Articles Posted in Asia Antitrust and Competition

Yang Yang

Author: Yang Yang

Ms. Yang is an Antitrust Partner at Fairsky Law Offices in Shangai. She is also a lecturer and researcher at China University of Political Science and Law. She authored a treatise on China Merger Control and is a member of the expert advisory team for Amendments to China Anti-Monopoly Law (with a total number of 8 members). Indeed, she leads the drafting of an expert report on suggested amendments to China Merger Control regime, Chapter 4 of Chinese Anti-Monopoly Law. She is also a frequent contributor to the Antitrust Report of LexisNexis and Competition Policy International (Asia Column and Asia Chronicle).

See also Yang’s previous article on this website: Antitrust Merger Control in China: Notifiable Transactions under the People’s Republic of China Anti-Monopoly Law

On October 23, 2021, the Chinese legislative authority released a draft amendment for public comments to China’s Anti-Monopoly Law (“AML”)1, with a public comment period open until November 21, 2021.2 The amendment is controversial because of the hefty fines on antitrust violations imposed in China by the State Administration for Market Regulation (“SAMR”). Internet platforms have been the most heavily fined by the SAMR, partially due to the use of a calculation method for monetary fines based on gross sales.3

Still No Clarification on the Definition of “Sales”, Which Serves as the Base for Monetary Fines

One of the most controversial legal matters for antitrust enforcement in China is the definition of “sales” as the basis for the calculation of monetary fines. The SAMR has the power to impose a fine between 1 to 10 percent of the “sales” generated by the firm in the preceding year. Even though both the current AML and the amendment are silent on the definition of “preceding year,” the SAMR has been considering for this purpose the year when the investigation is officially initiated.

Similarly, according to the published cases of the SAMR, the word “sales” refers to all sales from the firm as a whole, rather than just the firm’s sales from the relevant products and geographic markets.

With these two factors in mind, under the new draft, the calculation of “sales” would significantly impact firms doing business in China. Indeed, once the SAMR discovers the existence of a cartel or a Resale Price Maintenance (RPM) provision in one product market, it would consider all sales from the firm(s) involved as the basis for the calculation of the monetary fine.

But the main reason why this matter is controversial is the fact that––according to Chinese Administrative Law––administrative fines must be commensurate with the underlying violation in degree, importance and effects, among others. Considering the size of a firm as a whole, even 1 percent of the total sales would be heavier than any underlying violation.

For example, in the Alibaba Group decision, the parent company owns and operates shopping platforms, including Taobao.com and Tmall.com4. There, the abusive conduct refers to the alleged exclusive-dealing agreements since 2015, where Alibaba “forced” some major downstream merchants to enter the “Strategic Merchant Framework Agreement”, the “Joint Business Plan”, the “Memorandum of Strategic Cooperation” and other agreements. In those agreements Alibaba required that such major merchants would not access other competing online platforms. Despite the conduct only involving exclusive-dealing agreements with certain major merchants, the sales as the basis for calculating the monetary fines were the total sales of Alibaba Group in 2019, the year preceding the year when the government initiated the investigation.

Another example is the fine on Meituan, a platform well known for food-delivery.5 In this decision, the relevant market was the online food-delivery platform, implying that the violating abusive conduct all occurred in this market. But, the basis for the fine was still the total sales of the group, RMB 114,747,995,546 in 20206, which also included sales from travel and other businesses, like drug-delivery and flower delivery. Such non-food-delivery businesses in 2020 generated approximately 46% of the sales for this public company7.

Hub-and-Spoke Agreements Constitute a Third Kind of Illegal Agreement

Article 18 of the amendment provides that Operators shall not organize other operators to reach monopoly agreements or provide substantive assistance to other operators in reaching monopoly agreements. This clause essentially accepts “hub-and-spoke” agreements as a third kind of illegal agreement in addition to horizontal agreements between/among competitors and vertical agreements between/among merchants and distributors.

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Yang YangAuthor: Yang Yang. Ms. Yang is an Antitrust Partner at Fairsky Law Offices in Shangai. She is also a lecturer and researcher at China University of Political Science and Law. She authored a treatise on China Merger Control and is a member of the expert advisory team for Amendments to China Anti-Monopoly Law (with a total number of 8 members). Indeed, she leads the drafting of an expert report on suggested amendments to China Merger Control regime, Chapter 4 of Chinese Anti-Monopoly Law. She is also a frequent contributor to the Antitrust Report of LexisNexis and Competition Policy International (Asia Column and Asia Chronicle).

Merger Control in China

According to Article 20 of the Anti-Monopoly Law of the People’s Republic of China (“Chinese AML”)1, a transaction is subject to a mandatory notification obligation at the State Administration of Market Regulation (SAMR) before being consummated or implemented if the transaction constitutes a “concentration” of undertakings or business operators, which meets or exceeds the relevant thresholds set forth in the Provisions of the State Council on the Notification Thresholds of the Concentrations of Undertakings.2

According to the Turnover Threshold Regulation, the concentrations not meeting the turnover threshold are still subject to the investigation of SAMR regardless of whether they are closed if the SAMR has evidence indicating potential anticompetitive effects of such concentrations.

In Summary, according to all Chinese AML, Turnover Threshold Regulation and the departmental rule, the circumstances when a concentration would fall within the Chinese merger regime would be as follows:

  • Mandatory Notification: Concentration and Turnover Thresholds. For failure to comply with this notification, SAMR has the power to reverse the consummated transaction and can impose a monetary penalty up to RMB 500,000 Yuan (approximately USD 70,000).
  • Voluntary Notification by Parties.
  • Where the turnover thresholds are not triggered, but evidence shows that there may be potential anti-competitive effects, SAMR has the power to initiate a review of the concentration.

Concentration

Under the Chinese AML and the current rules, any of the following transactions may constitute a “concentration” of undertakings:

  • a merger of business operators by absorption;3
  • a merger of business operators by new establishment;4
  • a business operator acquiring control of another business operator through an equity acquisition;5
  • a business operator acquiring control of another business operator through an asset acquisition;6
  • a business operator acquiring control of another business operator through contracts or other means;7 or
  • a jointly-controlled company by two or more business operators also referred to as a joint venture.8

Turnover Thresholds

Turnover thresholds may be triggered when:

  • in the preceding fiscal year, (i) the combined worldwide turnover of the parties participating in the concentration exceeds RMB10 billion (approximately US$1.6 billion) and (ii) at least two of the parties participating in the concentration each has a turnover within China exceeding RMB400 million (approximately US$60 million); or;
  • in the preceding fiscal year, (i) the combined turnover within China of the parties participating in the concentration exceeds RMB2 billion (approximately US$315 million), and (ii) at least two of the parties participating in the concentration each has a turnover within China exceeding RMB400 million (approximately US$60 million).

Revenues will be calculated on a group basis for each party participating in the concentration. And, “turnover within China” shall include the business operator’s import of products or services into mainland China from countries or regions outside of China, and shall exclude the export of its products and/or services from mainland China to countries or regions outside of China.

According to Guiding Opinions of Notifications of Concentrations, the turnover includes all the revenue from sales of products and provision of services in the preceding year, exclusive of relevant taxes and surcharges.9

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