust regime. The AML did not provide a conclusion to this debate, and has reserved this issue for the State Council to decide in more detailed AML implementing rules.

Nine: Abuse of Intellectual Property Rights

The AML, on one hand, declares in its clause 55 that it is not applicable to conduct by undertakings to exercise their legitimate intellectual property rights. One the other hand, it vaguely states that abuse of intellectual property rights to restrict or limit competition is governed by this AML. There are concerns that this loosely drafted clause may be used in a discriminatory fashion against foreign companies that are technology driven and have a relatively larger market share in certain sectors in China.

Ten: Effective Date

The AML will become effective on Aug. 1, 2008. This means the subject of legal compliance under China's new and aggressive antitrust legal regime needs closer attention than ever. Substantial fines and damages claims are now a real possibility. There is little doubt that China remains the most important emerging market for many multinational companies. It could be a costly oversight not to consider China's antitrust law seriously.

Avoiding antitrust problems is perhaps the best antitrust strategy of all. To prepare for the new antitrust law, it is advisable to take proactive and preventive approaches from now on to identify and manage the antitrust risks of your business in China, including the exercise of internal antitrust audits for your China subsidiaries. With the help of outside antitrust counsel, the antitrust audits will help senior management and in house counsel to examine the existing business activities, contracts and practices of the company, identify areas of greatest risk under the new antitrust regime, and prioritize further work to remove or reduce these risks.

In addition, competition law is a fast changing legal regime in China. In the months to come, a number of new AML implementing rules and guidance will be adopted. A new Anti-Monopoly Commission will soon be created, and the institution and allocation of power amongst the antitrust enforcement agenc(ies) will be decided upon by the State Council. Multinationals should keep a sharp eye on these developments.

Peter Corne ([email protected]) is the Managing Director of Eversheds LLP's Shanghai Office. Steve Yu ([email protected]) is a senior lawyer in Eversheds' China Practice Group. Eversheds is a full-service law firm with 32 offices in major cities across the UK, Europe, Middle East and Asia. In China, Eversheds is one of the earliest international law firms advising multinationals on antitrust and competition law issues facing their business in China.

On Aug. 30, 2007, China's National People's Congress adopted the Anti-Monopoly Law ('AML'), the first ever comprehensive competition law in the largest emerging market in the world. This was the culmination of 13 years of legislative effort and debate since the first draft of this law was originally conceived. What are the essentials of China's emerging antitrust legal regime? The following are the ten key things that you should know about this area.

One: A Western Style Competition Law with Chinese Characteristics

Similar to the competition law in many other jurisdictions, China's AML primarily addresses issues in three key areas: monopoly agreements, abuse of dominant market position, and merger control. Experts in the international legal and business communities such as the EU Chamber of Commerce and the American Bar Association were invited to submit comments during the drafting and consultation period. As a result, the AML is roughly in line with international competition law standards, and is analogous to the EU model in many aspects.

The AML also includes one chapter to regulate 'administrative monopoly conduct,' which is rare in competition law elsewhere. On one hand, this represents an intention to regulate a long-term problem in China's economy where government power has been used routinely to advance the interests of State-owned business. One the other hand, State control in certain sensitive industries (such as power generation, oil and petrochemicals, telecommunications, coal, aviation, shipping and armaments) has been acknowledged in the AML as crucial to national security. This suggests that it may be optimistic to assume that foreign business will soon be able to compete with their domestic counterparts on a level playing field.

Two: Monopoly Agreements

The AML broadly prohibits competing companies to enter into certain horizontal monopoly agreements to: 1) fix prices; 2) restrict production or sales; 3) allocate or carve up markets; 4) limit the purchase of technology and equipment, or limit the development of new technology or new products; or 5) jointly boycott transactions. Monopoly agreements are not limited to those in writing, but also include any agreements, decisions or concerted activities that eliminate or restrict competition.

