China: China Passes Antitrust Law

Last Updated: 17 December 2007
Article by Paul Schoff and Nigel Francis

Marking the end of a legislative process that has lasted more than a decade, on 31 August 2007 the National People's Congress passed China's first Antitrust Law (literally Anti-Monopoly Law), to take effect 1 August 2008.

The Antitrust Law prohibits restrictive agreements, abuses of dominant market positions and mergers and acquisitions with the effect of restricting or eliminating competition. It also addresses anti-competitive administrative action. Significant penalties and remedies for infringement apply.

The Antitrust Law generally treats foreign companies and Chinese companies equally. It also establishes a dedicated enforcement authority, the Anti-Monopoly Enforcement Agency (AMEA).

Restrictive Agreements

The Antitrust Law prohibits specified horizontal agreements, namely, pricing fixing, supply restriction, market sharing and collective boycotts. It also prohibits resale price maintenance. These prohibitions also apply to industry associations.

The AMEA can add to the categories of prohibited conduct and can also grant exemptions. The Antitrust Law gives examples of various exemptions which are broad, including for reason of technological progress, improved quality or efficiency, enhancing the competitiveness of SMEs, environmental protection, energy conservation and mitigating oversupply during recessions.

Abuse Of Dominant Market Position

The Antitrust Law prohibits dominant companies from abusing their market position by engaging in certain specified conduct. It refers to that conduct being engaged in 'without justification' or 'unfairly'. This leaves a degree of flexibility and scope for judicial development.

Specifically, the conduct prohibited is imposing unfair prices or other terms, selling below cost, refusing to supply, exclusive dealing, discriminating between equivalent trading partners and tying. In addition, the AMEA can identify further categories of prohibited conduct.

The Antitrust Law endeavours to clarify what amounts to 'dominance' in a market and lists various traditional factors to be considered in this analysis, including a company's market share and its ability to control the sales market or raw materials purchasing market. Unless evidence is led to the contrary, 'dominance' will be assumed on the basis of certain defined market shares prescribed in the Antitrust Law. For example, unless otherwise proven, a company with a 50% market share will be assumed to have a dominant market position.

Mergers & Acquisitions

The Antitrust Law contains a prohibition on certain M&A activity that has the effect of restricting or eliminating competition, although a public interest exception exists. It also introduces a M&A antitrust review regime.

M&A activity which reaches certain thresholds, or concentrations, must now be notified to, and approved by, the AMEA. Those thresholds are yet to be determined by the State Council. The new regime applies to both Chinese and foreign acquiring parties. The Antitrust Law establishes a statutory timeframe for the AMEA to consider filings.

Under the Antitrust Law, foreign takeovers will be subject to a separate national security review in addition to review of economic issues. The national security review contained in the Antitrust Law is largely consistent with the existing regime for foreign investment under China's M&A regulations in force since 2006.

Anti-Competitive Administrative Action

Importantly, the Antitrust Law prohibits public authorities from abusing their administrative power by engaging in anti-competitive actions, including:

  • requiring persons to deal with particular companies
  • blocking the free flow of goods between regions within China
  • blocking businesses from establishing local operations where they come from other regions, and
  • making regulations or taking other action to eliminate or restrict competition.

In light of history, these provisions were, perhaps not surprisingly, amongst the most controversial in the Antitrust Law.

Intellectual Property

The Antitrust Law prohibits the 'abuse' of IP rights which restrict or eliminate competition, at the same time acknowledging 'legitimate' conduct to protect IP rights. 'Abuse' is undefined in this context and its interpretation will be pivotal.

Enforcement And Remedies

The Antitrust Law establishes:

  • an enforcement authority designated by the State Council (referred to here as the AMEA); and
  • a committee, which is intended to develop competition policies and guidelines and co-ordinate the AMEA's work.

The AMEA will have extensive investigative powers and its decisions will be subject to an administrative review process and judicial review.

The maximum fines for breaches of the Antitrust Law are 10% of a company's prior year sales revenue, or a lesser amount for breaches considered to be less significant or where a wrongdoer reports its own breach.

Remedies available include orders prohibiting certain activities, appropriation of a company's profit attributable to a breach of the Antitrust Law as well as cease and desist and divestiture orders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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