On January 2, 2020, China's national antitrust authority, the State Administration for Market Regulation (SAMR), released a draft of amendments (Draft Amendment) to the Anti-Monopoly Law of the People's Republic of China (AML) to solicit public comments. For over a decade since the enactment of the AML in 2007, the overall domestic and international environment has changed significantly, and the AML has gradually fallen behind the shifts in society and in its own enforcement practice. When passed, the impact of the Draft Amendment would be wide-ranging. On the one hand, it intends to codify some existing practices that have evolved over the years. On the other, it introduces several important mechanisms in response to the emerging issues in the area of antitrust and competition law worldwide. In particular, the Draft Amendment will bring reform to the current merger control regime.

I.Sharply Increased Fines and Potential Criminal Liabilities

The Draft Amendment proposes around 40 revisions in respect of the principles, rules and wording of the AML (please refer to the Appendix below for a summary of the key revisions), and for companies and their management those revisions related to the legal liabilities deserve special attention.

Considering the fast development of the Chinese economy, the fines set by the current AML for violations are relatively trivial and cannot provide an adequate deterrence for violators of the AML. As shown in the table below, the Draft Amendment substantially increases the maximum fine for various types of violations.

Table 1: Comparison of the AML and the Draft Amendment as to fines for different violations

 Violations Current Fines Draft Amendment Changes in %
Illegal concentrations (including gun jumping, breach of remedies, and concentration against decisions that block it ) up to CNY 0.5 million up to 10% of the violator's revenue in the previous year Unmeasurably significant increase
Monopoly agreements entered but not implemented up to CNY 0.5 million up to CNY 50 million 10000%
Monopoly agreements where violators have no revenue in the previous year (no fine in practice due to lack of legal basis) up to CNY 50 million From 0 to significant fine
Third parties organizing, assisting others in entering monopoly agreements (e.g., hub-and-spoke cartels) (no fine in practice due to lack of legal basis) up to 10% of the violator's revenue in the previous year Unmeasurably significant increase
Obstructing investigations, providing false information, or not cooperating with the investigation  Individual up to CNY 0.1 million CNY 0.2 million to CNY 1 million  1000%
Company up to CNY 1 million up to 1% of the company's revenue in the previous year, or up to CNY 5 million if no revenue or clear revenue record in the previous year Unmeasurably significant increase
* The Draft Amendment does not propose revisions to the fines set by the current AML for monopoly agreements and abuse of market dominant position, which remain at 1% to 10% of the violator's revenue in the previous year.

In addition to the above administrative fines, the Draft Amendment also provides that companies that behaved as monopolies may face criminal liabilities. Currently, China's Criminal Law has set criminal liabilities for bid rigging, but the Draft Amendment might lead to amendments to the Criminal Law in the future to criminalize hardcore cartels and management.

II.China's Merger Control Regime Faces Drastic Reform

SAMR (previously MOFCOM) has accumulated considerable experience with the nearly 3,000 merger filing cases that it has reviewed in the past 11 years. Its experience shows that the current merger control regime does not function efficiently and effectively to prevent anti-competitive mergers and deter violations such as gun jumping. The Draft Amendment is therefore to reform, upgrade and strengthen the merger control regime.

The table below summarizes all the major changes proposed by the Draft Amendment to the merger control regime. Note that although SAMR launched another public consultation on a draft merger control rule – the Interim Provisions on the Review of Concentration of Undertakings on January 7, 2020, this new rule mainly consolidates six merger control rules enacted in the MOFCOM time and there is no material change.

Table 2: Proposed revisions to the merger control regime by the Draft Amendment

Proposed Revisions Notes
Stipulating the definition of "control" "Control" is the central concept of the merger control regime. Although current rules have provided a list of factors to assess when control is obtained, there is no definition or legal basis in the AML. In this regard, the Draft Amendment stipulates that "control means the right or actual status of an undertaking(s) which directly or indirectly, solely or jointly has or may have decisive influence on the production and operation activities or other major decisions of another undertaking".
Adjusting the merger filing threshold Currently, there is only a turnover-based filing threshold in China, and such a threshold can only be set by the State Council. The Draft Amendment proposes to empower SAMR to set and adjust the filing threshold based on economic development and industry size. This revision might envisage a raise of the current turnover threshold and supplement of transaction size, market share or other types of filing threshold.
Launching the "stop-the-clock" mechanism The current rules do not provide a "stop-the-clock" mechanism. To allow the authority to have more time to review complicated filings, the current practice is for the notifying parties to withdraw and refile their cases one or more times. With the proposed "stop-the-clock" mechanism, the statutory time limit of merger review can be suspended in the following scenarios:
  • Upon application or consent by the notifying parties;
  • When the notifying parties are required to supplement materials; or
  • When the notifying parties are in negotiation with the antitrust authority on remedies.
The detailed rules of the "stop-the-clock" mechanism will be enacted by SAMR separately.
Specifying the liabilities for providing incorrect or inaccurate information Merger clearance based on incorrect or inaccurate information may be revoked. Also, providing false information may face heavy fines as mentioned in Table 1 above.
Enormous increase in fines for illegal mergers As illustrated in Table 1 above, the fines for illegal mergers including gun jumping have risen steeply, from the maximum CNY 0.5 million to the maximum 10% of the violator's revenue in the previous year.
Empowering authorities to investigate mergers which are below the filing threshold but have potential anti-competitive effect This rule is not a new creation and it originates from the Regulations on Merger Filing Threshold by the State Council (2008). Nonetheless, it is the first time that such a rule will be included in the AML. Also, the Draft Amendment specifies that SAMR has the power to impose conditions or unwind such mergers if they have or may have anti-competitive effects.

