China Publishes Draft Amendment to the Anti-Monopoly Law

A second version of a draft amendment (“Draft”) to the Anti-Monopoly Law of the People's Republic of China (“AML”) was published on 24 October 2021, open for public comments until 22 November 2021. Further, since the Draft has officially entered the National Congress’ review process, it is very likely that the relevant amendments encapsulated in the Draft will eventually be reflected in the final revised version of the AML. The amendments include, on the one hand, increased penalties for violations, introducing a “stop-clock mechanism” in the merger control review process, and a general enhancing of anti-monopoly regulation, especially in sectors such as the internet, and on the other hand, an exception for resale price maintenance and minimum resale price arrangements that do not eliminate or restrict competition as well as a general market share safe harbor. This Newsletter introduces some of the highlights of the Draft from a corporate compliance perspective.

Significantly Increased Penalties for Antitrust Violations; Personal Liability for Executives

1. The penalties for unlawful concentrations would be significantly increased: for a concentration that has or may have the effect of eliminating or restricting competition, the fine would be up to 10% of the operator's turnover in the previous year (compared to a maximum RMB 500,000 under the current AML). For a concentration that has no effect of eliminating or restricting competition, the maximum fine would be RMB 5 million (from RMB 500,000);
2. Executives would be personally liable for illegal implementation of monopoly agreements: the Draft adds personal liability for companies’ executives and imposes a fine of up to RMB 1 million on legal representatives (a unique role connected with every PRC company), the principal persons in charge and the personally responsible personnel;
3. An “aggravated penalty clause” would be added: regarding illegal activity constituting a “particularly grave violation of this Law with an exceptionally pernicious impact and exceptionally grave consequences”, the Draft stipulates that a fine of two to five times the amount of a general penalty shall be imposed (for example, based on 1-10% of the turnover).

In addition, the Draft includes a credit disciplinary system: once an operator violates the AML and is subject to administrative sanctions, such activities would be recorded in accordance with the relevant provisions of the state credit records. The credit disciplinary system is used to enforce disciplinary action for serious violations and to impose public disclosure obligations. Since many business matters, such as the public issuance of corporate bonds and government procurement, have conditions requiring participating companies not to have “major violations or irregular activities”, the cost of violating the AML may continue to increase with the improvement of the credit disciplinary system. A bad corporate credit record may lead to the loss of valuable business opportunities.

Enhancing Anti-Monopoly Regulation of the Internet Sector

Following the Anti-Monopoly Guidelines in the Field of Platform Economy ("Guidelines for Platform Economy"), the Draft re-affirms a strong regulatory attitude toward the new economy, especially the internet sector, from a legislative perspective. The Draft includes not only a general principle that operators must not abuse data and algorithms, technology, capital advantages or platform rules to eliminate or restrict competition, but an additional provision specifically providing that it will be an abuse of a dominant market position for an operator with a dominant market position to use data and algorithms, technologies or platform rules to set up obstacles to impose unreasonable restrictions on other operators.

Competition Effects Assessment Is Required in Determining Vertical Monopoly Agreements

In practice, there has always been controversary between judicial and enforcement perspectives regarding whether it is necessary to prove an effect of eliminating or restricting competition in order to deem an agreement or behavior to be a vertical monopoly agreement. The Draft clarifies that the agreement or behavior must have an effect of eliminating or restricting competition in both horizontal and vertical forms. Accordingly, we understand that resale price maintenance (so-called “RPM”) and minimum resale price arrangements that have justifications may receive approval from anti-monopoly enforcement authorities, which would significantly reduce the compliance risk in the monopoly agreement sector for operators in manufacturing and retailing businesses. However, the level of tolerance of anti-monopoly enforcement authorities in practice would remain to be determined.

On the other hand, the Draft provides for imposing liability on parties other than those to a monopoly agreement. According to the Draft, a business operator must not organize other business operators to enter into monopoly agreements or provide substantial assistance to other business operators entering into monopoly agreements; otherwise, it may be subject to the same provisions on liability as the parties entering into monopoly agreements. Since no relevant laws or regulations provide explicit criteria for determining the nature of “substantial assistance”, the application of such rules would remain to be further clarified by regulatory authorities.

