Key Developments in China

Introduction

The emergence of internet platforms has been the driver of a series of new economic sectors and industrial reforms but, at the same time, the abuse of the platform’s power has brought chaos to not only the digital market but also the new economy. Because of the characteristics of the internet, the digital market is prone to forming a ‘winner takes all’ situation. Therefore, according to the Central Economic Work Conference,^[2] intensifying antitrust enforcement and preventing ‘disorderly capital expansion’ have become the top priorities in China.

On 1 August 2022, the first amendment to Anti-Monopoly Law of the People’s Republic of China (AML) came into effect. Before that, the Anti-Monopoly Guidelines for the Platform Economy Industries (the Guidelines) were implemented on 7 February 2021. The Guidelines are enacted based on the AML to prevent and prohibit monopolistic conduct in the field of platform economy. The promulgation of the Guidelines is a milestone, initiating China’s anti-monopoly movement against internet platforms. Within just one month of the draft Guidelines being introduced, the State Administration for Market Regulation (SAMR) had imposed administrative penalties on internet companies in three cases of unreported concentrations, all of which are typical of transactions involving variable interest entities (VIEs), a common governance structure adopted by Chinese internet companies. In April 2021, the SAMR imposed an unprecedented 18 billion yuan administrative fine on Alibaba, the biggest online retailer platform in China, for the abuse of its dominant position.

Against the backdrop of intensifying scrutiny of digital platforms, the aim of this chapter is to shed light on China’s latest legislation and law enforcement activities in the area of digital platforms and e-commerce. The chapter covers monopoly agreements, the abuse of market dominance and merger control.

Monopoly agreements

As a technological force under the control of human beings, artificial intelligence (AI) and digital algorithms play an inconspicuous but significant role in market competition. Big data enhances market transparency and makes it much easier for companies to understand the market, and AI can improve the efficiency of decision-making. However, these tools may also be used to exchange informa- tion or make decisions that have anticompetitive effect, such as fixing prices and segmenting markets. Thus, the second chapter of the Guidelines specifically stipulates the methods to regulate monopoly agreements in the context of digital platforms.

On the basis of the AML, the Guidelines take full account of the dynamic, systematic and complex nature of the platforms, and provide clarification of the specific scope of monopoly agreements and their operation mode. The Guidelines recognise that undertakings may use algorithms and platform rules to enter into horizontal monopoly agreements, vertical monopoly agreements and hub-and- spoke agreements to exclude or restrict competition.

Algorithmic collusion

AI stands out as a transformational technology in the digital market.^[3]AI using machine learning, especially price algorithms, is now widely employed in many fields and industries. Algorithms can provide quick and easy price adjustment strategies and facilitate dynamic market transactions. Many undertakings in trans- actional areas, such as hotel bookings and online stores, use pricing algorithms to automatically adjust prices to match those of their competitors. However, the use of algorithms may also lead to anticompetitive behaviours, of which algorithmic collusion is typical.

Algorithmic collusion is collusion agreed between human beings and executed with the assistance of technology.^[4] Because of the advent of algorithms, different competing parties can directly use pricing algorithms to reach tacit collusion to maximise their collective interests instead of going through traditional discus- sions, negotiating or signing agreements, which makes it harder for antitrust authorities to find evidence of a cartel’s existence. In addition, algorithms increase market transparency on the supply side, allowing undertakings to gather sufficient information about competitors, so that they can quickly adjust prices, which further reinforces the anticompetitive situation in the market and the stability of a cartel.

Given that algorithmic collusion is a new form of collusion, whether it should be tackled had been controversial, but now the AML and the Guidelines clearly identify the anticompetitive characteristics of algorithmic collusion. Article 9 of the AML prohibits business operators from utilising data and algorithms to engage in monopolistic conducts. Article 5 of the Guidelines emphasises that ‘other concerted acts’ mentioned in Article 16 of the AML include concerted acts by means of algorithms; Article 6, Paragraphs (II) and (III) of the Guidelines stipulate that using technical means to communicate and using data, algorithms and platform rules to achieve coordination and consistency can constitute horizontal monopoly agreements; and Article 7(III) of the Guidelines sets forth that directly or indirectly restricting prices using data and algorithms may also constitute vertical monopoly agreements. The stipulation of the AML and the Guidelines provides the legal basis for authorities to deal with algorithmic collusion and demonstrates the authority’s will to combat algorithmic collusion.

