China: Antimonopoly Law
Chinese Antimonopoly Law Enforcement: Launching into Stormy Seas
China's first comprehensive competition statute, the Antimonopoly Law (AML), took effect on 1 August 2008.1 Its much-anticipated debut was promptly upstaged by the worldwide financial crisis. As China's government focused on economic stimulus and stabilisation, international merger activity subsided. Nevertheless, hints at the future course of Chinese antitrust may be found in recent rulemakings and decisions to clear conditionally the acquisition of Anheuser-Busch Companies Inc by InBev NV/SA and to block the acquisition of the Huiyuan Fruit Juice Company Ltd by the Coca-Cola Company.
Competing goals and a pliable text
Divergent views of the AML's proper goals and place in the overall policy agenda persist throughout China's political and academic establishment, and the financial crisis sharpens these disagreements. For advocates of antitrust as a tool of industrial policy, the crisis underscores the need to consolidate strategic industries, cultivate domestic innovation and homegrown brands, foster national champions, and encourage Chinese companies to expand overseas. Those solicitous to the interests of small and medium enterprises can point to rising unemployment, while protectionists can point to collapsing exports. Meanwhile, proponents of the mainstream antitrust goals of promoting efficiency and consumer welfare face greater scepticism of the wisdom of Western regulatory techniques in the wake of financial collapse.
The text of the AML itself does not dictate the balance between these competing goals. Core provisions against 'monopolistic conduct' (fanlongduan xingwei) by 'business operators' include conduct rules addressing 'monopoly agreements' among multiple firms and abusive practices by dominant firms, as well as procedures for reviewing concentrations on competition grounds. The final text clearly incorporates basic principles adapted from the EU, Germany, Japan, Korea, the US and Taiwan, but omits the minutiae of many substantive doctrines and the mechanics of implementation. 'Public interest' exceptions perforate the rules against anticompetitive agreements and mergers, and enforcement authorities are expressly admonished to 'protect the lawful business activities' of industries that are 'controlled by the state-owned economy' and that are 'critical to the well-being of the national economy and national security.' Consequently, the extent to which foreign concepts embedded in the law will be applied with imported analytical techniques, interpretations and policy judgments depends on the motives, perspectives, and political clout of the regulators and judges entrusted with its enforcement.
Administrative enforcement structure
Allocating enforcement power was among the most contentious issues in the AML's drafting. Three central government agencies asserted antitrust leadership: the State Administration of Industry and Commerce (SAIC), the National Development and Reform Commission (NDRC) and MOFCOM. Moreover, sector regulators and local authorities vied to maintain authority to regulate competition within their jurisdictions.
The AML accommodates these competing interests with a two-tiered enforcement structure. A new interagency Antimonopoly Commission (AMC) is to play a policymaking and coordination role, while frontline enforcement responsibilities fall to one or more antimonopoly enforcement authorities. The AML authorises the State Council to designate the enforcement authorities and to determine the size and composition of the AMC. As 1 August approached, the State Council roughly divided power among MOFCOM, the SAIC and the National Development and Reform Commission (NDRC) to track their roles under previous legislation.
MOFCOM's chief responsibility under the new AML enforcement scheme is merger review. MOFCOM was instrumental in drafting the AML and in government-to-government exchanges on competition policy, and it reviewed certain transactions involving foreign companies on 'antimonopoly' grounds pursuant to the Regulations on the Mergers & Acquisitions of Domestic Enterprises by Foreign Investors (the M&A Rules). MOFCOM elevated its former Antimonopoly Office to become a new Antimonopoly Bureau just before the AML took effect. It includes two separate investigation divisions for reviewing 'onshore' transactions and 'offshore' transactions, a Competition Policy Division responsible for rulemaking, an Economic Analysis Division focused on assessing the economic effects of transactions, a Supervision and Law Enforcement Division responsible for addressing concerns about unreported transactions, and a General Affairs Division which will also serve as the secretariat to the AMC. Somewhat paradoxically, MOFCOM is also tasked with coordinating international cooperation with foreign antitrust authorities while simultaneously guiding Chinese parties ensnared in antitrust proceedings overseas.
