On August 30, 2007, the National People’s Congress passed the Anti-monopoly Law of the People’s Republic of China (“AML”). Such marks a historical moment in China’s legal history as, after over 10 years of drafting and preparing this AML, China has finally become one of the countries with advanced antitrust law system. The AML will come into effect on August 1, 2008, and many view this law as a tool that will finally regulate the market competition in China.
The AML mainly focuses on the monopolistic conduct existing in various industries that eliminates or has restrictive effects on competition of the market. According to the AML, monopolistic conduct includes
(i) monopoly agreements made between undertakings; (ii) abuse of dominant market position by undertakings; and (iii) concentration conducted by undertakings that may have the effect of eliminating or restricting competition.
Horizontal and Vertical Monopoly Agreement
The AML defines two types of monopoly agreements, monopoly agreement (i) between the competing undertakings (“Horizontal Monopoly Agreement”); and (ii) between the undertaking and certain transaction party (“Vertical Monopoly Agreement”). Both Horizontal Monopoly Agreement and Vertical Monopoly Agreement shall be deemed as illegal and invalid upon the investigation and recognition by the anti-monopoly enforcement agency.
As interpreted by the official from the National People’s Congress who participated in the legislation of the AML, the Horizontal Monopoly Agreement is deemed as core cartel in the market that shall be strongly prohibited and investigated. Thus, once an agreement meets the definition of Horizontal Monopoly Agreement, it shall be deemed as Horizontal Monopoly Agreement, which shall be invalid due to its obviously illegal nature of eliminating or restricting the market competition. However, recognition of Vertical Monopoly Agreement shall be reviewed and made on a case-by-case basis. As a general practice, some famous brand or multi-national group company may have their internal subsidiaries conclude special agreement arrangement as a strategy of developing its own brand or controlling of its cost, if such agreement is for reasonable commercial purpose and does not cause harm to the market competition, such agreement shall not be deemed as illegal or invalid though it meets the definition of Vertical Monopoly Agreement.
According to reliable sources of the State Council, the government is considering establishing agreement pre-consultation system. Under such system, the undertakings can voluntarily submit the proposed agreements to the government for pre-judgment. However, it might highly likely that the central government (largely Ministry of Commerce) may not have the capacity to pre-review thousands of volunteer submission of agreement every month once such system is approved.
Concentration and Notification Procedure by Undertaking
Market Concentration by undertakings is another hot topic of the AML. The following conducts are defined as concentration by undertakings:
(1) Mergers conducted by undertakings;
(2) Controlling other undertakings by acquiring their shares or assets or through other means; and
(3) Acquiring control over other undertakings by contract or other means or by obtaining the ability to exercise decisive influence over other undertakings by contract or other means.
The “control” or “ability to exercise decisive influence” mainly includes the arrangement of management positions or employment relationship, intellectual property license or ownership and other commercial contract.
In accordance with Article 21 of the AML, undertakings are obliged to notify the Anti-monopoly Enforcement Authority regarding concentration reaching the threshold of notification stipulated by the State Council. However, the AML does not provide the details of such notification procedure, except the four types of documents and an open-ended clause stipulated in Article 23. As indicated by the officials of the Ministry of Commerce and the People’s Congress, such notification procedures shall be a major topic of the proposed implementation rules / the guideline.
Special Regulation on Industry Association
Compared with the previous drafts of AML, the passed AML adopts strict liability for industry association in organizing and encouraging monopolistic conduct of its members. The liabilities of industry association for monopolistic conduct are up to fine of RMB500,000 and deregistration as a legal association. The back ground of such regulation is that a lot of industry associations has led or organized several collective price increasing activities in various types of commodities, which caused serious impact to the market. In lack of proper and strong legal restriction on such activities by certain industry association, the new AML places rigid restrictions and penalties and authorizes the Anti-monopoly Enforcement Agency to punish the similar monopolistic conduct in an efficient manner.
Anti-monopoly Examination and National Security Examination
In Article 31, the AML states that:
“In the case that national security is concerned, besides the examination on concentration in accordance with this Law, the examination on national security according to the relevant regulations of the State shall be conducted as well on the acquisition of domestic undertakings by foreign capital or other circumstances involving the concentration of foreign capital.”
It is the first time that the national statute clearly requires the foreign investment shall pass both anti-monopoly examination and national security examination. Such a requirement obviously increases the burden of approval of any foreign investment in China that might be deemed as concentration in a certain industry. National security has currently been improperly involved in disapproving certain sensitive foreign acquisition deals in China in heavy machine industry and home kitchen wears, and such involvement has caused numerous obstacles for foreign investors in completing the relevant governmental approval procedures, which took almost 12 months. The new rules of the AML clearly regulates that the Anti-monopoly Enforcement Agencies shall only has the power to conduct anti-monopoly examination, while any concerns in national security issue in a concentration examination of foreign investment shall be separately conducted by the governing department under specific national regulations and rules. According to the source in the People’s Congress, such national security examination shall not be implemented as further restricting foreign merger and acquisition in China, unless the foreign merger and acquisition concerns a military factor or sensitive industries where China intends to set strict limitation to foreign investors.
