The proposed reforms follow earlier draft changes published in January 2020. Key features include:
- Tougher penalties, including administrative fines for individuals, potential criminal liability, and significantly higher fines for procedural violations (e.g., potentially over RMB 5 million/USD 784,000 for a failure to notify a merger).
- Introduction of a ‘stop-the-clock’ mechanism for merger reviews.
- Giving the State Administration for Market Regulation (SAMR) the legal authority to create safe harbours for certain types of non-hardcore conduct.
- Possible exemptions/defences to the SAMR’s previous hardline stance against resale price maintenance (RPM).
- Codifying certain categories of illegal conduct for online platforms, building on the SAMR’s prior work in this area.
- A new public interest litigation mechanism, that may be initiated by People’s Procuratorates against violations.
These were published on 23 October 2021 for public comments1, and are subject to further revisions. The final version is expected to be issued in 2022. It is imperative that domestic and internal businesses operating in China continue to treat antitrust compliance as a top priority, and monitor these reforms closely.
The wide-ranging proposed amendments to China’s Antimonopoly Law (AML) (“Proposed Amendments“) were published for public comments immediately after being presented to China’s top legislature for the first reading. It is clear from the Proposed Amendments that China intends to continue to strengthen antitrust enforcement.
1. Safe harbours for non-hardcore conduct
Article 19 of the Proposed Amendments would authorize SAMR to create a presumption of legality for certain types of cooperation between businesses whose market share(s) are below prescribed thresholds. Whilst this development may be compared to the block exemption regime in the EU, there is a crucial difference: the safe harbours will consist of a rebuttable presumption, rather than a legal exclusion — SAMR will be able to enforce against conduct within the safe harbour where it has evidence of harm to competition. The Proposed Amendments do not specify precise market share levels – these are expected to be matters for SAMR to decide later.
2. Effects-based defences for RPM?
RPM has been a consistent enforcement priority for the SAMR since the AML came into force in 2008. The SAMR has maintained the view, now supported by the PRC courts, that RPM is presumptively illegal.
Whilst maintaining the position that RPM is in general anticompetitive, the Proposed Amendments appear to (slightly) open the door to a more flexible approach, by allowing businesses to advance justifications for RPM. The burden will rest on the companies under investigation, and SAMR will retain a significant margin of discretion in assessing whatever arguments are put forward. The antitrust guidelines for the automotive industry have already illustrated some circumstances where RPM may be justifiable.2 However, experiences in other jurisdictions with a similar approach (e.g., the EU) suggest that, given the risks of enforcement, many businesses will be reluctant to avail themselves of these potential justifications.
3. Specific prohibited abusive practices for digital platforms
Amid rising regulatory scrutiny of tech companies across the world, the SAMR has been active in various investigations targeting China’s tech sector operators.
The Proposed Amendments codify findings in recent cases, with the following listed as specimen examples of illegal conduct:
- Unreasonable exclusion/restrictions via data, algorithms, technology, and platform rules.
- Downgrading and/or reduction of various rights/privileges (e.g., access to the promotional activities and visibility in the searches) for non-compliance with “choose one from two”/exclusivity requirement.
The challenge for internet operators in China remains how to navigate the risks of intervention by the SAMR. The Antimonopoly Guidelines for the Internet Platform Economy issued on 7 February 2021 can be useful for internal antitrust compliance audits and/or “healthchecks” and provide a non-exhaustive list of unlawful restrictions in the internet sector.
4. More sophisticated merger review process
On the merger control front, the Proposed Amendments include a variety of innovations:
- Article 32 of the Proposed Amendments retains the proposed stop-the-clock regime that first appeared in the earlier 2020 Draft, i.e., the 180-day period for merger review is suspended once requests for information (RFIs) are sent and until responses are deemed complete. The review procedure would also be suspended when the parties are in negotiation with the SAMR regarding the remedy proposals. The adoption of a “stop-the-clock” mechanism may delay the initially set deal timeline and companies should factor such risk in their deal timetables. But, conversely, the proposal could make the process more efficient in complex cases where the SAMR currently has to require the parties to pull-and-refile when the 180-day review period expires.
- Article 26 confirms that SAMR can review deals that fall below the notification thresholds, for example, in the event of ‘killer acquisitions’ of competitively significant companies with zero/low revenues.
- Article 37 sets out a list of key sectors in respect of which the SAMR should place increased focus, including sectors directly related to peoples’ livelihood, finance, technology and media. Although the authority commits to strengthening the merger review in these sectors, there are no concrete measures in place.
