In addition, the amended AML requires that antitrust violations be documented on an enterprise’s social credit records, which could impact not only such enterprise’s goodwill and reputation but also its potential business opportunities, especially for public procurement. For example, a medical enterprise with an antitrust sanction record may be subject to a credit downgrade and restricted or prohibited from participating in centralized medicine procurement.
For certain investors (especially private equity and venture capital firms) that participate in a series of investments in portfolio companies, such a series of investments in a target company may meet the filing threshold even if no single acquisition in isolation would have required a filing. Therefore, it is important to plan early to assess potential filing obligations and avoid exposure to heightened sanctions for failure to notify. Due diligence should also include determining whether there were prior notifiable investments in a company which had not been notified, as that could expose the investors to significant fines.
For MNCs with leading or potentially dominant market positions or operating in sectors with relatively complex supply chains (e.g., a mechanism of multi-tiered suppliers), it is advisable to enhance compliance regimes, including adopting contingency plans to respond to any potential antitrust investigation. For MNCs with a sound compliance framework, the increase of potential legal liability may provide a competitive edge against their competitors who have poor compliance standards and become subject to antitrust investigations.
Changes to merger control rules. China’s merger control regime remains a key regulatory factor for MNCs starting or expanding their businesses in China. The new draft AML implementing rules propose to significantly raise the filing thresholds (e.g., for a target business in a typical acquisition, the threshold revenue in China for a reportable transaction is increased to RMB 800 million from RMB 400 million), making it less likely to require notification of small and medium-sized deals without any competition concerns. This initiative will definitely be welcomed by MNCs (especially private equity and venture capital firms), as it can help to substantially expedite timing and save costs in closing such transactions.
However, one newly-added notification requirement in the draft implementing rules could impose new filing requirements on MNCs with significant operations in China. The draft rules propose that an acquisition by an undertaking with Chinese turnover of RMB 100 billion or more may be required to notify a transaction if another party (usually the target) has a market capitalization (or valuation) of at least RMB 800 million and Chinese turnover accounts for more than one third of its global turnover, even if its turnover is minimal. That is, a large acquiring party may trigger notification requirements even for a relatively small acquisition.
This proposed new notification threshold based on a target’s valuation rather than its turnover suggests that SAMR is on heightened alert regarding “killer acquisitions” of start-ups by large enterprises. However, it may be difficult to determine whether the valuation of a start-up meets the threshold, since valuation tends to fluctuate according to industry trends and market conditions. In any case, for a transaction involving a target firm with a valuation in the range of RMB 800 million and an acquirer/investor with RMB 100 billion in Chinese turnover, the parties should proactively and carefully design the transaction structure and assess merger filing obligations at an early stage.
In addition, the amended AML has introduced a “stop-the-clock” mechanism, which is expected to reduce (or even supersede) the need for “pull-and-refile” procedures for complex mergers. Triggers of the “stop-the-clock” mechanism include the notifying parties’ failure to provide information requested by SAMR in a timely manner, new facts or circumstances requiring further verification, and the notifying parties’ request to “stop the clock” to provide time for them to evaluate alternative remedies. Although the new mechanism is expected to optimize review schedules for complex cases, its use by SAMR in other contexts could create undesired extensions of the review period for ordinary or even simple cases.
The amended AML also introduces a “tiered” review system to prioritize the availability of skilled personnel for mergers in important sectors and to improve the efficiency of merger review. Correspondingly, SAMR announced that, from August 1, 2022, it would delegate five provincial competition authorities (Beijing, Shanghai, Guangdong, Chongqing and Shaanxi) to review a portion of simplified merger filing cases on a trial basis. In 2022, roughly 14% of the merger cases were handled by these local competition authorities. As to the focus of merger reviews, the amended AML provides that important sectors involving “national economy and people’s livelihood” are key enforcement fields in respect of which it will strengthen the review of concentrations. While the amended AML does not further clarify the meaning of “national economy and people’s livelihood”, an earlier exposure draft of the amended AML suggested that antitrust enforcement in respect of finance, science, technology, and media businesses will likely be prioritized. Accordingly, MNCs active in such sectors should be particularly proactive in evaluating merger risks and following enforcement trends.
“Safe harbor” mechanism for vertical restraints. While the 2008 AML did allow for exemptions of certain types of agreements from the AML, the bar was extremely high in practice and we are not aware of any published successful application of such provision. Nor did the 2008 AML even contemplate “safe harbors” until certain IPR-related implementing rules and antitrust guidelines introduced the concept in 2019 by proposing certain market share thresholds (20% for horizontal agreements and 30% for vertical agreements). The amended AML for the first time formalizes a “safe harbor” mechanism for vertical restraints in all sectors: a vertical agreement will not be prohibited if the relevant undertaking can show that its “share in the relevant market is lower than the threshold prescribed by [SAMR] and meets other conditions.” SAMR’s draft implementing rules proposed to prescribe a 15% market share threshold, although it was deleted in the officially issued version.
