Article by Hannah C. L. Ha , John M. Hickin and Gerry P. O'Brien

Originally published 20 July 2010

Keywords: China, antitrust, cartels, merger control, anti-monopoly law

A casual observer of China's competition law regime could be excused for assuming that antitrust-related enforcement has been scaled back in the lead up to the second anniversary of the commencement of the Anti-Monopoly Law (AML), given the absence of significant new merger control decisions and the continued paucity of AML conduct rule cases.

Indeed, it is now ten months since China's Ministry of Commerce (Mofcom) imposed any constraints on deals reviewed under the AML merger control regime. Further, no AML private action decisions or significant enforcement initiatives relating to the AML conduct rules have been reported during 2010.

The truth, however, is that the Chinese authorities are actually stepping up their antitrust enforcement efforts, as well as their initiatives aimed at preparing for even more vigorous application of competition laws in the near future. In particular, considerable efforts are being directed at strengthening regulatory enforcement powers in relation to price-fixing cartels. Further, while the authorities continue to piece together the AML enforcement framework, pre-existing laws (such as the 1997 Price Law) are being used to crack down on cartel behaviour in politically sensitive industry sectors.

Meanwhile, Mofcom is continuing to develop its merger control framework and authority. New guidelines were recently published to provide guidance on the procedures for divestments that may occur as a condition of deal approvals, amid signs that the Ministry is having increasing success in making domestic Chinese businesses submit to the regime. These developments may be seen as heightening the likelihood that Mofcom will begin actively penalising non-compliance with the regime's mandatory notification requirements in the months ahead.

In this update bulletin, we summarise each of the developments mentioned above, and further explain their significance for the business sector.

New Anti-Cartel Enforcement Initiatives and Framework

It is generally agreed that cartels are very prevalent in the Chinese economy. Although China has had laws which can be used to tackle cartels since long before the AML was introduced, application of those laws has been very limited - and the continued paucity of specific AML-related enforcement action means that the risk level for price-fixing and market-sharing arrangements in China did not change significantly in recent years.

However, developments over the last few months have begun to alter the risk analysis for cartels in China. In particular, politically sensitive sectors such as agriculture have come under increasing scrutiny, with the Chinese government keen to address concerns amongst the general populace about rising food prices and price manipulation practices (particularly following a series of recent natural disasters in Chinese provinces heavily involved in agricultural production).

The concerted focus on this sector by the regulatory body with primary responsibility for enforcing price-related antitrust laws in China, the NDRC, is not surprising - as this body is also charged with protecting of the stability of market prices in key China markets.

There are several recent examples of the NDRC's more active enforcement in this sector.

As we reported in an earlier bulletin, the NDRC announced in June that significant fines have been imposed on a group of rice noodle manufacturers in Guangxi province, due to their involvement in a joint action to increase prices in the region.

More recently, on 1 July, four further enforcement actions were jointly announced by the NDRC, Mofcom and SAIC - also focused on food sectors. As with the Guangxi rice noodle case, all four enforcement actions were taken under the authority of the pre-AML laws (mainly the Price Law).

Perhaps the most significant of the most recent cases involved the Jilin Corn Centre Wholesale Company ("Jilin Corn Centre"), a large Chinese mung bean producer. Jilin Corn Centre was fined RMB1,000,000 (approx. US$147,000) by local price bureaus that are effectively supervised by the NDRC, after it was found to have been the 'ringleader' for serious price-fixing behaviour and the fabrication and spreading of price-hike information in relation to mung beans. Several other co-conspiring enterprises were each fined RMB500,000 (approx. US$73,000), and a large number of further competitors across 16 provinces in China received warnings about their behaviour.

The case related to a conference concerning the mung bean production situation in China that was held in October 2009, during which it is alleged that steps were taken to spread false information regarding production output and to coordinate future pricing activities in the sector.

One of the three other cases announced by the NDRC also concerned collusion in relation to the production and sale of mung beans, while the other two cases concerned garlic production and sales. The fines imposed in these cases ranged from RMB 20,000 (approx. US$3,000) to RMB 100,000 (approx US$15,000).

The NDRC is clearly anticipating that anti-cartel work will keep it busy in the months ahead, as it has also now announced its intention to set up a new team within its existing Price Supervision and Inspection Department, which team will be specifically dedicated to pre-related anti-monopoly enforcement and market price supervision.

In addition to its new resources in this area, the NDRC may soon benefit from stronger enforcement powers. The Chinese authorities have published new draft Special Provisions on the Punishment of Price Violation Conducts During Market Price Unusual Fluctuation Periods ("Special Provisions") which amongst other things empower regulatory bodies like the NDRC to fine cartel participants 5 times the amount of any illegal gain they obtain from their unlawful collusion behaviour, and suspend or revoke the operating licenses of those businesses. The draft Special Provisions also provide the NDRC with the power to impose similar penalties on businesses that fabricate and spread information on price increases to the extent that such practices "disrupt the market price order".

