Home / Publications / An Overview of the Draft of Amendments to the PRC...

An Overview of the Draft of Amendments to the PRC Anti-Monopoly Law

21/01/2020

In the past years several rounds of amendments have been made to the PRC Anti-Monopoly Law (“AML”). On 2 January 2020 the draft of another round of amendments to the AML (“Draft AML”) was released on the website of the State Administration for Market Regulation (“SAMR”) for public comments during the period between 2 and 31 January 2020.

Since it is unclear how the Draft AML will look when it is enacted, the below briefing of the major amendments provided for in the Draft AML is for reference purposes only.

1. There are two major amendments with regard to the stipulations on “monopoly agreements”. First, there is a newly added Article 17 in the Draft AML, according to which an undertaking is expressly prohibited from organizing and/or facilitating (“Organizing and/or Facilitating”) other undertakings to reach monopoly agreements. Second, according to Article 18 of the Draft AML, in order for a horizontal agreement, a vertical agreement or a monopoly agreement reached through the Organizing and/or Facilitating by an undertaking to meet the list of exemption circumstances and the conditions and get exempted according to Article 15 of the AML, an additional condition is added.

a) According to the newly added Article 17 of the Draft AML, it shall be a hardcore violation of the Draft AML if an undertaking organizes and/or facilitate other undertakings to reach monopoly agreements.

Horizontal agreements and vertical agreements are expressly prohibited and constitute a hardcore violation according to Articles 13 and 14 in the AML. According to Article 17 of the Draft AML, a monopoly agreement reached through the Organizing and/or Facilitating by an undertaking shall also be expressly prohibited and constitute a hardcore violation of the Draft AML.

As such, after the Draft AML is enacted, if an undertaking organizes and/or facilitates other undertakings to reach monopoly agreements, the PRC competition authority will then have an express legal basis in order to conduct investigations and/or impose penalties also on the organizing or facilitating entity.

b) According to Article 18 of the Draft AML, a new precondition is added in order for a horizonal agreement, a vertical agreement or a monopoly agreement reached through the Organizing and/or Facilitating by an undertaking to meet the Exemption Requirements in the AML.

(1) Exemption Requirements provided for in Article 15 of the AML

According to Article 15 of the AML, an exemption situation exists when undertakings can prove that the horizontal agreements and/or vertical agreements they entered into are for the purpose of any of the below circumstances (“Exemption Circumstances”):

(a) improving technology or research and development;

(b) enhancing product quality, reducing costs, improving product efficiency or unifying product specifications or standards;

(c) enhancing overall competitiveness of small and medium sized enterprises and aiming at achieving public interests such as environmental protection or energy conservation;

(d) mitigating the severe decrease of sales volume or excessive overstock during economic recessions;

(e) protecting the legitimate interests of international trade and foreign economic cooperation; or

(f) other situations as stipulated by PRC law or the State Council.

Article 15 of the AML continues to state that in case a horizontal agreement or a vertical agreement is proved to fall under any of the Exemption Circumstances as listed in Article 15 (a) to (e) of the AML, the concerned undertakings shall also prove that the following two conditions (“Two Conditions”) are met, i.e. the agreement in question (i) 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. In other words, in order for a horizontal agreement or a vertical agreement to get exempted, in addition to prove that it falls under any of the Exemption Circumstances, the concerned undertaking shall also prove that the agreement in question has met the Two Conditions as stated in Article 15 of the AML (collectively, the “Exemption Requirements”).

(2) Additional precondition provided for in Article 18 of the Draft AML

According to Article 18 of the Draft AML, in order for a horizontal agreement, a vertical agreement or a monopoly agreement reached through Organizing and/or Facilitating by an undertaking to get exempted, the concerned undertakings shall also prove that the agreement in question is necessary for the Exemption Circumstances as stated in Article 15 of the AML.

Thus, the wording “necessary condition” newly added in Article 18 of the Draft AML imposes a new obligation on the concerned undertakings, i.e. in addition to proving that the Two Conditions as already set forth in Article 15 of the AML are met, the concerned undertakings shall further prove that the agreement in question is indispensable or necessary for the Exemption Circumstances as stated in Article 15 of the AML.

Since so far no horizontal or vertical agreements according to public news have been proved to meet the Exemption Requirements and obtained exemption according to the AML, with such newly added wording “necessary condition” as stated in Article 18 of the Draft AML, it will become even more difficult or impossible for any such monopoly agreement or agreement through the Organizing and/or
Facilitating by an undertaking to get exempted.

2. In order to determine whether an undertaking has a dominant position, according to Article 15 of the AML, various factors must be considered, including the market share of an undertaking, the conditions of competition on the relevant market, the ability of an undertaking to control the sales market or the raw material purchasing market, the extensive financial wealth or resources and the technology level of an undertaking and barriers to expansion and entry to the relevant market with respect to other undertakings, etc.

According to 21 of the Draft AML, in order to determine whether an undertaking in the internet sector has a dominant position, such additional factors as network effects, economies of scale, lock-in effects and capabilities of grasping and processing relevant data, etc. also must be taken into consideration.