The SAIC is a ministry-level organisation that enforces various commercial regulations, including the 1993 Anti-Unfair Competition Law (AUCL). The AUCL includes weak rules against predatory pricing and tying by business operators and exclusionary conduct by state-sanctioned monopolies and government agencies. The SAIC is now responsible for enforcing the rules against monopoly agreements and abuse of dominance - except for price-related misconduct. The SAIC's new Antimonopoly and Anti-Unfair Competition Enforcement Bureau is expected to expand the SAIC's current programme for enforcing the AUCL to include AML enforcement. Despite this experience as an investigative and enforcement agency, the SAIC's traditional roles do not encompass significant economic analysis or economic policymaking, and the central SAIC has devoted less than ten personnel to full-time Antimonopoly Law enforcement efforts.
The NDRC, a powerful macro-economic planning body with broad authority over nationwide industrial policy and economic policy, is now responsible for addressing price-related violations of the AML conduct rules. This role essentially extends the NDRC's sweeping authority to regulate all prices (either through permanent price controls or emergency measures) pursuant to the 1997 Price Law. The Price Law also includes rudimentary rules against price-fixing, predatory pricing, and price discrimination.
This division of authority heightens concerns about inconsistent enforcement and policy coordination. Distinguishing 'price-related' violations and 'non-price' violations may prove untenable. Where a single course of anticompetitive conduct combines pricing practices with other non-price measures, it is unclear whether and how the SAIC and NDRC will coordinate their investigations. More importantly, MOFCOM, the SAIC and the NDRC may embrace divergent approaches to defining markets, gauging market power, and weighing the interests of consumers and competitors when applying the many 'public interest' exceptions of the AML. Overlaps between the AML, the AUCL, the Price Law and other measures exacerbate these risks of contradictory results.
The AMC is intended to mitigate these risks by acting as a policymaking and coordinating body. It is chaired by Vice Premier Wang Qishan, whose portfolio also includes trade and financial policy. The AMC includes members from most central government bodies involved in economic regulation: the NDRC; MOFCOM; the SAIC; the Ministry of Industry and Information Technology; the Ministry of Supervision; the Ministry of Finance; the Ministry of Transportation; the State-owned Assets Supervision and Administration Commission; the State Intellectual Property Office; the China Banking Regulatory Commission; the China Securities Regulatory Commission; the China Insurance Regulatory Commission; and the State Electricity Regulatory Commission. This broad roster might simply relegate interagency tussles from the State Council to a smaller venue, leaving serious policy and enforcement judgments to be escalated beyond the AMC to the State Council.
Development of the merger review regime surged ahead of the implementation of the conduct rules. While the SAIC and the NDRC may set the scope and pace of initial enforcement efforts, the AML directs MOFCOM to review all reported transactions within the statutory deadlines. MOFCOM is also building on the experience of reviewing over 400 transactions under the M&A Rules.
The AML sketches out a mandatory pre-merger notification regime requiring parties to suspend consummation of reported deals pending completion of a two-stage review. Concentrations that may 'exclude or restrict competition' are to be blocked or approved subject to restrictive conditions, unless the parties to the transaction 'can prove that the positive effects of such concentration on competition obviously outweigh the negative effects' or that 'the concentration is in the public interest.' The precise mechanics of merger review were left for future measures.
On 1 August 2008, the State Council adopted the Rules of the State Council on Notification Thresholds for Concentrations of Business Operators, defining the notification thresholds without which the merger review rules could not be implemented. A more ambitious draft circulated for public comment in April 2008 had tackled a wider range of procedural issues, most of which were deferred for future measures. In a flurry of rulemaking in January and February 2009, MOFCOM issued the Guiding Opinions on the Notification of Concentrations of Business Operators and the Guiding Opinions on Notification Materials of Concentrations of Business Operators, largely codifying MOFCOM practices developed during the first months of merger review under the AML. MOFCOM also invited public comment on Guidelines for Definition of the Relevant Market, which set forth principles for market definition in merger cases.
In addition to these guidelines, MOFCOM also released drafts of several formal implementing regulations for public comment. The Provisional Measures on the Review of Concentrations between Business Operators describe procedures for conducting merger review. The Provisional Measures on the Notification of Concentrations between Business Operators clarify key concepts in identifying reportable transactions and flesh out the filing requirements. The procedures set forth in the Provisional Measures on Investigations and Handling of Concentrations between Business Operators Not Notified in Accordance with the Law address failures to notify reportable transactions. The procedures set forth in the Provisional Measures on the Collection of Evidence for Suspected Monopolistic Concentrations between Business Operators Not Reaching the Notification Thresholds and the Provisional Measures on Investigations and Handling of Suspected Monopolistic Concentrations between Business Operators Not Reaching the Notification Thresholds, in contrast, address circumstances where MOFCOM determines that an otherwise unreportable transaction nevertheless threatens to restrict or eliminate competition.
