China’s second draft of the Anti-Monopoly Law continues to signal aggressive antitrust enforcement policy
On 23 October, China’s top legislature, the Standing Committee of the National People’s Congress (NPC), published the Draft Amendment to the Anti-Monopoly Law (the AML) (the Draft Amendment) for public comments. This is the second draft of the proposed amendments to the AML. China’s antitrust authority, the State Administration for Market Regulation (SAMR) launched a public consultation on an earlier draft in January 2020. Both drafts propose major changes to the existing AML and reflect a more aggressive enforcement policy consistent with the uptick in enforcement levels in the past several months. Our client briefing on the earlier draft amendment can be found here. The main aspects of the second draft are highlighted below.
1. Harsher penalties for violations
Most notably, the Draft Amendment seeks to reinforce the deterrence effects of the AML by proposing harsher penalties for violations of the law.
- The Draft Amendment proposes to increase the maximum level of fines for the following violations. Most striking amongst these is the proposal to significantly increase the maximum fine for failure to notify notifiable transactions. As SAMR considers failure to notify to be a continuous conduct, it is possible that the new fine, once enacted, will have retroactive effect. This, combined with SAMR’s continued efforts in enforcing against failure to notify violations (49 cases so far this year), signals SAMR’s commitment to ramp up its already active enforcement in this area.
|Violation||Maximum fines under the current AML||Proposed maximum fines under the Draft Amendment|
|Failure to notify notifiable transactions||RMB 500,000
(approx. USD 78,291)
- RMB 5 million
|Trade associations that organise anticompetitive conduct||RMB 500,000
(approx. USD 78,291)
|RMB 5 million
(approx. USD 782,914)
|Concluding an anticompetitive agreement, but not implementing it||RMB 500,000
(approx. USD 78,291)
|RMB 3 million
(approx. USD 468,793)
|An undertaking that concludes an anticompetitive agreement, but which had no turnover in the preceding financial year||Not provided||RMB 5 million
(approx. USD 782,914)
|Obstructing an investigation, refusing to provide required information, destroying evidence, providing false information, etc.||
- Fines for individuals:
- Fines for individuals: RMB 500,000
- In addition, the Draft Amendment raises the possibility of pursuing penalties against individuals such as legal representatives, management or personnel who played a key role in the decision to infringe the law. Individuals could be subject to a fine of up to RMB 1 million (approx. USD 156,583).
- The Draft Amendment proposes to add a separate prohibition on organising or providing substantive assistance to others concluding anticompetitive agreements. Fines for such violations would be the same as those for parties to the anticompetitive agreement. This prohibition could be used against 'hub-and-spoke' type conspiracies where the 'hub' is not a member of the cartel but facilitates the conduct of the cartel members.
- Notably, the Draft Amendment allows multiplying fines by up to two to five times of the original fine amount if the impact and consequences of the violation are particularly severe. This makes fine calculation and determination considerably uncertain, and theoretically this proposal would grant SAMR the discretion to impose fines of up to 50% of a company’s revenue. If the proposal is ultimately enacted, this would underscore China’s commitment to more aggressive antitrust enforcement.
- Finally, the Draft Amendment adds a sentence that anticompetitive conduct amounting to a crime should be investigated under criminal law provisions. This proposal would not create any criminal offenses as such, but it suggests that the Chinese government is contemplating the introduction of criminal sanctions for antitrust violations. The Draft Amendment also proposes that companies and individuals penalised for infringing the AML will suffer consequences under China's social credit system.
2. Reforms to the merger control regime
- The Draft Amendment introduces a 'stop-the-clock' mechanism, when: i) SAMR awaits a response to an information request; ii) SAMR and the parties engage in remedy negotiations; and iii) the notifying party requests it. The mechanism could make the review process of complex cases more efficient by avoiding the withdrawal and refiling of notifications multiple times (eg where parties are unable to conclude remedy discussions with SAMR within the statutory review period). However, there is a clear risk that SAMR could issue more requests for information to gain more time to review a transaction, which could undermine the envisaged benefits of the stop-the-clock mechanism.
- Another far reaching proposal in the Draft Amendment is to incorporate a clause which codifies SAMR’s ability to scrutinise a transaction that falls below the filing thresholds if the transaction has anticompetitive effects. This is in line with the intent of other antitrust authorities to address a perceived M&A enforcement gap, particularly in innovation-heavy sectors, where target companies may not meet filing thresholds.
- In terms of enforcement priorities, the Draft Amendment has identified industries relating to people’s well-being, finance, technology and media as key sectors for the merger control review regime. While it is unusual to include sector enforcement priorities in laws, this is considered to be in line with the central government’s determination to curb 'disorderly expansion of capital'. While this wave of tightened regulatory scrutiny may be mainly targeted at large domestic companies, it is conceivable that this will impact foreign companies as well.
3. Further guidance on anticompetitive conduct
- The Draft Amendment proposes to authorise SAMR to establish safe harbour rules to exempt agreements concluded by companies with low market share. The proposal does not specify the precise safe harbour market share levels. This is expected to be decided later by SAMR. The Draft Amendment does not explicitly carve out hardcore violations from the proposed safe harbour exemptions. However, SAMR’s Anti-Monopoly Guidelines in the Automobile Industry and the Anti-Monopoly Guidelines in the Intellectual Property Industry suggest that safe harbour exemptions are unlikely to apply to hardcore violations under the AML (such as cartels and resale price maintenance (RPM)).
- Over the past years, there has been discussion in the China antitrust community on whether RPM should be subject to an effects-based analysis and who should bear the burden of proof. The Draft Amendment confirms the approach that SAMR and its predecessors have taken in the past, namely SAMR can presume anticompetitive effects exist and require companies engaging in RPM to bear the burden to rebut the presumption. SAMR will retain a significant margin of discretion in assessing this, and based on experience in past cases, it is difficult for companies to argue that the RPM conduct had no anticompetitive effects and/or otherwise generated efficiencies.
- The Draft Amendment draws particular attention to the role of data and platforms, a warning to dominant players in the digital economy sector not to abuse a dominant market position. This is in line with the increased regulatory scrutiny of Internet players in China. The proposal seems to suggest that antitrust enforcement in this sector is unlikely to decrease in the near term.
- The Draft Amendment introduces an enforcement mechanism that would allow the People’s Procuratorates to bring public interest-based litigation. This is expected to accelerate the growth of antitrust litigation in China.
The public consultation will run until 21 November 2021. There is no concrete timetable for the adoption of the proposed amendments to the AML. However, we anticipate that the amendments will be finalised and adopted soon given the AML has been identified as a priority on NPC’s legislative agenda. For companies doing business in China, continued compliance with the AML is important more than ever before, particularly against the backdrop of increased enforcement of the law.