Vertical monopoly agreements are also prohibited, including those that fix retail prices or restrict minimum resale prices. It is worth noting that, unlike its previous draft, the final version of the AML makes a distinction between restrictions on minimum resale prices and on maximum resale prices. Under international competition law, minimum prices are inherently anti-competitive while maximum resale prices are often not anti-competitive, particularly if they serve to prevent a retailer with market power in an exclusive territory from raising retail prices. This development suggests that the setting of maximum retail prices by way of vertical agreement will not be considered illegal per se and that a broader reasonableness test will be applied.

Three: Safe Harbors

There are several exemptions, or, as generally known under competition law, 'safe harbors' to monopoly agreements, including agreements for the improvement of technology or product quality, enhancement of efficiency of small or medium sized enterprises, maintenance of public warfare, and crisis cartel, etc.

In an earlier draft of the AML, the conditions for application of safe harbors were loosely drafted. There were concerns that the cartel crisis exception, without being made subject to conditions, would be routinely claimed by hard-core cartels as a convenient defense in such a way that it will undermine the purpose of the safe harbor concept.

The final version of the AML narrows down the circumstances under which safe harbors can be applied. Undertakings are required to demonstrate that such agreements will not 'substantially restrict competition in the relevant market' and can enable consumers to 'share the benefits provided by the agreements.'

Four: Abuse of Dominant Market Position

Enterprises with a dominant market position are prohibited from engaging in certain activities, including: 1) predatory pricing; 2) selling products at an unreasonable high price or purchasing products at an unreasonable low price; 3) refusal to trade; 3) exclusive trade; 4) tying and other unreasonable trading terms; and 5) discriminatory treatment without proper reasons. The criteria to determine such abusive behaviors are to be set out in more detailed AML implementing rules.

A dominant market position under the AML refers to the ability to control the price or quantity of products or other transactional conditions in the relevant market, or the ability to block or impact the entry of its competitors into the relevant market. To determine a dominant market position, the AML will examine various factors including market shares, the ability to control sales or raw materials market, the financial status, reliance of competitors and the level of market entry.

As a rule of thumb, undertakings will subject to presumption of dominance if: 1) the market share of one undertaking exceeds 50% or more; 2) the combined market share of two undertakings exceeds 2/3 or more; or 3) the combined market share of three undertakings reach 75% or more in the relevant market. In responding to the concerns from commentaries with regard to this rule of 'presumption of dominance,' the final version of the AML includes a new provision that allows an undertaking with presumed dominance to provide opposite evidence to rebut the presumption.

Five: Concentration Review

The early draft of the AML used a turnover threshold to determine whether statutory merger notification must be made to the antitrust enforcement authority for what is known as a 'concentration' (e.g., acquisitions, mergers, etc). For example, a filing must be made if the worldwide sales volume of all the parties in the concentration for the preceding year exceeds RMB12 billion (approximately U.S. $1.5 billion) and the sales volume for any one of the companies in the concentration in Mainland China for the preceding year exceeds RMB 800 million (approximately U.S. $1 million). The concentration will be rejected if it is deemed to (or is likely to) have the effect of eliminating or limiting competition.

This threshold was heavily debated during the second reading in the Congress. The Standing Committee of the Congress was reportedly concerned that the threshold was too low and could limit the growth of State-owned business, which remains a priority on China's economic agenda. The members of the Standing Committee reportedly were not able to reach agreement on an appropriate threshold, and had therefore suggested that the threshold be removed from the AML and reserved for the State Council to determine in a separate merger filing guidance.

The AML contains more detailed procedures on merger filings and reviews than those in the currently applied 2006 M&A Rules. Under the AML, the antitrust enforcement agency is required to give decisions on merger filings within 30 days. At the sole discretion of the antitrust enforcement agency, this may be extended to 180 days. There are serious legal consequences for failures to make required filings, including fines and orders to unwind offending concentrations. This means that future M&A in China by foreign capital will need to take competition law issues into serious consideration at an early stage.

Six: National Security Scrutiny

In the second reading, there are proposals from the members of the Standing Committee calling for greater regulation of acquisitions of domestic Chinese business by foreigners to ensure the State's economic safety. This arises in the context of rising disquiet within China that foreign companies command too much power in certain sectors of China's economy.