Although traditional collusion is usually solved by law enforcement using investigative tools to detect a cartel or by cartel members providing information, the advent of algorithms has made it even harder to find evidence from outside or to crack cartels from inside. To tackle this problem, the Guidelines first lower the evidential standard of identifying collusion, stating in Article 9 that ‘if it is difficult to obtain direct evidence, in accordance with Article 6 of the Interim Provisions on Prohibition of Monopoly Agreements, the level of access by undertakings to the relevant information may be determined based on logically consistent indirect evidence’. In addition, the Guidelines highlight the use of leniency programmes and encourage undertakings involved in cartels to self-report and hand over evidence.

Though currently there are no reported cases of algorithmic collusion in China, using computer algorithms to improve pricing models, customise services and predict market trends has become a common practice for companies in China, especially in the e-commerce area. Thus, it is highly likely that the anti- trust authorities will later attach great importance to this topic.

Hub-and-spoke agreements

Hub-and-spoke arrangements are horizontal restrictions at the supplier or retailer level (the spokes), which are implemented through vertically related players that serve as a common hub (e.g., a common manufacturer, retailer or service provider). The ‘hub’ may facilitate the coordination of competition between the ‘spokes’ without direct contact between the spokes. In the extreme, the effects of a horizontal hardcore cartel can be achieved purely based on communications between a hub and the spokes.

Article 19 of the AML prohibits business operators from organising or providing substantive assistance to other operators to reach monopoly agreements. Considering the characteristics of online platforms, it is very easy for platform operators and operators on the platform to form a hub-and spoke cartel. To be more specific, the ‘double identity’ nature of platforms enables platform operators to play the roles of both hub and spoke.

Thus, the Guidelines specifically emphasise this special collusion by:

• recognising that a hub-and-spoke agreement, though vertical in form, may have the same effects on market competition as a horizontal monopoly agreement;
• stating that such an agreement could be analysed under Article 17 or Article 18 (or both) of the AML; and
• including a few factors for consideration to determine whether a hub-and- spoke agreement constitutes a horizontal monopoly agreement regulated by Article 17 of the AML or a vertical monopoly agreement as regulated by Article 18 of the AML although no legal test for such determination is laid out.

In addition, hub-and-spoke collusion is often conducted using algorithmic technology, platform rules and other means. For instance, the online car hailing platforms provide drivers with passengers’ orders and allow the transactions to take place. However, platforms use algorithms to assign orders that customers cannot choose, so there is no competition among drivers. Besides, the amount to be charted is also determined by platforms, and both customers and drivers are deprived of the right to bargain and reach an agreement. The plaintiff in the US case of Meyer v. Kalanick mentioned this when he expressed his concern about Uber, and we understand that the situation is quite similar in China. Although the Guidelines do not set forth the specific solutions to hub-and-spoke agree- ment, the SAMR clearly signals that these agreements should undergo more strict antitrust scrutiny.

MFN clause

Most-favoured nation (MFN) clauses (also known as anti-discrimination clauses) are provisions by which an undertaking requires its suppliers or customers to treat it no worse than all other undertakings. Setting up MFN clauses in contracts is a typical act of the platform operator requiring operators on the platform to provide it with trading conditions equal to or superior to other competitive platforms in terms of commodity prices and quantity, among other things. The widespread use of such clauses not only binds the contracting parties but also impedes the overall competition condition of the whole market. MFN clauses are widely used on price comparison websites, online travel agencies and the like, and there have been already some enforcement practices in the United States, the United Kingdom and the European Union. The SAMR also mentioned in response to a reporter’s question on the Guidelines that platform operators might not impose requirements for the trading conditions of operators on the platform with other competing platforms.

