Sharper teeth for the PRC: China’s new Anti-Monopoly Law (AML)

November 2022  |  FEATURE | COMPETITION & ANTITRUST

Financier Worldwide Magazine

November 2022 Issue

Inconsistent and toothless are but two of the many criticisms often levelled at authorities tasked with dealing with anti-competitive activity, such as anti-monopoly lawmakers.

In the People’s Republic of China (PRC), the robustness of anti-monopoly laws has long been a source of contention. However, in a bid to enhance provision, and for the first time since its introduction in 2008, significant amendments have recently been made to the country’s Anti-Monopoly Law (AML).

On 24 June 2022, the final text of an amended AML was released by China’s legislature, the Standing Committee of the National People’s Congress (NPCSC) . The legislation emphasises the fundamental role of competition policy in China’s market economy and came into force on 1 August 2022.

More than two years in the making, the State Administration for Market Regulation (SAMR) – a governmental authority that serves as a market regulator in various public areas – first proposed amendments to the AML in early 2020 and a formal draft amendment was submitted to the NPCSC for a first reading on 19 October 2021.

“China’s AML was first adopted in 2008 but talks about possible amendments have regularly surfaced in the last few years,” says Sébastien Evrard, partner-in-charge of the Hong Kong office of Gibson, Dunn & Crutcher LLP. “The main factor behind the change was the need to address certain shortcomings that appeared over the years, in particular around the SAMR’s ability to effectively sanction breaches of the law.”

The new law expands the eight chapters with 57 articles of the old AML to eight chapters with 70 articles – boosting the legal framework for authorities to pursue certain types of anti-competitive behaviour by companies and administrative agencies.

“The final text was passed only three days after the second reading, which was in an unprecedentedly expedited manner,” notes Yong Bai, a partner and head of antitrust, Greater China at Clifford Chance. “The amended AML is generally viewed as opportune as the SAMR has, over the past 14 years, gained significant experience but has until the amended AML been challenged by uncertainties in the underlying law and practice.”

Among the new additions to the AML are prohibitions on the use of certain technologies to engage in anti-competitive behaviour, and a rise in the maximum fines for violations by administrative organs and organisations. Moreover, two days after the release of the new AML, the SAMR issued six draft supporting regulations to provide clarification and help with the implementation of the new legislation.

Overall, with the unveiling of the new AML, it would appear that China’s antitrust penalty regime has been substantially strengthened, with greater potential for fines to be imposed on individuals as well as undertakings, if they organise or facilitate the conclusion of monopoly agreements.

Key provisions

Drilling down, the new AML features a number of key provisions and prohibitions that are likely to impact tech giants and other large companies in particular. According to Clifford Chance, the items listed below represent the “highlights” of the amended AML.

‘Stop-the-clock’ for merger control review. The amended AML allows the SAMR to suspend a merger review if notifying parties fail to provide requested information or materials 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, or the proposed remedies require further assessment, and the relevant undertakings request for suspension.

The ‘stop-the-clock’ mechanism can provide the SAMR with more time when reviewing complex merger cases, in particular those involving remedy negotiations. Under the existing law, the SAMR has up to 180 calendar days to clear a merger filing, which, in practice, is usually extended by notifying parties’ “pull and refile” when it is not feasible for the SAMR to finish its review within 180 days.

Below-threshold transactions may be caught. Pursuant to the amended AML, if there is evidence proving that a transaction that falls below the merger control filing thresholds has or may have the effect of eliminating or restricting competition, the SAMR can require the parties to notify the transaction. Pursuant to the Consultation Draft of Implementing Rules, if the transaction concerned is completed, the SAMR can require the parties to supplement a filing within 180 days.

If the below-threshold transaction is not completed at the time of filing, parties to the transaction cannot complete the transaction before obtaining clearance from the SAMR. If, however, a transaction is completed at the time of filing, the SAMR can require parties to cease implementation of the transaction or take other necessary measures.

Safe harbour for certain vertical agreements. The amended AML introduces a market share-based safe harbour for vertical agreements in certain circumstances. The new safe harbour provision in the amended AML is, however, quite vague as it does not provide specific market share thresholds but states that “if undertakings can prove that their market shares in the relevant markets are below the standards provided by the state’s antitrust authorities, and meet other conditions provided by the same, such vertical agreements will not be prohibited”.

A relaxed approach to resale price maintenance (RPM). Under the amended AML, RPM remains presumed to be illegal but will not be prohibited if the undertakings concerned can prove the lack of anticompetitive effects. Previously, China, like the EU and many other jurisdictions, considered RPM to be illegal per se, unless exempted by efficiency-related conditions (i.e., the equivalent of Article 101(3) of the Treaty on the Functioning of the EU). In addition, China has also endorsed a bifurcated approach to RPM in public enforcement and private proceedings, as anticompetitive effects need to be proved in court cases by plaintiffs but need not be proved by law enforcers.