Establishment of a Safe Harbor Mechanism for Monopoly Agreements

The Draft, for the first time, introduces a safe harbor mechanism at the level of law, stipulating that where a business operator can prove that its market share in the relevant market is lower than the threshold prescribed by the State Council’s AML enforcement authority, the relevant provisions on unlawful monopoly agreements will not apply, unless there is evidence proving that such agreements eliminate or restrict competition.

At present, although the safe harbor mechanism has been formerly introduced to a certain extent in the Guidelines of the Anti-Monopoly Committee of the State Council on Anti-Monopoly in the Automobile Industry and the Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Eliminate or Restrict Competition, the application scopes thereof involve only certain industries and sectors. Upon the establishment of the Draft’s safe harbor mechanism, the restrictions imposed on some operators’ businesses may be "relaxed" to a large extent. However, given that there are no specific procedural regulations concerning the application of such a safe harbor mechanism, relevant practical details would remain to be clarified by further regulations and other means.

Major Changes to the Review System for Merger Control Filing

1. Introduction of “Stop-Clock Mechanism” in Review Procedure

The Draft for the first time introduces a "stop-clock mechanism" in the formal process for reviewing merger control applications, which means that the review period would be suspended during the review process, and the AML enforcement authorities will issue a written notice on the suspension and on the continuation of the review period. The Draft provides that, under any of the following circumstances, the AML enforcement authorities may decide to suspend the calculation of the review period: (1) a failure by the business operator to submit documents and materials in accordance with the rules, making the review incapable of being conducted; (2) the arising of any new circumstance or new fact that has a material impact on the review and needs to be verified; (3) the need to further evaluate additional restrictive conditions, provided that the business operator agrees to such evaluation.

The establishment of the "stop-clock mechanism" would generally further extend the review period. Since submitting supplementary documents and materials to the AML enforcement authorities may result in a "stopping of the clock ", the quality of the initial merger control filing documents and the professionalism of the teams interfacing with the authorities would be relied on to minimize the effects of this new mechanism.

1. Key Regulatory Areas Are Listed in the Merger Control System

The Draft, for the first time, lists the key areas for merger control review, i.e., the areas for AML enforcement authorities to focus on: areas of people's livelihood, finance, technology and media. This provision likely reflects current and prospective AML enforcement attitudes and practices, thus potentially serving as a reference for companies to gauge key areas of AML enforcement focus in the future. Companies in the relevant sectors may wish to evaluate any historical and future potential transactions and make due preparations as soon as possible.

1. Introduction of Legal Basis for Proactive Investigation of Concentrations That Do Not Meet Filing Thresholds

The Draft further clarifies, at the level of a law, that AML enforcement authorities have the power to proactively investigate concentrations that do not meet filing thresholds. When a concentration does not meet the filing thresholds stipulated by the State Council, but there is evidence that the concentration has or may have an effect of eliminating or restricting competition, the AML enforcement authorities would be required by law to investigate.

The above amendment takes the same provisions from the Interim Provisions on the Review of Concentrations of Undertakings, the Provisions of the State Council on the Notification Thresholds for Concentrations of Undertakings and the Guidelines for Platform Economy, which were at a relatively low legislative level, and raises them to the level of a law, thus likely imparting on them a higher effect. Similar "killer acquisitions" aimed at start-up companies may be subject to such provisions in the future.

In a nutshell, this Draft appears to represent a substantial amendment to the current anti-monopoly regulatory framework. The Draft has been developed based on knowledge accumulated from AML enforcement practices and international experiences, and under the idea “to strengthen anti-monopoly push and prevent disorderly capital expansion” as well as the call to enhance the weight of the AML. Along with the increasingly strict enforcement of anti-monopoly regulations, the publishing of this Draft further indicates China’s new efforts to strengthen anti-monopoly regulation.