Anti-Monopoly Law: The Lawyers are Ready, but the Law Isn't

Crucial information such as notification thresholds were originally missing from the AML. China is a country where mergers and acquisitions (M&A) is the strongest activity in the market, and the lack of such details is likely to deter enterprises looking to invest in China. Lawyers welcome the government's willingness to accept public comments on the draft regulations – not only does it show the government's transparency but also their willingness to clarify the uncertainties in the AML.

“Merger review is one of the most important activities to regulate. A lot of people investing in China need to know more about what is now included in this review,” says Peter Wang, partner at Jones Day.

Although the draft was eagerly awaited by lawyers and widely agreed to be a positive step, it has not cleared up the ambiguities.

THRESHOLDS AND MARKET DEFINITION

The thresholds for merger notification is one area of the draft to have received criticism. Covering three aspects, the thresholds complicate lawyers' and enterprises' business procedures. Any kind of business can easily trigger the thresholds. If a large company with a strong practice in China plans to take over a small company in a foreign country, the former is obliged to file a notification. The drawback is that unnecessary filings could delay the authorities' approval procedures.

“The law is not clear,” says Susan Ning, managing partner at King & Wood. “Though the government has proved their efforts by publishing the thresholds regarding the concentration of operators, that is merely a small part of the entire AML. Even for the concentration, the draft doesn't cover the review of authorities, the timeline, the market definition, and the factors for consideration. All these things are blank.”

This raises another question: how should the relevant market be defined?

Whether or not a company is dominant in the market depends on the government's definition of “dominance”. It requires detailed market research and analysis. A certain brand of red wine, for example, could have huge market share among other brands of wine, but this “dominance” could be completely eradicated if the “market” included all alcohol, or if the wine dominated the market locally but not internationally.

“The market share-based notification threshold is very subjective, and it's difficult for companies and lawyers to use precisely. How do you know what is the right market to talk about?” Wang says.

Even the methodology of calculating the turnover is missing from the implementing rules. According to Hannah Ha, partner at Mayer Brown JSM, under the existing merger control regime, when the Ministry of Commerce (MOFCOM) is determining whether the turnover thresholds are met, they consider not only the turnover of each of the transaction parties, but also their affiliates and in many cases the entire corporate group. But the new regime under the AML has not yet provided any detailed methodology for calculating the turnover, nor is there any definition of “affiliate”. “We are still expecting some more guidelines on the implementation rules for the new merger control regime that might be able to explain a little bit more.” she says.

It is also uncertain how and to what extent the government will regulate state-owned enterprises, which often have a monopoly in the market. Ambiguities such as this baffle lawyers.

“That's a fundamental issue. If state-owned enterprises are exempted from the AML (which is an open question), all sorts of questions will be raised. Could a state-owned enterprise use their exempted position to make reports about other people? That would certainly put them in a very strong position,” says Andrew McGinty, partner at Lovells Shanghai.

But a regulation can never be detailed enough, he adds. “It is impossible for the government to cover every business scenario when providing just a general guideline.”

AML AS A WEAPON

With so many uncertainties, the AML also raises concerns for foreign investors. The government has always been wary of the opening up of the market to foreign companies. Too many foreign investors coming in to buy key Chinese assets could be risky: foreign investors could eventually take control of the market, a result that no country in the world would want to see. Although anti-monopoly laws, already in place in most developed countries, are not new to foreign investors, what they fear is the unpredictability of how the government defines the words “dominance” and “abusive”.

Under the new regime, if a local company alleges that a certain foreign enterprise has dominant market power, this can put the local company in an advantageous position. There have been cases in certain countries where governments have used their anti-monopoly law as a weapon against foreign investors. Last year, Indonesian competition watchdog the Business Competition Supervisory Committee (KPPU) ruled that Temasek, a Singapore investment company, had violated the anti-monopoly laws. But Temasek released a statement saying that they were not guilty. Forbes quoted Lee Theng Kiat, president and chief executive officer of SingTel saying that “The KPPU decision calls into serious question the application of the rule of law and whether foreign investors can safely invest in Indonesia.” The company is planning to file another appeal with Indonesia's Supreme Court.

“What you are getting is the key to change the way people are doing business, change how people behave, and change how you educate your workforce. Some larger foreign clients are concerned that they are going to be the targets. There is a potential for this law to be used against foreign companies at the expense of local companies,” says Jodie Coutts, consultant at Simmons & Simmons.

Also, according to Graeme Johnston, partner at Herbert Smith, one risk with any new anti-monopoly law in any country is that it may not be sufficiently enforced against local parties. This concern is highlighted in the case of the PRC legislation, in which its application to state-owned enterprises in important sectors is vague. There is also a history of tolerating cartels in China which would be blatantly illegal elsewhere. “The opposite risk is that a new law of this sort may be applied inappropriately to certain companies and practices, causing harm not only to the particular targets but also to the economy and the national interest,” he says.

