Jun 27, 2022

China Makes Major Amendments to Anti-Monopoly Law

On 24 June 2022, the Standing Committee of the National People’s Congress adopted a decision to amend the Anti-Monopoly Law (“AML”). The amended AML will come into effect on 1 August 2022.

1. Significantly Increased Penalties

Penalties for individuals and criminal liabilities. The amended AML establishes personal liabilities for individuals. If the legal representative, principal person-in-charge or directly responsible person of an undertaking is personally responsible for reaching a monopoly agreement, a fine of up to RMB 1 million can be imposed on that individual. Moreover, the amended AML specifies that monopolistic conduct may result in criminal liabilities (pending future confirmation in the Criminal Law), for which the scope is broadened to include all kinds of violations of the AML.

Exponentially increased fine. The amended AML substantially increases the fine for various violations of the AML. In particular, for violations relevant to the concentration of undertakings, the fine is raised from RMB 500,000 to up to 10% of the sales from the preceding year if such concentration eliminates or restricts competition. Where the concentration does not have such an effect, the fine could still reach RMB 5 million. Moreover, under the amended AML, the AML enforcement authorities may multiply the amount of the fine by a factor between 2 and 5 times where the violation is “extremely severe”, the impact is “extremely adverse” and the consequences are “especially serious”.

Credit record and publication. Pursuant to the amended AML, if an undertaking is punished for violating the AML, the relevant credit records will be publicly announced and preserved in China’s credibility system. This not only means that all anti-monopoly punishments will be publicly announced, but also that the punishments can potentially influence other aspects of an enterprise’s business-operations (e.g., IPO plans or government procurement, both of which require a clean record without any major violations of laws or regulations).

2. New Mechanisms for Merger Control

Classification and delegation mechanism. The amended AML requires the State Council’s AML enforcement authority to establish a classification and delegation-review mechanism for merger control review. Classification refers to different levels of review for different industries, meaning that key industries will likely be reviewed with stricter standards. Delegation relates to the division between the State Council’s AML enforcement authority and the local AML enforcement authorities. Currently, the State Council’s AML enforcement authority solely reviews all cases pertaining to concentration of undertakings. In the future, simpler cases may be delegated to the local authorities instead. The State Council’s AML enforcement authority has already embarked on this delegation process, with detailed arrangements of the classification and delegation mechanism to be specified in future regulations.

Stop-the-clock mechanism. The amended AML introduces a “stop-the-clock” mechanism, which is common in many jurisdictions. The State Council’s AML enforcement authority will have the discretion to suspend its review process under any of the following scenarios: (1) a failure by the business operator to submit documents and materials in accordance with the rules, thus making it impossible to conduct the review; (2) where a new circumstance or fact has arisen having a material impact on the review and requires verification; or (3) there is a need to further evaluate additional restrictive conditions, provided that the business operator agrees to such evaluation.

The new mechanism will increase the transparency and predictability of the review process. In parallel, it imposes higher requirements not only for the quality of the submission documents, but also for the professionalism needed when interfacing with the authorities. Submission documents that do not meet the relevant requirements or inefficient communications will very likely “stop-the-clock”, thus slowing down and undermining the entire review process.

Notification below the threshold can still be required. The amended AML authorizes the State Council’s AML enforcement authority to demand a notification of concentration of undertakings even if the notification threshold is not satisfied, provided that the concentration evidently has or could have eliminated or restricted competition. If the parties fail to submit the notification, the State Council’s AML enforcement authority has the further power to directly investigate such concentration. In recent years, “killer acquisitions” that target start-ups or tech companies have prevailed in innovative industries such as the Internet and pharmaceuticals. Such acquisitions often do not satisfy the notification-obligation threshold but have potential anti-competition characteristics. With the coming into effect of the AML, undertakings involving such acquisitions will need to proceed more cautiously and conduct an internal anti-monopoly review in advance.