Anti-monopoly Committee and Anti-monopoly Enforcement Agencies
The AML sets up the government authorities that have the power to govern the monopolistic conduct, including Anti-monopoly Committee and Anti-monopoly Enforcement Agencies (“Agencies”). As clearly stated in the AML, the Anti-monopoly Committee (“Committee”) should be a coordination body, “organizing, coordinating and guiding” the anti-monopoly matters. Thus, this Committee will not be direct leading government body in charge of anti-monopoly enforcement, but a discussing government body governing the national strategy and framework of anti-monopoly matters and resolving the conflict among various Agencies. Agencies will be the main governmental authorities in charge of daily anti-monopoly affairs under the scope of power authorized by the AML. According to the source of the central government, the following government authorities that have been conducting anti-monopoly related functions before the issuance of the AML will jointly form such Agencies: the Anti-monopoly Investigation Office of the Ministry of Commerce, the Fair Trade Bureau of the State Administration of Industry and Commerce and State Development and Reform Committee. However, the AML has not classified the respective power, scope and relationship among enforcement agencies, which may result in unnecessary conflict among the Agencies and greatly impact the efficiency of anti-monopoly enforcement work. This issue remains to be a big topic to be solved and to be further defined in the implementation rules/guidelines.
Unlike the antitrust law of the United States, the AML does not adopt criminal punishment in the liabilities for the monopolistic conducts. The respective legal liabilities are as follows:
(1) Monopoly Agreement
The undertaking of a monopoly agreement may face confiscation of the illegal gains and imposition of fines ranging from 1% to 10% of the total sales volume in the relevant market from the previous year. If monopolistic agreements have not been implemented, a fine of less than 500,000 RMB may be imposed by the Anti-monopoly Enforcement Agencies.
On the other hand, the AML has adopted a similar leniency procedure to the undertaking that reports their monopolistic conduct to the Anti-monopoly Enforcement Authority and provides important evidences, the undertaking under the leniency policy may enjoy a mitigated punishment or be exempted from punishment at the discretion of the Anti-monopoly Enforcement Agencies.
(2) Abuse of dominant market position
In the case that the undertakings violate the relevant provisions of the AML by abusing their dominant market position, the Anti-monopoly Enforcement Agencies shall order the undertakings concerned to cease and desist such acts, confiscate the illegal gains, and impose fines from 1% to 10% of the total sales volume in the relevant market from the previous year.
In the case of a concentration by the undertakings, the Anti-monopoly Enforcement Agencies under the State Council shall order the undertakings concerned to stop implementing concentration, dispose whole or part of its stock or assets within a specific time, transfer part of its business, adopt other necessary measures to restore the market situation before the concentration, and may also impose a fine of less than RMB 500,000.
Although the AML regulates that the undertakings violate the AML and cause damage to others shall bear civil liability, it is still not clear whether a class action could be taken by group of individuals against certain monopolistic undertaking.
Further, in case the undertakings concerned are dissatisfied with the decisions made by the Anti-monopoly Enforcement Agencies regarding the notification of concentration, they may first apply for an administrative reconsideration; if they are still dissatisfied with the reconsideration, they may bring an administrative suit in accordance with the law.
In general, the AML establishes the framework and principles of the anti-monopoly practice system of China, while there are some general regulations therein remain to be further interpreted and defined upon issuing implementation rules or provisions. From now until the commencement of the AML marks an interesting period as many legal scholars are eager to find out the Chinese government’s reaction to some of the issues mentioned herein. As a timing issue, the relevant government officials have expressed the intention that before the AML formally comes into effect on August 1, 2008, the State Council should timely issue an implementation rules or guidelines in advance.
AML Vs. Existing Pre-merger Notification Rules
Upon analysis of the regulations of AML regarding concentration, the notification of concentration procedure seems to overlap the existing pre-merger notification rules of the Provisions on the Takeover of Domestic Enterprises by Foreign Investors (“Takeover Provision”) issued by six governmental departments, including the Ministry of Commerce and the State Administration for Industry and Commerce. As disclosed by the relevant officials in the People’s Congress, since the Takeover Provision is a department regulation while the AML is a national law, the AML shall no doubt replace any overlapping low-level rules. Therefore, the regulations on concentration in the AML shall prevail in any possible conflicts with the pre-merger notification. However, before the AML comes into effect on August 1, 2008 and its implementation rules of the AML containing the notification procedure of concentration is drafted and passed, the pre-merger notification shall still be valid and enforced between now and next August.
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Senior Legal Consultant