As a result, a new clause 31 has been added to the AML which states that 'where national security is concerned, acquisition of domestic undertakings by foreign capital or other concentrations involving foreign capital shall be examined according to the relevant regulations of the State.'

Many commentators opine that national security may not be an appropriate standard for inclusion in a competition law. This clause may also give rise to questions under China's WTO obligations of non-discrimination and national treatment, given that competition policy with respect to concentrations should universally be applied to all transactions targeted by the AML, regardless of whether foreign capital is involved.

Seven: Penalties

The AML states that companies implementing prohibited monopoly agreements or abusing their dominant market position will have their illegal gains confiscated by the antitrust enforcement agency, and be penalized up to 10% of their sales for the previous year.

Compared with its earlier version, the adopted AML has reduced the penalty against unimplemented monopoly agreements from RMB2 million (approximately U.S. $0.25 million) to RMB 0.2 million (approximately U.S. $25,000). This low penalty amount, together with the removal from the adopted AML of the antitrust enforcement authority's power to freeze a violating company's bank account, is likely to be insufficient to create any real deterrence. The AML does not impose personal criminal sanctions for directors and executives involved in cartels.

Eight: Antitrust Enforcement Agency

The AML provides that a new Anti-Monopoly Commission will be set up under the purview of the State Council, China's highest administrative body. The Commission will only play a coordination and advisory role, with routine responsibilities assumed by an antitrust enforcement agency to be designated by the State Council.

The creation of a single enforcement authority has been one of the most heavily debated issues in the preparation of the AML. The majority commentators are of the view that it is preferable to confer the application of competition law and policy exclusively to a single agency. This will help to promote efficiency, consistency and predictability in enforcement, and will foster the development of institutional knowledge and an unified body of case law in this very complex area.

However, there are presently a number of existing agencies who have the authority to regulate national or sector-wide competition issues including the Ministry of Commerce, the State Admin- istration of Industry & Commerce, and the National Development and Reform Commission. Some of them have a very strong interest in the plenary regulatory power to be offered by the new antitrust regime. The AML did not provide a conclusion to this debate, and has reserved this issue for the State Council to decide in more detailed AML implementing rules.

Nine: Abuse of Intellectual Property Rights

The AML, on one hand, declares in its clause 55 that it is not applicable to conduct by undertakings to exercise their legitimate intellectual property rights. One the other hand, it vaguely states that abuse of intellectual property rights to restrict or limit competition is governed by this AML. There are concerns that this loosely drafted clause may be used in a discriminatory fashion against foreign companies that are technology driven and have a relatively larger market share in certain sectors in China.

Ten: Effective Date

The AML will become effective on Aug. 1, 2008. This means the subject of legal compliance under China's new and aggressive antitrust legal regime needs closer attention than ever. Substantial fines and damages claims are now a real possibility. There is little doubt that China remains the most important emerging market for many multinational companies. It could be a costly oversight not to consider China's antitrust law seriously.

Avoiding antitrust problems is perhaps the best antitrust strategy of all. To prepare for the new antitrust law, it is advisable to take proactive and preventive approaches from now on to identify and manage the antitrust risks of your business in China, including the exercise of internal antitrust audits for your China subsidiaries. With the help of outside antitrust counsel, the antitrust audits will help senior management and in house counsel to examine the existing business activities, contracts and practices of the company, identify areas of greatest risk under the new antitrust regime, and prioritize further work to remove or reduce these risks.

In addition, competition law is a fast changing legal regime in China. In the months to come, a number of new AML implementing rules and guidance will be adopted. A new Anti-Monopoly Commission will soon be created, and the institution and allocation of power amongst the antitrust enforcement agenc(ies) will be decided upon by the State Council. Multinationals should keep a sharp eye on these developments.

Peter Corne ([email protected]) is the Managing Director of Eversheds LLP's Shanghai Office. Steve Yu ([email protected]) is a senior lawyer in Eversheds' China Practice Group. Eversheds is a full-service law firm with 32 offices in major cities across the UK, Europe, Middle East and Asia. In China, Eversheds is one of the earliest international law firms advising multinationals on antitrust and competition law issues facing their business in China.