China’s Market Regulator Releases Supplementary Antitrust Regulations
China’s market regulator has released four new sets of antitrust regulations to supplement the implementation of the amended Anti-Monopoly Law. The new regulations tackle different areas of China’s antitrust law, including monopoly agreements, abuse of a dominant market position, and reviews of company consolidations. The supplementary regulations provide additional clarity on definitions and implementation of the Anti-Monopoly Law, thus improving law enforcement and raising compliance burdens for companies operating in China.
The State Administration for Market Regulation (SAMR) has released four supporting regulations that serve to help implement China’s latest amendments to the Anti-Monopoly Law (AML) and further strengthen China’s antitrust enforcement framework.
In June 2022, SAMR released a set of six supporting regulations for public comment, among which four have been adopted and will come into effect on April 15, 2023.
The four supporting regulations tackle different areas of antitrust law enforcement: monopoly agreements, abuse of market dominance, abuse of administrative power to exclude or restrict competition, and operator consolidation reviews. These supporting regulations all also correspond to specific chapters of the AML and serve to further expand and clarify the provisions and definitions of these chapters.
The implementation of the new supporting regulations, as well as the amendment to China’s AML, form part of a broader effort to reform and strengthen China’s antitrust regulatory system and improve fair competition.
It is important for companies operating in China to understand all of the regulations, as they raise the burden of compliance when it comes to a range of activities – from entering into sales agreements to engaging in M&As.
Below we look at some of the key additions and clarifications provided in the four new supplementary regulations.
Clarification of the definition of “monopoly agreements”
The Provisions on Preventing Monopoly Agreements (the “Monopoly Agreements Provisions”) provide an expanded definition of “monopoly agreements”. In Chapter 2 of the AML, “monopoly agreements” are defined as “agreements, decisions or other concerted actions that exclude or restrict competition”. The Monopoly Agreements Provisions elaborate on the meaning of “other concerted actions”, which are defined as “behaviors in which there is substantial coordination between business operators even if no express agreement or decision has been made.”
They add that the following factors are to be considered when determining the “other concerted acts”:
- Whether the market behavior of the business operator is consistent;
- Whether contact or information exchange has taken place between operators;
- Whether the business operator can provide a reasonable explanation for the consistency of behavior; and
- The market structure, competition situation, market changes, and other characteristics of the relevant market.
Clarification of “relevant market”
In the AML, the term “relevant market” is used as a factor to determine how dominant a company’s position is within a given market when discussing the illegal behavior of monopoly agreements and abuse of a dominant market position to restrict competition.
For instance, Chapter 3 of the AML on the abuse of a dominant market position defines the “dominant market position” as “a market position in which a business operator has the ability to control commodity prices, quantities, or other transaction conditions, or to hinder or influence other business operators’ ability to enter the relevant market.”
Similarly, in Chapter 2 on monopoly agreements, the AML states that if an operator can prove that an agreement does not result in restrictions to competition in a “relevant market”, then the law does not apply.
However, the law does not clearly define what is considered a “relevant market”.
In both the Monopoly Agreements Provisions and the Provisions Prohibiting the Abuse of a Dominant Market Position (the “Dominant Market Position Provisions”), “relevant market” is defined as “the commodity scope and geographical scope in which business operators compete for specific commodities or services […] within a certain period of time, including relevant commodity markets and relevant geographic markets.”
They also go on to say that “demand substitution” and “supply substitution” analysis must be conducted when defining the relevant market of a given operator. This means taking into account different commodity prices, characteristics, and uses, as well as the sales channel through which a commodity is purchased when determining the scope of the relevant market.
Changes to standards for application of safe harbor rule
The amended AML added a “safe harbor” clause for the first time to the use of monopoly agreements. Specifically, with regard to the prohibition of monopoly agreements between different parties, the law states that “Operators who can prove that their market share in the relevant market is lower than the standard stipulated by the State Council’s anti-monopoly law enforcement agency and meet other conditions stipulated by the State Council’s anti-monopoly law enforcement agency shall not be prohibited [from entering into monopoly agreements]” (Article 18 paragraph 3 of the AML).
This safe harbor clause gives business operators some space to engage in activities, such as setting price ceilings for distributors, which could be considered anti-competitive under the law. However, it is only applicable to some vertical monopoly agreements, not horizontal agreements, meaning it only applies to agreements made with an upstream or downstream business operator. This is implied by the fact that in the provisions, the safe harbor rule is applied to agreements that are reached between a company and its “transaction counterpart”, suggesting a vertical rather than a horizontal relationship.