5. Increased penalties for AML violations
The Proposed Amendments would strengthen the potential penalties for both substantive and procedural violations in a number of ways:
- For the first time in Chinese antitrust history, SAMR would be empowered to impose administrative fines of up to RMB 1 million (approximately USD 150,000) on legal representatives, directors and other employees directly responsible for infringements of the AML.
- The Proposed Amendments retain the provisions on criminal liability included in the 2020 Draft, which appear to open up the possibility that individuals involved in infringements of the AML would also be held criminally responsible. That being said, there is currently no corresponding crime in the PRC Criminal Code for antitrust violations (except for bid rigging and obstructing an antitrust investigation), and the utilization of criminal sanctions would – even if the Proposed Amendments were adopted – presumably depend on further amendments to the PRC Criminal Code.
- The potential penalties for failure to file/gun jumping are significantly increased, from RMB 500,000 (approximately USD 78,350) in the current law to RMB 5 million (approximately USD 784,000) (or higher where the transaction is found to have anti-competitive effects). Gun jumping has been a significant enforcement priority for the SAMR in recent times. Should the Proposed Amendments be adopted in their present form, SAMR is likely to make quick and extensive use of its new powers to deter parties from failure to comply with their filing obligations.
- Business operators and individual penalized for violation of the AML will also be subject to negative consequences under China’s social credit system.
A summary of the proposed changes to the penalties for antitrust violations is as follows:
|Violation||Fines under the AML||Fines proposed in the Updated Amendment|
|Merger control violations Failure to notifyImplementing pre-clearance (gun-jumping)Breach of remedies in a conditional approval decisions; ORImplementing a deal that was blocked||Up to RMB 0.5 million / USD 0.08 million||Concentrations with anti-competitive effect:Up to 10% of the turnover in last year.|
|No anti-competitive effect:Up to RMB 5 million / USD 0.77 million|
|Monopoly agreements that have been entered into but yet to be implemented||Up to RMB 0.5 million / USD 0.08 million||Up to RMB 3 million / USD 0.46 million|
|Where the relevant undertaking does not generate turnover in last year||N/A3||Up to RMB 5 million / USD 0.77 million|
|Where the undertaking’s legal representative, persons in charge and those most directly responsible are personally responsible for entering into the monopoly agreement||N/A||Up to RMB 1 million / USD 0.15 million|
|Violation by a trade association for organizing or facilitating a monopoly agreement||Up to RMB 0.5 million / USD 0.08 million||Up to RMB 3 million / USD 0.46 million|
|Obstructing an investigation, refusing to provide required information, destructing evidence, providing false information, etc.||Fines for individuals: Up to RMB 0.1 million / USD 0.02 millionFines for the company: RMB 0.2 million-1 million / USD 0.03-0.15 million||Fines for individuals: Up to RMB 0.5 million / USD 0.08 millionFines for the company: Up to 1% of the turnover in last yearWhere the relevant undertaking does not generate turnover in last year or the turnover is difficult to calculate: Up to RMB 5 million / USD 0.77 million|
|Where the circumstances of violation of the AML are particularly serious, the impact is extremely bad, and the violation results in serious consequences||N/A||2-5 times the original amount of the fine under the AML|
|Where the violation of the AML constitutes a crime||N/A||The criminal liabilities will arise|
6. Public enforcement mechanism for Peoples’ Procuratorates
The Proposed Amendments introduce an enforcement mechanism that would allow Peoples’ Procuratorates to initiate public interest litigation in competition law cases. Public interest litigation in China has historically been used to enforce environmental protection laws, and more recently has been extended to privacy and youth protection laws, with focus on big tech.
A Chinese version of the client alert is available here.
2. According to the antitrust guidelines for the automotive industry, RPM may not infringe the AML in the following circumstances : (i) RPM imposed as part of a short-term promotion for the introduction of a new product, e.g., new energy vehicles; (ii) RPM imposed on distributors who merely act as intermediaries; (iii) RPM for public government procurement; and (iv) certain online sales via online platforms where it is the suppliers of auto vehicles and the customers negotiating the price but the transactions are made by online platform.
3. In May 2019, the Zhejiang Administration for Market Regulation penalized eight concrete manufacturers in the city of Quanzhou for cartel. The company that initiated the cartel has escaped fines because it had not materially gone into business and had generated no revenues during the previous year, indicating a loophole in the AML for companies with zero sales in previous year.