The main concern of the antitrust law enforcement agencies is that the use of MFN clauses tends to have an exclusive effect on competitors. Low-cost compe- tition strategy is a common method of increasing market share. However, if the seller signs an MFN clause with certain platforms, it may not be able to offer lower prices to other platforms. In this way, the cost of market entry or expansion of other platforms will significantly increase.

Therefore, setting up MFN clauses can raise issues with both abuse of market dominance and vertical monopoly agreements. The draft Guidelines emphasise that MFN clauses may constitute vertical monopoly agreements and clarifies the factors to be considered when evaluating their influence, stating that ‘in order to analyse whether MFN treatment clauses constitute a vertical monopoly agreement, the commercial motivation for entering into such clause, the ability to control the market and the impact of the implementation of such clause on market competition, consumer interests and innovation may be comprehen- sively considered’. Although the final version of the Guidelines does not contain this stipulation, Article 7 of the Guidelines clarifies that an MFN clause may constitute a monopoly agreement as well as abuse of market dominance. Those factors still stand as good reference when assessing relevant risks. Because the vertical monopoly agreement offence does not require market dominance, companies should pay particular attention to the potential risk when considering MFN clauses, even if not with a dominant position.

Safe harbour rule

Article 18 Clause 3 of the AML newly introduces a safe harbour rule. Under the rule, vertical monopoly agreements are not prohibited if certain requirements, including a market share ceiling, are met. The detailed requirements for safe harbour are still in draft. Although not explicitly targeting the digital market, the safe harbour rule will apply to all industries.

Abuse of market dominance

The traditional determination of the abuse of a dominant position usually follows the steps of: defining the relevant market; analysing whether the undertaking has a dominant position; and determining whether the act in question constitutes an abuse. However, the nature of the internet makes the traditional analysis and identification approach extremely difficult.

Owing to multiple factors such as the innovation of the information tech- nology industry, the SAMR has been very cautious in terms of the antitrust regulation of digital platforms. Since the release of the Guidelines, the SAMR has begun to focus on the abuse of market dominance by digital platforms and is making a start on drastic reforms and remediation.

Key factors in identifying market dominance

Digital platforms are characterised by multiple unique economic phenomena such as network effects, two-sidedness or below-cost pricing, which makes it more complex to define relevant market positions and identify dominance.

The Guidelines provide a detailed list of factors that should be considered in defining the relevant market. Article 4 of the Guidelines stipulates the factors that can be used when conducting substitution analysis, such as platform func- tions, business models, application scenarios, user groups, multilateral markets and offline transactions for demand substitution analysis, and market access, technical barriers, network effects, lock-in effects, transfer costs and cross-border compe- tition for supply substitution analysis. This is discussed further in the ‘Merger control’ section, below.

Article 11 of the Guidelines specifies the factors to identify a market domi- nant position in light of the characteristics of the platform economy industries, including an undertaking’s market share and the status of competition, an under- taking’s ability to control the market, financial and technical conditions, the degree of dependence of other undertakings on the undertaking in question in respect of transactions, the degree of difficulty for other undertakings to enter the relevant market, as well as other factors based on the characteristics of the plat- form economy industries. The diversity of the considered factors gives antitrust law enforcement more flexibility.

In view of the above, the Guidelines set forth the requirements and methods in terms of the relevant market in platform economy. Furthermore, considering the specialty and complexity of the digital area, we understand that the SAMR may also cooperate with other relevant regulatory bodies to jointly study and investigate antitrust compliance issues.

Big data killing

Big data killing refers to the practice of some platforms using algorithms to discriminate in pricing practices.^[5] Big data killing can increase profits because many of the regular or important customers are less sensitive to price increases and they may pay more for a product or service compared with new customers. This phenomenon is particularly common on food delivery and online travel agency platforms.

In general, big data killing is regarded as illegal in two respects: (1) differen- tial pricing based on consumer profiling violates consumers’ personal information rights; and (2) the act of charging different prices for the same item violates consumers’ right to fair trade.

