Why SAIC needs to speed up

China Law & Practice's Annual Review was released at the Awards Ceremony in Beijing this month. Part of the Annual Review comprises insights from leading lawyers. In this Q&A, Ken Dai discusses the competition arena and what foreign companies should consider during anti-trust reviews and the effects of the Anti-monopoly Law.

1. What were the key changes in legislation affecting competition over the past 12 months and how did they affect the competition regime?

In the past 12 months, two sets of implementing rules have been released by the Ministry of Commerce (MOFCOM): Tentative Provisions for the Assessment of Competitive Effects of Concentrations of Business Operators (Assessment Provisions,《关于评估经营者集中竞争影响的暂行规定》) on September 2 2011, which became effective on September 5 2011 and Tentative Measures for Investigating and Handling Concentrations of Business Operators that Fail to Report in Accordance with the Law (Investigating and Handling Measures, 《未依法申报经营者集中调查处理暂行办法》) on January 5 2012, which came into effect on February 1 2012. In addition, the Supreme People's Court promulgated a set of judicial interpretations on May 4 2012: Provisions on Several Issues Concerning the Application of the Law in Trials of Civil Dispute Cases Arising from Monopolistic Acts (Judicial Interpretation, 《关于审理因垄断行为引发的民事纠纷案件应用法律若干问题的规定》), which entered into force on June 1 2012. Finally, MOFCOM released the Form for Reporting in Connection with Anti-monopoly Reviews of Concentrations of Business Operators (《经营者集中反垄断审查申报表 (修订) 》) and its Instructions (《填表说明》) (Amended Form and Instructions) on June 6 2012, which became effective on July 7 2012.

The implementing rules issued by MOFCOM expand on the legislation regime of merger control in China. Although criticised for lacking details, the Assessment Provisions try to provide guidance on the methodology and certain economic tools for competitive assessment by MOFCOM, which may make self-evaluation and preparation easier for merging parties. The Investigating and Handling Measures also show MOFCOM's determination to punish business operators that refuse or fail to provide due notification by introducing a longer investigation process than the normal merger review process, as well as imposing fines and orders to withdraw the transaction. The Judicial Interpretation which clarified aspects of Anti-monopoly Law (AML) private actions such as burden of proof, will serve as a gap-filler between the AML and civil litigation and are a foundation for the development of antitrust judicial reviews in China. The recently enacted Amended Form and Instructions will provide further clarification on how to fill out the notification form for the merging parties. The Amended Form and Instructions indicate MOFCOM's efforts to further standardise the notification content and format with the objective of reducing requests for information before formally accepting the case.

2. What developments do you expect to see in the next 12 months?

According to Shang Ming, Directorate General of the Anti-monopoly Bureau of MOFCOM, at the BRICS International Competition Conference last year, at least two more implementing rules will be issued by MOFCOM in the near future, namely the Provisions for the Imposition of Restrictive Conditions on Concentrations of Business Operators (《关于经营者集中附加限制性条件的规定》) and Measures for Investigating and Handling Suspected Monopolistic Concentrations of Business Operators that Have not Reached the Reporting Thresholds (《未达申报标准涉嫌垄断经营者集中调查处理办法》). It has also been reported that MOFCOM is proposing to streamline anti-monopoly reviews by classifying M&A transactions on the basis of market shares, which might finally introduce an expedited procedure for antitrust reviews of the concentration of business operators in China.

3. How will any of these developments change the competition landscape?

It is still too early to assess the impact of the formal enactment of the supplemental rules above on the competition landscape in China. However, the introduction of the Provisions for the Imposition of Restrictive Conditions on Concentrations of Business Operators will provide important guidance on negotiating the restrictive conditions imposed by MOFCOM to address competition concerns in specific transactions. The final promulgation of Measures for Investigating and Handling Suspected Monopolistic Concentrations of Business Operators that Have not Reached the Reporting Thresholds will also help business operators to better comply with the AML as they will know when MOFCOM is to begin the antitrust review of M&A transaction, even if the threshold is not satisfied.

