Hot on the heels of the passing of the amendments to China's Anti-Monopoly Law (Amended AML) last Friday (24 June 2022), China's competition regulator (the State Administration for Market Regulation, or SAMR) has launched a public consultation on 27 June 2022 in relation to amendments to six substantive regulations. The proposed amendments are wide ranging, and include changes to the notification thresholds under the merger control regime and the introduction of a safe harbour for certain vertical agreements.

The draft regulations that have been published for consultation include:

  • Provisions of the State Council on Thresholds for Prior Notification of Concentration of Undertakings (Consultation Draft);
  • Provisions on the Examination of Concentration of Undertakings (Consultation Draft);
  • Provisions on Prohibiting Monopolistic Agreements (Consultation Draft);
  • Provisions on Prohibiting Abuse of Dominant Market Positions (Consultation Draft);
  • Provisions on Prohibiting Abuse of Intellectual Property Rights to Eliminate or Restrict Competition (Consultation Draft); and
  • Provisions on Prohibiting Abuse of Administrative Power to Eliminate or Restrict Competition (Consultation Draft).

(together, the Draft Regulations)

In this briefing, we consider some of the key amendments to China's competition law regime proposed by the Draft Regulations. For further details on the changes introduced by the Amended AML, please refer to our earlier briefing here.

1. Key changes to the merger control regime

Jurisdictional thresholds substantially increased

Under the Draft Regulations, the jurisdictional thresholds applicable to merger control notifications have been substantially increased. In particular, the Chinese domestic turnover threshold will be doubled from RMB400m to RMB800m. If these amendments are passed, this will substantially reduce the number of transactions that will trigger a filing obligation in China, which will be welcome news for many businesses.

However, the Draft Regulations introduce a new scenario in which filing will be required, where: (i) one party's turnover in China exceeds RMB100bn; and (ii) another relevant party has a market value greater than RMB800m and generated more than one-third (1/3) of its global turnover within China.

This new threshold has a dual purpose of capturing acquisitions made by a purchaser with substantial market power within China (thereby achieving the aim stated within the Amended AML of preventing abusive behaviour via the "exploitation of capital advantages") and acquisitions of target companies with substantial market importance by companies outside of China.

This should be read in conjunction with Article 26 of the Amended AML, which provides that the AML enforcement authority (i.e. SAMR) may require parties to notify a concentration, even if the notification thresholds are not exceeded. The Draft Regulations provide further clarification on this power, including the power to require notification of a concentration that has already been completed within 180 days of SAMR's notice.

Current Provisions of the State Council on Thresholds for Prior Notification of Concentration of Undertakings Provisions of the State Council on Thresholds for Prior Notification of Concentration of Undertakings (Consultation Draft)
Article 3 Where the concentration of business operators satisfies any of the following threshold, the business operators shall file an application to the anti-monopoly enforcement authority of the State Council in advance, otherwise, no concentration shall be carried out:

1. The total amount of the global turnover realized by all business operators participating in the concentration during the previous accounting year exceeds RMB 10 billion with at least two business operators each achieving a turnover of more than RMB 400 million within China during the previous accounting year;

2. The total amount of the turnover within China realized by all business operators participating in the concentration during the previous accounting year exceeds RMB 2 billion with at least two business operators each achieving a turnover of more than RMB 400 million within China during the previous accounting year.

For the purpose of calculating the turnover, the actual situations in special industries and fields such as banking, insurance, securities, futures, etc. shall be taken into account. The specific measures shall be otherwise formulated by the anti-monopoly enforcement authority of the State Council jointly with other relevant departments of the State Council.

 Article 3 Where the concentration of business operators satisfies any of the following threshold, the business operators shall file an application to the anti-monopoly enforcement authority of the State Council in advance, otherwise, no concentration shall be carried out:

1. The total amount of the global turnover realized by all business operators participating in the concentration during the previous accounting year exceeds RMB 12 billion with at least two business operators each achieving a turnover of more than RMB 800 million within China during the previous accounting year;

