The Anti-Monopoly Law of China

Charles WANG, Yuan SHEN

Abstract: After 15 years of consultation, deliberation, and delays, China finally adopted a new Anti-Monopoly Law ("AML") on August 30, 2007, which became effective on August 1, 2008. This is the first comprehensive anti-monopoly law in Chinese history. Business people like to know whether they would have serious compliance challenges and risks in China or not?

This briefing summarizes the main content of the new AML and explains the structure and responsibilities of its enforcement agencies according to the Law as well as the latest developments regarding its enforcement.

Key words:AML, AMC, Monopoly Agreements, Abuses of Dominant Position, Concentration.

A text aims at upholding a fair market in China
The Anti-Monopoly Law (AML) was first proposed 15 years ago and it finally came into force on 1 August this year.

Before its enactment, the Chinese anti-monopoly laws are dispersed in several legal texts, in particular, the Anti-Unfair Competition Law of 1993 (1) and the regulations of 2003 and 2006(2) concerning the merger with and the acquisition of domestic companies by foreign investors.

It will be a challenging task to implement this new law in real life. Relevant implementing rules are still in discussion(3) and we hope that they would provide more clarity and predictability for companies operating in the Chinese market.

The Law and Authorities
The AML will be applied both to the domestic and foreign companies(4)in China.  

The China new AML comprehensively covers the traditional anti-monopoly topics, including prohibition of Monopoly Agreements (i), prohibition of Abuses of Dominant Position (ii), and Concentration (iii). Furthermore, it also covers areas not normally addressed in most similar laws, such as abuse of administrative power by government agencies that results in an anti-competitive impact on the market.

The State Council has set up the Anti-Monopoly Commission (AMC), which is directly under the State Council. The National Development and Reform Commission (NDRC), Ministry of Commerce (MOC) and the State Administration for Industry and Commerce (SAIC) have taken part of the responsibilities of this new commission. Prior to the enactment of the AML, these authorities are respectively in charge of the monopoly agreements (particularly price-fixing) (NDRC), merger review (MOC) and abuses of dominant position (SAIC). The new AMC will be in charge of coordinating policy-making among the enforcement authorities and draft detailed implementing guidelines on anti-trust and merger control. Since the Commission is a compromise between the outcry for one unified agency and the maintenance of the existing division of powers among different authorities under the State Council, it will not be expected to possess substantive enforcement power.

Monopoly Agreement
In accordance with the AML, monopoly agreements referred to the agreement, decision or concerted action which eliminate or restrict competition.(5)

The AML provides a non-exhaustive list of prohibited agreements(6): agreement to fix, maintain or change prices, limit the output or sales of the products, allocate the sales markets or the raw material purchasing markets and so on; this list could be supplemented by the authorities.

Some agreements can be exempted from the law(7) (i) if specific conditions are satisfied (for example: when they make it possible to improve technological progress, the reduction of the costs, when they improve competitiveness of SME(8)); (ii) if it is proven that the consumers profit at least partly from the advantages generated by these agreements and that those do not affect significantly the competition on the market.

Abuses of Dominant Position
This list is also non-exhaustive. The abuses that dominant firms are expressly prohibited from engaging in, including: selling at unfairly high or buying at unfairly low prices, selling below cost without justification and so on.

Dominant market position is defined in the AML as the ability to control the price or output of products or other trading conditions in the relevant market or to block or affect the entry of other undertakings into the relevant market.

The AML introduced a presumption of dominance based on the importance of market share: for example, a dominant position exists when two businesses jointly hold at least the 2/3 of a relevant market. Such a presumption is rebuttable (it may be refuted by the evidence contrary).

The concentration covers not only the merger and acquisition between businesses, but also exercising control or decisive influence over companies by contract or other means.

According to the new AML, if the proposed concentrations reach certain thresholds(9), the enforcement authority must be notified and the deal needs to be reviewed and approved. However, rather than providing the details of these thresholds, the AML only states that the threshold standards will be set by the State Council.

If the notification is required under the AML, the company must submit a notification letter, a description of the effects on the competition status in the relevant market, the actual merger or acquisition agreement and a financial accounting report for the previous year of the companies involved in the concentration. The enforcement authority may further require companies to submit “other documents and information” in order for the concentration to be approved. These submissions, particularly the open-ended “other documents and information,” could substantially increase the burden and costs of pursuing a merger or acquisition in China.

The AML further provides two exemptions that would allow companies to avoid submitting a concentration for review. Under the first exemption, no notification is required when a company possesses more than 50 percent of the voting shares or assets of each of the other companies involved in the concentration. To qualify for the second exemption from notification, a company that is not involved in the concentration must possess more than 50 percent of the voting shares or assets of each company that is involved in the concentration.

After reviewing the documents provided by the company(10) , the authorities will prohibit any concentration that eliminates or restricts competition. However, if the company can prove that the concentration bring more positive effect than negative effect on competition, or the concentration pursuant to public interests, the authorities shall decide not to prohibit the concentration.

Besides, the acquisition of domestic companies by foreign investors will also be subject to specific approval when the national security is concerned.(11) 

The Implementation of the AML
As the AML came into force, the Chinese media has speculated widely as to which companies will be the first target of this new law. Most people believe that it would be companies like Microsoft or Intel. As matter of fact, the first case of action was brought by four Chinese companies against the General Administration of Quality, Inspection and Quarantine of China, because the AML also stipulates the prohibition of the abuses of the administrative powers. The Chinese legislator has made it clear that the very intention of Chinese legislature is not to restrict foreign firms but to uphold a fair market.
As the development of market economy in China, this country needs a law to tackle monopoly activities just like every market economy countries did. Most of the foreign businesses in China already have the experience of observing their own domestic anti-monopoly laws. Therefore, we don’t’ think this new AML would be a serious obstacle for foreign business in China. However, it would be interesting to watch the court ruling in the first case.
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Note: Mr. Charles WANG and Mr. Yuan SHEN are both Attorneys at Law at WZW & Partners.

WZW & Partners is a Shanghai-based full service firm with correspondent firms in the UK, US, France, Germany, and Japan. We offer a high quality legal service to both domestic and international business clients.

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(1)This law should be abolished as of the entry into force of the LAM.

(2) These regulations should remain in force, but their anti-trust provisions will be subordinate to those contained in the LAM.

(3) A draft was made public on March 27 2008 for comments; the final text has not yet been approved.

(4) Other than the “sectors of monopoly legitimates” such as telecommunications or energy, where large State-owned companies are de facto in situation of monopoly.

(5) Article 13 of AML.

(6) Article 14 of AML.

(7) Article 15 of AML.

(8) Small and medium enterprise.

(9) The turnover global and local (PRC) of the operators involved and their market share in the PRC post-merger should be concerned.

(10) The operators can ask that the material be treated very confidentially; it is of course desirable that the AMEA enforces standards of confidentiality highly considering the nature of information to which it will have access.

(11) Article 31 of AML provides: In case the acquisition of domestic enterprises by foreign investors or other manners to concentrate referred to national security, besides being reviewed according to this law, shall be carried out national safety review according to related regulations.