China's antimonopoly law ("AML") came into effect
in August 2008, after more than a decade of consideration. Even if
China's antitrust regime is still in its infancy, it is
increasingly a significant concern for Western companies,
particularly given the lack of transparency surrounding the
antitrust agencies and the resulting unpredictability.
On the merger review side, China rapidly has become a significant
regulatory obstacle for both Chinese and global M&A
transactions. Relatively low turnover thresholds require many
transactions to be filed in China, even if there is little
connection to China, and the increasingly long timeframe to obtain
approval has delayed closing numerous cross-border deals. The
introduction of a national security review system for the
acquisition of domestic companies or assets may add yet another
layer of difficulty.
The enforcement of the nonmerger provisions (against cartels and
abuse of a dominant position) has been relatively less active and
visible. However, the agencies have now finalized their enforcement
guidelines and slowly are beginning to use their powers, including
in several noteworthy enforcement actions against large
multinational and Chinese state-owned enterprises.
This Commentary looks at the most significant
developments in AML enforcement since its entry into force and what
companies doing business in China may expect in the years
ahead.
Merger Control
The AML has introduced a mandatory premerger approval process
for any transaction that involves parties of a certain size. These
thresholds are relatively low, starting at US$63 million of
revenues in China for each party to the transaction. Hence, any
global merger of two, even offshore, companies with minimal sales
in China is reportable under the AML.
Reportable transactions must be notified to the Ministry of
Commerce ("MOFCOM"). There is no short-form or expedited
procedure for mergers with little impact on competition law. As
soon as MOFCOM has formally accepted the notification (which
invariably happens only after one or two rounds of additional
questions), the formal procedure will start. The review may include
three phases of 30, 90, and 60 days, respectively. MOFCOM does not
need to justify why it moves a case to a subsequent phase and is
understood frequently to do so simply because of its own timing,
capacity, or procedural constraints. (Compare this to the European
Union, where the Commission may put a case into a phase II review
only if it has "serious doubts" about the transaction,
and the United States, where the agency staff generally will
recommend a "second request" only if it has tentatively
concluded that the transaction may create competitive
problems.)
MOFCOM has reviewed 267 cases as of June 2011. The only decisions
that are made public are those prohibiting a transaction (one so
far) or imposing remedies (nine so far).
Timeframe for MOFCOM Approval. The
pre-acceptance phase (the phase preceding the formal acceptance of
the case, during which MOFCOM may ask follow-up questions) has
significantly expanded, from two to four weeks on average. It is
not uncommon for merging parties to have to respond to two sets of
additional questions from MOFCOM before the notification is deemed
complete and the 30-day phase I period can start. The number of
additional rounds of questions in the pre-acceptance phase does not
seem to be correlated to the level of detail of the draft
notification.
Most, if not all, cases are put into phase II even if a transaction
does not present significant competition law issues. MOFCOM does
not seem to have sufficient resources at this stage to handle
incoming merger cases within the 30 days of phase I. Thirty days
also does not seem to be sufficient in most cases for MOFCOM to
gather all internal approvals and receive feedback from other
ministries such as the National Development and Reform Commission
("NDRC") or the Ministry of Industry and Information
Technology, which are routinely required to submit comments as part
of the merger review process.
Fortunately, merging parties can expect clearance of mergers with
relatively little impact on concentrations within the first four to
eight weeks of the second phase, which could last 90 days.
Given that merging parties generally first file in jurisdictions
such as the U.S. or EU before turning their attention to China,
MOFCOM's approval of global deals frequently lags that of the
other major jurisdictions. It is therefore essential for the
merging parties to plan ahead and file their notification in China
in parallel to other jurisdictions.
Emphasis on Effects of Mergers in China. Even
if the relevant market is worldwide, MOFCOM will ask the merging
parties to provide a detailed description of the Chinese market,
including market shares (not always easily available) and the
effect on Chinese customers and Chinese competitors.
MOFCOM generally focuses on the effect a proposed merger may have
on the Chinese market, paying particular attention when the
relevant products are viewed as important to the development of the
Chinese economy. For example, in a merger between two Russian
potash (fertilizer) producers, MOFCOM imposed a remedy aiming at
securing the availability of supply to Chinese customers, rather
than focusing on whether the global potash market would remain
sufficiently competitive (see, e.g., Jones Day
Antitrust Alert, "
China Approves Merger between Russian Potash Producers but Requires
They Continue to Supply the Chinese Market," June
2011).
National Security Review. In addition to the
competition review, China recently has put in place a new national
security review process, which provides for review and potential
rejection of the acquisition of a Chinese company by foreign
investors where the acquisition could affect national security
(see Jones Day Commentary, "
China Publishes Final Rules on the National Security Review of
Foreign Investment in Chinese Companies," September 2011).
It applies to acquisitions in a wide range of industry sectors,
including defense, agriculture, energy, and transportation. The
review is to be conducted by a joint ministerial panel that
includes MOFCOM, the NDRC (the price and industrial policy
regulator), and other relevant agencies. There remains no clear
indication of what sorts of transactions are likely to be rejected
on national security grounds. However, the PRC government takes a
broad view of "national security," to include, for
example, economic security, social order, and R&D capabilities
relating to key technologies.
The national security review rules leave great discretion in the
hands of government agencies. Whether these rules will constitute
another serious obstacle for foreign companies doing business in
China will depend on how they are applied in practice. So far, no
decision taken under the new procedure has been published.
