China’s Anti-Monopoly Law (AML) continues to evolve since it went into effect in 2008. Recent developments offer some guidance on how future matters will be handled. Highlights of China’s latest antitrust and competition issues over the past six months include:
China Anti-Monopoly and U.S. Antitrust Agencies Sign Memorandum of Understanding. On July 27, 2011, China’s three anti-monopoly enforcement agencies—National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM) and State Administration for Industry and Commerce (SAIC)—signed a Memorandum of Understanding (MOU) with the U.S. Federal Trade Commission (FTC) and the Department of Justice (DOJ) to further promote communication and cooperation among the agencies in the two countries. The MOU provides for periodic high-level consultations among all five agencies as well as separate communications between individual agencies. Specific areas of cooperation include, among others, (1) exchange of information about competition law enforcement and policy developments; (2) training programs, workshops and other means to enhance agency effectiveness; (3) provision of comments on proposed laws, regulations and guidelines; and (4) cooperation on specific cases or investigations when in the agencies’ common interest.
China’s Local Administration of Industry and Commerce Departments Sign Regional Cooperation Agreement for Enforcement of Anti-Monopoly Law. On Aug. 3, 2011, six of China’s provincial and regional Administration of Industry and Commerce (AIC) Departments (Xinjiang, Shanxi, Gansu, Qinghai, Ningxia and Xi’an) signed a regional cooperation agreement for the enforcement of the AML and the Anti-Unfair Competition Law. The cooperation agreement aims to improve cooperation between the six AICs on the enforcement of the AML and the Anti-Unfair Competition Law in general, and specifically in trans-regional cases. The agreement provides for the AICs to establish cooperation mechanisms, such as data exchanges, to notify each other of ongoing investigations, to commission joint surveys and to hold annual meetings to share experiences. Under the agreement, the AICs will also focus on investigating and dealing with unfair competition issues—in particular, widespread alleged illegal activities in key industries, commodity markets and regions—and they will conduct joint law enforcement activities.
China’s First Enforcement Action of Abuse of Administrative Power Under the AML. On July 27, 2011, China’s State Administration for Industry and Commerce (SAIC) published information on China’s first anti-monopoly case regarding abuse of administrative power to eliminate or restrict competition. The Guangdong AIC conducted investigations after three vehicle global positioning system (GPS) operators filed a complaint alleging that a municipal government abused its administrative power by issuing administrative orders that (1) required all targeted vehicles to upload real-time monitoring data to a specified municipal platform operated by a private company and to pay a service fee to that platform of no more than 30 yuan per vehicle, and (2) required traffic police departments to forbid vehicles that failed to comply from passing annual vehicle examinations. The Guangdong AIC concluded that these orders constituted an abuse of administrative power under the AML, and recommended that the Guangdong Provincial Government (GPG) correct the abuse. The GPG then ruled that the orders violated the AML and constituted an abuse of administrative power.
MOFCOM’s Promulgation of M&A Security Review Rules. On Aug. 25, 2011, the Ministry of Commerce (MOFCOM) promulgated the final version of the Implementing Rules for Security Review System on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“Implementing Rules”), replacing the provisional rules issued on March 4, 2011. Under the Implementing Rules, transactions involving enterprises in the fields of national defense security, agricultural products, energy and resources and other areas with a bearing on national security—and which will be acquired and controlled by foreign investors—will be required to undergo a security review. Transactions ruled to have potential or significant impact on national security may be blocked. The requirements for filings under Article 5 of the Implementing Rules go beyond those of an anti-monopoly filing for a concentration of undertakings in some aspects, and include the following: application and introduction of the transaction; identification documents and basics of the foreign investors; basic introduction and documents of the merged domestic enterprise; documents of the foreign investment enterprise to be set up post-transaction; share transaction documents; asset transaction documents; and documents on the potential control of the foreign investors over the target.
The Implementing Rules remain largely the same as the provisional rules with the significant addition of Article 9, the anti-circumvention provision. Article 9 emphasizes that whether an M&A deal falls within the scope of national security review should be assessed by the substance and the actual impact of the deal, and any foreign investors are prohibited from escaping the security review via shareholding entrustment, trust, multiple-level reinvestment, leasing, loans, agreement control, overseas transaction or other ways.
MOFCOM’s Promulgation of Competitive Assessment in Anti-Monopoly Review Rules. On Aug. 29, 2011, MOFCOM promulgated the Interim Provisions on Assessment of the Impact of Concentration of Undertakings on Competition (“Interim Provisions”). The Interim Provisions discuss the unilateral effects and the coordinated effects of horizontal concentrations and the potential impact of non-horizontal concentrations on the up/downstream or associated markets to be considered in MOFCOM’s assessment of a transaction. Articles 5 through 12 identify six factors to be considered, including the following:
- Article 5: Market shares, market structure and whether the business operators who are party to the concentration will gain or increase market control as a result of the concentration.
- Article 6: Herfindahl-Hirschman Index and CRn index are clearly mentioned, but no specific index thresholds above which a concentration is considered as anticompetitive are provided. This reflects a case-by-case approach of MOFCOM, at least for the time being.
- Articles 7–11: In analyzing the impact of the concentration of undertakings on market entry, technological progress, consumers, other relevant undertakings and the development of national economy, the Interim Provisions note the potential negative impact of concentration, and at the same time, acknowledge the potential positive side.
- Article 12: Near-bankruptcy (the failing firm defense) and countervailing buying power are two of the catch-all factors to be considered. The latter is newly added in the Interim Provisions.