China -Antitrust & Competition Guide 2016
Legal News & Analysis – Asia Pacific - China - Competition & Antitrust
20 April, 2016
What is the main piece of legislation of general application which regulates anti-competitive behavior? What are the main prohibitions in the legislation?
The Anti-Monopoly Law of the People’s Republic of China (AML). The AML provides for: prohibition of agreements, decisions or other concerted practices amongst business operators which eliminate or restrict competition (monopoly agreements); prohibition of abuse of a dominant market position; and merger review regime.
Which regulator is responsible for administering and enforcing competition laws?
The State Council established two regulatory bodies to regulate monopolistic activity:
(a) the Anti-Monopoly Committee (AMC), which is responsible for developing competition legislation and policy, publishing guidelines and coordinating the administrative enforcement work; and
(b) the Anti-Monopoly Enforcement Agency (AEA), which is responsible for enforcing the AML. The enforcement powers of the AEA are divided among three agencies namely:
(i) the National Development & Reform Commission (NDRC) - responsible for price-related offences;
(ii) the State Administration for Industry & Commerce (SAIC) - responsible for enforcing the prohibition against monopoly agreements, abuses of dominant market position and abuses of administrative powers to eliminate and restrict competition (other than price-related offences); and
(iii) the Ministry of Commerce (MOFCOM) - responsible for merger control.
Are there any exclusions from the competition legislation of general application? Are there any sector-speci c competition laws or regulations?
The AML does not apply to the association of or cooperation by agricultural producers or rural economic organisations in their business activities of production, processing, sale, transportation, storage of farm products, etc.
The NDRC is currently drafting sector-specific guidelines for the automotive industry.
In addition, the NDRC, the SAIC, MOFCOM and the State Intellectual Property Of ce are each drafting competition guidelines relating to the exercise of intellectual property rights. These will be consolidated by the AMC into a single set of guidelines, which are expected to be published in 2016.
Several free trade zones (e.g. Shanghai Free Trade Zone, Tianjin Free Trade Zone and Fujian Free Trade Zone) have also published their local procedural anti-trust measures.
Does the competition legislation apply extraterritorially to persons, behaviour or action outside the jurisdiction?
Yes. The Anti-Monopoly Law applies extra-territorially (i.e. to persons, behaviour or action outside of the PRC) where the relevant conduct may have the effect of eliminating or restricting competition in the Chinese market.
What penalties and liabilities may be imposed for a breach of the competition law?
The penalties for breach of the prohibitions in the AML for concluding and implementing monopoly agreements, or abuses of dominant position are fines of up to 10% of the total turnover in the preceding year. For violation of the merger control provisions, there are fines of up to RMB500,000. Other penalties include the confiscation of illegal income, the invalidation of agreements concluded in violation of the law, and cease and desist orders in respect of abuses of dominant position.
The AML also allows private actions to be brought by parties who have suffered loss as a result of the contravention.
Prohibition on anti-competitive agreements
What kinds of agreement or conduct is illegal under the prohibition?
The AML prohibits monopoly agreements.
What types of agreements or conduct are illegal by object? And which are illegal only if they are signi cantly anti-competitive in effect?
The AML does not distinguish between illegality by object and effect.
In practice, the following monopoly agreements are presumed to be illegal by the AEA:
(a) agreements amongst competitors to:
(i) x or change the price of goods;
(ii) restrict the quantity of goods produced or sold;
(iii) divide a sales market or a raw materials procurement market;
(iv) restrict the purchase of new technology or new equipment, or to restrict the development of new technology or new products; or
(v) refuse to deal (i.e. joint boycott); and
(b) resale price maintenance in a vertical agreement.
This list is non-exhaustive and may be updated by the AEA from time to time.
Is there regulation of vertical agreements and if so, what type of vertical restraints or provisions in such agreements are typically examined?
Yes, vertical agreements are caught by the AML.
In practice, resale price maintenance has been a key focus of the AEA, with multiple investigations and significant penalties imposed.
Is resale price maintenance allowed? Are recommended resale prices or maximum resale prices permitted?
No. Resale price maintenance is prohibited under the AML. Whilst there is some evidence that the Chinese courts (when hearing private actions under the AML) have been willing to take an effects-based approach to resale price maintenance, the AEA continues to take the approach that the practice is presumptively unlawful.
Recommended and maximum prices are generally permissible.
Are there any defences or relief from liability provided by the legislation?
Yes. An exemption from the prohibition on monopoly agreements is available if a business operator can show that:
(a) the agreement will not substantially restrict competition in the relevant market;
(b) consumers will receive a fair share of the resulting bene ts; and
(c) the agreement has a qualifying purpose, such as, technological advancement and/or product development, improvement in product quality, increases in ef ciency and reduction in costs.
There is at present no mechanism under the AML to apply for an exemption. However, the NDRC is currently drafting an exemption application guideline, which is expected to be adopted by the NDRC and SAIC in 2016.
Is there a leniency regime? If there is, please describe the extent of and process in seeking leniency?
Yes. Both the NDRC and SAIC operate leniency regimes in the PRC, which apply to anti-competitive agreements (including vertical agreements), but not to abuse of dominance.
Under the NDRC’s Leniency Rules:
(a) a business operator which voluntarily reports the relevant information on its conclusion of a price fixing agreement and provides important evidence may receive full or partial immunity from potential nes from the NDRC;
(b) the rst applicant may receive 100% immunity from potential fines;
(c) the second applicant may receive a reduction of at least 50% from potential nes; and
(d) third and subsequent applicants may receive a reduction of up to 50% from potential fines.
Note that the NDRC is currently in the process of revising its rules on leniency.
