Anti-Trust & Unfair

In brief: The People's Republic of China Anti-Monopoly Law was passed by the Standing Committee of the National People's Congress on 30 August 2007 (having been under consideration for 13 years) and will come into force on 1 August 2008. Although anti-competitive conduct is already subject to a degree of regulation in the PRC by different agencies and under different laws, the new law sets out a broader definition of monopolistic conduct and creates a commission to oversee this area.

How does it affect you?

  • As with much of the legislation in the PRC, the new Anti-Monopoly Law is cast in broad terms, with further detail expected to follow in implementing regulations. In addition, its impact will depend on the way the law is interpreted and enforced on the ground. However, the following can be noted from the text of the new law:
    • the Anti-Monopoly Law prohibits monopolistic conduct, including monopoly agreements, misuse of market power and transactions that lead to a concentration of market share, and applies to conduct within the PRC, as well as outside the PRC, where that conduct restricts competition in the PRC domestic market;
    • mergers and acquisitions by domestic and foreign purchasers are subject to a notification and review process (such a process was applied only to foreign purchasers under regulations issued last year); and
    • the penalties for engaging in monopolistic conduct can be up to 10 per cent of the sales revenue of the business operator in the previous year.
  • Foreign businesses operating in the PRC are advised to review their practices and processes to ensure compliance with the new law when it commences next year. In addition, foreign businesses considering PRC acquisitions will need to take into account the new merger rules. The competition concepts introduced in the Anti-Monopoly Law should, for the most part, be familiar from competition law regimes in other jurisdictions.
New Commission established

The new law provides for the establishment of an Anti-Monopoly Commission under the State Council, with responsibility for setting anti-monopoly policy, conducting market investigations, and formulating related guidelines.

It also provides that the State Council will designate an authority or authorities to have responsibility for enforcing the Anti-Monopoly Law (the Enforcement Agency). Currently, a number of bodies, such as the State Administration of Industry and Commerce, the Ministry of Commerce, the National Development and Reform Commission and various local authorities, have powers in relation to various types of anti-competitive conduct. The State Council will decide whether to create a new body to enforce the Anti-Monopoly Law or to continue the current approach of giving regulatory power to different bodies under different laws (such as the 1992 Anti-Unfair Competition Law, the 1997 Pricing Law, and the Provisions for the Acquisition of Domestic Enterprises by Foreign Investors passed in 2006 (the M&A Regulations)).  

Application of the Anti-Monopoly Law

The new law applies to 'business operators', which includes natural persons, legal persons or other organisations that engage in production or other operations in relation to products, or provide services.

It regulates monopolistic conduct within the territory of the PRC, as well as monopolistic conduct outside the PRC that has the effect of eliminating or restricting competition in the PRC domestic market. Monopolistic conduct is defined as including monopoly agreements, abuse of dominant market status and the 'concentration' of business operators that has, or may have, the effect of eliminating or restricting competition. 

 

Monopoly agreements

For the purposes of the Anti-Monopoly Law, a 'monopoly agreement' is an agreement, decision or other form of joint conduct that eliminates or restricts competition.

The new law prohibits competitors from concluding monopoly agreements involving:

  • fixing or changing the price of commodities (including services);
  • restricting production or sales volumes;
  • market sharing (dividing sales markets, or markets for the supply or raw materials);
  • restricting the purchase of new technology or equipment, or the development of new technology or products;
  • conducting boycotts; and
  • other monopoly agreements as determined by the Enforcement Agency.

It also prohibits an operator from reaching a monopoly agreement with a trading partner which fixes the price for the resale of commodities or specifies a minimum resale price.

Monopoly agreements are exempt from these prohibitions if the business operators can prove that the agreement reached by them is for the purpose of improving technologies or developing new products, improving product quality, making cost reductions, improving efficiency, increasing the competitiveness of small and medium-sized business operators, achieving public benefits, mitigating the effects of severe decreases in sales volume or excess production during economic recessions, or protecting legitimate interests with respect to foreign trade or economic co-operation. To fall within one of these exemptions, the business operators involved will (except in the case of the last exemption) also need to demonstrate that the agreement does not substantially restrict competition in the relevant market and that consumers will be able to share the benefits of the agreement. 

Abuse of dominant market status

Business operators with dominant market status are prohibited from engaging in the following conduct without any 'legitimate reason':

  • refusing to deal with another party;
  • requiring others to deal exclusively with the operator or with a designated person;
  • engaging in third-line forcing (supplying on condition that another product is purchased), or imposing unreasonable trading conditions;
  • engaging in price discrimination (or imposing other discriminatory conditions); and
  • other conduct stipulated by the Enforcement Agency.

There are no exemptions for conduct constituting abuse of dominant market status, but this type of conduct will contravene the prohibition only where there is no legitimate reason for the conduct.

Business operators with dominant market status are also prohibited from selling products at unfairly high or low prices, or selling below cost (regardless of whether they may have a 'legitimate reason' for doing so).

The Anti-Monopoly Law defines 'dominant market status' as the market position of an operator that can control the price or quantity of goods, or other trading conditions, in the relevant market, or that can block other operators from entering the relevant market or affect their ability to enter the market. A number of factors are taken into account to determine whether a business operator has a dominant market position, including market share, the ability to control sales or raw material markets, financial and technical strength, the extent to which other operators rely on that operator and barriers to market entry. In addition, market dominance will be presumed to exist in the following cases (although this presumption can be rebutted by evidence to the contrary):

  • if the operator has a market share of at least 50 per cent;
  • if the joint market share of two operators accounts for at least two-thirds of the relevant market; or
  • if the joint market share of three operators accounts for at least three-quarters of the relevant market.