These draft measures elicited extensive comments from law firms, bar associations, and private companies. On 13 March 2009, the State Council released revised drafts of these measures for further public comment. As of 28 March 2009, these measures have not been finalised.
These initiatives reflect increasing receptiveness to public comment and international practice. On many issues, China has moved much closer to the international mainstream. The State Council openly acknowledged prevailing practice in discarding proposals for notification thresholds based on market shares in favor of thresholds defined in terms of the parties' worldwide revenues and revenues from sales to customers in China and in requiring that at least two parties have a substantial 'nexus' with China. The State Council also highlighted the fact that China's final notification thresholds were higher than those of France and Japan, thus falling within the range of triggers set by large economies. MOFCOM's draft implementing measures likewise clarified that, in the context of an acquisition of a part of a business, only the revenues attributable to the business being acquired (as opposed to the selling group as a whole) should be considered. The State Council's revisions, in turn, addressed many of the public comments about the MOFCOM drafts. Many customary protections for minority shareholders were carved out of the definition of 'control'. In response to comments distinguishing 'full function' joint ventures from other collaborations, the applicability of merger review to joint ventures was limited to the creation of 'new, continuously and independently operating enterprises' and excluded entities that 'only undertake such specific functions of their parent companies as research and development or sale or production of certain products.'
Nevertheless, substantial concerns remain about the sequence and structure of the investigative procedures and about safeguards such as the right of defence, the right to counsel and the protection for confidential communications with attorneys. Although the procedural provisions or many Chinese laws lack detail, such fluidity is disconcerting in international merger review. Moreover, MOFCOM has little experience as an investigative body aside from trade remedies. Similarly, the scope of data and materials to be submitted, coupled with requirements for translation, notarisation, and authentication, may unduly burden transaction parties. The draft measures require parties to submit internal documents constituting 'all kinds of reports supporting the concentration' including 'due diligence reports, research reports, and reports on the concentration plan.' Whereas section 4© of the American HSR form, for example, focuses on internal documents prepared for or by senior officers and decision-makers that directly address competition issues, the Chinese draft measures trawl for a broad range of sensitive materials that are likely irrelevant to the competitive effects.
Tellingly, none of these measures address substantive merger analysis. MOFCOM retains the discretion to develop its methodology on a case-by-case basis. Problematically, the public record of MOFCOM's merger review work is sparse. Decisions to block or impose conditions on concentrations are the only administrative rulings that must be published pursuant to the AML. The authorities are permitted to publish decisions unconditionally clearing deals or enforcing the conduct rules, but they are not obligated to do so. Although MOFCOM has reviewed 40 transactions under the AML, Coca-Cola/Huiyuan and InBev/Anheuser-Busch remain the only published decisions. Because there is no public record of the deals cleared by MOFCOM, it is difficult to confirm whether recent consolidations in the steel and auto industry are being reviewed by MOFCOM and, if so, whether they are blessed on 'public interest' grounds. Moreover, both published decisions are brief and conclusory, with scant explanation of the specific factual findings, economic analysis, and legal interpretations supporting the ultimate conclusions. Nevertheless, these rulings do provide insight into MOFCOM's approach.
In InBev/Anheuser-Busch, MOFCOM demonstrated its willingness to impose prophylactic remedies to prevent future harm to competition. It is possible that the US Department of Justice's announcement on 14 November 2008 of its decision to require divestiture of InBev's Labatt USA subsidiary emboldened MOFCOM to select InBev/Anheuser-Busch as its first case. In its 18 November 2008 notice, MOFCOM found that the 'size of the acquisition is enormous, the market share of the combined new enterprise is very big, and the competitiveness of the combined new company will be increased significantly'. MOFCOM did not find that the transaction itself would harm competition. Nevertheless, MOFCOM imposed conditions to 'reduce possible adverse effects on future competition in the Chinese beer market.' Specifically, InBev must obtain MOFCOM approval for acquiring or increasing stakes in certain leading breweries. Under normal circumstances, such investments would not be subject to supervision by the MOFCOM Antimonopoly Bureau unless they qualified as reportable concentrations involving a change in control - begging the question of whether such investments could meaningfully affect competition. InBev was further directed to 'inform MOFCOM in a timely manner regarding changes in InBev's controlling shareholders or the shareholders of InBev's controlling shareholders.' Although MOFCOM reserved considerable discretion to monitor and restrict InBev's future investments in the beer market, these conditions did not disturb the current deal.
