China's Anti-monopoly Law ("AML") became effective on 1 August 2008. This new piece of legislation has attracted attention worldwide because of its potential impact on foreign investments in China. This article will outline the key activities prohibited by AML and explain how AML will affect foreign investors.
Three main types of activities are specified under AML, namely (1) monopoly agreements, i.e. cartel arrangements; (2) abuse of dominant market position by undertakings; and (3) concentration of undertakings.1
AML also identifies a unique form of monopoly activity in China, i.e. administrative monopoly, which refers to a monopoly situation created by local government authorities or administrative agencies,2e.g., in some regions of China, only locally produced beer can be sold and the sale of beer produced in other Chinese regions is restricted. Administrative monopoly will not be discussed in this article.
The key idea of AML is that if an activity specified in the AML has the effect of eliminating or restricting competition within the Chinese market, such an activity shall be prohibited no matter if it is carried out within or outside China.3Therefore, to a certain extent, AML has an extra-territorial effect. AML is applicable to an activity that takes place outside of China if that overseas activity can eliminate or restrict competition in the Chinese market.
Objective Of AML
The objective of AML is to ensure that there will be a sufficient degree of competition within the Chinese market so that the rights of the Chinese consumers will not be jeopardized. Therefore, only activities which have the effect of eliminating or restricting competition shall be prohibited.4 This objective can be distinguished from that of the 1993 Anti-unfair Competition Law, which is focused on protecting fair dealings in the market and discouraging undertakings from acting unfairly or dishonestly to obtain an advantage over their competitors. Examples of acts that are prohibited by the 1993 Anti-unfair Competition Law include passing off, infringement of trade secrets, dumping, false advertising, bid-rigging, etc.
Enforcement Of AML
AML is enforced by three different Chinese government agencies.
The Ministry of Commerce ("MOFCOM") is the agency responsible for examining any proposed merger and acquisition ("M&A") transactions in order to ascertain whether they will result in a concentration of undertakings as provided under AML.
The Fair Trade Bureau under the State Administration for Industry and Commerce ("SAIC") is responsible for carrying out investigations on any potential or reported cases of monopoly agreements, e.g., cartel arrangements, and cases of abuse of dominant market position by undertakings, and imposing administrative sanctions as appropriate.
The National Development and Reform Commission ("NDRC") will investigate all price-related monopoly cases, which may either arise from a case of monopoly agreement or a case of abuse of dominant market position by undertakings.
Collectively, MOFCOM, SAIC and NDRC can be referred to as the AML enforcement agencies under the AML.5
There may be an overlap in the jurisdictions between SAIC and NDRC. An undertaking may have to duplicate the time and resources required to report to two agencies instead of one on a potential case of price-related monopoly agreement or price-related abuse of dominant market position, and the undertakings being accused of committing the above acts may also have to be subject to investigations by two agencies instead of one. The duplication is likely to increase the administrative costs as far as the Chinese government authorities are concerned if compared with the use of one single AML enforcement agency.
Anti-monopoly Commission: The Policy Formulating Agency
An anti-monopoly commission has also been set up by the State Council to formulate AML related policies and to further develop the anti-monopoly regime in China.6The Anti-Monopoly Commission is headed by Wang Qi-shan, Vice-Premier of the State Council.
AML's Relevance To Foreign Investors
Article 2 of AML, which expressly provides that AML shall be applicable to activities committed outside China, together with the lack of distinction between foreign undertakings and PRC domestic undertakings in AML, appear to suggest that a foreign undertaking will be subject to administrative investigation by the AML enforcement agencies and their administrative decisions and sanctions imposed thereon in the same way as a PRC domestic company if the act of the foreign undertaking can have the effect of eliminating or restricting competition in the Chinese market.
If a foreign undertaking is involved in a monopoly agreement, (e.g., a cartel arrangement to fix prices or divide the sales market) or has abused its dominant market position (e.g., selling products at unfairly high prices or buying products at unfairly low prices, tie-in sales, etc.),7which has the effect of eliminating or restricting competition in the Chinese market, it is arguable that the foreign undertaking can be subject to the administrative actions of SAIC or NDRC respectively. The question of whether an undertaking or a group of undertakings enjoys a dominant market position in China can be determined by reference to its relevant market share in the relevant market or other factors (e.g., its ability to control the sales market or the raw materials procurement market, its financial strength or level of technology advancement, etc.),8unless the undertaking or the group of undertakings concerned can prove otherwise.9
Since most foreign investors may not be involved in any monopoly agreements or enjoy a dominant market position in China, it appears that the concentration provisions in the AML, which are applicable to all potential M&A transactions (including purely offshore transactions in which none of the parties is a PRC company if those transactions may affect competition within the Chinese market) will be more relevant to foreign investors.