Similar factors indicating dominance to be considered in the internet sector have also been specified in the Interim Provisions on the Prohibition of Abuse of Dominant Market Position, which took effect on 1 September 2019.

According to Article 22 of the PRC E-Commerce Law, where an E-commerce operator gains a dominant market position as a result of its technological superiority, quantity of users, its controlling power over relevant industries, and degree of dependence of other operators on such e-commerce operator with respect to transactions, it shall not abuse its dominant market position to eliminate or restrict competition.

Both PRC competition law and the PRC E-commerce Law provide a legal basis for determination of the dominance of an undertaking in the internet sector. This reflects the fact that the PRC competition authority is increasingly paying more attention to the law enforcement in the internet sector.

For more information on the PRC E-Commerce Law from the perspective of PRC competition law, please refer to our newsletter “Competition Law Aspects of the PRC E-Commerce Law”.

3. The Draft AML also makes some amendments to the stipulations of merger control.

a) The definition of the term “controlling power” is newly added according to Article 23 of the Draft AML. It refers to the right to or the actual status of exercising sole or joint decisive influence by an undertaking, whether directly or indirectly, on other undertakings, with regard to business operations or other major business decisions.

Thus, even if an undertaking becomes a minority shareholder (10% or even less, for example) in the target after the transaction, in the event that such undertaking will obtain a “controlling power” in the target after the transaction, the transaction in question shall still be notifiable provided that other notification requirements under the Draft AML are also met.

b) Currently, the notification threshold (“Notification Threshold”) for merger control filing purposes is issued by the State Council in the Provisions of the State Council on the Notification Threshold for the Concentration of Undertakings (“Notification Provisions”) on 3 August 2008. Further, the turnover numbers as specified in the Notification Threshold have remained the same ever since the Notification Provisions took effect more than ten years ago.

According to the Notification Provisions, the Notification Threshold is triggered either if (i) the total worldwide turnover of all the parties to the transaction exceeded RMB 10 billion and the turnover in China of each of at least two parties to the transaction in the preceding financial year exceeded RMB 400 million; or (ii) the combined turnover in China of all parties to the transaction exceeded RMB 2 billion and the turnover in China of each of at least two of the parties to the transaction in the preceding financial year exceeded
RMB 400 million.

According to Article 24 of the Draft AML, the SAMR is authorized to promulgate from time to time new Notification Thresholds based on the level of economic development and scale of the industry, etc.

Thus, it will be easier for the PRC Government to adjust the Notification Thresholds, if these adjustments are no longer subject to decision of the PRC State Council, but can be done by the SAMR itself.

c) In accordance with Articles 25 and 26 of the AML, for a normal procedure, if all the documents and information requested are submitted to the PRC competition authority for review purposes, theoretically it takes 30 days for a Phase I review, 90 days for a Phase II review, and if necessary, another 60 days for a third phase review.

In practice, in order to meet the review timeline or re-calculate the review timeline of a complicated merger control filing case, due to their heavy workload, it is not uncommon that the case handlers of the SAMR keep requesting the notifying parties to either submit supplementary documentation or request the notifying parties to withdraw their applications and re-notify the transaction later.

Article 30 of the Draft AML now introduces a stop-the-clock stipulation. According to the stop-the-clock stipulation, the time limit for the review timeline will not start to run should any of the following circumstances occur, including:

(1) when the notifying parties apply or agree to suspend the review;

(2) when the notifying parties submit supplementary documentation as requested by the PRC competition authority; or

(3) when the PRC competition authority and the concerned undertakings negotiate over restrictive conditions in accordance with Article 33 (which is about restrictive conditions to be imposed on a concentration in the decision of the SAMR to be issued) of the Draft AML.

Thus, the case handlers of the SAMR shall have an express legal ground to use the stop-the-clock stipulation according to Article 30 of the Draft AML. If the notifying parties agree to the stop-the-clock (per the request of the case handlers, for example) according to Article 30(1) of the Draft AML, then the review timeline will be suspended. Thus, it will significantly decrease the pressure faced by the case handlers of the SAMR since in practice they can circumvent the fixed review deadline stated in the law.

However, since the review timeline will be suspended if any of the circumstances for the stop-the-clock mechanism arise according to Article 30 of the Draft AML, it will be difficult to predict how long it might take for the SAMR to review the case and when the approval decision will be granted. This may bring concerns to the notifying parties because clearance by the SAMR is usually one of the closing conditions.

4. According to the Draft AML, the legal consequences faced by an undertaking which violates the AML are getting more serious.

a) According to Article 46 of the AML, for undertakings which have entered into and have also implemented monopoly agreements, the PRC competition authority shall order the undertakings concerned to cease and desist such acts, confiscate the illegal gains and impose fines from 1% to 10% of the total sales volume of the preceding financial year. For undertakings which have entered into but have not yet implemented monopoly agreements, the PRC competition authority shall impose a fine of less than RMB 500,000.