If InBev was the first to hear China's antitrust bark, Coke was the first to feel its bite. On 3 September 2008, Coca-Cola publicly announced plans to acquire Huiyuan through a wholly-owned subsidiary for HK$17.9 billion. Huiyuan, China's largest fruit juice maker, was established as a private company in 1992, and subsequently listed in Hong Kong through a Cayman Islands listing vehicle in 2007. The proposal provoked tremendous public outcry in China, but the objections dwelt more on the foreign control over one of China's premier domestic consumer brands than on potential anticompetitive effects.
The 18 March 2009 notice blocking the acquisition identifies six factors considered by MOFCOM in its analysis. Five focus on competitive effects: the parties' 'market shares in the relevant market and their market power;' 'the degree of market concentration in the relevant market;' impacts on 'market access and technological advancements;' impacts on 'consumers and other business operators;' and impacts on 'competition in the fruit juice beverage market.' The sixth factor, the impact on 'national economic development,' signals MOFCOM's readiness to consider industrial policy in merger review.
MOFCOM advanced a theory of competitive harm arising from the 'leveraging' of Coca-Cola's dominance in the carbonated beverage market into the fruit juice market. MOFCOM found that the acquisition would enable Coca-Cola 'to carry over its dominance over the carbonated soft drink market to the fruit juice beverage market, triggering the effect of eliminating or restricting competition over the existing fruit juice beverage enterprises and, in turn, compromising the legitimate interest of consumers.' Emphasising brand recognition as 'a key factor affecting the effective competition in the beverage market' MOFCOM found that Coca-Cola would have 'considerably stronger market power in the fruit juice beverage market by controlling two well-known fruit juice brands,' specifically Huiyuan and Coca-Cola's existing meizhiyuan brand. MOFCOM found that 'given its current dominance over the carbonated beverage market and the carry-over effect, the concentration will considerably raise the barriers for potential competitors to enter the fruit juice beverage market.' MOFCOM further found that the acquisition would squeeze out small- and medium-sized rivals and 'curtail the ability of domestic enterprises to compete and independently innovate in the fruit juice beverage market.' This, in turn, would negatively affect 'the pattern of effective competition in the Chinese fruit juice beverage market' and impede 'the sustained and sound development of the Chinese fruit juice industry'.
MOFCOM avoided explicitly condemning the transaction on grounds of 'economic nationalism.' Apart from 'pure' antitrust concerns, the deal had also provoked public opposition to the acquisition of control over a famous homegrown brand by a foreign conglomerate. The M&A Rules actually include special procedures for approving onshore acquisitions by foreign investors of control over 'domestic enterprises which own any well-known trademarks or Chinese historical brands'. It was unclear, however, whether this rule technically applied to an offshore stock deal. Although the public furor focused on this issue, MOFCOM framed the value of the Huiyuan brand in terms of its competitive effects rather than in terms of economic nationalism.
The notice explains that Coca-Cola had offered two proposals for remedial conditions at MOFCOM's request, but the proposals failed to 'reduce effectively the negative impact caused by the concentration.' The notice does not explain whether MOFCOM proposed alternate restrictive conditions, or whether such alternatives were rejected by the parties.
The final decision to prohibit the transaction follows the decision-making structure outlined in the AML. Initially, MOFCOM determined that the concentration would have the effect of 'eliminating or restricting competition.' Echoing foreign antitrust principles, MOFCOM specifically found that the transaction would adversely impact 'effective competition in the Chinese fruit juice beverage market.' In the same sentence, however, MOFCOM also emphasised the transaction's adverse impact on 'the sound development of the fruit juice industry.' MOFCOM concluded that the parties had 'failed to provide sufficient evidence' to prove either 'that the positive impact of the concentration over the competition considerably outweighs its negative impact' or 'that the concentration serves the public interest of society.' MOFCOM then reiterated that Coca-Cola had 'failed to propose, within the prescribed time limit, a feasible solution to reduce the negative impact.' Accordingly, MOFCOM prohibited the concentration.