III.Timeline for the Draft Amendment to Be Enacted

The amendment to the AML was initiated by the State Council's 2015 legislation plan and later the Congress's 2018-2023 legislation plan. The general legislation procedure is as follows:

SAMR is currently soliciting public opinions of the Draft Amendment until January 31, 2020. After that, the Draft Amendment with further revisions will be submitted to the Ministry of Justice (MOJ), which is the legislative body under the State Council. After being reviewed by the MOJ, the further revised amendment will be reviewed by the State Council, and then reviewed by the National People's Congress (NPC) or its Standing Committee (NPCSC). Once passed by the NPC or NPCSC, it will be enacted by a Presidential Order.

In view of the foregoing, the Draft Amendment is expected to be enacted by March 2023 at the latest, but the process could be accelerated significantly if there are few differing opinions on its contents. The interested parties may keep a close eye on the legislative development in each phase illustrated above. Also, it needs to be noted that after the Draft Amendment is enacted, there will normally be a transition period of several months before it comes into effect.

Please do not hesitate to contact us should you have any comments on the Draft Amendment. We would like to gather comments if any and submit them to the SAMR.

Appendix:

Table 3: Highlights of the Draft Amendment to the AML

Proposed Revisions Notes
Stipulating the definition of "control" "Control" is the central concept of the merger control regime. Although current rules have provided a list of factors to assess when control is obtained, there is no definition or legal basis in the AML. In this regard, the Draft Amendment stipulates that "control means the right or actual status of an undertaking(s) which directly or indirectly, solely or jointly has or may have decisive influence on the production and operation activities or other major decisions of another undertaking".
Adjusting the merger filing threshold Currently, there is only a turnover-based filing threshold in China, and such a threshold can only be set by the State Council. The Draft Amendment proposes to empower SAMR to set and adjust the filing threshold based on economic development and industry size. This revision might envisage a raise of the current turnover threshold and supplement of transaction size, market share or other types of filing threshold.
Launching the "stop-the-clock" mechanism The current rules do not provide a "stop-the-clock" mechanism. To allow the authority to have more time to review complicated filings, the current practice is for the notifying parties to withdraw and refile their cases one or more times. With the proposed "stop-the-clock" mechanism, the statutory time limit of merger review can be suspended in the following scenarios:
  • Upon application or consent by the notifying parties;
  • When the notifying parties are required to supplement materials; or
  • When the notifying parties are in negotiation with the antitrust authority on remedies.
The detailed rules of the "stop-the-clock" mechanism will be enacted by SAMR separately.
Specifying the liabilities for providing incorrect or inaccurate information Merger clearance based on incorrect or inaccurate information may be revoked. Also, providing false information may face heavy fines as mentioned in Table 1 above.
Enormous increase in fines for illegal mergers As illustrated in Table 1 above, the fines for illegal mergers including gun jumping have risen steeply, from the maximum CNY 0.5 million to the maximum 10% of the violator's revenue in the previous year.
Empowering authorities to investigate mergers which are below the filing threshold but have potential anti-competitive effect This rule is not a new creation and it originates from the Regulations on Merger Filing Threshold by the State Council (2008). Nonetheless, it is the first time that such a rule will be included in the AML. Also, the Draft Amendment specifies that SAMR has the power to impose conditions or unwind such mergers if they have or may have anti-competitive effects.

III.Timeline for the Draft Amendment to Be Enacted

The amendment to the AML was initiated by the State Council's 2015 legislation plan and later the Congress's 2018~2023 legislation plan. The general legislation procedure is as follows: sds SAMR is currently soliciting public opinions of the Draft Amendment until January 31, 2020. After that, the Draft Amendment with further revisions will be submitted to the Ministry of Justice (MOJ), which is the legislative body under the State Council. After being reviewed by the MOJ, the further revised amendment will be reviewed by the State Council, and then reviewed by the National People's Congress (NPC) or its Standing Committee (NPCSC). Once passed by the NPC or NPCSC, it will be enacted by a Presidential Order.

In view of the foregoing, the Draft Amendment is expected to be enacted by March 2023 at the latest, but the process could be accelerated significantly if there are few differing opinions on its contents. The interested parties may keep a close eye on the legislative development in each phase illustrated above. Also, it needs to be noted that after the Draft Amendment is enacted, there will normally be a transition period of several months before it comes into effect.

Please do not hesitate to contact us should you have any comments on the Draft Amendment. We would like to gather comments if any and submit them to the SAMR.

Appendix:

Table 3: Highlights of the Draft Amendment to the AML

 Article No. Amendments
1. Including "encouraging innovation" as a legislative purpose of the AML
4. Establishing "competition policy" as a basic economic policy
9. Elevating position of Fair Competition Review System by including it in the AML
14. Restructuring the definition of monopoly agreements as a separate article
17. Including "organizing and assisting monopoly agreements" as a new offence
18. Adding a "Necessity Test": Undertakings would have to further prove that relevant conducts are necessary and there are no less anti-competitive alternatives in order to obtain exemptions for monopoly agreements
21.
Supplementing factors in determining the dominant position of internet companies
23.
Making clarification of the definition of "control"
24(2). Stipulating that the merger filing threshold can be revised by the antitrust authorities
24(3). Empowering antitrust authorities to investigate merger transactions that are below the filing threshold but could have anti-competitive effects
30.
Introducing the "stop-the-clock" procedure in the merger control regime
34.
Making clarification of the legal consequences when a merger transaction is below the filing threshold but is found by the antitrust authorities to have anti-competitive effects
46.
Including "keeping confidential personal privacy during legal enforcement" as an obligation of the antitrust authorities
50. Excluding hardcore cartels from the commitment procedure
51.
Making clarification of the legal consequence of submitting incorrect or inaccurate information in merger filings
53-59. Significantly increasing the fines for certain illegal behaviors

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