Such “safe harbor” rules appear diverge from those in the EU. The EU’s “safe harbor” rules cover so-called “minor agreements” from both horizontal (10%) and vertical (15%) perspectives. In addition, the Vertical Block Exemption Regulation provides a 30% market share as safe harbor exemption except for hardcore restrictions such as RPM, and the Horizontal Guidelines provide a safe harbor where parties have market shares below thresholds ranging from 15 to 20%. In contrast, the amended AML limits the scope of “safe harbors” to vertical restraints, and does not appear to distinguish RPM from other provisions. In some respects, however, this difference could provide more space for vertical distribution practices by MNCs in China relative to the EU.
The amended AML also attempts to reconcile a long-existing divergence between the Chinese enforcement authority’s “per se illegal” approach (or so-called “prohibition in principle with exemptions as exceptions”) and Chinese courts’ “rule of reason” approach in addressing RPM issues. Under the courts’ approach, RPM would not be prohibited unless it has anti-competitive effects, and an undertaking accused of RPM bears the burden to show the absence of anti-competitive effects. The adoption of safe harbors is consistent with the goal stipulated in Article 11 of the amended AML of “improving the interconnection mechanism between administrative law enforcement and judicial practice”. This appears to conform with the approach taken by the administrative and judicial authorities in EU.
While the newly added “safe harbor” mechanism should be welcome for providing greater flexibility for MNCs to manage their distribution channels in China, it does not suggest that one can ignore the potential exposure and additional burden of proof in connection with vertical agreement issues. For example, the undertaking bears the burden to rebut the presumption of a vertical restraint’s anti-competitive effect, and to demonstrate that its relevant market share does not cross the prescribed threshold, among fulfilling other conditions to be set by the SAMR. In practice, it could become challenging to (i) delineate a proper market definition (as there could exist a number of alternatives), (ii) evaluate a firm’s market position and the competitive landscape (as there could exist conflicting market data), and (iii) show an absence of anti-competitive effects (as counterfactual analysis requires convincing hypothesis and evidence), in particular for sectors with relatively complex supply chains and/or an impactful bearing on consumers’ livelihood (e.g., information and communications technology, healthcare, and automobiles) where an MNC has a leading position in a niche area (e.g., a premium segment). Accordingly, it may be advisable for MNCs to adopt a conservative stance in utilizing the safe-harbor mechanism, and closely monitor the Chinese antitrust legislative and enforcement activities in this respect.
Assisting “hub-and-spoke” cartels expressly codified as antitrust violation. While “hub-and-spoke” cartels have been subject to enforcement in other jurisdictions such as the U.S. and the EU for years, in a “hub-and-spoke” case in China, the enforcers were able to sanction only the “spoke” parties to the horizontal conspiracy and tackle trade associations which played a facilitating role. They were unable to directly sanction the “hub” entity due to a lack of legislative basis. The amended AML adds a specific provision to expand the scope of liable entities by subjecting any undertakings that play an organizing or substantial assisting role in a cartel to the same level of penalty as those directly participating in the cartel.
SAMR’s implementing rules clarify the meaning of “organiz[ing]” and “substantial assist[ing]” as follows:
“organiz[ing]” occurs where (i) the relevant undertaking is not a party to the cartel agreement, but has a decisive or leading role in the subject scope, substantive content and performance conditions of the agreement in the course of concluding or implementing the monopoly agreement; or (ii) the relevant undertaking signs an agreement with multiple trade counterparties, and intentionally causes the trade counterparties having competing relationships to communicate with each other or exchange information through such undertaking to conclude the monopoly agreement; and
“substantial assist[ing]” may be found where the relevant undertaking provides substantial support for the conclusion of the monopoly agreement by other undertakings, including providing necessary support, creating key and necessary conditions or other significant assistance.
Hub-and-spoke arrangements can occur in sectors where downstream third-party distribution channels and/or trade associations are involved. For example, a car maker may organize its dealers to engage in horizontal coordination while taking measures to maintain dealers’ resale prices. In another cartel case, an insurance association in Hunan was accused of organizing a number of insurers to collude on vehicle insurance rates with the assistance and coordination of an insurance agent. Such trade associations and all the participating insurers other than the agent were sanctioned. Were the above cases probed under the amended AML, the carmaker and the insurance agent would likely be held accountable for playing substantial assisting roles in the “hub-and-spoke” cartel.