In practice, it is difficult for consumers to prove whether a company’s price increase is justified or discriminatory. To address this issue, regulators have taken several approaches to prevent internet companies from using big data to practise price discrimination. Apart from the Guidelines, big data killing is also regu- lated under other laws and regulations, including the Consumer Protection Law, the E-Commerce Law, the Measures for the Supervision and Administration of Online Transactions, among others. Draft regulations on algorithms recently issued by the Cyberspace Administration of China also address this issue. Furthermore, local governments have carried out a series of enforcement activities against big data killing. For example, under the organisation of the Guangzhou Administration for Market Regulation, 10 internet companies signed a pledge not to use big data to conduct price discrimination.

In addition, a court has shown its consideration for consumers in a decision of 7 July 2021. Keqiao District Court of Shaoxing City, in Zhejiang Province, heard the case of Ms Hu and Shanghai Ctrip Commercial Co, Ltd (Ctrip), a well- known online travel agency in China. The Court ruled in favour of the plaintiff in the first instance. Ms Hu is a ‘diamond VIP’ client of the Ctrip app, but she paid fees higher than the actual price when she booked a hotel room instead of enjoying the VIP discount. The Court held that the Ctrip app, as the intermediary platform, is obliged to report the actual value of the subject matter truthfully. As Ctrip failed to report, the Court determined that the app had committed fraudulent promotion, price fraud and deceptive acts, and supported the plaintiff ’s request for a full refund and punitive damages at three times the original payment. This is the first successful case for customers concerning big data killing. We understand that Keqiao District Court’s ruling in favour of the consumer and the frequent law enforcement activities against the use of platform data shows the will of judicial and administrative authorities to protect consumers.

Picking one from two

‘Picking one from two’ is technically not a legal term. The practice refers to a situation in which a platform requires the undertakings on the platform to do business only on that platform instead of others. For instance, since 2015, sellers have been asked to choose in marketing battles between Alibaba and its competi- tors. Alibaba used its market power, platform rules and technical means such as data and algorithms to adopt a variety of incentives and penalties to ensure the implementation of the requirement.^[6] In 2017, one of its competitors engaging in e-commerce, JD.com, filed a lawsuit against Alibaba for abusing its position to prevent merchants from selling on its platform, and Pinduoduo and Vipshop soon joined the lawsuit.^[7] However, owing to the complexity of the jurisdiction involved in the case, the court has not expressed any views on the substantive issues involved for the past few years.

The authorities’ ambiguity on the issue began to change in November 2020 when the SAMR clearly indicated that online trading operators should not abuse their dominant market positions to eliminate or restrict competition based on their technical advantages, number of users, the ability to exert control over the relevant industry and other operators’ dependence. In April 2021, the SAMR and Shanghai Administration for Market Regulation (Shanghai AMR) each issued within a short time of each other high-profile administrative penalty decisions against operators within the platform economy industry for the abuse of market dominance, namely Alibaba and Sherpa’s. Alibaba was fined 18 billion yuan (4 per cent of its domestic revenues in 2019) for the aforementioned abusive act. The two cases clearly signal a trend of a significant increase in antitrust enforcement activities now and for the future.

More importantly, the SAMR and Shanghai AMR have established a specific analysis model based on market power in these two cases, which is different from the theory mentioned by the Supreme Court eight years ago. In 360 v. Tencent, the Supreme Court ruled that competition within the internet market is highly dynamic and distinct from traditional markets, so the boundaries of the relevant markets are much less clear, which shows that the indicative role of market share should not be overestimated.^[8] Alibaba made the argument that the indicators for evaluating the online retail service are various and the dominant position cannot be identified based solely on market share. However, the SAMR did not approve of this argument, stating that Alibaba has long held a high market share and has a high level of market recognition and customer ‘stickiness’, with high migration costs for undertakings within the platform. As regards Sherpa’s, Shanghai AMR used a hypothetical monopolist test model to identify its dominant position. It is clear that owing to changes in the competition environment, the antitrust law enforcement agencies are taking a more active and aggressive approach towards identifying the relevant market.