According to Article 46 of the AML, fines on a trade association will be up to RMB 500,000 should it organize undertakings to enter into monopoly agreements.

According to Article 53 of the Draft AML, for undertakings which have entered into and have also implemented monopoly agreements, the penalties remain unchanged. For undertakings which have entered into but have not yet implemented monopoly agreements (as well as for undertakings which have no sales turnover in the preceding year), the fines will be up to RMB 50,000,000.

Article 53 of the Draft AML also states that the same penalties in the preceding paragraph shall also apply to an undertaking which organizes and/or facilitates other undertakings to reach monopoly agreements.

According to Article 53 of the Draft AML, fines on a trade association will be up to RMB 5,000,000 should it organize undertakings to enter into monopoly agreements.

As can be seen, if the Draft AML is enacted, the maximum possible fines on (i) undertakings which have entered into but have not yet implemented monopoly agreements; (ii) undertakings which have no sales turnover in the preceding year; and (iii) a trade association which organizes undertakings to enter into monopoly agreements, are increased significantly.

b) According to Article 47 of the AML, in case an undertaking violates the relevant provisions of the AML by abusing their dominant market position, the PRC competition authority shall order the undertakings concerned to cease and desist such acts, confiscate their illegal gains, and impose fines from 1% to 10% of the total sales volume from the preceding year. The Draft AML does not change these penalties.

c) According to Article 48 of the AML, in case an undertaking implements a concentration in violation of the AML, the PRC competition authority shall order the termination of the concentration; order the disposal of the relevant shares/assets within the prescribed time limit; order the assignment of relevant business within the prescribed time limit; or order adoption of necessary measures to restore to the status quo prior to the concentration. In addition, the PRC competition authority can as well impose a fine of up to RMB 500,000.

According to Article 55 of the Draft AML, under any of the following circumstances, the fines will be up to 10% of the sales turnover of the concerned undertakings in the preceding year:

(1) when the undertakings implement a concentration which should have been notified to the PRC competition authority for approval;

(2) when the undertakings implement a concentration after it is notified but before the approval from the PRC competition authority is granted;

(3) when the undertakings are in violation of the restrictive conditions or decisions contained in the approvals having been granted by the PRC competition authority; or

(4) when the undertakings implement a concentration, which has been forbidden by a decision of the PRC competition authority.

Therefore, due to the fact for the first time, potential sanctions which the competition authority can impose can also include confiscation of turnover, the financial risks on the concerned undertakings will be increased significantly,. Take a “gun jumping” case for example, the fines are currently only up to RMB 500,000. According to Article 55 of the AML, however, a fine of up to 10% of the sales turnover of the concerned undertakings in the preceding year is much larger.

d) According to Article 52 of the AML, if an undertaking during an investigation refuses to cooperate with the PRC competition authority or obstructs the investigation , the PRC competition authority shall ask it to correct the situation. Further, a fine of up to RMB 20,000 may be imposed on individuals and a fine of up to RMB 200,000 may be imposed on an entity. In case of a serious situation, the PRC competition authority may impose fines from RMB 20,000 to RMB 100,000 on individuals or fines from RMB 200,000 to RMB 1,000,000 on entities. Moreover, criminal liability may be imposed if a violation of criminal law occurs.

According to Article 59 of the Draft AML, the legal consequences faced by an undertaking which refuses to cooperate with the PRC competition authority or obstructs an investigation are more serious. I.e. the PRC competition authority may impose a fine of up to 1% of an entity’s turnover of the preceding year (if there is no turnover of the preceding year or it is difficult to calculate the turnover of the preceding year, the PRC competition authority may impose a fine of up to RMB 5,000,000) and fines from RMB 200,000 to RMB 1,000,000 on individuals. Moreover, criminal liability may be imposed if a violation of criminal law occurs.

Further, Article 44 of the Draft AML states that wherever necessary, the public security authority shall provide assistance in accordance with PRC law when the PRC competition authority conducts investigations of an alleged monopolistic conduct. Thus, the competition authorities are entitled to also involve for example the police in their investigations.

5. Conclusion

In summary, the amendments in the Draft AML primarily concern monopoly agreements, merger control filings and legal consequences faced by an undertaking which violated the law. I.e. the Draft AML newly adds the definition of “controlling power” for merger control filing purposes, clarifies that a monopoly agreement reached through the Organizing and/or Facilitating by an undertaking is a hardcore violation of the law, and significantly increases the level of sanctions on an undertaking in case of violations.

The Draft AML was made based on the enforcement experiences of the PRC competition authority over the past years. It shows the intention of the PRC competition authority to strengthen their enforcement. Therefore, if the Draft AML is enacted, considering the costs in violation of law are increased considerably, companies operating in the PRC are therefore well advised to establish a compliance scheme according to the AML and other PRC laws and regulations. We will continue to follow up on the Draft AML and will provide an update once it is enacted.

Authors

Aiping Bao
Aiping Bao
Counsel
Shanghai