The risk exposure of organizing or assisting a cartel could also be heightened for MNCs operating in two- or multi-sided markets, in particular if data security and digital activities are concerned. For example, the Anti-monopoly Guidelines on Platform Economy Sector issued by the State Council Anti-monopoly Commission expressly provide that “[c]ompeting in-platform operators may conclude a hub-and-spoke agreement which has the effect of horizontal agreements by utilizing their vertical relationship with a platform operator, or through organization and coordination by the platform operator”. Such practices have already been closely scrutinized outside of China (e.g., the Apple e-book case (2015)). In the digital platform economy sector, concerted conduct may be organized and coordinated through information exchanges facilitated by data, algorithms, or platform rules, absent a written or verbal agreement or decision, raising the risk of exposure to a tacit or unspoken monopoly agreement, including hub-and-spoke agreements. With MNCs historically engaging in brick-and-mortar business transitioning to offering their products/services via digital platforms, the captured scope of such rules will undoubtedly continue to expand. For example, if the platform participants are deemed to be indirectly exchanging competitively sensitive information through a platform operator’s provision of vertical services, a hub-and-spoke agreement may occur. Accordingly, MNCs operating in the platform economy sector would be well advised to watch out for competitively sensitive information exchanges with other firms realized through data or other digital activities and manage the underlying risk exposure.
Abuse of IPR to eliminate or restrict competition. As IPR by their very nature constitute the lawful right to exclude, IPR licensing arrangements, by granting access to their use, generally enhance competition. Therefore, Article 55 of the 2008 AML (Article 68 in the amended AML) provides that the AML does not apply to the lawful exercise of IPR, but only to abuses of IPR to eliminate or restrict competition. For antitrust compliance, it is key to assess the competitive effect of unilateral conduct involving the exercise of IPR, such as licensing and patent acquisitions. To build an effective case, the positive impacts of IPR-related conduct on innovation and efficiency (including promoting the dissemination and utilization of technologies, and enhancing the utilization efficiency of resources) need to be fully explained.
Similar to the EU and the U.S. competition authorities which have issued antitrust guidelines with respect to technology transfer or IPR, China has also formulated a set of implementing rules and antitrust guidelines with respect to IPR abuse. For AML purposes, typical IPR-abusive behavior includes excessive pricing, refusal to license, IPR tying and bundling, imposing unreasonable licensing terms (including restrictive clauses), and discriminatory licensing. SAMR’s new draft antitrust rules on IPR abuse further clarify the factors to be considered when determining whether an IPR holder is dominant, such as the substitutability of IPR, the dependence of downstream customers on IPR derived commodities, and countervailing buyer power. SAMR’s draft rules also propose that problematic IPR restrictive behaviors could include, among other things, prohibiting a licensee from dealing with another licensor, forcing licensees to accept portfolio licensing at the time of IPR licensing, and imposing unreasonable exclusive grant-backs (i.e., a licensee exclusively grants a licensor the right to any improvements or new IPRs obtained by using licensed IPRs) in addition to sole grant-back clauses (i.e., only a licensee and its designated parties can practice any improvements or new IPRs obtained by using licensed IPRs).
To deal with an emerging trend, SAMR’s new draft rules propose to improve the supervision of conduct involving standard essential patents (SEPs) and patent pools. For SEPs, potential abusive behavior includes excluding a specific undertaking from participation in standard setting or implementation, joint boycotting with competitors against another undertaking in standard setting or licensing, unfair excessive pricing and discrimination, and the use of injunctions to force the licensee to accept unfair excessive pricing or unreasonable trade conditions. For patent pools, a “patent pool management entity” is flagged as having possible market dominance, and potential abusive behaviors by patent pool participants include unfair pricing in license fees and exclusive grant-backs.
As an active participant in the dynamic global technology space and in response to the current delicate global geopolitical situations, China is making increasing efforts to encourage investment in innovation. One of its initiatives lies in the intersection of IPR licensing and antitrust, with China growing its antirust regulatory teeth to become one of the major jurisdictions, in line with the goal of transitioning to an innovation-driven economy—it is learning the art of balancing between IPR protection and antitrust regulation in a “glocal” field. IPR intensive industries have also become one of the antitrust enforcement priorities and spotlights in judicial practices in China. For MNCs active in IPR licensing (especially those having significant IPR assets in license-in arrangements), the fine-tuned IPR-related rules could provide more guidance and greater guardrails, but also expand the scope of potential liability in scenarios such as product standardization and patent pooling.
Conclusion
In sum, the amended AML further codifies more instances of anticompetitive behavior to be regulated, while heightening the consequences for a number of violations, including failure-to-notify and refusal-to-cooperate during investigations, which will bring both more clarity and heightened exposure for MNCs’ operations and investments in China.