2. The total amount of the turnover within China realized by all business operators participating in the concentration during the previous accounting year exceeds RMB 4 billion with at least two business operators each achieving a turnover of more than RMB 800 million within China during the previous accounting year.
Article 4 Where the concentration of business operators does not satisfy the threshold for reporting specified in Article 3 hereof, but the facts and evidence collected pursuant to the prescribed procedures show that the said concentration has or might have the effect of excluding or restricting competition, the anti-monopoly enforcement authority of the State Council shall conduct an investigation in accordance with the law. Article 4 Where the concentration of business operators does not satisfy the threshold for reporting specified in Article 3 hereof, but meets the following conditions, the business operators shall file an application to the anti-monopoly enforcement authority of the State Council in advance, otherwise, no concentration shall be carried out:

(1) The turnover in China of one of the business operators participating in the concentration exceeds RMB 100 billion in the previous fiscal year;

(2) The market value (or valuation) of the merger of other parties specified in Article 2 (1) of these Regulations or the market value (or valuation) of other business operators specified in Article 2 (2) and (3) shall not be less than RMB 800 million, and its turnover in China in the previous fiscal year accounted for more than one-third of its global turnover.
Current Provisions on the Examination of Concentration of Undertakings Provisions on the Examination of Concentration of Undertakings (Consultation Draft)
Article 6 Where a concentration of business operators reaches the reporting thresholds prescribed by the State Council (hereinafter referred to as "reporting thresholds"), relevant undertakings shall report to the SAMR in advance, and no concentration may be implemented without reporting.

Where a concentration of undertakings fails to reach the reporting thresholds, but the facts and evidence collected in line with prescribed procedures indicate that the concentration of undertakings has or may have the effect of eliminating or restricting competition, the SAMR shall conduct an investigation in accordance with the law.

 Article 7 Where the concentration of business operators reaches the reporting thresholds prescribed by the State Council (hereinafter referred to as "reporting thresholds"), the business operators shall file a notification to the anti-monopoly enforcement authority of the State Administration for Market Regulation in advance, otherwise, no concentration shall be carried without reporting or without approval after reporting:

Where the concentration of business operators does not satisfy the threshold for reporting, but the facts and evidence collected show that the said concentration has or might have the effect of excluding or restricting competition, the State Administration for Market Regulation may require the business operators to notify and inform the business operators of such in writing. If the concentration has already been implemented, the State Administration for Market Regulation may require the business operator to file an application within 180 days.

For the concentration of business operators specified in the preceding paragraph, the business operators shall submit documents and information to the State Administration for Market Regulation in accordance with Article 14 of these regulations. If the concentration has not yet been implemented, the business operators shall not implement the concentration before notifying or before obtaining an approval on their notification; if the concentration has already been implemented, the State Administration for Market Regulation may require the business operators to cease the implementation of the concentration or to take other necessary measures.
Introducing flexibility to apply mitigating circumstances to penalties

While the Amended AML has significantly increased the maximum fine for infringements of the merger control notification requirements, the Draft Regulations introduce a mechanism for SAMR to consider mitigating (and aggravating) factors in deciding on the level of fines to be imposed.

These factors include, in particular, whether any circumstances exist to reduce the impact of the infringement – this is expected to include situations where a party in breach of the notification requirement actively reports its failure to file, and may serve as an incentive for parties to come forward in the event of an infringement.

Current Provisions on the Examination of Concentration of Undertakings Provisions on the Examination of Concentration of Undertakings (Consultation Draft)
No corresponding provisions. Article 67 When determining the specific fine amount in accordance with the Anti-monopoly Law and Articles 65 and 66 of these Provisions, the State Administration for Market Regulation shall, in accordance with the requirements of Article 59 of the Anti-monopoly Law, consider factors such as the nature, extent, duration and circumstances of eliminating the consequences of the violation.
Guidance on "implementation" of a concentration

The Draft Regulations explicitly address for the first time what SAMR may view as "implementation" of a concentration in breach of the notification (or suspension) requirements. Under the Draft Regulations, "implementation" is the act of gaining control over, or exerting a decisive influence on, other business operators, including but not limited to:

  • Completing the registration of changes in shareholders or rights;
  • Appointing senior management;
  • Actual participation in the making of business decisions or management;
  • Exchanging sensitive information with other business operators; and
  • Substantially integrating the business.

This guidance provides greater clarity for parties in considering their transaction structures and the actions that may be done prior to filing (or receiving clearance on any filings made).