Community group buying

Compared with other formats of the online new economy, community group buying is definitely unique and has distinctive Chinese characteristics. Community group buying refers to a form of business in which a certain number of consumers buy the same goods at a low discount through certain organisations in their communities. Customers can order goods online and get them offline. During the covid-19 pandemic, community group buying rapidly became popular with customers. To open up the market and gain customers quickly, platforms offered customers high subsidies and sold goods at very low prices. This predatory pricing behaviour not only brought chaos to the community group-buying market but also affected traditional farmers, traders and self-employed people.

To address this issue, the SAMR and the Ministry of Commerce jointly held an administrative guidance meeting to regulate the order of community group buying, at which six internet platform enterprises participated, including Alibaba, Tencent and Meituan. The SAMR emphasises that internet platform enterprises should strictly regulate the operation of community group buying and strictly abide by the ‘nine don’ts’, such as not abusing their pricing rights and reaching monopoly agreements. In addition, in March 2021, the SAMR imposed fines totalling 6.5 million yuan on five community group buying platforms for unfair price behaviours excluding or restricting competition.

From the above enforcement activities, we can tell that although online fresh food retail services and offline services may not be the same relevant market, the emergence of community group buying may distort the market for the traditional retailing of vegetables, fruits and other commodities, potentially leading to the loss of a large number of undertakings engaged in traditional fresh food retailing. We understand that the SAMR’s focus has extended beyond traditional market competition to a number of areas, such as other undertakings’ interests, public interests and employment, but how these multiple values will fit in is still a matter of debate.

Merger control

SAMR confirms notifiability of VIE structures

The notifiability of VIE structures has long been controversial in China because the VIE structure is considered a legal grey area. Companies in China often set up VIE structures to bypass foreign investment restrictions. In practice, many foreign-listed major Chinese technology companies have VIE structures.

Historically, if a transaction party adopts a VIE structure, merger notification of the transaction would be difficult since the merger review agency did not want to be seen as tacitly recognising the legality of VIE structures. As a result, many transactions involving VIE-structured Chinese tech companies were not notified even though they have met the notifying threshold.

The uncertainty hanging over the notification of VIE structured transactions was finally lifted with the publication of several guidelines and review decisions in the past years. In the following, we briefly explain the sequence of events that crystallised the notifiability of VIE structures.

The SMZ case

On 20 April 2020, the SAMR published on its website a notice in relation to the simple case review decision involving the establishment of a new joint venture between Shanghai Mingcha Zhegang Management Consulting Co, Ltd and Huansheng Information Technology (Shanghai) Co, Ltd (the SMZ case). On 20 July 2020, the SAMR unconditionally cleared the transaction.

According to information disclosed in a public notice, the ultimate controller of Mingcha Zhegang (a purely domestic company) is Leading Smart Holdings Limited, a Cayman Islands listed company. Control is exercised through related entities based on a series of contractual arrangements.

This case marked the first time that the SAMR has officially accepted a merger control filing in respect of a transaction in which the VIE structure was adopted by a party to the transaction.

Publication of the draft Guidelines

In November 2020, the SAMR released for public consultation a draft version of the Guidelines, which expressly stated that transactions involving VIE structures were subject to merger notification requirements.

Publication of failure to notify decisions

On 14 December 2020, the SAMR published decisions to fine three companies for failing to notify their respective VIE-related transactions. This was the first time that the SAMR has imposed the maximum fine (500,000 yuan) under the AML for failure to file regarding VIE-related transactions. The reasons for the penalties were summarised as follows:

• Alibaba Investment Limited, an investment vehicle of Alibaba Group, for its failure to notify its acquisition of Yintai Retails (Group) Co, Ltd, which is active in department stores and other retail outlets;
• China Literature Limited, a Hong Kong-listed company ultimately controlled by Tencent, for its failure to notify its acquisition of New Classics Media, a company incorporated in the Cayman Islands, which controls a domestic company via a VIE structure that is primarily active in the production and distribution of television series, films and web series; and
• Shenzhen Hive Box Network Technology Co, Ltd (Hive Box), an affiliate of SF Express, which operates intelligent terminal service facilities through a subsidiary controlled via a VIE structure, for its failure to notify its acquisition of China Post Smart Express Technology Co, Ltd, which is active in the same sector as Hive Box.