In the draft provisions on the prohibition of the use of monopoly agreements released for comment in June 2022, the standard for the market share was set as “less than 15 percent”. However, in the new Monopoly Agreement Provisions, the wording has been changed to be in line with that of the AML and the “less than 15 percent” threshold has been removed, suggesting that the exact “standard stipulated by the State Council’s antitrust law enforcement agency” has not yet been agreed upon.
Further clarification on the prohibition of “hub-and-spoke” agreements
The amended AML for the first time prohibits business operators from entering into “hub-and-spoke” monopoly agreements, wherein several competitors, usually vertical companies, enter into a monopoly agreement with a single leading company and then form horizontal anticompetitive agreements with one another.
Article 19 of the AML states that “a business operator shall not organize other business operators to reach a monopoly agreement or provide substantive assistance for other business operators to reach a monopoly agreement”, thus prohibiting the use of the hub-and-spoke model. The inclusion of the phrase “provide substantial assistance” means that companies or organizations that facilitate or enable the formation of a monopoly agreement are also liable for penalties under the law.
The Monopoly Agreements Provisions further strengthen the prohibitions of the hub-and-spoke model by clarifying the definition of “organize” and providing “assistance”. First, they state that organizing other operators to reach a monopoly agreement includes the following circumstances:
- Where the operator is not a party to the monopoly agreement, but plays a decisive or leading role in the subject scope, main content, performance conditions, and other aspects of the agreement during the conclusion or implementation of the monopoly agreement;
- Where an operator enters into an agreement with multiple transaction counterparties, whereby the counterparties with a competitive relationship communicate or exchange information through the operator and reach a monopoly agreement as defined in the Monopoly Agreement Provisions; and
- Organizing other business operators to reach a monopoly agreement by other means.
In addition, the Monopoly Agreement Provisions state that activity constituting “substantial assistance” for other operators to reach a monopoly agreement includes “providing necessary support, creating key convenient conditions, or other important assistance.”
Further clarification on organizing and assisting the creation of hub-and-spoke agreements raises the compliance burden for companies, in particular for the platform and internet companies whose terms and conditions of use could inadvertently be defined as “organizing” or “assisting” other operators from entering into a monopoly agreement. It is therefore advisable for large companies in particular to reassess their current platform rules to ensure they cannot be perceived as aiding the formulation of monopoly agreements.
Strengthening of antitrust regulations for the platform economy
The amended AML increases regulatory oversight over monopolistic and anti-competitive behavior of platform and internet companies, an area of antitrust law that has been difficult to define legally.
Specifically, the AML states in Article 9 that “operators shall not use data and algorithms, technology, capital advantages, and platform rules to engage in monopolistic behavior prohibited by this law”. The monopolistic behavior referred to in this article is specified in the different supplementary regulations, with the Monopoly Agreement Provisions prohibiting using these means to “engage in communication, exchange sensitive information, coordinate behavior, or otherwise reach monopoly agreements”, while the Dominant Market Position Provisions prohibits the use of these means to abuse the dominant market position.
These two supplementary provisions also tackle the issue of defining the “relevant market” in terms of the platform economy, which can be more difficult when compared for other industries. The provisions offer the following parameters:
- The relevant market can be defined according to the products or services provided by the platform; or
- According to the different types of products and services sold on the platform, the platform as a whole can be defined as a relevant commodity market, or multiple relevant commodity markets can be defined separately, and the mutual relationship and influence between the relevant commodity markets can be considered.
The Abuse of Market Dominance Provisions also outlines the scope for identifying the six major types of abuse of market dominance outlined in the AML as they pertain to the platform economy.
Addition of “whistleblower” clause for company consolidation
The Provisions on the Review of Operator Consolidation (the “Consolidation Review Provisions”) have added a clause that allows companies or individuals within a company to report to the SAMR if they have knowledge of a company consolidation transaction that may result in the elimination or restriction of competition.
Article 43 of the Consolidation Review Provisions states that “Any unit or individual that finds a consolidation of business operators that does not meet the reporting standards [the threshold of requirements under which a business consolidation must report the activity to SAMR for a review], but which has or may have the effect of eliminating or restricting competition, may report the consolidation to [SAMR] in writing and provide relevant facts and evidence.”
It goes on to say that “if there is evidence to prove that the consolidation of business operators that do not meet the declaration standards has or may have the effect of eliminating or restricting competition, it shall be dealt with in accordance with Article 8 of these provisions.”
Article 8 of the Consolidation Review Provisions states that if a business consolidation does not meet the threshold for reporting and undergoing a review by SAMR but there is evidence that it has the effect of eliminating or restricting competition, then SAMR may require the company involved to inform the other company of the situation in writing.
