Update on Anti-Monopoly Law in China

published on 22 February 2023 | reading time approx. 5 minutes

Authors: Jiawei Wang and Xueqin Xie

2022 witnessed an important reform in China’s Antimonopoly Law. The revised Anti-monopoly Law of the People’s Republic of China (hereinafter referred to as “AMG”), which came into effect on 1 August 2022, not only expanded the overall scope of its application, but also significantly increased the penalties and liability for monopolistic behavior.

Since the AMG only provides the general framework in this field, relevant secondary legislations, e.g. the implementing provisions, shall play an important role in the legal practice. As highest Chinese Anti-Monopoly authority – the State Administration for Market Regulation (hereinafter referred to as “SAMR”) – launched a public consultation procedure for the revised versions of 6 implementing regulations shortly after the promulgation of the AMG, including:

the Draft of the “Regulation on the Review of Concentration between Business Operators”
the Amendment of the “Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators”
the Draft of “Provisions on Prohibiting Monopoly Agreements”
the Draft of “Provision on Prohibiting Abuse of Intellectual Property Rights to Exclude and Restrict Competition”
the Draft of “Provisions on Prohibiting Abuse of Dominant Market Positions”
the Draft of “Provision on Prohibiting Abuse of Executive Power to Exclude and Restrict Competition”

Although the above-mentioned regulations have not yet come into effect, which shall be expected in 2023, the draft provisions do set the groundwork for legislative developments in this legal field. The most important changes are summarized as below.

I. Anti-competitive Agreements and “Safe Harbor” Rule »
II. New Notification Threshold for Merger Control »
III. Reform in Procedure Law: Stop the Clock and Localization of Competence »
IV. Increase of Liability »
V. Our Observance and Compliance Advice »

I. Anti-competitive Agreements and “Safe Harbor” Rule

The legal provisions for anti-competitive agreements were not fundamentally revised in the new law and draft regulations. However, in the general part of the AMG, some legal elements do have a broader scope, such as the anti-competitive agreement.

While horizontal agreements are still prohibited, vertical agreements below the threshold set by the SAMR are no longer prohibited according to the new Paragraph 3 of Article 18 AMG, the so-called “Safe Harbor Rule”. In principle, vertical agreements that do not qualify for the Safe Harbor Rule shall still be considered as prohibited monopolistic behavior, unless companies can prove that such agreements have not any anti-competitive effects.

It is important to note that the relevant companies bear the burden of proof for fulfillment of the requirements in application of the Safe Harbor Rule (including market share), as well as non-existence of any anti-competitive effects of the relevant vertical agreement. According to the draft of the “Provisions on Prohibiting Monopoly Agreements”, the Safe Harbor Rule shall be applied, if the market share of the companies involved in the vertical agreement does not exceed the threshold of 15 per cent. Currently, it is still unclear whether this number will be changed. SAMR is expected to reach a decision in this regard in near future. Under these circumstances companies are advised to get a clear picture at an early stage of their own market share and the relevant market volume. For calculation of market shares, companies that are controlled by a party or over which a party has a decisive influence must also be included.

II. New Notification Threshold for Merger Control

In the above-mentioned draft implementing provisions, the threshold of the notification obligation for merger control is increased by SAMR. If one of the following thresholds is fulfilled, companies are obliged to fulfill the notification obligation:

in the last financial year, the aggregate global turnover of all the participant companies to the concentration exceeded 12 billion RMB, and each of at least two of these participant companies to the concentration had turnover in mainland China of more than 800 million RMB in the last financial year or
in the last financial year, the aggregate total turnover (in mainland China) of all the participant companies to the concentration exceeded 4 billion RMB, and each of at least two of the participant companies to the concentration had turnover of more than 800 million RMB in mainland China in the last financial year

In addition to turnover, the market capitalization or valuation of a company is also applied to determine whether a notification shall be filed:

in the last financial year, the turnover of one of the participant companies to the concentration exceeded 100 billion RMB in Mainland China and
the market capitalization or (estimated) valuation of the other party to the concentration amounts to at least RMB 800 million, and this party derives at least 1/3 of its global turnover from Mainland China

The implementing provisions also specify whether companies shall fulfill the notification obligation under the case of an “acquisition of control”. This is for the case where the acquirer obtains the veto right in business decisions or the acquirer materially controls the target company, although it only acquires a minority stake in the target company. This legal concept is comparable to the atypical acquisition of control in an investment screening under the German Foreign Trade and Payments Act. As legal consequence, for such acquisition of control, the SAMR is entitled to conduct a formal review of the transaction as provided under Article 26 AMG, if the transaction could be proved that as preventing or restricting competition.

Consequently, the SAMR is entitled to order merger control proceedings in this case, even if the relevant filing thresholds are not reached. This revision aims at preventing the transactions, also known as “killer acquisitions”, e.g. acquisition of startups in field of e-commerce and entertainment by big tech-companies in recent years. Although such transactions do not meet the formal notification threshold, they do have a significant influence on competition. Accordingly, concentrations of companies in this area could be examined more intensively in the future on the basis of the new legal provisions by the SAMR.

III. Reform in Procedure Law: Stop the Clock and Localization of Competence

The “stop-the-clock” mechanism (Article 32 AMG), which is widely accepted by other antitrust authorities in the world, was introduced in the newly revised AMG. As the name suggests, the period of the review proceedings would be suspended in one of the following three regulated situations:

If the notifying parties fail to submit documents and materials as required within the set period so that the merger review cannot proceed.
New circumstances or new facts that materially impact the merger review occur, and the merger review cannot proceed without examining the new circumstances or facts.
The proposed terms or conditions require further assessment, and the relevant undertakings request for suspension.

With introduction of the “stop-the-clock” mechanism SAMR gains more flexibility in the process of merger control review. At the same time, the requirements on all applicants for the completeness and correctness of the application documents are increased.

As another new mechanism in the revised AMG, the local offices of SAMR now assume certain review competence from SAMR for simplified procedures. The local SAMR offices now shall first examine documents and then submit a report to the SAMR. Formally, the decision is still to be issued by SAMR and the relevant decision will still be affixed with the seal of the SAMR. However, such localization of competence could significantly increase the efficiency of the relevant proceedings, especially for the simplified procedures. From August 1, 2022 to June 31, 2025, such localization will be officially implemented as pilot projects in five Chinese provinces, namely Beijing, Shanghai, Chongqing, Shaanxi and Guangdong.

IV. Increase of Liability

The new law and the drafts of the regulations provide for more severe legal liability. Under the new legal framework, not only monopolistic behaviors shall be sanctioned, but other violations could also lead to legal liabilities, e.g., the company close the merger before approval of the transaction by the SAMR (violation against Closing Prohibition). Furthermore, the legal entity is no longer the exclusive party to bear the legal liability. The new law does provide for personal liability. As a result, the legal representatives or the responsible persons could also be responsible for violations and face monetary penalties, etc.

V. Our Observance and Compliance Advice

The new legal framework in the field of Chinese anti-monopoly law poses new challenges for all market participants. As described above, companies are expecting the finalization and adoption of the six implementing regulations and provisions, which will hopefully bring more clarity in this area. For companies planning transactions, including mergers & acquisitions, joint ventures, but also contractual cooperation, it is advisable to consider the new legal requirements at an early stage and prepare the relevant documents in a diligent way. A critical and through review of all relevant facts of the transaction is recommended. Substance over form is also a good advice in this legal field.