China: The Latest Steps Towards a More Robust Enforcement Framework for Anti-Monopoly

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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 the 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 were enacted based on the AML to prevent and prohibit monopolistic conduct in the field of the platform economy. The promulgation of the Guidelines is a milestone, initiating China’s anti-monopoly movement against internet platforms.

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 areas of monopoly agreements, the abuse of market dominance and merger control in the area of digital platforms and e-commerce.

Latest legislative developments

The State Administration for Market Regulation (SAMR) promulgated four much-anticipated Implementation Rules on 24 March 2023, namely the Regulations on Review of Concentrations of Undertakings (the Merger Review Regulations), the Regulations on Prohibiting Monopoly Agreements (the Monopoly Agreements Regulations), the Regulations on Prohibiting the Abuse of Dominant Market Positions (the Abuse Regulations) and the Regulations on Prohibiting the Abuse of Administrative Powers to Exclude or Restrict Competition, all of which came into force on 15 April 2023. The Implementation Rules provide clarity on several areas of antitrust regulation in the field of the digital economy.

Adding special considerations based on the characteristics of the platform economy

Taking into consideration the characteristics of the development of the platform economy, the Merger Review Regulations add special factors to the analysis and determination of control over the market concerned, market access and additional restrictive conditions. For example, in Article 33 of the Merger Review Regulations, the ‘ability to possess and process data’ is added as a consideration in analysing the control over the market concerned by the undertakings participating in the concentration. In Article 34 of the Merger Review Regulations, in addition to control of production resources, sales and procurement channels, and key technologies and facilities, the control of data is added as a consideration in assessing the impact of the relevant concentration of undertakings on market access. Moreover, as for the restrictive conditions set forth in Article 40 of the Merger Review Regulations, data stripping is added as a structural condition, and ‘modifying platform rules or algorithms, undertaking to ensure compatibility or not to reduce the level of interoperability and other measures’ are added as behavioural conditions.

Prohibiting horizontal and vertical monopoly agreements by using data or platform rules

As to horizontal monopoly agreements, Article 13 of the Monopoly Agreements Regulations stipulates that ‘[c]ompeting undertakings shall not reach any of the monopoly agreements set forth under Articles 8 to 12 hereof by making use of, among others, data, algorithms, technologies or platform rules, through communication on intention, exchange of sensitive information, concerted acts or otherwise.’ In addition, according to Article 8 of the Monopoly Agreements Regulations, agreement on ‘algorithms or platform rules’ for price calculation between competitors shall also be deemed a type of horizontal monopoly agreement to fix or change the price concerned. Paragraph 2 of Article 10 of the Monopoly Agreements Regulations stipulates that the rules on prohibited ‘dividing sales market or raw material procurement market’ shall also apply to ‘among others, data, technologies and services’.

As to vertical monopoly agreements, Article 15 of the Monopoly Agreements Regulations stipulates that ‘[u]ndertakings shall not reach any of the monopoly agreements set forth under Article 14 hereof by making use of data, algorithms, technologies or platform rules, etc., through price fixing, restricting or automatic setting of the resale price of commodities or otherwise.’

Strengthening the regulation of abusive behaviours in the platform economy

The AML sets forth only general rules on the abuse of market dominance in the platform economy, while the Abuse Regulations fully incorporate the relevant rules of the Guidelines and specify more detailed rules and regulations on such abuse, taking into consideration law enforcement practices in the platform economy. Specifically:

  • ‘transaction amount’, ‘transaction quantity’, ‘ability to control traffic’ and other new considerations are added for the determination of dominant market position of an undertaking in the platform economy;
  • in the case of the platform economy, ‘cost association among the relevant markets in multi-sided markets involved in the platform and the reasonableness of such association’ may also be considered in the determination of ‘unfairly high or low price’ and ‘selling at price below cost’; ‘type of platform’ is added for the determination of identical or similar market conditions in respect of ‘unfairly high or low price’;
  • in terms of the determination of ‘tie-in sales’, bundling or combination sales by ‘making use of contract clauses, pop-up windows, necessary operation steps or other methods that are difficult for the transaction counterparties to select, modify or refuse’ are newly listed as prohibited ‘tie-in sales’ acts;
  • the circumstance that ‘the transaction counterparty explicitly refuses to comply or actually fails to comply with the rules of the platform that are fair, reasonable and non-discriminatory’ is added as a ‘justifiable reason’ for refusal to deal;
  • the circumstances that ‘it is necessary for maintaining the reasonable business model of the platform’ and ‘it is necessary for protecting data security’ are added as ‘justifiable reasons’ for restrictive transaction; and
  • the circumstance that ‘the transaction is a random transaction carried out in accordance with the rules of the platform that are fair, reasonable and non-discriminatory’ is added as a ‘justifiable reason’ for differential treatment.

All of the rules above are covered in the Guidelines and will have greater legal effect and deterrent after being incorporated in the Abuse Regulations.

A step towards more flexible enforcement

During a press conference held on 13 April 2023, Gan Lin, deputy chief of the SAMR, emphasised that apart from administrative penalties, the SAMR may undertake ‘softer’ enforcement measures such as regulatory talks and guidance meetings. Given the complexity of antitrust enforcement in the digital economy, we believe that the SAMR may increase the use of regulatory talks in future enforcement cases.

Regulatory talks in the AML 2022 and previous enforcement practices

Article 55 of the AML expressly states that ‘[w]here a business operator, an administrative agency, or an organization empowered by laws or regulations to administrate public affairs is suspected of violating the AML 2022, the antitrust enforcement authority may arrange an antitrust regulatory talk with its legal representative or person in charge, and require it to propose corrective and improvement measures.’