Suspicions abound that economic nationalism or protectionism drove the decision. Indeed, the Antimonopoly Bureau may have prepared a menu of alternative rulings to more senior decision-makers, or may have reverse engineered an antitrust analysis to fit a desired outcome. It would be a mistake, however, to dismiss MOFCOM's reasoning as wholly divorced from international practice. Although reliance on theories of 'leveraging' or 'portfolio effects' to block conglomerate mergers meet scepticism in the US and Europe, MOFCOM can point to US and EU precedents. Indeed, a MOFCOM spokesperson explicitly referred to the Australian Competition and Consumer Commission's 2003 decision to block Coca-Cola's acquisition of Berri Limited on a leveraging theory as influencing MOFCOM's reasoning. Regardless of the actual motivations behind the decision, MOFCOM's stated grounds for blocking the transaction fall near - though not necessarily beyond - the outer boundaries of international antitrust practice. But because the public notice itself does not detail MOFCOM's factual findings and economic analysis, the rigor of MOFCOM's leveraging analysis remains in doubt.
Although the AML's conduct rules are patterned on foreign precedent, the text is broad and imprecise. The sweeping rules against all 'monopoly agreements' that 'eliminate or restrict competition' (including non-exhaustive lists of restrictive practices) are subject to equally sweeping exemptions for conduct ranging from crisis cartels to agreements 'in [the] public interest'. While the AML broadly prohibits any 'abuse of a dominant market position' recognised by the enforcement authorities, it stipulates that the listed abuses are only prohibited when 'unjustified' or 'unfair' - two concepts left undefined by the text. Although companies face onerous penalties ranging from a minimum of 1 per cent to a maximum of 10 per cent of annual turnover for violating the conduct rules, the scope of prohibited conduct remains unclear.
No administrative decisions enforcing the rules against monopoly agreements or abuse of dominance have been published, and no formal implementing measures have been issued or released for public comment. Unofficial draft measures attributed to the SAIC and to the NDRC have, however, suggested gaps between the perspectives of the SAIC and the NDRC and prevailing international practices. For example, unofficial draft rules against anticompetitive agreements may be read to condemn conscious parallelism (absent any agreement among competitors) or prohibit a wide range of cooperation among non-competitors. Similarly, unofficial drafts reportedly translate the AML's provision against 'unfairly high' pricing by dominant firms (mimicking article 82(a) of the EC Treaty) into unworkable rules barring dominant firms from charging prices 20 per cent higher than competitors' prices or realising profits over 20 per cent on sales. Even if these provisions are ultimately not enacted, their mere proposal demonstrates the gap between the NDRC's instincts and prevailing international practices.
Fortunately, both the NDRC and the SAIC are ramping up engagement with foreign antitrust authorities, with the European Commission and the United States government sponsoring substantial technical assistance and training programmes for enforcement personnel.
Nevertheless, many multinationals remain apprehensive that the conduct rules may be relaxed for the benefit of state-owned enterprises and struggling small and medium companies but enforced vigorously against foreign players. The concerns are most acute with respect to intellectual property, where exercise of foreign-owned IP rights may clash with industrial policies aimed at domestic innovation and promotion of national champions. The AML prohibits, but does not define, the 'abuse' of IP rights, a recent revisions to the Patent Law authorise compulsory licensing as a remedy for anticompetitive misuse of IP rights. While detailed guidelines on the AML's application to IP might be forthcoming, such measures have not yet materialised.
Meanwhile, the SAIC and NDRC face growing complaints about the abusive conduct not only of multinationals, but also of leading state-owned companies and prominent private Chinese companies (such as domestic search-engine leader Baidu). Chinese courts are now accepting similar claims for damages caused by AML violations.
Foreign and domestic companies alike must remain cognisant of prevailing international practices and compelling political or policy interests which may guide Chinese antitrust enforcement. Although transparency is improving, distinguishing the evolution of China's 'default' rules from episodes where industrial policy or politics prevail will remain challenging.<>Notes
- For an analysis of the statutory text and an unofficial English translation, see Nathan Bush, 'The PRC Antimonopoly Law: Unanswered Questions and Challenges Ahead', Antitrust Source, October 2007, http://www.abanet.org/antitrust/at-source/07/10/Oct07-Bush10-18f.pdf.