“In addition to raising the stakes for companies, the new AML also aims at curbing abuse by anti-monopoly authorities,” observes Dezan Shira & Associates’ China Briefing. “Article 40 of the new AML explicitly prohibits administrative offices from hindering companies from entering a market or imposing unequal treatment, or otherwise limiting competition.

“This move is likely partly an effort to curb local protectionism, where local governments restrict or prevent companies from other regions from entering or expanding in their jurisdiction in order to give local companies or organisations a competitive advantage.”

Uncertainties and supporting provisions

While the new AML brings China’s antitrust regime into a new era, uncertainties remain in many critical areas, one of which is whether the law has retrospective effect.

“As things stand this is unclear but it appears most likely that historical non-compliance prior to 1 August 2022 would only be subject to the amended AML if it continues after 1 August 2022,” suggests Clifford Chance. “This is however subject to official guidance from future antitrust practice in China.”

For the moment, the SAMR is providing clarification on the amended AML via six drafts of relevant antitrust regulations and rules for public consultation: (i) Regulations on the Merger Control Filing Thresholds; (ii) Provisions on Prohibition of Monopoly Agreements; (iii) Provisions on Prohibition of Abuse of Dominance; (iv) Provisions on Prohibition of Elimination and Restriction of Competition through Abuse of IP Rights; (v) Provisions on Prohibition of Elimination and Restriction of Competition through Abuse of Administrative Power; and (vi) Provisions on Merger Control Review (collectively, the Consultation Draft of Implementing Rules).

“These provisions will assist in the implementation of the AML after they have passed and come into effect,” adds Dezan Shira & Associates.

Enhanced penalty regime

In light of the generally held view that the previous AML provided insufficient deterrence, the penalty regime under the amended AML has been significantly strengthened in key areas, according to Clifford Chance, as outlined below.

First, the maximum fine for failure to file, otherwise known as gun-jumping, is 10 times higher. For an unreported merger that does not lead to competition concerns, the maximum fine is increased from RMB500,000 to RMB5m. When anticompetitive effects are found, the maximum fine will be further increased to up to 10 percent of the notifying party’s group turnover in the last year.

Second, there is now personal liability for monopoly agreements. The amended AML introduces personal liabilities for substantive antitrust violation for the first time. Previously, personal liability was only imposed for procedural violations. The amended AML also provides that legal representatives, principal responsible persons and directly responsible persons can now be fined up to RMB1m if they are personally responsible for a monopoly agreement.

Third, fines may be uplifted. Antitrust fines can be further increased to a range between two and five times the initial amount if the circumstances of an antitrust violation are “particularly serious”, with “particularly egregious impact” and “particularly serious repercussions”.

Lastly, there is now potential criminal liability. The amended AML introduces a new article stipulating that persons committing antitrust infringements may be held criminally accountable, if the infringement constitutes a crime. Previously, the potential to constitute a criminal offence was only connected with obstruction of antitrust investigations.

“A weakness of the previous AML was the very low fines for parties failing to file a transaction or gun jumping,” recalls Mr Evrard. “The SAMR can now impose a fine of up to 10 percent of sales in the preceding year where the transaction that was not filed is anticompetitive.

“The amended AML also empowers the SAMR to review transactions that do not trigger mandatory notification obligations where it considers that the transaction has or may have the effect of eliminating or restricting competition,” he continues. “This may have the potential to disrupt closings of global transactions.”

In addition to the increased fines, a new article 64 of the amended AML specifically stipulates that violations will be added to a company’s credit record and be publicised.

“This addition aligns with new regulations on China’s corporate social credit system, which seeks to improve transparency and accountability for unethical or illegal behaviour by corporations and social entities,” explains Dezan Shira & Associates. “The potential consequences for having a violation added to a company’s record include suspensions of operations and production, exclusions from government purchasing schemes, and exclusions from incentive schemes and preferential policies.”

Sharper teeth

Ongoing reservations aside, the amended AML increases the available penalties for companies that violate the law and expands the tools that antitrust authorities have at their disposal for pursuing antitrust cases – giving more legal teeth to the law underpinning China’s anti-monopoly legislative framework.

“Large companies are most likely to be impacted by the increase in potential fines,” concludes Mr Evrard. “Yet it remains to be seen how the SAMR will use its discretion in respect of the ‘superfine’ clause – whereby the SAMR can multiply the amount of a fine by a factor between two and five where a violation is ‘extremely severe’ – but the possibility of fines against companies being increased fivefold should provide strong incentive to companies to ensure their operations in China remain compliant with the amended AML.”

In summary, the new AML will significantly impact large companies and, in particular but not exclusively, large technology and platform companies. Moreover, given the increased pressure on both companies and anti-monopoly authorities to limit monopolies, the likelihood is that more regulations targeting monopolistic behaviour will be proposed by antitrust lawmakers in the coming months and years – prohibiting many more practices that have previously been commonplace in China.

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Fraser Tennant