After five years, Zhan Hao zeroes in on the effectiveness of the Anti-Monopoly Law and antitrust enforcement in China
Experts think that rigorous enforcement marked 2013 as a milestone of the Chinese antitrust regime, even though the Anti-Monopoly Law (AML) has been in effect for five years. Given the reality that the AML is playing a more important role, business operators, lawyers and other stakeholders at home and abroad feel it necessary to analyse the trend of antitrust enforcement in China and assess foreseeable risks. The AML consists of three pillars: merger control, monopolistic agreement and abuse of market dominance.
Merger control
There are three antitrust enforcement agencies in China, namely the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC), and the State Administration for Industry and Commerce (SAIC). As the only authority in charge of merger review, MOFCOM probably is the busiest among the three.
Up to the fourth quarter of 2013, MOFCOM had completed 749 pre-merger notification cases, of which 672 were cleared without conditions, 20 were approved with remedies, and one was blocked.
Foreign-to-foreign transactions accounted for roughly 50% of the cases reviewed by MOFCOM in 2013, with domestic transactions only approximately 10%. These numbers suggest that deals between giant multinationals may reach the filing threshold more easily, and foreign companies are more concerned about compliance issues.
MOFCOM also remains active in rule-making. The ministry finished the drafting work of the Interim Provision on the Applicable Standards in Simple Cases of Concentrations in 2013 and issued it on 11 February 2014. It became effective from 12 February 2014. Although MOFCOM has clarified the criteria according to which a proposed deal may be treated as a “simple case”, the new rule does not touch on equally important procedural and treatment issues.
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MOFCOM also circulated the draft Provisions on Imposing Restrictive Conditions on the Concentration of Business Operators, soliciting public opinions in March 2013. The proposed provisions are aimed at making clear how to decide the restrictive conditions, selection of supervision trustees, how to carry out divestiture and select appropriate purchasers, the procedures, the change and termination of restrictive conditions, and the responsibilities of relevant parties.
The lengthy review period is often a complaint of filing parties. In theory, the review takes up to six months, but in reality it can be longer. Under certain circumstances, the filing parties may have to drop the filing and re-file to avoid unwanted results.
Market shares of the filing parties in the relevant market are a frequent parameter that MOFCOM refers to as a key element in its competitive analysis.
Among all the 22 conditionally approved cases, market share of the filing parties was mentioned in 14. However, usually there is no further analysis on the data in the published decisions. It can be expected that in the foreseeable future, MOFCOM may include more economic grounds in published decisions, thereby enhancing transparency.
Another fact is that MOFCOM seldom explicitly considers efficiency as a key element when reviewing a merger. None of its decisions expressly mentioned efficiencies. Indeed, efficiency is a controversial issue. Even in developed antitrust regimes such as the EU and the US, the regulators will not accept efficiency claims without careful scrutiny.
It seems that MOFCOM may not regard efficiency as a key element that needs to be considered because of the abstraction of efficiency; or at least MOFCOM’s decisions do not articulate efficiency clearly. Nonetheless, it is noteworthy that in the Interim Provisions for the Assessment of the Effects of Concentrations, MOFCOM admits that efficiency that might be generated by a merger may bring positive effects to consumers and therefore should be considered. To this end, we anticipate MOFCOM can come up with clearer guidelines on when and how it evaluates efficiency, and we look forward to test cases.
A further fact is that MOFCOM takes a relatively rigorous view towards non-horizontal mergers. Among the 22 cases, 10 are non-horizontal, accounting for nearly 50%, while in the US, non-horizontal mergers are typically of less concern, only accounting for 6% of all phase II cases investigated by the Federal Trade Commission.
Outlook and suggestions
First, it is reasonable to say that MOFCOM will remain active in merger review given increasing numbers of mergers. Second, one may expect the review period can be shortened thanks to the interim provision. However, for cases that are not so simple, we may have to stay with the status quo as it is not realistic to see a significant improvement on staffing in MOFCOM.
Third, based on the three latest cases cleared with conditions – especially the last one, Thermo Fisher/Life Technology – it seems that MOFCOM intends to provide more transparency and economic reasoning in decisions. However, in relation to efficiency, it is still unclear whether and how MOFCOM will treat this element. Despite this fact, merging parties are still encouraged to articulate the economic reasoning when preparing the notification materials, because for one thing, efficiency consideration has solid legal basis; for another, efficiency will not make things worse.