Abuse of Dominance
The AML prohibits abuse of a dominant position, analogous to
"monopolization" in the U.S. system, such as predatory
pricing, unfair pricing, tying, and refusals to deal. Both the NDRC
and State Administration of Industry and Commerce
("SAIC") have issued guidelines on how they intend to
interpret these provisions of the AML (see Jones Day Antitrust
Alert, "
China Issues Rules for Price-Related Antitrust
Enforcement," January 2001, and "
China's SAIC Publishes its Final Anti-Monopoly Law
Rules," January 2011).
So far, enforcement of the AML's abuse of dominance provisions
has been primarily by courts rather than through the administrative
agencies. According to data released by the Supreme People's
Court, courts had accepted 43 first-instance civil AML cases as of
the end of 2010. Courts have proven relatively conservative in
their decision-making. There were two widely reported cases,
Sursen vs. Shanda and TRISC vs. Baidu, which were
filed right after the AML took effect (see Jones Day Antitrust
Alert, "
New Chinese Court Developments Provide Insights into Anti-Monopoly
Law," November 2009, and "
Second Chinese "Dominance" Decision Issued Under the
China Anti-Monopoly Law," January 2010). Both judgments
reiterated that AML does not prohibit the existence of a dominant
market position itself, only conduct that constitutes an abuse of
such a dominant position. The courts also required a high level of
proof of a dominant market position to support a claim.
The courts demanded substantial evidence and refused to base a
finding of a dominant position solely on media reports or the
parties' own statements about market shares. They took a
skeptical view of third-party market share reports if the
underlying calculation method was not disclosed, so that the court
could make its own judgment of whether the market shares
calculation was scientific and objective. Both courts appeared open
to considering practical business justifications and ultimately
concluded that the alleged abusive conduct was justified. In its
Baidu decision, the Beijing No. 1 Intermediate Court
appeared to require proof of anticompetitive effects, "an
injury on the competition order," to sustain a finding of
abuse of dominance.
Partly due to the setbacks of the first waves of antitrust cases
and the relatively high burdens of proof placed on complainants and
lower burdens on defendants, in April 2011, the Supreme
People's Court published a draft judicial interpretation
regarding AML civil suits, to clarify the burden of proof and other
procedural issues of antitrust civil suits (see Jones
Day Antitrust Alert, "
China's Supreme Court to Set Framework for Antitrust
Litigation," May 2011).
On the administrative side, there have been only a handful of
reported decisions, notably the investigation by the NDRC into
tying practices by the Hubei Salt Industry Group, which was
suspended after the Group committed to refrain from tying. More
significantly, the NDRC announced in November 2011 that it was
investigating China Telecom and China Unicom for alleged abuse of
dominant position in the broadband market. This announcement is
significant, as it indicates that enforcement agencies are ready to
take action against state-owned enterprises, which still enjoy
monopolies in many industries.
Cartels
Cartel activity, such as price fixing and market allocation,
violates the AML and also other Chinese legislation, such as the
PRC Price Law. So far, there have been only a few cartel decisions,
and most seem to have been taken on the basis of the Price Law
rather than the AML itself. Both the NDRC and SAIC have issued
leniency policies in 2011 (see Jones Day
Commentary, "
China's New Leniency Procedure in Cartel
Investigations," January 2011), which offer protection
from penalty in exchange for cooperation by a cartel participant.
The details of these policies at this point are unclear, and it
remains to be seen whether they will lead to more cartel
enforcement in China.
The NDRC has published several enforcement actions against local
cartels among Chinese companies (see Jones Day Antitrust
Alert, "
Chinese Pricing Enforcers Impose Higher Fines as New Rules
Proposed," July 2010). The largest fine so far imposed by
the NDRC, about US$1 million, concerned price fixing and market
allocation between two pharmaceutical companies in the Shandong
Province, in relation to the supply of promethazine hydrochloride.
The NDRC also imposed a fine of US$313,000 on Unilever under the
Price Law for spreading information about price increases and
disturbing market order. In its April 2011 press release, the NDRC
expressly prohibited "maliciously spreading information about
price increase to test the market and increase price with
competitors in tacit collusion." SAIC published its first
cartel decision under the AML in 2011. It imposed a US$31,000 fine
on a trade association of concrete manufacturer in the Jiangsu
Province for market allocation.
What to Expect in the Future
More Private Antitrust Litigation. So far, private litigation has been surprisingly active, more than some western observers predicted, and it is likely to receive a boost when the People's Supreme Court releases its final guidelines on private antitrust litigation. Indeed, if the final guidelines are adopted along the lines of the draft release for comments in April 2011, plaintiff's burden of proof would be made easier (see Jones Day Antitrust Alert, " China's Supreme Court to Set Framework for Antitrust Litigation," May 2011). Given that China is a very litigious country (more IP lawsuits than any other country in the world), this could pave the way for significant private antitrust litigation.
Increased Cartel Enforcement. The existence of a robust leniency program has been a catalyst for cartel enforcement in many other jurisdictions, in particular the U.S. and EU. The leniency regime put in place by the PRC Anti-Monopoly Agencies presents some uncertainties. The most important one is whether a leniency applicant, upon disclosing the prescribed evidence to the authorities, will automatically receive leniency, or whether the authorities retain discretion enabling them to refuse leniency. The Anti-Monopoly Agencies have not yet clarified this point. Obviously, increasing companies' confidence that they actually will receive leniency will clear the way for more leniency applications and lead to more cartel enforcement.
Longer Delays in Merger Review. MOFCOM's resources for conducting merger reviews seem to be insufficient to tackle the increased flow of merger notifications. Unless MOFCOM is able to significantly increase its resources in the short term, companies are likely to face increasing delays in getting their mergers cleared in China.
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