On August 1, 2022, long-awaited amendments to China’s Anti-Monopoly Law — the first ever — will go into effect. These amendments include significantly harsher penalties and fines for certain violations, modifications to the merger review process, and additional clarification of the law surrounding certain types of conduct. These amendments will impact a wide variety of industries, and particularly digital platforms, as China works to modernize its antitrust policies and ratchet up enforcement.
In 2008, China enacted its first antitrust laws — the Anti-Monopoly Law. For many years, amending and strengthening the Anti-Monopoly Law has been a priority for China’s legislative agenda. In January 2020 and October 2021, China’s State Administration for Market Regulation (SAMR) introduced several draft amendments to the Anti-Monopoly Law, signaling a strong desire to enforce China’s antitrust policies more aggressively.
On June 24, 2022, the Standing Committee of the National People’s Congress adopted the sweeping amendments to the Anti-Monopoly Law, with the changes taking effect on August 1. Following the adoption of the new Anti-Monopoly Law, on June 27, SAMR published several draft implementing regulations for public consultation. These drafts relate to, among other things, the merger review process and filing thresholds, abuse of dominance and monopolies, and intellectual property rights.
The amendments to the Anti-Monopoly Law are wide-ranging and designed to increase SAMR’s ability to take meaningful enforcement action against companies and individuals that violate the law. Several notable amendments include:
1. Modified Merger Review Process
- “Stop-the-clock” mechanism. The “stop-the-clock” mechanism suspends the merger review process and provides SAMR additional time to review a transaction, if: (1) the notifying parties fail to provide requested information or materials; (2) new circumstances or facts that materially impact the review arise; or (3) the proposed remedies require further assessment, at the notifying parties’ request. This mechanism largely eliminates the need for companies with complex transactions to pull and re-file if the review extended beyond the prior 180-day time limit. However, the “stop-the-clock” mechanism may result in uncertainty for less complex cases.
- Transactions below turnover thresholds. If a transaction falls below the filing thresholds but is likely to eliminate or restrict competition, the amendments allow SAMR to “call in” that transaction and require the parties to file. In particular, this amendment allows SAMR to review and intervene in “killer acquisitions” of maverick firms or nascent competitors, even if they do not meet turnover thresholds. From a practical perspective, since there is no clear definition of “eliminating” or “restricting” competition, particularly in a new market sector, the parties should consult SAMR in advance for guidance on whether filing is required for the proposed transaction.
Under the proposed turnover thresholds in SAMR’s June 27, 2022 Draft Amended Merger Filing Thresholds, the thresholds would increase to:
- Total global turnover in the preceding financial year of 12 billion yuan (approx. $1.8 billion) or Chinese turnover of 4 billion yuan (approx. $600 million); and
- Chinese turnover in the preceding year of each of at least two concerned undertakings of 800 million yuan (approx. $120 million).
A filing is also required if one party’s turnover in China exceeds 100 billion yuan (approx. $14.9 billion) and the other party has a market value greater than 800 million yuan (approx. $120 million) and generates more than one-third of its global turnover within China.
- New classification system. The amendments introduce a new classification system for mergers, by category and level, to improve the quality and efficiency of the merger review process. This new system may lead to the creation of specific filing thresholds or alternative turnover calculation methods for certain business sectors, or condense the process for transactions that lack substantive concerns.
2. Clarification of Substantive Law Governing Anticompetitive Conduct
- Relaxed approach to resale price maintenance. The amendments clarify that, although resale price maintenance is generally prohibited, it is not a per se antitrust violation. Instead, companies have the opportunity to rebut the presumption of illegality by proving that their resale price maintenance conduct does not give rise to anticompetitive effects. However, given prior practice by SAMR and Chinese courts, it is likely that companies will face a very high bar to defend their practices.
- Safe harbors for vertical transactions. The amendments empower SAMR to create safe harbors for vertical transactions, creating a presumption of legality for certain vertical agreements based on market share. Although the amended Anti-Monopoly Law does not set forth a threshold, SAMR’s draft implementing rules propose a threshold of 15%. At present, this change does not apply to horizontal transactions, but SAMR may seek to introduce similar safe harbors for horizontal agreements in the future.
- Abuse of dominance for digital platforms. The amendments pay particularly close attention to the role of data and digital platforms — long an area of intense scrutiny in China. The amendments warn dominant players in the digital economy not to abuse their dominant position, such as by eliminating or restricting competition through the abuse of data and algorithms, technologies, platform rules, or capital advantages. The amendments also make clear that “encouraging innovation” is an objective of China’s competition policy. This change reflects the delicate balance between preventing anticompetitive conduct and encouraging innovation, and future draft regulations will likely provide additional guidance on how SAMR anticipates achieving this balance.
3. Enhanced Fines and Penalties
- Increased maximum fine for gun-jumping. Where merging parties fail to notify SAMR of a reportable transaction or otherwise engage in gun-jumping, the fine was increased from 500,000 yuan (approx. $75,000) to 5 million yuan (approx. $750,000) for deals that do not harm competition. For mergers with anticompetitive effects, the fine is set at a maximum of 10% of the infringing party’s turnover in the prior year.
- Increased maximum fine for certain anticompetitive agreements and associations. The fine for anticompetitive agreements that were not implemented was increased from 500,000 yuan (approx. $75,000) to 3 million yuan (approx. $450,000), as was the fine for industry associations involved in anticompetitive behavior.
- Increased maximum fine for “grave violations.” For “grave violations” of the antitrust laws, the fine is set at up to 50% of the company’s turnover or 25 million yuan (approx. $3.7 million). However, the term “grave violation” has not been defined and requires further clarification by SAMR.
- Criminal liability and fines for individuals. The amendments permit individuals to be held criminally liable and/or be fined for anticompetitive agreements, up to a maximum of 1 million yuan (approx. $150,000). This includes individuals who are legal representatives of a company or a person in charge or with direct responsibility for the anticompetitive agreement. Although the amended Anti-Monopoly Law does not explain the circumstances in which individuals will be liable and there is no corresponding crime under China’s criminal law, liability will likely be imposed for the most extreme violations. Previously, individuals could only be penalized for obstructing investigations.
Practical Effect of the Amendments
While the amended Anti-Monopoly Law modernizes China’s competition policy and includes many welcome clarifications, there is much that remains uncertain. To begin providing that clarity, SAMR has already published draft rules and regulations for public consultation, which would fill in some of the gaps left by the amendments to the Anti-Monopoly Law. It is likely SAMR will publish additional rules and regulations in the future to further refine and explain the amended Anti-Monopoly Law.
One thing that is certain is that digital platforms and tech companies will continue to face significant antitrust scrutiny under the amended Anti-Monopoly Law. Many of these amendments were motivated by challenges SAMR has faced when enforcing the law against large companies like Alibaba and Tencent and a desire to expand upon SAMR’s 2020 Guidelines for Anti-Monopoly in the Platform Economy. And the text of the Anti-Monopoly Law itself now sets forth heightened restrictions for tech companies. As in other parts of the world, antitrust enforcement against such companies will continue in the near future.
Legal consultant Ida Du contributed to this update.