Non-compliance Risks of Monopoly Agreements concerning Affiliates under the PRC Anti-Monopoly Law

This Newsletter will provide an overview on the non-compliance risks of monopoly agreements between affiliates (“Affiliates”) belonging to the same company group, as well as of monopoly agreements by Affiliates (i.e. as so-called unified conductors) with any third party, from the perspective of the PRC Anti-Monopoly Law (“AML”) and the competition law enforcement practices of the PRC competition authorities.

1. Under EU Competition Law, if Affiliates form a single economic unit within which an Affiliate has no real freedom to determine its course of action on the market, they are treated as a “single economic entity” and Affiliates within a single economic entity are characterized as a single undertaking. Since EU Competition Law prohibits joint, not individual, conduct, monopoly agreements concluded between such Affiliates within a single economic entity are not caught by EU Competition Law.

The single economic entity principle under EU Competition Law has various consequences, including:

• Relationships within a single economic entity do not constitute an agreement between undertakings or concerned practices between undertakings;
• Affiliates which are part of a single economic entity are only counted as one party to an agreement;
• Transactions between Affiliates do not constitute a “concentration” and, therefore, they are not notifiable for merger control filing purposes; and
• Parent companies might be held responsible for violations of EU Competition Law by their Affiliates which are under their control.

Under EU Competition Law, the term “undertaking” focuses on the nature of the economic activity of an undertaking regardless of its legal form. Thus, Affiliates belonging to a single economic entity may have distinct legal personalities, but they are not undertakings. Whether or not an Affiliate can be regarded as being independent of its parent or forming part of a single economic entity will depend on a number of factors, inter alia, whether the parent has control of its board of directors, the amount of profits taken by the parent and whether the Affiliate complies with the directions given by the parent, for example, on marketing and investment matters. For competition law purposes, as mentioned above, the principle of a single economic entity has many advantages.

2. There is no express legal stipulation on the concept of “single economic entity” in the AML.

The AML does not state expressly whether an Affiliate should also be regarded as the “undertaking” as defined in the AML. It is not stated expressly either, whether an agreement reached and/or implemented between Affiliates could also constitute a monopoly agreement prohibited by the AML, and therefore also faces the risk of being investigated and/or penalized by the PRC competition authorities. In short, there is no express statutory stipulation on the concept of “single economic entity” in the AML. Further, PRC statutory law does not provide for the factors which should be taken into consideration in order to decide whether and if yes where the single economic entity principle should be applicable in the AML.

3. This issue is of great importance for agreements between Affiliates to decide whether agreements on price fixing, output restrictions, marketing sharing, customer allocation and collective boycott, etc. constitute horizontal monopoly agreements which are prohibited according to Article 13 of the AML. Further, whether agreements between Affiliates which are trading partners on resale price maintenance and minimum resale pricing, etc. constitute vertical monopoly agreements which are prohibited according to Article 14 of the AML.

The prohibition lists stated in Articles 13 and 14 of the AML are a hardcore violations of the AML unless the concerned undertakings can prove that the exemption requirements (“Exemption Requirements”) provided in Article 15 of the AML are met.

According to Article 15 of the AML, an exemption situation exists when undertakings can prove that the monopoly agreements they entered into are for the purposes of improving technology or research and development, enhancing product quality, reducing costs, improving product efficiency or unifying product specifications or standards, enhancing overall competitiveness of small and medium sized enterprises and aiming at achieving public interests such as environmental protection or energy conservation, etc. Further, the concerned undertakings shall also prove that the following two conditions are met, i.e. (i) the agreement in question will not substantially restrict competition on the relevant market; and (ii) it can enable the consumers to share the benefits arising out of the agreement in question.

Therefore, if an agreement between Affiliates constitutes a monopoly agreement which falls under the prohibition lists stated in Articles 13 or 14 of the AML, it might as well constitute a hardcore violation of the AML unless the Exemption Requirements set forth in Article 15 of the AML are met. In other words, if Affiliates cannot prove that the concerned monopoly agreement meets the Exemption Requirements as listed in Article 15 of the AML, they can be subject to investigations and penalties by the PRC competition authorities.