In addition, if the consolidation has not yet been carried out, then the activity must be halted until the consolidation has been declared to SAMR, or until the consolidation has obtained approval. If the consolidation has already been carried out, then the company must declare the consolidation within 120 days from the date of receiving the written notice, and take necessary measures, such as suspending the implementation of the consolidation and reducing the adverse effects that the consolidation has upon competition.
The addition of this clause may make it more difficult for M&As to happen, as it enables any person or company to report a consolidation to SAMR, even if the activity does not meet the threshold for requiring a review by the SAMR, and even if it has not been proven that the consolidation is anti-competitive.
Clarification of “control” in operator consolidation
Among the definitions of “operator consolidation” given in the AML are where “The business operator obtains control over other business operators by acquiring equity or assets” and “The business operator obtains control over other business operators or is able to exert a decisive influence on other business operators through contracts or other means.”
The Consolidation Review Provisions provide parameters for determining whether a company has gained “control” over another company and therefore is subject to the relevant regulations of these provisions and the AML. The parameters to be considered are:
- The purpose of the transaction and future plans;
- The equity structure and changes of other business operators before and after the transaction;
- Voting matters and voting mechanism of other operators’ shareholders and other bodies, as well as their historical attendance rate and voting situation;
- The composition and voting mechanism of decision-making or management bodies, such as the board of directors of other operators, as well as their historical attendance and voting conditions;
- Appointment and removal of senior managers of other operators;
- The relationship between shareholders and directors of other operators, whether they are entrusted to exercise voting rights, are persons acting together, and so on;
- Whether the business operator has any major commercial relationship, cooperation agreement, or other relationship with other business operators; and
- Other factors that should be considered.
In addition, it states that where two or more companies have control over other companies or are able to exert decisive influence over other companies, it constitutes joint control over the other company.
Promotion of fair competition in the formulation of policy and regulations
The Provisions on Preventing Abuse of Administrative Power to Exclude and Restrict Competition (the “Abuse of Administrative Power Provisions”) have added new clauses that emphasize the need for authorities to uphold a system of fair competition when formulating new regulations and policies and managing public affairs.
This addition is important because historically, the main cause of monopoly violations by administrative agencies is that these agencies do not have a full understanding of the importance of fair competition when formulating policies and regulations.
Article 29 of the Abuse of Administrative Power Provisions, therefore, requires such agencies to conduct “fair competition reviews” when formulating such documents, in which they must assess the impact on market competition and ensure no competitors are being excluded or restricted. In addition, if there is a suspected case of abuse of administrative power that excludes or restricts competition, it will be investigated by the anti-monopoly law enforcement agency.
But the provisions go even further and call for market regulatory authorities to actively support administrative agencies in various measures to improve fair competition. These measures include:
- Promoting fair competition legislation, regulations, and policies;
- Providing fair competition consultation in the process of formulating policy measures;
- Organizing and carrying out competition impact assessments on the implementation of relevant policies and measures, and issuing assessment reports;
- Organizing training exchanges; and
- Providing work guidance and suggestions.
Clarification on the implementation of “law enforcement interviews”
The amended AML has added a clause enabling interview by law enforcement in the event that a company or organization has violated the law or any supplementary regulations.
Specifically, Article 55 of the AML states that “where business operators, administrative agencies, and organizations […] are suspected of violating the provisions of this Law, anti-monopoly law enforcement agencies may conduct interviews with their legal representatives or responsible persons and require them to propose improvement measures.”
This clause ostensibly offers more flexibility and efficiency in the process of law enforcement. It may also provide an easier way for entities that have been found to be in violation of the laws to correct the situation; however, it is not clear whether it would reduce penalties or fines.
The new supplementary regulations provide more details on how these interviews will be conducted.
For violations of both the Monopoly Agreement Measures and the Abuse of Market Dominance Provisions, it is clarified that:
In such interviews, the anti-monopoly law enforcement agencies shall highlight the alleged conclusion of a monopoly agreement or abuse of its dominant market position to the legal representative or person in charge of the company, listen to their explanations, and may require them to propose improvement measures to eliminate the harmful consequences of its conduct.
The company shall then make improvements in accordance with the requirements of the anti-monopoly law enforcement agency, propose specific measures to eliminate the harmful consequences of the illegal behavior as well as the time limits for the implementation, and submit a written report.
Improving China’s antitrust framework
It is important to remember that one of the main amendments to the AML is increases to the fines for violations, which now extend to the supplementary regulations. The consequences for violations are therefore now more serious, and there is less scope for interpretation and leniency in the regulations.
At the same time, the supplementary regulations, as well as the amendments to the AML, serve to improve competitiveness and create a fairer playing field for companies operating in Chinese markets. The stricter antitrust legislation will be particularly helpful for smaller companies that have found themselves priced out of certain markets due to anti-competitive behavior from larger companies, or otherwise restricted from competing.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
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