China: New Anti-Monopoly Law Takes Effect

Last Updated: 23 September 2008
Article by David Tang and Julian Y. Zou

Introduction

On August 1, 2008, China's new Anti-Monopoly Law (the "AML") took effect. and two days later the Provisions on the Declaration of Concentration of Business Operators also became effective. The latter is widely considered to be the rules of implementation for one of the pre-transaction thresholds set forth in the AML (the "Concentration Provisions"). For purposes of simplifying this analysis, the AML and the Concentration Provisions will be collectively referred to as the AML.

In the AML, monopoly activities have been categorized into three types (Article 3): monopoly agreements between business operators ("Monopoly Arrangement"), abuse of dominant market position by business operators ("Abuse of Market Position"), and concentration of business operators that have or may have the effect of eliminating or restricting competition ("Concentration of Business Operators"). Each of the three types are addressed in detail in the following discussion, which is aimed at providing recognizable standards for those reviewing the AML.

However, note that uncertainties still remain over various aspects of the AML including the method of turnover calculation and filing information requirements. Parties involved in any affected transaction are therefore advised to consult their attorneys and, where appropriate, Chinese authorities on a case-by-case basis.

Monopoly Arrangement

Monopoly Arrangements are not limited to situations arising between business operators. If a business operator reaches an agreement with a trading party fixing the re-sale price or restricting the minimum re-sale price, such an agreement may also be considered a Monopoly Arrangement. As a common practice, the new AML also uses an unspecified "catch-all" clause to cover all activities that exclude or restrict competition and provides that any entity or individual has the right to report Monopoly Arrangements to an appropriate authority.

Attributes such as common good, technology improvements and manufacturing efficiency can be used to qualify for an exemption from a monopoly investigation, but no detail has been provided in the relevant chapter regarding such an exemption. It is therefore difficult to estimate how the exemptions will be applied to actual cases.

Abuse of Market Position

Compared to the 1993 Anti-Unfair Competition Law which also sets forth restrictions over Abuse of Market Position, one of the improvements made in the new AML is providing clearer recognition standards on what will be considered a "dominant market position." Market share will be used as the principal factor in determining whether a business operator is in a position of dominating the market. However, the new law does not provide a reliable method for calculating market share. This results in business operators being able to offer evidence in an effort to show that although it satisfies the "dominant market position" standards, it really does not dominate the market. Such a loophole may allow business operators to avoid restrictions and potential punishment under the AML.

In addition to the lack of standards for calculating market share, the AML also references several variations that may make activities associated with Abuse of Market Position difficult to recognize and give the appropriate authorities vast discretion in decision making regarding this issue. These variations include, but are not limited to, the ability of a business operator to control the sales and resources markets, the financial and technological conditions of a business operator and the degree of difficulty for other business operators to enter the relevant market.

Concentration of Business Operators

The AML uses the term "Concentration of Business Operators" to replace "merger and acquisition," a term commonly used in other laws and regulations. The use of such term is believed to expand the scope of activities and transactions that are covered under the anti-trust regulations and provisions.

Clearly defined under the AML, Concentration of Business Operators refers to the following types of transactions:

  • merger of business operators;
  • take-over of controlling power through equity or assets acquisition or contractual arrangements; and
  • contractual arrangement resulting in the ability to exercise decisive influence over other business operators.

If any of the above mentioned transactions satisfy the pre-transaction reporting thresholds, the transaction must be reported to and investigated by the appropriate authorities before the transaction can be executed.

Surprisingly, as illustrated in the Comparison Chart of Pre-transaction Reporting Thresholds below, many thresholds found in the previous regulations, such as the anti-monopoly section under the Provisions on Merger with and Acquisition of Domestic Companies by Foreign Investors ("Acquisition Provisions"), have been abandoned. Now, sales revenue (or turnover) is the only standard applicable under the new AML. The standard is as follows:

  • Where all of the parties to the transaction have a total and aggregate global sales revenue during the previous accounting year that exceeds RMB 10 billion, or where at least two parties to the transaction each had sales revenue from sales within China during the previous accounting year exceeding RMB 400 million; or
  • Where all of the parties to the transaction have a total and aggregate sales revenue that exceeds RMB 2 billion for sales within China during the previous accounting year, of which at least two parties to the transaction each had sales revenue for sales within China during the previous accounting year of more than RMB 400 million.