These decisions clarified the SAMR’s position on VIE structures in the merger review context. The SAMR held a press conference regarding the three penalty decisions during which SAMR officials reiterated that the AML does not exempt VIE-structured transactions from merger notification requirements.

Promulgation of the Guidelines

In February 2021, the SAMR issued the final version of the Guidelines, which now unambiguously state that ‘concentration of business operators involving agreement control (VIE control) falls within the scope of concentration of business operators and needs antitrust clearance before implementation’. In concert with the Guidelines, some local anti-monopoly enforcement agencies have also issued guidelines emphasising that VIE-structured transactions are subject to merger notification requirements, including Tianjin Antitrust Compliance Guidelines for Business Operators published by Tianjin Municipal Market Regulatory Commission on 10 August 2021 and Zhejiang Competition and Compliance Guidelines for Platform Enterprises published by Zhejiang Provincial Administration for Market Regulation on 24 August 2021.

New trends

It has become crystal clear that transactions involving VIE-structured parties are subject to merger filing requirements if they meet the notification threshold. Since in practice most VIE-structured Chinese companies operate within the internet industry, the transactions in the internet sector can no longer eschew merger review in China going forward.

SAMR details how revenue should be calculated for online platforms Pursuant to the AML, if a transaction gives rise to ‘a concentration of business operators’ (i.e., a change of control) and the parties to the transaction meet the turnover threshold, a merger notification is required.

Owing to the complexity of calculating turnover in digital platform industries, the Guidelines give more detailed guidance on how the SAMR may calculate the turnover of operators. First, the Guidelines recognise that calculating turnover in the platform industry differs in principle from traditional industries. Second, the Guidelines provide for a bifurcation of methods for calculating turnover:

• for platform operators who only provide information matching and receive service charges such as commissions, turnover may be calculated according to the service fees charged by the platform and other revenues generated by the platform; and
• for platform operators who specifically participate in competition or play leading roles in one side market of the platform, the transaction amounts involved in the platform can also be calculated.

As an example, an online hailing platform that only operates the platform, the turnover will be the charges levied against parties that use the platform (e.g., customers or taxi companies). For an online hailing platform that not only operates the platform but also provides transportation services, the turnover will be the aggregate of the charges and the service fees from the transportation services.

Merger remedies in the digital economy

Because the digital platforms market is characterised by special features such as platform duality (i.e., a platform operator, as well as promoting the platform, often participates in transactions on one side of the platform, being data-driven and interoperability-centric), the Guidelines have set forth some specific restrictions that the SAMR may consider imposing. Article 21 of Platform Anti-Monopoly Guidelines states that the SAMR may consider the following restrictive condi- tions: divestiture of data, opening up platforms and data that constitute essential infrastructure, modifying platform rules or algorithms, a commitment to be compatible or not to reduce the level of interoperability.

Overall, the SAMR has stepped up merger enforcement in the digital plat- form market not only by clarifying that VIE-structured transactions are notifiable, but also by increasing the intensity of substantive review on reported transactions. The SAMR issued its decision prohibiting a merger between Huya and Douyu on 10 July 2021 and published its decision imposing remedies on Tencent’s acquisition of a controlling stake in China Music Group on 24 July 2021. Both decisions are milestones as the Huya/Douyu decision was the first transaction blocked by the SAMR in the digital platform industry and Tencent/China Music Group is the first case in which the SAMR has imposed remedies post-closing, in a failure-to-file procedure.

Huya/Douyu case

Both Huya Inc (Huya) and DouYu International Holdings Limited (Douyu) are publicly traded companies listed on US stock exchanges. Tencent is a share- holder in both companies. Tencent solely controls Huya and jointly controls Douyu with the founder of Douyu. Through the transaction, Huya planned to acquire 100 per cent shares of Douyu and, as a result, Tencent would acquire sole control of Douyu.