Some of the prohibitions in relation to monopoly agreements and misuse of market power set out above reflect prohibitions in previous Chinese laws, such as the Pricing Law and the Anti-Unfair Competition Law, although the new law has expanded the types of conduct that constitute misuse of market power. Given the wide scope for interpretation of some of these concepts (such as 'unfairly high prices', or refusing to trade 'without any legitimate reason'), the critical test will be to see how these provisions are interpreted and enforced in practice, and, hence, the impact of these provisions on the operations of companies that do possess market power in the PRC.

Concentration of business operators

The M&A Regulations issued in 2006 gave the Ministry of Commerce and State Administration of Industry and Commerce the right to review, for their impact on competition, acquisitions by foreign entities of interests in PRC companies and assets where certain defined thresholds were met.

The Anti-Monopoly Law requires that any merger, acquisition or other transaction whereby one party gains control over, or the ability to exercise decisive influence upon, another party may need to be notified to the Enforcement Agency for its approval if certain thresholds are met. Accordingly, it 'levels the playing field', since this review can apply not only to foreign acquisitions but also wholly domestic transactions. Unlike the M&A Regulations, the new law does not specify the thresholds to apply (these will be stipulated by the State Council), so it remains to be seen whether the thresholds, for example as to the degree of 'concentration' of market share required, will be the same as those under the M&A Regulations. It is also not yet clear whether review under the Anti-Monopoly Law will replace the current reporting and review procedure under the M&A Regulations and, if so, which authority will conduct the review.

A merger transaction subject to review will be assessed against a number of factors relating to the degree of concentration in the relevant market and the impact of the transaction on the market. If the transaction will, or may, eliminate or restrict competition, the Enforcement Agency may prohibit the transaction or impose conditions on its approval of the transaction

National security review

In addition to any concentration review under the Anti-Monopoly Law, where a foreign investor participates in an acquisition or other transaction that leads to a concentration of business operators, and 'national security is involved', the new law provides that the transaction will also be subject to national security review in accordance with the relevant national laws and regulations. It is not clear whether this will mean the establishment of an additional review procedure or if this provision is simply a statement that already existing reviews will still be conducted. The significance of this provision will only become apparent once this law is enforced.

Anti-competitive practices by administrative authorities

The Anti-Monopoly Law prohibits discriminatory and anti-competitive practices by local administrative and public bodies against products, business operators and investors from other parts of China. The Anti-Unfair Competition Law already contains less detailed but similar prohibitions.

It also prohibits administrative bodies from compelling business operators to engage in monopolistic activities and from abusing their administrative power by formulating provisions eliminating or restricting competition.

Investigation powers and whistleblowers

The new law gives the Enforcement Agency broad investigative powers, including the right to enter the operator's premises and to seize evidence. In addition, companies and individuals can tip off the Enforcement Agency in relation to any conduct suspected of being monopolistic, although any such tip-off must be made in writing and be supported by evidence before the Enforcement Agency will investigate. The Enforcement Agency is required to keep the identity of the informer confidential.

Importantly, the Anti-Monopoly Law provides that where the business operators concerned voluntarily report a monopoly agreement and provide evidence to the Enforcement Agency, they may be given a reduced punishment or be exempt from punishment, at the discretion of the Enforcement Agency. The Enforcement Agency may also suspend an investigation if the business operators under investigation promise to take measures to eliminate the anti-competitive effects of the conduct within a specified period.

Penalties

The Anti-Monopoly Law provides for the following substantial fines to be imposed on business operators engaging in monopolistic conduct:

  • If a monopoly agreement has been concluded and implemented, or operators abuse their dominant market status, the Enforcement Agency shall order that the illegal conduct cease, shall confiscate any illegal gains, and shall impose a fine of between 1 per cent and 10 per cent of sales revenue in the previous year.
  • If a monopoly agreement has yet to be implemented, or a transaction involving a concentration of market share is implemented in violation of the AML, a fine of less than RMB 500,000 can be imposed (and in the case of the transaction, it shall be unwound in the manner required by the Enforcement Agency).

The new law does not provide for penalties to be imposed on individuals involved in monopolistic conduct. However, penalties can be imposed on individuals, as well as business operators, who fail to provide information, destroy or conceal information or provide fraudulent information in the course of an investigation.

Application of the law to state-owned enterprises

It is unclear at this stage exactly what impact the Anti-Monopoly Law will have on state-owned enterprises that enjoy monopoly status across various industries. It provides that the State will protect the lawful business operations of state-owned enterprises, but that they will be subject to price supervision, must not harm consumers' interests, and fixet conopolistic coors to cquisy or produides o be seen whether thelegal cocompetitied enterprises, but thasubjeculason') appa>The noi an ;rs', which includes natural persons, legane e and shalthat they rentratio be sentrations operatoominant maroperantra Ant engage in mo provid Agencll be sr in thestor patinatemation or additionahibitew process (such a process was amanner hen Sef=" Toand Pises--> ractice-areainer" clas ractice-areas="t>Tags: may alsclass="pat/cring" alt="" /> a brief introratiass="tatkspan clt=""but th State

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