As can be seen from above, Article 15 of the AML does not expressly state that monopoly agreement between Affiliates within a company group will automatically meet the Exemption Requirements and, therefore, will get exempted according to the AML. In other words, in order for it to get exempted, the Affiliates shall also prove that the concerned agreement between them has met the Exemption Requirements according to Article 15 of the AML.

Due to the lack of express stipulations, the PRC competition authorities have been found to exercise vast discretion when investigating and penalizing agreements between Affiliates. Also, due to lack of statutory guidelines the decisional practices of the PRC competition authorities in this regard have not been consistent.

Below is a short brief on two cases concerning monopoly agreements in connection with Affiliates which have been investigated and fined by the competent PRC competition authorities. The methodologies having been adopted by the PRC competition authorities in these two cases were not consistent.

a) Chongqing Qingyang Case

In the case (“Chongqing Qingyang Case”) concerning Chongqing Qingyang Pharmaceutical Co. Ltd. (“Chongqing Qingyang”) and Chongqing Datong Pharmaceutical Co. Ltd. (“Chongqing Datong”), according to the Decision ([2016] No. 1) issued by the National Development and Reform Commission (“NDRC”, which was one of the three former PRC competition authorities), the NDRC found that the majority share-holder, the top management as well as the sales managers of Chongqing Qingyang and Chongqing Datong were basically identical. The NDRC also found that the relevant decision-making procedures and the activities conducted by both Chongqing Qingyang and Chongqing Datong in relation to the concerned pharmaceutical products have been consistent. Therefore, the NDRC decided that Chongqing Qingyang and Chongqing Datong, two Affiliates controlled by the same majority shareholder, should be regarded as “unified conductors” (共同行为人 in Chinese) vis-à-vis a third party.

According to the Decision ([2016] No. 1), since Chongqing Qingyang and Chongqing Datong are not independent of their parent (i.e. the same majority shareholder) and they have followed almost the same decision-making procedures, the NDRC investigated and imposed fines on both of them as “unified conductors” collectively by calling them uniformly “Parties subject to punishment” (“当事人” in Chinese) in the same Decision [2016] No. 1. The NDRC decided that agreements containing such clauses as “price fixing” and “market sharing” between Chongqing Qingyang with its competitors were monopoly agreements which are expressly prohibited under the AML and imposed a fine of 8% of the turnover of the concerned pharmaceutical products in 2014 on Chongqing Qingyang. The NDRC has also made the same decision on Chongqing Datong.

As mentioned in Item 1 above, according to the single economic entity principle under EU Competition Law, Affiliates which are part of a single economic entity are only counted as one party to an agreement. According to the Decision [2016] No. 1, even if Chongqing Qingyang and Chongqing Datong are two independent legal entities, due to the fact that they are under control by the same majority shareholder, have the same management and exercised the similar decision-making procedures, etc., the NDRC seemed to consider that both belong to a single economic entity and decided that Chongqing Qingyang and Chongqing Datong should be regarded as unified conductors with regard to the concerned monopoly agreements vis-à-vis the other contractual parties. Thus, according to the Decision [2016] No. 1, even if the concerned monopoly agreements containing such clauses as “price fixing” and “market sharing” were not concluded directly between the two Affiliates, i.e. Chongqing Qingyang and Chongqing Datong, the NDRC decided that they should be regarded as unified conductors (following the instructions of the same majority shareholder) vis-à-vis a third contractual parties under the concerned monopoly agreements. In other words, in the Chongqing Qingyang Case the NDRC might have taken reference to the single economic entity principle in EU Competition Law despite that there are no express legal stipulations under PRC competition law.