The SAMR identified a horizontal overlap in the live broadcast gaming market in China, in which Douyu and Huya had a combined market share of more than 70 per cent in terms of revenues. In addition, the SAMR found a problematic vertical relationship between the upstream internet gaming operation services market (in which Tencent was found to have a market share above 40 per cent) and the downstream live broadcast gaming market. The SAMR was concerned that Tencent who would solely control Douyu, and Huya post-transaction would likely engage in foreclosure tactics at both levels (input foreclosure and customer foreclosure).

After the SAMR found that the remedies proposed by Tencent were unsatis- factory, the SAMR prohibited the transaction.

Tencent/China Music Group case

In July 2016, Tencent signed an agreement to acquire 61.64 per cent of shares in and, consequently, sole control over China Music Group. The transaction was closed in December 2017.

Tencent filed the merger notification to the SAMR through a failure-to- notify procedure.

What distinguishes Tencent/China Music Group from all other decisions is that it is the only failure-to-file decision in which the SAMR found the transaction to have anticompetitive effects. In particular, the SAMR found Tencent post-transaction to have a very high market share (70 per cent in terms of revenues and higher on other metrics) in the internet music broadcast platform market. To ensure that the transaction would not foreclose other internet music platforms from obtaining music rights licences and that other internet music platforms would have the ability to compete with Tencent, the SAMR imposed multiple conditions on the conglomerate.

Tencent is prohibited from entering into new exclusive music rights licensing agreements with record labels and other licensors (except for individual artists and for new songs) and was ordered to rescind existing agreements of this kind; absent valid reasons, Tencent is not allowed to request conditions from music rights licensors that are more favourable than those granted to other internet music platforms. Existing agreements to the contrary need to be amended.

Tencent cannot offer excessive pre-payment to licensors so as to indirectly raise competitors’ costs.

If Tencent has a ‘concentration’ (i.e., an acquisition of a controlling right in another company) that does not meet the filing thresholds but may have anti- competitive effects, it is obliged to submit a filing to the SAMR and suspend closing until the SAMR gives clearance.

SAMR reviews of killer acquisitions in the digital platform industry

In recent years, internet giants have invested heavily in mergers and acquisitions of start-up platforms and emerging enterprises by relying on huge capital. Owing to huge gaps in capital, scale, human resources, technology, market shares, among other things, start-up platforms and emerging enterprises often find it hard to resist a takeover offer from an internet giant. If they refuse to accept the takeover offer, they may face existential threats.

The concern triggered by killer acquisitions in the internet platform is continuing. In September 2021, the SAMR published its Annual Report on Anti-Monopoly Law Enforcement in China (2020), in which is mentioned the severity of killer acquisitions. It says small and medium start-up enterprises may grow rapidly by researching and developing advanced technologies and innovating business models, so as to promote competition in the industry and stimulate market vitality. The killer acquisition of internet giants has sparked widespread public concern about stifling competition and impeding innovation. To this end, the authorities in China are paying close attention to the actions of their counterparts in other jurisdictions.

One way to respond to killer acquisitions is case-by-case review. Both Article 26, Clause 2 of the AML and Article 6 of Interim Provisions on the Examination of Concentrations of Undertakers stipulate that if a concentration between undertakings does not meet the notification threshold, but the facts and evidence establish that the concentration has, or may have, the effect of eliminating or limiting competition, the SAMR may demand a merger filing by the business operators. However, since the criteria for excluding or restricting competition are not clear, this factor is difficult to apply and it is not clear how the SAMR will conducted reviews of concentration that do not meet the threshold.

Another way to respond is introducing new transaction value thresholds. According to the draft implementation rule on notification threshold, transactions involving one party with more than 100 billion yuan turnover and another party with no less than 800 million yuan valuation, among other requirements, require merger filing to the SAMR. We believe this is intended to capture transactions involving a large business operator and star-ups/nascent competitors.

Furthermore, the Guidelines confirm that the SAMR may conduct ex officio investigations into technology deals below turnover thresholds in digital platform economy industries, when the party in question is a start-up or an emerging platform, the turnover of a participating party of the concentration is relatively low owing to the free or low-price model, the concentration of the relevant market is high or the number of competitors is small, among other things.

Notes