All M&A transactions (both onshore and offshore) that meet the notification thresholds must be reported to MOFCOM to obtain its approval to proceed.10If MOFCOM considers that the relevant Chinese market will become too concentrated after the proposed M&A transaction and thus competition within the market will be eliminated or restricted, MOFCOM may refuse to approve such M&A transaction or impose conditions on the approval for such M&A transaction to proceed.11
According to a MOFCOM official, in principle MOFCOM will not publish its decision on a reported M&A transaction unless MOFCOM refuses to approve the transaction or conditions have been imposed on the approval. After issuing a number of decisions giving a green light to the reported M&A transactions, MOFCOM published its first decision to conditionally allow InBev N.V./S.A.'s proposed acquisition of Anheuser-Busch Companies Inc. on 18 November 2008. The conditions imposed by MOFCOM include a restriction on Anheuser-Busch Companies Inc. from increasing its current shareholding in Tsingdao Brewery and a similar restriction on InBev N.V./S.A. from increasing its current shareholding in Zhujiang Brewery. InBev N.V./S.A. is also restricted from acquiring any shareholding in China Resources Snow Breweries or Beijing Yanjing Brewery in the future. It is therefore likely that MOFCOM may impose conditions, such as restrictions against a further increase of foreign shareholding in Chinese enterprises, on a reported M&A transaction whenever MOFCOM considers it necessary and appropriate in the future.
As of end of December 2008, MOFCOM has only published one decision.
At present, the case that draws most of the market's attention is Coca-Cola's proposed acquisition of China Huiyuan Juice Group Limited, a Hong Kong listed company, which owns the Huiyuan juice business throughout China. At the date of this article, this case is still under review by MOFCOM.
Concentration Of Undertakings And The MOFCOM Notification Requirement On A Potential M&A Transaction
According to the notification thresholds separately specified by the State Council on 3 August 2008 under the Provisions on the Notification Thresholds for Concentration of Undertakings ("Notification Thresholds"), notification is required to be made if the parties to a proposed M&A transaction meet any one of the following requirements:
(1) During the previous financial year, the total global turnover of all the undertakings to the concentration exceeds RMB 10 billion (approximately USD 1.46 billion) and the PRC turnover of at least two of those undertakings exceeds RMB 400 million (approximately USD 58.5 million) each; or
(2) During the previous financial year, the total PRC turnover of all the undertakings to the concentration exceeds RMB 2 billion (approximately USD 292 million) and the PRC turnover of at least two of those undertakings exceeds RMB 400 million (approximately USD 58.5 million) each.
The calculation of business turnover does not seem to be appropriate for special industries such as banking, insurance, securities, futures, etc. The Notification Thresholds expressly provides that specific measures on appropriate adjustment to the calculation of business turnover for these industries will be issued later.12
In applying the above business turnover test, if the parties to a proposed M&A transaction are already controlled by one single undertaking before implementing the proposed transaction, no notification is required to be made to MOFCOM notwithstanding that the notification thresholds may be met.13
Upon notification, MOFCOM will examine the proposed transaction in detail. It shall be noted that if the above thresholds are not met but the facts and evidence demonstrate that the proposed transaction would or could have the result of eliminating or restricting competition, such proposed M&A transaction may still be subject to examination by MOFCOM.14
Examination timeline and results of examination by MOFCOM
MOFCOM will take 30 business days from the date of receipt of the documents from the applicant to conduct a preliminary examination to decide whether to make a further examination, which may take a further 90 business days (subject to a further extension of 60 business days if the documents submitted by the applicant are not accurate or if the relevant circumstances have significantly changed since the date the application was made).15MOFCOM will then decide whether to allow the proposed M&A transaction to proceed, and if so, whether such M&A transaction should be proceeded with or without any restrictive conditions.16
National security check
Any proposed M&A transaction involving a foreign investor, apart from the MOFCOM notification requirement (if any), is also subject to a separate national security check to be conducted by a joint panel to be formed by representatives of NDRC, MOFCOM and such other authorities. The national security check is mentioned in AML although it is independent of the MOFCOM examination.
