China's New Anti-Monopoly Law Now in Force
September 16, 2008

    
Other than the recent Olympics in Beijing, one of the biggest stories to come out of Asia recently was China's Anti-Monopoly Law (AML) which quietly came into force on August 1, 2008, after 15 years of debate and redrafting. While the Olympics will soon fade into memory, the AML will not, as it makes China — along with the US and the EU — one of the most formidable antitrust regimes faced by multinational corporations. Christopher F. Corr and Xiaoming Li, White & Case partners in Beijing, discuss the details of the new law and its ramifications.

Q: What is the AML?

Corr: The AML is China's first comprehensive and unified legislation regulating competition. It borrows from EU and US law and practice, but also has concepts that are unique to China. The AML applies not only to acts committed within China, but also to those with an anticompetitive effect in China. As China's economy grows in size and importance, this law will have broad implications for businesses operating in China or transacting with vendors or customers here.

Q: What areas does the AML focus on?

Li: Like competition laws in other jurisdictions, it targets three general categories of prohibited behavior: Monopoly agreements; abuse of dominant market position; and regulation of M&A or business "concentrations." The AML also has special provisions for government or "administrative" monopolies. Given the high degree of state intervention in China's "socialist market" economy, these provisions raise serious questions as to how much of China's economy will be subject to the forces of competition.

Q: What does the AML say about monopoly agreements?

Li: The AML prohibits agreements or concerted actions among competitors or counterparties that eliminate or restrict competition. For example, it bars agreements between competing businesses to fix prices, limit production or sales, or divide markets, or agreements between trade counterparties to set minimum resale prices. These so-called "monopoly agreements" may be exempted in certain circumstances, such as when the agreement is entered into to improve technology or product quality and it does not materially restrict competition.

Q: How does the AML define "abuse of dominant market position"?

Corr: The AML prohibits abuse of market power by "dominant" firms. A firm may be presumed dominant under the AML if its market share meets or exceeds certain thresholds. The AML considers acts such as tying, exclusive dealing, refusal to deal, price discrimination and predatory pricing, among others, as abusive and thus prohibited, unless otherwise "justified." The possibility of justification suggests that a US-style rule of reason analysis may apply.

Q: What does the AML say about anticompetitive "concentrations"?

Corr: The AML prohibits mergers and acquisitions that eliminate or restrict competition.

Q: What are the penalties for violating the AML?

Li: The AML provides for substantial monetary and injunctive penalties, including fines of up to ten percent of an offender's revenue from the preceding year. Multinationals should take note that it appears this may be based on global turnover. It also allows for civil actions by private third parties. At this time it does not impose criminal liability for violations, although there is some interest in amending the law to do so.

Q: The AML has extensive provisions on required pre-merger notification and review. What are the details of those provisions?

Corr: The AML requires that merger and acquisition transactions exceeding certain thresholds be reported to relevant authorities in advance. Reportable transactions include: (i) mergers between firms; (ii) the acquisition of control of another firm through purchase of shares/equity or assets; and (iii) the acquisition of the ability to exert decisive influence over another firm through contractual or other means.

Q: Have any rules implementing these notification requirements been issued?

Li: Yes. On August 4, 2008, the State Council released the first implementing regulation, the Rules on the Notification of Concentration of Business Operators, which went into effect on August 1, 2008. These rules provide that a notification must be filed in two situations: First, if the global turnover in the preceding accounting year of all parties to the concentration exceeds RMB400 million (roughly US$58 million) over the previous accounting year. And second, if the turnover within China in the preceding accounting year of all parties to the concentration exceeds RMB 2 billion (roughly US$290 million) and the turnover within China of each of at least two of those parties exceeds RMB 400 million over the preceding accounting year.

Q: How do these notification rules differ from the draft rules circulated for public comment in March 2008?

