Landmark AML reforms modernise enforcement

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Landmark AML reforms modernise enforcement

In June, the National People’s Congress 13th Standing Committee approved far-reaching amendments to the Anti-Monopoly Law (AML) that become effective from 1 August.

Alongside the amendments, the State Administration for Market Regulation (SAMR) has issued for public comment proposed updates to key implementing rules and regulations concerning cartels and vertical restraints, abuse of dominance, merger control and abuse of IP rights.

TOUGHER PENALTIES

The amendments imposed steep increases in penalties for antitrust violations. In particular, the cap of penalties has been notably elevated for violations such as non-implemented cartel and resale price maintenance (RPM) and hub-and-spoke violations, gun-jumping and obstruction of investigation (company and individual). The amendments also set out the administrative fines and criminal liabilities targeting senior leadership and employees directly for AML violations.

MORE ROBUST MERGER REVIEW

Revised thresholds. The SAMR has published draft regulations that would marginally raise the existing turnover thresholds for merger control, and a new hybrid threshold aimed at competitively significant (“killer”) acquisitions.

Stop-the-clock mechanism. The 180-day period for merger review can be suspended by the SAMR when the parties are working on its requests for information, there are new facts or issues to be looked into, or the parties are in negotiation over proposed remedies or commitments. The introduction of a “stop-the-clock” mechanism emphasises the importance of undertaking a prior China merger filing requirement analysis to allow for greater flexibility in closing or long-stop dates, reverse breakup fees and other risk allocation clauses.

Power to pursue below-threshold deals. The SAMR is now authorised to require parties to notify it of transactions below filing thresholds if it considers the deal may raise competition concerns. Consequently, parties who do not follow the SAMR’s requirement to notify might be subject to penalties.

Classification of merger filing cases. Cases are classified according to the sector involved, the size of the parties’ business and any potential competition concerns from the proposed transaction.

STEPPING UP CONDUCT SUPERVISION

Hub-and-spoke violations in the spotlight. China’s antitrust legislation was previously silent on hub-and-spoke violations until rules emerged in two industry-specific guidelines, for the platform economy and active pharmaceutical ingredients, both published in 2021. The amendments include a standalone prohibition on a business operator “organising other business operators to reach a monopoly agreement, or providing substantial assistance for other business operators to reach a monopoly agreement”.

The SAMR draft regulations propose the hub would be held responsible for the conduct as an “organiser” or “substantial contributor” on the grounds of its decisive or leading role in the scope of the spokes and the terms agreed upon, among them the intention to contribute to the indirect information exchange through its actions, and a prominent function in support of the anticompetitive effects of cartel activities.

More permissive stance on RPM. Similar to the EU, there has been a strong presumption that RPM is anti-competitive in the SAMR’s enforcement to date, although the PRC courts have examined anti-competitive effects in RPM cases. Following the amendments, RPM will still be treated as presumptively unlawful, i.e., the SAMR will not need to show anti-competitive effects. However, a defendant will be able to rebut this by demonstrating on a case-by-case basis that RPM did not have such effects. The burden of proof will be on defendants.

Considering China’s longstanding approach to RPM, how this defence might be successfully invoked remains to be seen. It would likely require strong evidence, supported by a range of analytical tools and economic models, public policies and innovation dynamics.

Safe harbours for vertical restraints. Article 18(3) of the amended AML enables the SAMR to grant safe harbours for some vertical restraints including territorial restraints, single branding, non-compete and other exclusive arrangements. Unlike RPM, non-price vertical restraints are not presumptively anti-competitive under the AML, and the SAMR’s enforcement efforts have focused almost exclusively on RPM. The authors have seen limited guidance that suggests some non-price restraints may be problematic in certain sectors, namely absolute territorial restrictions in the distribution of vehicles and related spare parts. The safe harbour provision could offer more clarity in the assessment of vertical restraints under China’s competition law.

The safe harbours are to be based on a market share threshold and conduct-specific tests, which are not specified in the amendments. The SAMR is likely do this in future guidance or decisions, and appears to retain discretion to enforce against conduct falling within a safe harbour where there is evidence of anti-competitive harm.

Different from an earlier draft, the safe harbours under the amendments are not applicable to horizontal agreements, which entail a high risk warranting detailed assessment even if the parties involved have a limited market share.

Scrutiny of platform operators’ use of data, algorithms, technology, capital advantage and platform rule-setting. Recent SAMR enforcement and private litigation have focused on alleged abuses of dominance by platform operators, particularly exclusivity obligations precluding counterparties from dealing with competing platforms (“choose one from two”).

As the platform economy in China evolves, there are some signs that the SAMR’s enforcement focus in this area may be shifting. The amendments suggest the SAMR will continue to rein in allegedly abusive practices, and signal increased enforcement of platform operators’ business co-operation, vertical restraints and merger review. This is also consistent with China’s policy initiatives calling for a holistic approach to strengthen AML enforcement in the platform economy. In addition, the amendments highlight the challenges posed by data, algorithms, capital advantage, technology and platform rules.

In light of this, the SAMR and PRC courts may take an interest in, or be more willing to intervene in:

  1. Anti-competitive data/technology co-operation between platform operators;
  2. Formulation of platform rules and algorithm rules; and
  3. Data/algorithm/technology-driven M&A transactions that create or enhance market power.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at howard.wu@bakermckenzie.com