Under the SAIC’s Leniency Rules:
(a) a business operator which voluntarily reports the reaching of an anti- competitive agreement; provides material evidence; and comprehensively and voluntarily cooperate with the SAIC during the investigation, may receive full or partial immunity from potential nes from the SAIC, if it is not the “organiser” of the monopoly agreement;
(b) the rst applicant should receive 100% immunity from potential nes; and
(c) the second and subsequent applicants may receive reductions in nes at the discretion of the SAIC.
Neither agency operates a marker system.
Abuse of Dominance or Market Power
How is “dominance” or “market power” determined? Is there a market share test?
The AML de nes a dominant market position as the ability of one or several business operators to control the price, or volume or other trading terms in the relevant market or to otherwise affect conditions of a transaction so as to hinder or in uence the ability of other business operators to enter into the market.
The dominance assessment is based on a number of factors including the relevant business operator’s market shares, the ability of the business operator to control the sale or input market, the nancial and technical resources of the business operator, competitiveness of the relevant market, the extent to which other business operators rely on the relevant business operator and barriers to market entry.
Dominance is presumed where:
(a) a business operator’s market share exceeds 50%;
(b) the combined market share of the business operator and one other business operator exceeds 66.6%, provided that the business operator’s market share exceeds 10%; or
(c) the combined market share of the business operator and two other business operators exceeds 75%, provided that the business operator’s market share exceeds 10%.
Thus, two or more business operators may be found to hold a dominant market position even if there is no coordination of their conduct.
Presumptions of dominance can be rebutted by evidence to the contrary.
What type of conduct constitutes abuse of dominance or abuse of market power?
The AML prohibits the following types of conduct as an abuse of a dominant market position:
(a) selling goods at prices that are unfairly high or purchasing goods at prices that are unfairly low;
(b) without a legitimate reason, selling goods at below cost price;
(c) without a legitimate reason, refusing to deal with a business operator;
(d) without a legitimate reason, restricting a trading partner by requiring it to deal only with the dominant operator(s) or with other designated operators;
(e) without a legitimate reason, tying goods or attaching other unreasonable conditions to a transaction; and
(f) without a legitimate reason, treating equivalent trading partners in a discriminatory manner with respect to sale price or other trading conditions.
This is a non-exhaustive list and may be updated by the AEA from time to time.
Are there any defences or relief from liability or exclusions applicable for abusive conduct?
Yes. With the exception of excessive pricing, it is open to business operators to argue that there is a legitimate reason for a particular practice, and therefore that it should not be characterised as abusive.
Is there a merger control regime? What is considered a “merger”?
Yes. Under the AML, mergers that meet the relevant noti cation thresholds must be noti ed to MOFCOM.
A merger includes the following:
(a) a merger between business operators;
(b) a business operator’s acquisition, by way of equity or asset acquisition, of control over another business operator; or
(c) a business operator’s acquisition, by way of contract or other means, of control over, or the ability to exert a decisive influence on, another business operator.
Joint ventures are also subject to noti cation if the thresholds are met.
Is the merger noti cation a mandatory or voluntary process?
Yes. Where the thresholds are met, the notification obligation is both mandatory and suspensory.
When must the merger be notified to the regulator?
The parties to a noti able transaction may not close the transaction prior to receiving MOFCOM approval.
What are the ling thresholds and are there any exemptions from notification requirements?
Notification is required if either of the following thresholds are met: (a) first threshold:
(i) the combined worldwide turnover in the most recent completed accounting year of all parties to the transaction exceeds RMB 10 billion (approximately US$1.6 billion); and
(ii) each of at least two of the parties to the transaction had turnover in the PRC in the most recent completed accounting year exceeding RMB 400 million (approximately US$65.3 million); or second threshold:
(i) the combined turnover in the PRC in the most recent completed accounting year of all parties to the transaction exceeds RMB 2 billion (approximately US$326.5 million); and
(ii) each of at least two parties to the transaction had turnover in the PRC in the most recent completed accounting year exceeding RMB 400 million (approximately US$65.3 million).
For nancial institutions (which include banking, securities, futures, fund management and insurance companies), the thresholds are higher (10 times the thresholds set out above for non- nancial institutions). Further, there are special rules setting out the additional factors to be taken into account when calculating the turnover of nancial institutions.
MOFCOM has the discretion to investigate a merger not exceeding the turnover thresholds, if it considers that a concentration has or may have an effect of restricting or eliminating competition, as demonstrated by supporting facts and evidence obtained in accordance with prescribed procedures. However, to date, no statutory procedures have been issued.
Please provide a brief description of the merger clearance process and the typical timeline for merger clearance.
MOFCOM has a two-track review procedure, namely
(a) standard procedure; and
(b) simpli ed procedure.
The standard procedure typically involves the following phases:
(a) pre-noti cation - typically six to 12 weeks (but can be longer);
(b) Phase 1 review – 30 days;
(c) Phase 2 review – 90 days; and
(d) Phase 3 review – 60 days.
The majority of long form cases are approved after day 45 of Phase 2. However, if the parties offer commitments and/or the transaction raises signi cant competition law concerns then the review process may be extended to Phase 3.
In exceptional cases the parties may be required to re- le the transaction at the end of Phase 3. However, this is extremely rare.
Certain transactions may qualify for merger review under the simpli ed procedure. MOFCOM has indicated that it aims to clear transactions which qualify for the simpli ed procedure within Phase 1.
What are the consequences of failing to notify the regulator when required?
MOFCOM may impose a ne of up to RMB 500,000 for failure to notify a noti able concentration, as well as requiring the parties to provide the information necessary for the review of the transaction (in effect, to submit a ling). If MOFCOM subsequently decides to prohibit the transaction, it may order that the transaction be unwound.
For further information, please contact:
Stephen Crosswell, Partner, Baker & McKenzie