But not everyone has the same point of view. Some lawyers are confident that this law will protect both local and foreign enterprises from any unreasonable competition or monopolies. Most lawyers are glad to see that the government finally has a law that will allow fair competition between companies, whether local or foreign. Peter Wang from Jones Day says that for many years, foreign companies have been complaining that unfair M&A regulations have violated the WTO principles by targeting foreign investors. But the anti-trust M&A process in the new AML does not distinguish between local and foreign enterprises.

It's true that AML will make things more complicated to some extent, but it should not be a barrier to foreign investment, Jodie Coutts said. “It can protect consumer interest and get rid of inefficiency in the economy. That's the aim.”

NEW REGIME RESTRICTS BUSINESS EXPANSION

The law may restrict private businesses' expansion in China. As “dominance” is not properly defined, private companies could encounter difficulties when competing with certain state-owned enterprises, which often have monopolies and are exempted under the new regime.

China is still a developing country with a developing economy. If the government enforces the law strictly, some sectors and companies might have difficulty growing bigger. “Companies who want to grow or to go multinational might be an issue,” said Wu Peng, partner at Zhong Lun Law Firm.

According to Han Qimeng, partner at Gide Loyrette Nouel, developed countries (especially the US) have effective rules for limiting extreme market concentration. But this could be a problem for developing countries due to their immature economies. Things like political change, economic growth, or new creations of enterprises could shift the government's regulatory focus. “All kinds of changes could happen in a developing country. Not until a company really dominates the market, then the government will be alert and start thinking about how to regulate the market. And it's the same in China,” he says.

The prohibition of price fixing will also impact domestic companies. Unable to exercise the practice of resell price maintenance or demand exclusive cooperation, domestic enterprises will have to struggle to fight for a position in the midst of competition.

“In China, private enterprises are quite new in comparison to the state-owned enterprises,” Han says. “But they are growing. They don't enjoy monopoly today, because they are new.” Han expects that in the future, the government will consider how to bring competition to the state-owned enterprises.

Perhaps five years later, he says, the government will consider regulating the state-owned enterprises in key sectors, and how they will bring the mechanism of competition into the market.

“We need to wait till the private companies to become more mature.”

LAWYERS ARE READY

Though complaining of its uncertainties, lawyers and law firms have been gearing up for this new law. Kirstie Nicholson, Of Counsel at Lovells Shanghai, was transferred from overseas due to her extensive experience in the European AML. A lot of law firms also attended seminars organized by government officials and gave opinions on the implementing rules. Lawyers have been actively working with the government officials to construct the AML, and officials have gained experience by listening to opinions from AML specialists.

According to Andres Font Galarza, partner at Mayer Brown International Brussels office, several MOFCOM officials in the PRC were sent to Brussels to gain practical experience on handling antitrust cases. Galarza worked with MOFCOM and the State Administration for Industry and Commerce on developing a Structured Dialogue on Competition matters between the EU and the PRC.

“The contact with the PRC officials showed me that I was dealing with professionals of the highest technical standards,” he says. “I think the Chinese Government has been very wise in the process of preparation of the AML.”

The government's transparency in this law allows great interaction and communication between lawyers and government officials. Susan Ning from King & Wood, who was invited to the State Council legislative office for the purpose of the AML, says the new law holds new business opportunities and new practice areas for lawyers. She has also written a lot of articles about the draft and has been giving talks to in-house submits.

“We have done a lot of research. We have been actively involved in giving all the comments to the authorities. We also organize seminars to talk about the AML draft. Of course, we have organized a lot of training internally,” she says.

“It's a win-win situation to both sides,” Wu Peng from Zhong Lun says. On one hand, lawyers can learn what the government thinks about the AML. On the other hand, the officials gather from lawyers some practical cases about the law in other jurisdictions. In order to further lawyers' knowledge of anti-monopoly laws, Peng says the firm has invited government officials and professors as speakers. They are also planning to send some lawyers to foreign countries for training.

“We want them to pay attention to foreign countries' markets, because anti-monopoly law has been around for a while in foreign countries. We want them to study some of the cases there for the most recent results,” he says. “This is very common, because we are learning.”

PREDICTABILITY AND CHALLENGE

The AML is definitely an opportunity for lawyers who are interested in this area, but it's also a challenge. As there have been no previous cases in China, lawyers will have to rely on international cases for reference.

“This is not a practice that you can take on right away. We have to rely on working with people from London and Brussels. They have been doing this for the last 20 or 30 years in the European Union. China is starting from scratch,” says Brinton Scott, attorney at Fredrikson & Byron.

Kelly Gregory, senior associate at Clifford Chance, says that it would be a bonus for a lawyer to have a background in European competition law, as the AML is based on the European model. Yet at the same time, it is crucial for lawyers to understand the Chinese culture and
legal environment. The AML, she says, has many Chinese characteristics, so merely having European experience is not enough. Lawyers
with both Chinese and European backgrounds can provide more informed opinions on how the law may be implemented in China,
she says.