Comparison Between The MOFCOM Notification Thresholds Under AML And The Reporting Thresholds Under The 2006 PRC Regulations For The Acquisition Of Domestic Enterprise By Foreign Investors ("2006 M&A Regulations")
The MOFCOM notification thresholds provided under AML are different from the reporting thresholds provided under the "anti-monopoly review" section of the 2006 M&A Regulations, which apply to both onshore and offshore M&A transactions involving a foreign investor.17
Under the 2006 M&A Regulations, an M&A transaction, no matter whether it is onshore or offshore, shall be reported to MOFCOM or SAIC if any of the parties (including the affiliate companies of the foreign investor) to the M&A transaction has a PRC turnover of more than RMB 1.5 billion (approximately USD 219 million).18Apart from the PRC turnover test, reporting of a proposed M&A transaction to MOFCOM or SAIC is also required under the 2006 M&A Regulations if (1) any of the parties to an onshore transaction or the foreign investor (including its affiliates) to an offshore transaction already controls not less than 20 percent of the Chinese market; or (2) the M&A transaction will result in a party to an onshore transaction, or a foreign investor (including its affiliates) to an offshore transaction, holding a market share of 25 percent or above in the Chinese market; or (3) more than 10 enterprises in the related industries in China have been acquired in one year by an party to an onshore transaction; or (4) an offshore transaction will result in a foreign investor (including its affiliates) holding more than 15 foreign-invested enterprises in the relevant industry in China; or (5) the foreign investor (including its affiliates) to an offshore transaction has assets in China for a value of not less than RMB 3 billion (USD 438 million).19
Since both AML and the 2006 M&A Regulations are current and effective in China, any proposed M&A transaction is subject to the review mechanisms under both laws if the relevant thresholds are met.
Administrative Decisions And Appeal
MOFCOM, SAIC and NDRC are empowered by AML to issue administrative decisions and impose administrative sanctions (e.g., an injunction order, a fine, etc.) on undertakings that are involved in activities prohibited by AML, e.g., implementing an M&A transaction that has been banned by MOFCOM, involvement in a cartel arrangement, abusing their dominant market positions to obtain an illegal benefit, etc.20
If an undertaking wishes to appeal against the administrative decisions or sanctions imposed by MOFCOM on a proposed M&A transaction, it shall first request an administrative review of the decision by MOFCOM before commencing an administrative lawsuit before the PRC court.21
For other administrative decisions or sanctions imposed by SAIC or NDRC in relation to a monopoly agreement or the abuse of dominant market position by an undertaking, the undertaking may either request an administrative review of the decisions by SAIC or NDRC or immediately commence an administrative lawsuit before the PRC court.22
Recourse To Court
Undertakings that are in breach of AML and have caused damages to third parties can be sued in the PRC court.23The Intellectual Property Tribunal under the PRC court shall have jurisdiction to hear a case for which the cause of action is based on AML.
Uncertainties In AML
AML sets out the framework of the anti-monopoly regime in China but a lot of areas are still unclear, e.g., the definition of horizontal and vertical cartels, the leniency program as provided under Article 46 of AML in respect of cartel arrangements, the definitions of the relevant market, the relevant product, the relevant geographical market, etc. for the calculation of the market share of undertakings, the calculation of business turnover for M&A transactions in special industries such as banking, insurance, securities, futures, etc. under the concentration provisions, method of determining the degree of market concentration, etc. It is expected that the above issues will be clarified in the future so that more guidance may by then be given to the implementation and enforcement of AML. 1 Article 3 of AML.
2 Article 8 and Chapter 5 of AML.
3 Article 2 of AML.
4 Articles 3,6,8,13 and 28 of AML.
5 Article 10 of AML.
6 Article 9 of AML.
7 Article 17 of AML.
8 Article 18 of AML.
9 Article 19 of AML.
10 Article 21 of AML.
11 Articles 28 and 29 of AML.
12 Article 3 of Notification Thresholds.
13 Article 22 of AML.
14 Article 4 of Notification Thresholds.
15 Articles 25 and 26 of AML.
16 Articles 28 and 29 of AML.
17 Chapter 5 of 2006 M&A Regulations.
18 Articles 51(1) and 53(2) of the 2006 M&A Regulations.
19 Articles 51(2)-(4) and 53(1), (3)-(5) of the 2006 M&A Regulations.
Myles Seto is a Partner with Deacons' China practice group and the chief representative of Deacons' Shanghai Representative Office. He has more than 10 years experience in China trade and investment matters. Peggy Chowis an associate in the Deacons' China Practice Group. She specialises in matters relating to foreign direct investment in China.