Although this is not stated with precision in the draft Special Provisions, it appears these powers are primarily intended to be utilised in circumstances where unusual fluctuations are identified in respect of the market price for major merchandise (including services), which may have significant impact on people's life and the operation of enterprises. As such, they are likely to be applied to address cartel behaviour not only in the agricultural sector, but also in other markets relating to key business inputs and basic resources or services.

It also appears that the draft Special Provisions may be applied in conjunction with the AML, so that cartel participants would also face the prospect of fines up to 10% of business turnover under that law in addition to the 'illegal gain' penalties that may be imposed under the draft Special Provisions.

Mofcom's New Divestment Procedures

Earlier this month, Mofcom published guidelines relating to the way in which divestitures must occur when divestment is a condition of Mofcom's approval of a deal under the AML merger control regime.

The guidelines largely reflect processes which are already in effect, and which have most recently been applied by Mofcom to require Pfizer to divest parts of its business relating to the production and sale of several types of animal health vaccines, pharmaceuticals and medicinal feed additives as a condition of approval for its $68 billion acquisition of Wyeth. That divestment proceeded in June, with China's Harbin Pharmaceutical Group being the successful purchaser.

Amongst other things, the guidelines make it clear that:

  • Companies who are required to make divestments under the AML merger regime may be held to strict timelines (for example, transfers must ordinarily occur within 3 months from the execution of the relevant sales agreement); and
  • Mofcom may appoint independent trustees to oversee divestment procedures, largely replicating arrangements that may be instituted in other mature antitrust jurisdictions such as Europe. A divestment trustee may also be empowered to sell relevant company assets if that company itself fails to proceed with a Mofcom divestment order in accordance with the stipulated timeframes.

Contrary to recent Mofcom practice, a public consultation process was not held in relation to the guidelines before they were finalised and published. Instead, the guidelines came into effect on the day of the first publication (5 July).

The 'fast tracking' of the guidelines probably reflects the fact that they are viewed as unlikely to raise significant controversy (although some observers remain uneasy about the fact that Mofcom publicly releases deadlines for the making of divestments - which practice could be argued to undermine the negotiation position of the company forced to make that divestment), and may also indicate that Mofcom is keen to hasten the advancement of its broader enforcement framework.

That framework is now quite well developed, with over a dozen implementing regulations, rules and guidelines now published in final or interim draft form.

Complimenting this progress, there are signs that Mofcom is also encountering more success in its efforts to ensure that relevant domestic Chinese deals submit to the AML merger review process. This has previously been a sticking point in the development of the AML regime, with several high profile deals between State Owned Enterprises in China having closed without competition review by Mofcom notwithstanding that those deals clearly triggered the AML's mandatory notification and Mofcom's pre-approval requirements.

Domestic avoidance of the AML merger control regime is likely to have been a significant factor in Mofcom's decision to thus far hold off from penalising foreign firms for non-compliance with the notification provisions. Mofcom has already faced criticism over the fact that all of its conditional approval decisions to date have applied to transactions wholly between foreign multinationals (i.e. InBev/Anheuser Busch, Mitsubishi Rayon/Lucite, Pfizer/Wyeth, GM/Delphi and Sanyo/Panasonic), while the single prohibition decision that has been announced concerned a foreign takeover of a domestic Chinese business (Coca-Cola/Huiyuan), and in this context it may have been reluctant to invite further criticism relating to discriminatory enforcement of the law.

However, with more recent successes in convincing domestic firms to submit to the merger control regime (as has occurred in relation to recent deals in China's aviation and banking sectors), there is an increasing likelihood that Mofcom will feel it can justifiably penalise foreign firms who fail to notify their deals - and any window for avoidance of the regime may therefore have now closed.

Summing Up

As we approach the second anniversary of the AML's commencement, it is clear that the primary bodies charged with enforcing the law (Mofcom, SAIC and NDRC) remain committed to a process of capacity building and are preparing for more vigorous enforcement of antitrust regulation than has previously been witnessed in China. As is common in emerging antitrust regimes, there is a primary focus on domestic cartel-busting, but it can be expected that the initial steps the NDRC is taking in China's agricultural sector will gradually widen to encompass other industries and - before long - foreign business operators.

Accordingly, all business operators with operations in (or sales into) China should be taking steps to ensure they are in compliance with the AML and pre-AML prohibitions relating to horizontal cooperation and agreements. Appropriate business reviews and compliance steps now will mitigate the risk of exposure to potentially massive penalties - including fines which the authorities are now (through instruments such as the draft Special Provisions) taking steps to escalate.

Additionally, foreign business operators should take heed of the news that Mofcom is further strengthening its merger control framework and authority. While inadvertent violations of the broad mandatory notification provisions (which can apply to wholly foreign deals) may previously have gone unpunished, there are signs that Mofcom's forbearance may be unlikely going forward.

Finally, businesses that may be interested in reviewing a full translation of the draft Special Provisions, and contributing to feedback Mayer Brown may provide on that document to the Chinese authorities, are encouraged to contact us via the details provided.

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