China is proposing sweeping changes to the Anti-Monopoly Law (AML) for the first time since the law went into effect in 2008. These include harsher penalties for violations (especially for failure to notify mergers), a mechanism to stop the clock in merger reviews, and more clarity on what will be considered anticompetitive, including hub-and-spoke cartels, abuse of dominance in the internet sector, and unfair discrimination.
China’s State Administration for Market Regulation (SAMR) launched a public consultation on a draft of the proposed amendments on 2 January 2020. The draft amendments are also subject to consultation and further review by the government and legislative agencies. There is no fixed timetable for their adoption.
Most notably, the draft amendments have reinforced the deterrent effects of the AML by proposing harsher penalties for violations. Most striking among these is the proposal to increase penalties for failure to file (or prematurely closing) notifiable mergers or other transactions – from RMB500,000 (US$71,400) to 10% of turnover. The SAMR has followed its predecessor, the Ministry of Commerce’s (MOFCOM) lead in regularly investigating parties for failure to notify, with 17 such cases handled in 2019 alone. This, combined with the potential for harsher penalties, is likely to have a significant deterrent effect, and to compel businesses that have not been filing notifiable transactions to give serious consideration to now doing so.
|Violation||Fines under the current rules||Fines proposed in the amendment|
Merger control violations:
Up to RMB500,000
Up to 10% of the sales revenue in the past year.
Where the minimum penalty for monopoly agreements and abuse of dominance would be 1% of sales revenues in the past year, the draft is silent on the minimum penalty for merger control violations. Thus, at least theoretically, the minimum penalty for merger control violations could be lower than 1% of sales revenues. The SAMR would have broad discretion to decide the amount of penalty.
Violation by a trade association for organizing or facilitating a monopoly agreement.
Up to RMB500,000
Up to RMB5 million
|Obstructing an investigation, refusing to provide required information, destroying evidence, providing false information, etc.|
Fines for individuals: up to RMB100,000;
Fines for a company: RMB200,000 to RMB1 million
Fines for individuals: up to RMB 1 million;
Fines for a company: up to 1% of sales revenues in past year or up to RMB5 million if the company does not generate revenue in past year.
Monopoly agreements that have been entered into but not yet implemented.
Up to RMB500,000
Up to RMB50 million
|Where the relevant undertaking does not generate turnover in the past year.|
Up to RMB50 million
In addition, the draft amendments appear to open up, for the first time, the possibility for criminal liability for antitrust violations. Currently, antitrust violations in China are not criminal offences. Article 57 of the draft amendments adds a new provision saying that criminal liabilities will arise where the violation constitutes a crime.
This amendment would not, even if enacted, create any new criminal offences in itself, as this would require amendments to the PRC criminal code. But the SAMR appears to be inviting the legislature to consider such amendments in the future, and signalling its belief in the utility of criminal sanctions as a driver of deterrence.
The merger review process
Stop the clock mechanism. The draft amendments preserve the current timeline for merger reviews (up to 180 days, in three phases). But article 30 of the draft amendments proposes the addition of a “stop the clock” mechanism that would suspend the review procedure in the following circumstances:
- The parties apply for or agree to a suspension of the review;
- The parties supplement information or materials as required by the SAMR; or
- The parties and the SAMR are in negotiation with respect to remedies for conditional approvals.
Such a stop the clock mechanism could be of some benefit in complex cases. Currently, multiple re-filings are common in circumstances where the parties are unable to conclude remedy discussions with the SAMR within the prescribed timeframe. The introduction of a stop the clock mechanism could make this process more efficient by avoiding the need to pull and refile in these circumstances.
But the parameters set out in the draft amendments are extremely broad, and the ability for an apparently open-ended extension for remedies to be negotiated is particularly striking. The notes provided with the draft amendments state that the SAMR will promulgate regulations specifying in more detail when it will stop the clock. But there is a clear risk that if the SAMR obtains the legal discretion to stop the clock, and this discretion is not constrained by sensible regulations, this could significantly lengthen review periods in China and add unwelcome uncertainty to deal timetables for corporate transactions.
New power to revoke prior approvals. The draft amendments also include a provision allowing the SAMR to revoke a clearance decision if it later finds that the information submitted is inaccurate (article 51).
New provisions against hub-and-spoke cartels. The draft amendments propose a separate prohibition on organizing or assisting others to enter into monopoly agreements. Fines for this type of “facilitation” violation would be the same as those for parties to monopolistic agreements. The newly added provision could be used against “hub-and-spoke” cartels where the “hub” is not directly involved as a member of the cartel, or active on the relevant market, but co-ordinates the conduct of the cartel members.
Additional factors for determining dominance in the internet sector. The draft amendments propose to codify specific factors relevant in determining whether an internet company is dominant. These factors include network effects, economies of scale, lock-in effects, and abilities in data manipulation and processing. The purpose of these amendments is to clarify the key points that the SAMR would consider when dealing with allegations of abuse of dominance in the digital space.
Lower thresholds for finding unfair discrimination. The current AML prohibits a dominant company, without justification, from providing different pricing or terms to trading counterparts that are in the same or a similar situation. The draft amendments have removed the prerequisite “trading counterparts that are in same or similar conditions” for finding unlawful discrimination.
This implies that the regulator would like to shift the burden of proof to the plaintiff/the company being investigated to prove that the differential treatment is justified by the commercial concerns that have arisen when dealing with different trading counterparts. This means that a company holding a significant market share should carefully evaluate its justification for differentiating the pricing/terms to its trading counterparts to avoid the perception of abusing its market position.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at [email protected]