Li: The notification rules eliminated the much-criticized filing thresholds based on market share or change in largest shareholder that were in the draft rules. They also dropped many other provisions of the draft rules (14 of 19 draft articles) some instructive, presumably to avoid controversy. The resulting brevity of the notification rules leaves the specifics to actual practice or future regulations, and will create uncertainty for multinationals seeking to comply. Examples of such uncertainty include the particulars of how turnover will be calculated, whether affiliate operations must be included and coverage of joint ventures.

Q: Who will enforce the AML?

Corr: The AML contemplates a dual-tiered enforcement regime. At the working level, enforcement authority is allocated among three agencies. The Ministry of Commerce (MOFCOM) will handle merger notifications and review. The State Administration for Industry and Commerce (SAIC) will enforce prohibitions against monopoly agreements and abuses of market dominance, save for any aspects that involve pricing. The National Development and Reform Commission (NDRC) will deal with price abuses by dominant firms and related issues under the AML. This division of authority reflects the historical responsibility of these agencies and is perceived to be a balance-preserving compromise after years of wrangling among the agencies.

Q: What is the top enforcement agency?

Li: At the top, an Anti-Monopoly Committee (AMC) is to be established directly under the State Council and will formulate overall polices and act as an overseer of AML administration. The State Council recently announced that the administrative office of the new and powerful AMC will be located at MOFCOM. This no doubt will enhance the importance of MOFCOM in the enforcement process. Vice Premier Wang Qishan, whose policy portfolio includes finance and foreign trade, was recently appointed head of the AMC.

Q: Will there be any overlap in the jurisdiction of the agencies?

Li: Probably. This means that multinationals under investigation may have to deal with more than one authority. For example, monopoly agreements and abuses of market dominance often involve pricing and market issues and, accordingly, a company under investigation may need to deal with both the NDRC and SAIC in such circumstances. Although MOFCOM's merger review authority is more clear-cut, its role as home to the oversight AMC may expand its involvement into other areas of enforcement. Over time and practice, it will hopefully become clearer how the agencies will divide their tasks or collaborate.

Q: Have the enforcement agencies taken any internal organizational measures in response to AML?

Corr: Yes. MOFCOM announced the creation of a department-level Anti-Monopoly Bureau. Likewise, SAIC has also announced the creation of an Anti-Monopoly and Anti-Unfair Competition Bureau. And, the NDRC stated that it has recently completed draft rules on implementing the AML's prohibition against price abuses by dominant firms.

Q: What kinds of uncertainties does the AML raise?

Corr: The AML contains broad language and concepts and leaves details to implementing rules and agency practice. For multinationals who must comply with the new law, this translates into large pockets of uncertainty as the relevant authorities decide upon their enforcement policies and requirements.

For instance, the AML provides that the exercise of legitimate intellectual property rights is exempt from enforcement actions, but also prohibits abuse of intellectual property rights. One question that will be followed with much trepidation is how aggressively the authorities will interpret the latter prohibition, particularly against multinational companies with intellectual property rights coveted by local competitors. A July 31, 2008 article in the China Business Newswire reflects a widely held view that "the Anti-Monopoly Law ... will help prevent foreign companies from using IPR violations as a reason to keep out competition in Chinese markets, but will have little impact on state-controlled" enterprises.

Another example of uncertainty in the law is whether it will be enforced against state-owned businesses and joint ventures in which they participate.

Q: In light of these uncertainties and the penalties involved with violating AML, what steps should multinational companies take now to lessen their risks?

Li: Multinationals doing business in China would be well advised to conduct an AML compliance review of their sales and operations in China. During this initial, uncertain implementation phase, firms should look to best practices under analogous provisions of EU and, secondarily, US law. They also should keep a sharp eye on AML developments in China, including issuance of implementing regulations, treatment of M&A, enforcement actions, and official and unofficial guidance by relevant authorities at the enforcing agencies.

"Talking" features White & Case lawyers answering questions about emerging legal and business issues. For more information or to schedule an interview with Christopher F. Corr or Xiaoming Li, contact Jo Hamilton at johamilton@whitecase.com.

Any information contained in this interview is for educational purposes only. It should not be construed as legal advice.