Current Provisions on the Examination of Concentration of Undertakings Provisions on the Examination of Concentration of Undertakings (Consultation Draft)
Article 48 Where a concentration of undertakings reaches the reporting thresholds, but the undertakings involved implement the concentration without reporting it or without approval after reporting it or breach the relevant examination decision, an investigation shall be conducted in accordance with this chapter. Article 55 Where a concentration of undertakings reaches the reporting thresholds, but the undertakings involved implement the concentration without reporting it or without approval after reporting it or breach the relevant examination decision, an investigation shall be conducted in accordance with this chapter.

For the concentration of business operators that do not meet the reporting standards, and the business operators fail to declare in accordance with Article 7 of these Provisions, the State Administration for Market Regulation shall conduct an investigation in accordance with these Provisions.

The term "concentration" as mentioned in these Provisions refers to the act of obtaining control over other business operators or exerting decisive influence on them, including but not limited to completing the registration of changes in shareholders or rights, appointing senior management, actually participating in business decision-making and management, exchanging sensitive information with other business operators, substantially integrating business, etc.

2. Key changes to prohibition on anti-competitive agreements

Introduction of the concept of "potential competitors"

Although SAMR has considered and made passing references to "potential competitors" in the context of enforcement decisions and other publications, the concept of "potential competitors" has not previously been explicitly introduced into the legislation or regulations.

Now, for the first time, the Draft Regulations address the concept of "potential competitors" in the context of horizontal anti-competitive agreements. This inclusion adds greater clarity to the application of the rules relating to anti-competitive agreements and brings the Chinese regime in line with international practices in this respect, such as those of the EU.

Current Provisions on Prohibiting Monopolistic Agreements Provisions on Prohibiting Monopolistic Agreements (Consultation Draft)
Article 7 Business operators that are in a competitive relationship are prohibited from reaching the following monopoly agreements on the price of commodities or services (hereafter collectively referred to as "commodities"):

(1) Fixing or changing price, the range of price fluctuations, profits and discounts, handling fees or other expenses;

(2) Agreeing to adopt a standard pricing formula;

(3) Restricting the power of other business operators that are party to the agreement to price independently;

(4) Fixing or changing price by other means.

 Article 8 Business operators that are in a competitive relationship are prohibited from reaching the following monopoly agreements on the price of commodities or services (hereafter collectively referred to as "commodities"):

(1) Fixing or changing price, the range of price fluctuations, profits and discounts, handling fees or other expenses;

(2) Agreeing to adopt a standard pricing formula, algorithms or platform rules etc.;

(3) Restricting the power of other business operators that are party to the agreement to price independently;

(4) Fixing or changing price by other means.

"Business operators in a competitive relationship" as referred to in these provisions include actual competitors and potential competitors. Actual competitors refer to operators who are actively competing in the same relevant market. Potential competitors refer to operators who have plans to enter into the relevant market within a certain period of time, and it is feasible for such operator to do so.

"Safe harbour" for all vertical agreements

Similar to other regimes (such as the EU and Singapore), a safe harbour has finally been introduced with respect to vertical agreements involving parties with a combined market share of less than 15% in any relevant market.

This safe harbour is expected to provide greater comfort and certainty for parties in managing their vertical relationships, such as distribution networks.

It should be noted, however, that this safe harbour threshold is significantly lower than the 30% market share threshold previously applied in relation to certain vertical non-price restraints under the guidelines for intellectual property related conduct, and the antitrust guidelines for the auto sector.

Current Provisions on Prohibiting Monopolistic Agreements Provisions on Prohibiting Monopolistic Agreements (Consultation Draft)
No corresponding provisions. Article 15 An agreement between a business operator and its counterparty to the transaction shall not be prohibited if the business operator can prove that the following conditions are met:

(1) The combined market share of the operator and the counterparty is less than 15%, except where the anti-monopoly law enforcement agency of the State Council stipulates otherwise, in which case such other stipulation shall be followed;

(2) There is no contrary evidence proving that the transaction excludes or restricts competition.

The calculation of the market share of business operators and counterparties in the relevant market in the preceding paragraph shall include the market shares of other entities controlled or entities over which decisive influence is exerted.

"Control" and "decisive influence" as referred to in the preceding paragraph refers to a right or actual practice to the effect that the business operator has or may have decisive influence over the production and operation activities or major decision-making of the other operator, whether directly or indirectly, individually or jointly.

In the case of multiple transactions, market shares in the same relevant market shall be calculated on a consolidated basis.