Fourth, since MOFCOM has specific concerns about non-horizontal mergers, and foreclosure and leverage effects may bring these about, filing parties need to be careful when the merger is likely to generate these effects. Last but not least, as MOFCOM’s de facto preferred type of remedy, behavioural remedies may still be frequently used in the future, and filing parties subject to such remedies are encouraged to keep smooth and frequent communication with MOFCOM and trustees, in order to comply with commitments and avoid violations.
Monopolistic agreements
In 2013, the NDRC was no doubt the player at centre stage of the AML. Its rigorous enforcement towards vertical price-fixing agreements was impressive. The two most high-profile cases related to premier liquor makers Moutai and Wuliangye, and the multinational infant formula producers. In the former case, Moutai was fined RMB247 million (US$40.3 million) and Wuliangye RMB202 million, both for resale price maintenance (RPM). In the infant formula case, the total fine was RMB669 million, for vertical price-fixing.
The enforcement towards horizontal agreements in 2013 was also more rigorous. The NDRC published four price cartel decisions and the SAIC published two non-price cartel decisions. The targets were mostly industrial associations’ self-discipline agreements, and the bulk of the fined parties were mostly domestic undertakings.
Anti-cartel enforcers in China include both the NDRC, responsible for combating price-related anti-competitive behaviours, and the SAIC, responsible for non-price related anti-competitive behaviours. NDRC and SAIC enforcement activities in 2013 and the past suggest: trade associations’ self-discipline agreements are under the spotlight of both authorities; and heavy industries such as gas or electricity were rarely targeted.
It is also notable that the insurance industry is at the centre of antitrust scrutiny. The insurance associations and companies in Hunan, Xinjiang, Zhejiang, Henan, Liaoning, and Anhui provinces were all investigated and fined.
Forecast and advice
It is not surprising to see the NDRC considers vertical price fixing or RPM as serious violations of the AML. Therefore, it is important that undertakings review their sales or distribution agreements to identify any conduct which may constitute RPM, and properly assess any possible antitrust risks.
With regard to anti-cartel enforcement, special attention should be paid to trade associations’ self-discipline agreements. One predictable thing is that horizontal price-fixing agreements will continue to be the focus of antitrust enforcement. It is hard to forecast any “safe” sectors.
Abuse of market dominance
Enforcement against abuse of dominant position seems relatively less active. Recently, there have been several significant abuse cases. Abuse of market dominance is a tough area for antitrust enforcement due to difficulties in defining the relevant markets and proving market dominance. Undertakings and lawyers have received little clue of the regulators’ reasoning when they consider whether and how an abuse of dominant position will be constituted.
In this regard, courts may play an increasingly more important role in curbing abuse of dominant market position. Encouraged and guided by the Provisions of the Supreme People’s Court on Certain Issues Relating to the Application of Law in Hearing Cases Involving Civil Disputes Arising out of Monopolistic Acts, more plaintiffs have filed private damage actions against their competitors or business partners for abusive behaviours in relevant markets.
Outlook and suggestions
The recent case of Yiyuan Purified Water has proved that the Chinese authorities have an improved ability to deal with abuse of market dominance cases. Although the enforcement activities have been leaning towards monopolistic agreements, abuse of dominant position is still under the radar of AML enforcers. For this reason, undertakings that have dominant position in the relevant market should take the risk of violating article 17 of the AML into serious consideration, especially when signing purchase and sales agreements, and in daily operations.
We anticipate that the general trend of rigorous enforcement of the AML will continue in 2014. Additionally, the old topic of a more integrated approach from the three antitrust authorities (MOFCOM, NDRC, and SAIC) will still be hot. In fact, with respect to AML enforcement, competition between juridical organs and administrative departments has already begun, and will become fiercer. Economic analysis will ascend to centre stage in administrative proceedings and court trials.
Bigger fines or damages imposed on violators of the AML should be anticipated, regardless of whether the target undertaking is an influential domestic tycoon or an international giant.
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Zhan Hao is the managing partner at AnJie Law Firm
