After more than a decade of deliberations, the People’s Republic of China promulgated its Anti-Monopoly Law (“AML”) at the Twenty-Ninth Meeting of the Standing Committee of the Tenth National People’s Congress on August 30, 2007. The new law will go into effect tomorrow, August 1, 2008. Like the Indian Competition Act, which will be effective later this year, the AML is based on Europe’s antitrust statutes broadly covering prohibitions on monopoly agreements, abuse of dominant positions and mergers. The law also has a highly controversial clause that prohibits the abuse of “administrative powers.” It also calls for the creation of an Anti-Monopoly Enforcement Authority (“AEA”), an “umbrella” antitrust regulatory agency.
Up until now it was not clear which Chinese institutions would fall within the purview of the AEA. However, recently Caijing, a Chinese news outlet, reported that mergers will be under the purview of the Ministry of Commerce; monopoly agreements, abuse of dominant market positions and abuse of administrative powers will be under the State Administration for Industry and Commerce (“SAIC”); and all anticompetitive pricing (not dealt with by the SAIC) will be under the National Development and Reform Commission. It appears that the three administrative agencies will be coordinated by the AEA. Most experts believe that the division of antitrust issues among these three agencies will undoubtedly create inefficiencies, conflict and friction among them. Lovells, an international law firm, told the Financial Times that companies will be “at the mercy of an unpredictable three-headed dragon.”
The prohibition of monopoly agreements will abolish all forms of trusts including horizontal agreements as well as vertical monopoly agreements. An “abuse of a dominant market position” includes price fixing, forcing partners into exclusive trade arrangements, and imposing unjustified trading conditions. For a company to be presumed to have a “dominant market position,” it must own more than 50% of the market share.
Currently, all foreign mergers and acquisitions are governed by rules under the Provisions on the Takeover of a Domestic Enterprise by a Foreign Investor issued in August 2006 and the Guide for Anti-Monopoly Declaration by a Foreign Investor in the Merger and Acquisition of a Domestic Enterprise issued in March 2007. The AML will now force all domestic transactions to be reviewed as well. Furthermore, foreign companies will be subject to two reviews: an anti-monopoly review and a national security review.
According to the Financial Times, although official M&A regulations have not been released by the Chinese authorities, leaked reports have indicated companies participating in a transaction with a worldwide turnover of RMB 10 billion ($1.5 billion) or a combined turnover in China of RMB 2 billion ($300 million) or where each has a turnover of RMB 400 million ($60 million) in China will need antitrust approval. Nonetheless, the AML does specify that the AEA will initially review a transaction for 30 days, which can be later extended to another 90 days. Also, if both parties to the transaction agree, or documents submitted to the AEA are inaccurate or need further verification, or “relevant circumstances” have changed, the AEA can extend the review process for another 60 days. A transaction can potentially be reviewed up to six months.
Furthermore, Article 31 of the AML states:
“In the case that national security is concerned, besides the examination on concentration in accordance with this Law, the examination on national security according to the relevant regulations of the State shall be conducted as well on the acquisition of domestic undertakings by foreign capital or other circumstances involving the concentration of foreign capital.”
The term “national security” is vaguely defined. This is the first time Chinese authorities have put such a requirement in written form. This clause essentially gives the Chinese government the final say on any transaction involving foreign capital. It gives the Chinese authority even more control over certain vital sectors such as energy and telecommunication. In February 2008, to restrain the rise of metals, Aluminum Corporation of China (Chinalco), the largest producer of primary aluminum and only producer of alumina in China, partnered with U.S.’s Alcoa to buy a 12% stake in Rio Tinto to thwart an unsolicited takeover by BHP Billiton. This is an example of the lengths China is willing to go to protect its national interests. The Chinese authorities have yet to release any implementing rules and guidelines that many analysts and lawyers believe would clear up these issues.
It is widely assumed that China will become the third largest antitrust jurisdiction next to the United States and the European Union. The new AML can be viewed in two ways: as a milestone that helps create a Chinese economy based on law or as another protectionist tool used by Beijing. Many legal experts believe that the AML will bring more clarity and predictability to the status quo potentially leading to the opening up of domestic industries to outside competition. However, they warn that the AML should not be viewed as panacea to current anticompetitive practices such as trade associations meeting to set prices and agree on business practices. Due to the lack of guidelines provided by the Chinese authorities regarding mergers and acquisitions, the implementation and effectiveness of the AML still remains to be seen. For example, it is not yet known whether domestic companies will receive the same scrutiny foreign companies will under the new law. It is also unclear how private equity deals and joint ventures will be dealt with. Foreign companies will have to now pay closer attention to transactions that might affect their Chinese subsidiaries or Chinese consumers. There is a real chance that major global mergers such as BHP Billiton/Rio Tinto and Microsoft/Yahoo may face significant delays under the new Chinese antitrust regime. In addition, there is a loophole within the AML that might save state-owned enterprises from antitrust regulation. Leaving the language dealing with state-owned enterprises vague may allow Chinese authorities to exempt them from this regulation. Even with these concerns, some believe that the new mergers and acquisition regime will not change the status quo in terms of the Chinese allowing foreigners to buy troubled Chinese companies and preventing them from buying majority stakes in large and financially successful Chinese companies.