b) The Shenzhen Port Tally Affiliates Cases

According to both the Decision ([2018] No. 5) and the Decision ([2018] No. 6) issued respectively by the State Administration for Market Regulation (“SAMR”, which is the PRC competition authority on the State level) on 9 July 2018 (collectively, the “Shenzhen Port Tally Affiliates Cases”), the SAMR decided that both China Ocean Shipping Tally Co. Ltd. (“Shenzhen Zhongli”) and China United Tally Co. Ltd. (“Shenzhen Zhonglian”) (collectively, the “Shenzhen Affiliates”) with the same majority shareholder (“Majority Shareholder”) were in violation of the AML for having reached and implemented horizontal monopoly agreements containing such clauses as market division and price fixing. The SAMR fined Shenzhen Zhongli RMB 2,014,056 according to the Decision ([2018] No. 5) and Shenzhen Zhonglian RMB 1,149,052 according to the Decision ([2018] No. 6), respectively.

According to the two Decisions ([2018] No. 5 and [2018] No. 6), the SAMR investigated and fined the two Shenzhen Affiliates based on the following reasons, among others:

(1) The SAMR has found that the two Shenzhen Affiliates have the same Majority Shareholder, which holds 50% shares in each of the two Shenzhen Affiliates. However, the SAMR decided that the Majority Shareholder only exercises controlling powers over Shenzhen Zhongli but not over Shenzhen Zhonglian. Therefore, Shenzhen Zhonglian can be to some degree independent of the Majority Shareholder.

In order to decide the existence of the controlling powers exercised by the Majority Shareholder, the SAMR has considered such factors as the shareholding ratios, the decisive influence of the Majority Shareholder on the two Shenzhen Affiliates, the management structure of the two Shenzhen Affiliates as well as the relevant State competition policies, etc.

(2) Further, the SAMR also found that the two Shenzhen Affiliates with the same Majority Shareholder are de facto competitors because of the following reasons:

(a) According to the relevant State competition policies on port tally business industry, the competing system have already been implemented. Further, in order to establish a second tally company on the port, this second tally company shall not be controlled by exactly the same shareholders (as the existing tally company already established). Thus, the SAMR decided that since there were only two existing companies which were in the tally business industry on the relevant market, i.e. the two Shenzhen Affiliates before 8 August 2016, Shenzhen Zhongli and Shenzhen Zhonglian must not have been controlled simultaneously by the Majority Shareholder. Further, the two Shenzhen Affiliates must have had conducted fair competition in accordance with the relevant State competition policies.

(b) The two Shenzhen Affiliates have had conducted de facto competition from the perspective of practical operations.

Thus, in the Shenzhen Port Tally Affiliates Cases, the SAMR has also considered an additional factor, i.e. the relevant State competition policies according to which the two Shenzhen Affiliate must not have been controlled simultaneously by the same Majority Shareholder and the two Shenzhen Affiliates should conduct fair competition on the market. In other words, by considering the relevant State competition polices, the SAMR decided that the two Shenzhen Affiliates, as two Affiliates, were counted as two independent competing undertakings on the market under the AML. Therefore, the SAMR decided that the concerned agreements between them were monopoly agreements in violation of the AML and thus imposed fines on the two Shenzhen Affiliates in the two Decisions ([2018] No. 5 and [2018] No. 6), respectively.

4. Conclusion

It is well accepted from the legal perspective that the term “undertaking” as defined under PRC competition law is not identical to the issue of legal personality for the purpose of company law. It is also well accepted that one of the major characteristics of an “undertaking” under PRC competition law is its economic independence, which is different from the independence of a civil subject under general civil and commercial laws. However, since so far there are no express stipulations on the “single economic entity” concept in the AML, the law enforcement practices of the PRC competition authorities towards monopoly agreements concerning Affiliates have not been fully consistent.

Therefore, it is suggested that Affiliates should be very careful before they intend to reach and/or implement monopoly agreements between themselves. Equally important, they should also be very careful before they (as so-called “unified conductors”) conduct the same with any third party, because they cannot rely on the “single economic entity” principle under EU Competition Law.

This article was authored by Aiping Bao who has now left CMS.