Below, we summarise several instances where regulatory talks have taken place based on relevant public news and past enforcement cases.

InstancesExplanations
Joint regulatory talksAntitrust enforcement authorities, together with other government departments, conducted joint regulatory talks with some major companies in certain industries such as iron ore, steel, copper, aluminium and ride hailing. During the regulatory talks, requirements were made to refrain from implementing monopolistic agreements, among other things.
Antitrust regulatory talks with specific business operator(s)Antitrust enforcement authorities conducted regulatory talks with specific companies concerning their non-compliant competition practices and guided them towards compliance.
Antitrust regulatory talks in investigation casesIn a limited number of investigation cases that resulted in administrative penalties or case suspension, antitrust regulatory talks were also held for assessing corrective or remedial measures.
Antitrust regulatory talks with administrative agenciesAntitrust regulatory talks were also used by antitrust enforcement authorities to remind relevant authorities of their suspected administrative monopoly behaviours. Such authorities proactively took rectification measures after the regulatory talks.

Who can initiate antitrust regulatory talks?

From the text of Article 55 of the AML, the antitrust enforcement authorities can initiate regulatory talks. However, with the growing awareness of antitrust compliance among business operators, many of them are inclined to seek clearer guidance on ambiguous issues such as the legality of certain non-price vertical restrictions. Therefore, this raises a further query: can business operators proactively apply for regulatory talks to seek advice and guidance on antitrust compliance issues that remain a grey area? We understand that the antitrust authority’s attitude towards such queries, corresponding procedures, legal consequences and other facets of the application of such antirust regulatory talks remain to be elucidated by pertinent rules.

Post-talks remedial measures

Determination of remedial measures

Both the Monopoly Agreements Regulations and the Abuse Regulations mention that antitrust enforcement authorities can request business operators to take remedial measures during regulatory talks to mitigate or eliminate the potential adverse effects of their behaviours. It can be reasonably inferred that when determining the specific remedial measures, there might be back-and-forth communications between the business operators and the antitrust authorities, somewhat akin to the process of imposing remedies during the merger filing review process. If the remedial measures are insufficient to mitigate the potential adverse effects, the antitrust enforcement authorities may require the business operators to propose additional measures within a reasonable time frame.

Supervision of remedial measures

Neither the AML nor its supplementary provisions explicitly indicate how to supervise the implementation of the remedial measures. Given the antitrust enforcement authorities’ heavy workload with limited staffing levels, we believe that the supervision of remedial measures may mainly consist of periodic compliance reports submitted by business operators and supervision by third-party trustees.

Consequences of not proposing or not implementing remedial measures

The AML and its supplementary provisions do not delineate penalties for business operators that do not propose remedial measures or implement the remedial measures proposed post the regulatory talks. The absence of specific penalties, however, does not imply that the antitrust enforcement authorities will not take further actions. If the business operators’ actions are deemed potentially non-compliant with the AML, formal investigations may be initiated, under which the business operators shall cooperate and cannot refuse or obstruct the investigation.

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 information or make decisions that have anticompetitive effects, 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 transactional 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 discussions, 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 the AML and the Guidelines now 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 agreement, the SAMR clearly signals that these agreements should undergo stricter antitrust scrutiny.

Most favoured nation 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 already been 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 may 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 competition 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 comprehensively 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 following steps: 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 technology 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 functions, 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 competition 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 dominant position in light of the characteristics of the platform economy industries, including an undertaking’s market share and the status of competition, an undertaking’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 and the degree of difficulty for other undertakings to enter the relevant market, as well as other factors based on the characteristics of the platform 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 the 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) differential 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 regulated under other laws and regulations, including the Consumer Protection Law, the E-Commerce Law and 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 believe that Keqiao District Court’s ruling in favour of the consumer and the frequent law enforcement activities against the use of platform data show 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 competitors. 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 the 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 the 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, the 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.

Merger control

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 the Platform Anti-Monopoly Guidelines states that the SAMR may consider the following restrictive conditions: divestiture of data; opening up platforms and data that constitute essential infrastructure; modifying platform rules or algorithms; and a commitment to be compatible or not to reduce the level of interoperability.

Overall, the SAMR has stepped up merger enforcement in the digital platform market not only by clarifying that variable interest entity-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 shareholder 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, which 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 unsatisfactory, 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 anticompetitive 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 and 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 the severity of killer acquisitions is mentioned. It says that small and medium-sized 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 the 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 thresholds, 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 that this is intended to capture transactions involving a large business operator and start-ups and 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

1 Susan Ning is a partner, Ruohan Zhangis is of counsel and Weimin Wu is an associate at King & Wood Mallesons.

2 The Central Economic Work Conference is the highest-level economic conference held by the Chinese Communist Party’s Central Committee and the State Council. Its task is to summarise the achievements of the year’s economic work, analyse and judge the current international and domestic economic situation, and formulate macroeconomic development planning for the following year.

3 See ‘Notes from the AI Frontier – Insights from Hundreds of Use Cases’, discussion paper, April 2018, McKinsey Global Institute.

4 A Ezrachi and M E Stucke, ‘Algorithmic Collusion: Problems and Counter-Measures’, Roundtable on Algorithms and Collusion (21-23 June 2017), https://one.oecd.org/document/DAF/COMP/WD(2017)25/en/pdf.

5 ‘China to Introduce New Laws to Regulate “Big Data Killing” by Internet Enterprises’ (16 August 2021), Pandaily, https://pandaily.com/china-to-introduce-new-laws-to-regulate-big-data-killing-by-internet-enterprises/.

7 ‘Sellers asked to choose in battle between Alibaba and Pinduoduo’, Financial Times, at https://www.ft.com/content/b55d0e0a-33a1-11ea-9703-eea0cae3f0de.

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