3. Regulatory Changes in Monopoly Agreements

Third-party liability. Under the current AML, third-party liability for monopoly agreements covers only trade associations, which are required to not organize business operators in their own industries to engage in monopolistic conduct prohibited by the AML. The amended AML expands the scope of the subjects of the third-party liability by stipulating that business operators shall not organize other business operators to reach monopoly agreements or provide substantial assistance to other business operators to reach monopoly agreements. The amendment indicates that third-party liability for monopoly agreements may arise between upstream and downstream, competitors, and parties to hub-and-spoke agreements in the future, and undertakings should pay attention and conduct compliance assessments in advance.

The “safe harbor” rule for vertical monopoly agreements. The amended AML introduces the internationally accepted “safe harbor” rule for vertical monopoly agreements (i.e., if the business operator can prove that its market share in the relevant market is lower than the standard set by the State Council’s AML enforcement authority and also meets other conditions, the law shall not prohibit the vertical monopoly agreement). It appears from the language of the amended AML that this “safe harbor” rule also applies to resale price maintenance (so-called “RPM”) arrangements but not to horizontal price-fixing agreements. We also note that the Antitrust Guidelines on Intellectual Property Rights (“IPR”) have set up a “safe harbor” for horizontal monopoly agreements, but whether the “safe harbor” system will apply to non-IPR horizontal monopoly agreements under the AML is still uncertain.

Changes in the determination of the RPM. The determination of whether the RPM needs to account for the effects of competition has been controversial in China, and not surprisingly judicial and law enforcement standards in making such determinations have also been divided. The amended AML makes it clear that, if a business operator can prove that its RPM arrangement does not have the effect of excluding or restricting competition, the law shall not prohibit it. It should be noted that RPM is still prohibited in principle, and the amended AML only provides an opportunity for business operators to defend itself, with the business operators bearing the burden of proof. The operability and effectiveness of such defense remain to be clarified by subsequent supporting provisions and the continued observation of future enforcement practices.

4. The Anti-Monopoly Regulation of the Digital Economy and Platform Economy

The general provisions of the amended AML stipulate that business operators shall not engage in monopolistic conduct under the law by abusing data, algorithms, technology, capital advantages, and platform rules, etc. In addition, Article 22 further specifies that business operators with dominant market positions shall not use data, algorithms, technology, platform rules, etc. to engage in the abuse of dominant market positions. The above provisions reflect the attitude of the legislators and law enforcement authorities to implement the decision and deployment of the CPC Central Committee on strengthening anti-monopoly protection and preventing the disorderly expansion of capital, which means that the strict supervision of the digital economy and platform economy will continue. Such arrangement indicates that anti-monopoly issues under the digital economy and platform economy are mainly centered on the abuse of dominant market positions. Nonetheless, the arrangement should not be construed as involving only the abuse of dominant market positions, since other monopolistic conduct, such as monopoly agreements, may also be involved.

5. Application of the Amended AML

The manner of applying old and new laws is a matter of great concern to the public. Based on our experience, we have analyzed and set out 2 potential situations below using the concentration of undertakings without notification as an example. However, the final judgment standards will need to be confirmed by way of subsequent supporting regulations or guidelines issued by the law enforcement authorities.

(a) Where a business operator involved in the concentration has withdrawn from or no longer has control over the target company before the amended AML takes effect, the business operator has grounds to claim for the application of the old law and the two-year “limitation period for prosecution” according to the principle of “non-retroactivity of laws”, since the illegal activities involved in the concentration have been terminated.

(b) Where a business operator involved in the concentration continues to have control over the target company until the amended AML takes effect, the illegal activity will be deemed as continuing. If the business operator voluntarily reports such information to the enforcement authorities before the implementation of the amended AML, the business operator may have grounds to claim for the application of the old law. Otherwise, the amended AML will likely be applied.

Since penalties are significantly increased under the amended AML, we suggest that undertakings with potential risks of non-compliance to voluntarily make a supplementary notification before the new law takes effect and attempt to claim for the application of the old law to reduce such risks.

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