But the ambiguities in the regulations make it difficult for lawyers to explain the situation to their clients. “There are still a lot of questions that we don't know the answers to. If a client comes to us and seeks advice, we can look at the agreement and say how we think the law will apply, but it remains unclear how the law will be interpreted by the authorities,” says Kirstie Nicholson.

Lawyers prefer predictability and transparency. It is better for lawyers to understand why the government has made certain decisions in order to provide services for their clients.

“Reasoning helps a lot,” Wang says. “Then we can go back to our clients and help them to anticipate what will work next time.

But until there are cases, they won't know the answers.

FUTURE PROSPECTS AND ENFORCEMENT

Lawyers not only expect more thorough rules before the effective date, they also believe that the government will expand its resources in this field after August 1. But getting sufficient officials with relevant backgrounds could be a challenge.

“The government in China is unlikely to hire non-Chinese citizens as anti-trust officials,” says Graeme Johnston of Herbert Smith. “It will inevitably take a long time for an experienced group of competition regulators to develop internally.”

In comparison to other laws dealing with similar subject, Yang Liu, trainee at Clifford Chance, says the government will provide more personnel and resources for the AML because of the degree of its complexity. “They have been taking this law cautiously and seriously.”

Expertise will need to be built up. China has had similar laws such as the competition law and pricing laws, as well as the M&A regulations. Officials and lawyers should have enough time to become familiar with the fundamental concepts. Besides, as Galarza mentions, MOFCOM officials were sent to Brussels to earn international experience. The question is in what way it should be enforced.²

“Anti-trust legislation always has ambiguities and this one is no exception,” Johnston says. “Whether such laws prove to be useful or oppressive and harmful lies in the fairness, sophistication and transparency of their application and, crucially, in the quality of judicial oversight to prevent the regulator from exercising its huge powers inappropriately. I am sure that with the focus on improving the rule of law that the Chinese authorities have all this very much in mind.”

The law may take anywhere from two to five years to become fully rigorous, says Lui Chun Fai, special counsel at Baker & McKenzie. Brazil, he says, passed their law in the 1990s, and now the country has one of the strongest competition regimes in the world.

But before this can happen in China, lawyers need to see a more detailed draft of the law.

Endnotes

1 See PRC Anti-Monopoly Law (中华人民共和国反垄断法) in CLP Oct 2007.

2 See Suggestions on Regulatory Compliance with the New Anti-monopoly Law for Multinational Companies in China in CLP October 2007.

ANTI-MONOPOLY LAWS ACROSS ASIA

PRC Anti-Monopoly Law: Has It Been Worth the Wait?

The AML, finally promulgated to much applause both domestically and internationally, incorporates many of the successful provisions contained in the anti-trust laws of other jurisdictions: however, some characteristics are unique to China .  

1. Prohibition of the abuse of administrative powers. The AML devotes a whole chapter to dealing with abuses of government power and administrative monopolies. This chapter is believed to have been made in response to public concerns: China is still in the transitional period between a planned economy and a market economy, and administrative monopolies are still commonplace. Although the law expressly indicates a strong opposition to administrative monopoly, its prevailing presence poses a great challenge. In a society where enterprises are commonly seeking government protection or assistance, effective enforcement against administrative monopolies will meet many problems.

2. The protection and control on the activities of businesses engaging in industries controlled by the state-owned economy. Under Article 7, the AML permits state-owned enterprises in industries that have a vital bearing on the lifeline of the national economy and national security to be dominant in the market in order to maintain China 's international competitive capacity. Reconciling these measures with the overriding purpose of the AML may take much effort.

3. National security review. While the AML in general makes no differentiation between foreign and domestic businesses, there is one article which applies only to foreign businesses. According to Article 31, when a foreign business seeks to acquire a Chinese-based business, it can be subjected to further review for “national security” reasons. However, there is no explanation yet of whether the Anti-Monopoly Enforcement Authority or another agency would conduct the national security review and to what extent this review will be applied. Consequently, concerns have been raised among foreign businesses that the national security review might be misused to discriminate against foreign investors.

 4. The enforcement scheme. The AML provides that the authority responsible for anti-monopoly enforcement duties shall be appointed by the State Council. However, the AML does not outline the structure and composition of the enforcement agency. If enforcement is designated to several existing government authorities, it will undoubtedly have an adverse effect on the law's effectiveness. A relatively unified and independent enforcement authority is widely desired. The AML also gives the anti-monopoly agency the power to delegate enforcement activities to government agencies at the provincial, autonomous region, and municipal levels. It is unclear to what extent there will be interaction at the various levels of government.

5. The relationship between the enforcement agencies and industry supervisory agencies. State-owned monopolistic enterprises each have a unique supervisory agency, and the relationship between the anti-monopoly enforcement agency and these industrial supervisory agencies will be a sensitive issue. If the enforcement agency fails to enforce the anti-monopoly law in these industries, the law's authority and position that it should deserve will be ironically bleak.

Jiangang Li

Institute of Law , PhD Candidate Graduate School of Chinese Academy of Social Sciences

IMPACT OF THE AML ON IN-HOUSE COUNSEL