Despite the fact that previous analyses of the reporting obligations have been simplified, the AML fails to clarify one of the most important variations that will make all of the standards reasonable and executable. This standard involves the entities that need to participate in the calculation of turnover. This uncertainty will definitely affect large company groups doing business in China. It appears that the legislation agent realized this problem when placing the new law into effect given the end of the Concentration Provisions provide that "the characteristics and actual situation of the industry involved such as banking, insurance, securities and futures shall be considered, with the specific calculation procedures to be formulated." Nevertheless, without the launching of new implementing rules addressing this issue, uncertainties that remain in the new AML will force investors to seek advice from appropriate authorities on a case-by-case basis.

Comparison Chart Of Pre-Transaction Reporting Thresholds

Reporting Thresholds

Provisions on Merger with and Acquisition of Domestic Companies by Foreign Investors

Anti-Monopoly Law and Provisions on Reporting Business Operators Concentration

M&A occurred inside China

M&A occurred outside of China

Sales Revenue

The current-year sales revenue of any party to the M&A in the Chinese market exceeds RMB 1.5 billion Yuan

The current-year sales revenue of the overseas party to the M&A in the Chinese market is more than RMB 1.5 billion Yuan

The total and aggregate global sales revenue in the previous accounting year of all of the parties to the concentration transaction exceeds RMB 10 billion, of which at least two parties to the transaction each had sales revenue from sales within China during the previous accounting year exceeding RMB 400 million; or

All of the parties to the concentration transaction have a total and aggregate sales revenue exceeding RMB 2 billion from sales within China during the previous accounting year, of which at least two parties to the transaction each had sales revenue from sales within China during the previous accounting year of more than RMB 400 million.

Number of Companies Involved

The foreign investor has, in the aggregate, taken over more than 10 enterprises in the domestic relevant industries

Due to the overseas M&A, an overseas M&A party will own all or part of the equity interest, directly or indirectly, in more than 15 foreign invested enterprises in relevant domestic industries

Non

Assets Amount

 

The overseas M&A party owns more than RMB 3 billion Yuan of assets inside China

 

Market Share

The market share of any party to the M&A has reached 20% in China; or

The market share of any party to the M&A will reach 25% after the overseas M&A.

The market share of an overseas party to the M&A and its connected enterprises in China has reached 20; or

The market share of an overseas party to the M&A and its connected enterprises in China will reach 25% after the overseas M&A.

 

Exempted Transaction

Apply for exemption of examination:

The M&A transaction may improve the conditions for fair competition in the market;

The M&A transaction is aimed at restructuring the loss-making enterprises and will ensure the employment of current employees;

The M&A transaction will help to introduce advanced technology and management experience and is able to improve the target company's international competitive ability; or

The M&A transaction will help to improve the environment.

Pre-Transaction Report Not Required:

One business operator involved in the concentration holds more than 50% of the voting shares or assets of each other business operator involved in the concentration; or

More than 50% of voting shares or assets of each business operator involved in the concentration are held by a same business operator which is not involved in the concentration.

"Competent Authorities?"

The new AML calls for an "anti-monopoly execution agent" as the supervising authority over the monopoly activities. For now, it is not certain whether this "anti-monopoly execution agent" will be the same as those designated for the anti-monopoly investigation under the Acquisition Provisions, the Anti-Monopoly Investigation Department in the Ministry of Commerce and the Fair Trade Bureau of the State Administration of Industry and Commerce ("SAIC").

Currently, it is being reported that both the SAIC and the National Development and Reform Commission have set up new departments in order to supervise the implementation of the AML, and these problems are expected to be resolved soon.

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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