3. Key changes to prohibition of abuses of dominant market position

Focus on digital sector

The proposed revisions in the Draft Regulations include several provisions specifically directed toward operators in platform economies, and closely track the updates in the Amended AML. In particular, the ability of an operator to control traffic on platform economics have now been expressly included as a factor for consideration in determining whether such operator has a dominant market position.

At the same time, platform operators are now prevented from "self-preferencing" practices, such as favouring their own products over others' on the platforms that they operate, or using platform data that is not publicly available to gain a competitive advantage in decision-making etc.

Current Provisions on Prohibiting Abuse of Dominant Market Positions Provisions on Prohibiting Abuse of Dominant Market Positions (Consultation Draft)
Article 11 Pursuant to Article 18 of the AML and Articles 6 to 10 of these Provisions, in determining whether a business operator operating within new economic models (such as Internet-related businesses) holds a dominant market position, the following factors may be taken into account: the characteristics of competition, business model, number of users, network effects, lock-in effects, technical characteristics, market innovation, the ability to master and process relevant data and the market power of the business operator in related markets. Article 11 Pursuant to Article 23 of the Amended AML and Articles 6 to 10 of these Provisions, in determining whether a business operator in the platform economy holds a dominant market position, the following factors may be taken into account: the characteristics of competition, business model, number of users, network effects, lock-in effects, technical characteristics, market innovation, the ability to control traffic, the ability to master and process relevant data and the market power of the business operator in related markets.
No corresponding provisions. Article 20 Platform operators with a dominant market position are prohibited from using data, algorithms, technologies, platform rules etc., without justifiable reasons, to confer on themselves the following preferential treatment when competing with other operators on the platform:

(1) Prioritizing the order of display of its own products;

(2) Using non-public data of operators on the platform to develop its own products or assist its own decision-making.

"Justifiable reasons" include:

(1) Order of display is based on platform rules that are fair, reasonable and non-discriminatory;

(2) Compliance with legitimate industry practices and trading norms;

(3) Other reasons that can prove the legitimacy of the conduct.

The introduction of the concept of "R&D markets" to address abuses involving innovation

The concept of "R&D markets" has been introduced in the context of defining a "relevant market", such that factors including innovation and new products in development may also need to be considered when identifying relevant markets.

Current Provisions on Prohibiting Abuse of Intellectual Property Rights to Eliminate or Restrict Competition Provisions on Prohibiting Abuse of Intellectual Property Rights to Eliminate or Restrict Competition (Consultation Draft)
Article 3 An "abuse of intellectual property rights to exclude and restrict competition" as referred to in these Provisions refer to monopolistic behaviour such as the exercise of intellectual property rights by business operators to violate the provisions of the AML, to implement monopoly agreements or to abuse dominant market positions.

The "relevant market" as referred to in these Provisions, including the relevant commodity market and the relevant regional market, shall be defined in accordance with the AML and the Guidelines of the Anti-Monopoly Commission of the State Council on Defining Relevant Markets whilst taking into account factors including intellectual property rights, innovation potential etc. In anti-monopoly enforcement cases involving intellectual property licensing, the relevant commodity market may be the market of the relevant technology or the market of the relevant product, as characterised by specific intellectual property rights. The "market of the relevant technology" refers to the market formed from the competition between technologies involved in the exercise of the intellectual property rights, and similar technologies that could substitute the former.

 Article 4 The "relevant market" as referred to in these Provisions includes the relevant commodity market and the relevant regional market and shall be defined in accordance with the AML and the Guidelines of the Anti-Monopoly Commission of the State Council on Defining Relevant Markets.

In anti-monopoly enforcement cases involving intellectual property licensing, the relevant commodity market may be the market of the relevant technology or the market of the relevant product, as characterised by specific intellectual property rights, and could also involve the relevant R&D market.

The "market of the relevant technology" refers to the market formed by a group or class of technologies which are closely substitutable. The "relevant R&D market" refers to the market formed from the competition between undertakings in respect of the research and development of new technologies or new products for the future.

Conclusion

The adoption of the Amended AML marks an important milestone in China's antitrust development, and the publication of the Draft Guidelines so swiftly after the passing of the Amended AML clearly shows that the legislative efforts have been well planned. While the current round of consultations remains open until 27 July 2022, we expect that the Draft Guidelines will be finalised very shortly thereafter.

Together with the Amended AML, the Draft Guidelines signal a heightened focus on competition law and policy in China, and we expect that enforcement activity will remain high throughout the remainder of this year.

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.