After 13 years of drafting and debating, China finally passed its first comprehensive Anti-monopoly Law (Law) on August 30, 2007. Please refer to our prior China Watch: "The New Antimonopoly Law and its Impact on Foreign M&A Transactions" AML Article) for the contents and our analysis of the Law.
As publicly recognized, the enactment of the Law marks a new era of anti-monopoly policy in China. While the Law makes an attempt to level the playing field for all market participants, many legal experts have suggested that expectations of what the Law is capable of providing should be low. This is the case, in part, because the Law lacks effective enforcement mechanisms. In addition, there are so many carve-out provisions1 for what constitutes an illegal monopoly that the exceptions swallow the rule.
Stressing Protection to State-owned Monopolies
The primary weakness of the Law is that it exempts from review monopolies run by State-owned Enterprises (SOEs) in an attempt protect key industries that are under exclusive State control.2 In addition to an express endorsement of State-owned monopolies, the Law does not establish clear criteria identifying what qualifies as a key industry to be run by the State. Thus, the government benefits from sanctioning State-owned monopolies and leaving the definition open as to what qualifies as such. Therefore, it appears that state-owned monopolies will not suffer as a result of the Law, nor will they be eliminated in the near future.
National Security Reviews for Acquisitions by Foreign Investors
The Law specifically requires that acquisitions of domestic enterprises by foreign investors or any other concentration of foreign capital involving national security be subject to "national security" review according to the relevant provisions of the statute.3 (See AML Article for more details.) As with the definition of what constitutes a key industry, the Law, again, fails to identify the relevant factors that will be involved in the review.
The basis for the review will most likely resemble the factors identified in the Regulations on the Mergers & Acquisition of Domestic Enterprises by Foreign Investors (M&A Regs).4 (See AML Article.) The M&A Regs, however, focus more on national economic security review and the Law stresses national security review. How these two types of reviews differ from each other in practice remains unclear and until such time as regulations are issued, we do not know what the scope of review will be or how it will be conducted.
Too Few Penalties
The Law establishes two regulatory bodies to regulate monopolistic activity: one is the Anti-monopoly Committee (AMC), which is responsible for organizing, coordinating and guiding monopoly legislation, and the other is the Anti-monopoly Enforcement Agency (AEA), which is responsible for enforcing the Law. The AMC and AEA are independent bodies. Despite the establishment of two agencies to regulate monopolistic activity, however, the legislation lacks real teeth.
When a company is determined to have breached the Law and engaged in monopolistic activity, the AEA’s enforcement mechanisms are limited. It has the authority to issue "cease and desist" orders and confiscate illegal gains. In addition, it may impose a maximum fine of 10% of the sales revenue in the previous year. In practice, however, it is quite difficult to calculate the sales revenue because the enterprise will likely make every effort to hide its records and/or present false records to the authorities. In an economy that is still largely cash-based, underestimating one’s sales revenue for this purpose is not difficult to do.
If the AEA determines that a company intends to engage in monopolistic activity, but has not yet done so, the AEA only has the authority to issue a fine of less than RMB 500,000. The AEA has no authority to pursue a criminal action against a wrong doer.
The Law permits the competitors of a monopolistic organization to be sued civilly. Such action would be a protracted and expensive proposition.
Therefore, with the fines as low as they are, with no risk of criminal liability, and with competitors disarmed by the daunting proposition of civil litigation as a way of combating an illegal monopoly, the penalties proposed by the law become a mere cost of doing business rather than a threat to the economic viability of an organization. Moreover, the senior management or company officers of the monopolistic enterprise bear no risk of personal legal liability for the monopolistic activities of the enterprise.
On paper, the Law prohibits monopolistic activity, but alongside this prohibition are many exceptions to the rule. In addition to the express prohibition of monopolistic activity, the Law identifies penalties for violators of the law, however, the potential penalties are so light as to amount to a mere cost of doing business rather than a deterrent against monopolistic activity. While it is a major step for China to promulgate this legislation, it is unlikely to have much of an effect in the short term. The implementing regulations will give us more insight into China’s approach to the legislation, but we are unsure of when they will be issued.
1. These exceptions include: researching and developing new products for the purpose of improving technologies; unifying product specifications or standards, or carrying out professional labor division for the purpose of upgrading product quality, reducing costs, improving efficiency; for the purpose of enhancing operational efficiency and reinforcing the competitiveness of small and medium-sized business operators; for the purpose of realizing public interests such as conserving energy, protecting the environment and providing disaster relief, etc.; for the purpose of mitigating the severe decrease of sales volume or obviously excessive production during economic recessions; for the purpose of protecting the justifiable interests in the foreign trade or foreign economic cooperation; or other circumstances prescribed by the law or the State Council.
2. See Article 7 of the Law.
3. See Article 31 of the Law.
4. The M&A Regs were promulgated by the Ministry of Commerce, State Assets Supervision and Administration Commission of the State Council, State Administration of Taxation, State Administration for Industry and Commerce, China Securities Regulatory Commission and State Administration of Foreign Exchange on August 8, 2006, and came into effect on September 8, 2006.
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