4. Over the past 12 months, have you seen the Anti-monopoly Law applied fairly to both domestic and foreign businesses?

Since the implementation of the AML on August 1 2008, it has been applied and enforced equally to foreign and domestic companies. For example, on November 10 2011, MOFCOM conditionally approved the incorporation of a proposed joint venture by GE (China) and China Shenhua Coal to Liquid and Chemical, the latter being a Chinese state-owned energy company. Another example concerns enforcement against a well-known state-owned enterprise by the National Development and Reform Commission (NDRC) in 2011. On November 9, the NDRC announced that it had begun anti-monopoly investigations into China Telecom and China Unicom, both of which are Chinese state-owned telecommunication operators. On November 14, NDRC also imposed fines of RMB 7 million ($1.1 million) on two local private pharmaceutical companies for price-related anti-competitive behaviour.

5. What are some of the highlights of the year in regard to AML cases? How do these help in understanding how the AML law is applied?

Qihoo 360 v Tencent

This was the first AML case before a Higher Court. Action against the abuse of dominance has been the most active area in AML private litigation since the Law entered into force. The Court here outlined the reasoning when ruling on the abuse of dominance: firstly, define the relevant market, including the product market, geographic market and in certain circumstances, the technology market; then determine the market dominant position according to Article 18 or Article 19 of the AML; thirdly, determine whether there is abusive conduct by the defendant; and finally, identify the damages caused by the abusive conduct. Qihoo appears to be the first plaintiff engaged in in-depth analysis, applied economic tests and presented ample evidence to define the relevant market and prove defendant's dominant position, such as with a demand-side substitutability test, market share data and expert witnesses. Whether and how the Court will accept this proof remains to be seen as the case develops.

Rainbow Medical Equipment & Supplies v Johnson & Johnson

In its first instance judgment, the Court dismissed Rainbow Medical Equipment's claim as it failed to define the relevant market, prove the market power of the defendant or show that the alleged vertical agreement was anti-competitive. This suggests that the Court is applying a rule of reason analysis to vertical agreements involving minimum resale price maintenance. This was also confirmed by the first judicial interpretation issued by the Supreme People's Court, which, unlike the previous draft version, removes the presumption of anti-competitive effects for vertical agreements concerning resale price fixing and minimum resale price restriction explicitly identified in the AML.

6. On May 4, the Supreme People's Court released the first court interpretation of the Anti-monopoly Law since it came into effect four years ago, what are the implications of these Provisions on domestic and foreign companies? Which areas of the Law do they clarify or remain unclear?

This Judicial Interpretation, which is applicable to both domestic and foreign companies, will promote the development of AML private litigation in China. It contains provisions to clarify the jurisdiction, acceptance and consolidation of cases, the allocation of burden of proof, use of expert witnesses and independent professional institutions and the statute of limitations of AML disputes. However, it remains unclear on some aspects, such as how the court is to review the facts determined by AML enforcement authorities, and whether the defendant can apply the passing-on defence to AML private actions. The Judicial Interpretation also says nothing on the triple damages rules, which has been well adopted by US courts.

PRC courts have yet to rule in favour of the plaintiff in an AML case, mostly due to a failure to meet the burden of proof. Less presumption of the illegality of the defendant, as well as adopting a compensatory damage principle, may dissuade those for whom the law was designed to protect, especially individuals, from launching lawsuits against monopolistic conduct.

7. What practical advice would you give to foreign companies about to engage in an acquisition that would trigger an AML review?

Foreign companies are advised to ensure that they comply with the PRC's AML review mechanism as follows:

• create a schedule for M&A transactions: factor in the PRC anti-monopoly review when contemplating the deal structure and formulating the schedule;

• make pre-notification contact with MOFCOM. MOFCOM can help in preparing the filing documents, defining the relevant market and identifying the potential competition concerns;

• collect information on the Chinese market. Data on the competition within a relevant market, such as market shares and competitors, is often difficult to obtain from public sources in China like the National Bureau of Statistics, so it may be necessary to engage a qualified PRC market-research firm to collect this information; and

• coordinate the AML review in China with the merger notification, if any, in other jurisdictions, such as the EU and US.

Foreign companies should also be cautious of whether the proposed acquisition could trigger a National Security review, which is deemed to be a supplementary mechanism of the AML review.

8. MOFCOM closely scrutinises M&A transactions. In your experience what does it focus on during merger review and how does its practices compare with other competition regulators?

MOFCOM tends to focus on the parties' market share after a transaction and the relevant market's concentration post-transaction. MOFCOM is familiar with the concepts of unilateral effect, coordination effect and foreclosure effects. This means that if the market's concentration is high and the business operators involved in the transaction have significant market shares, MOFCOM may believe that a transaction between them could eliminate or restrict competition in the market. MOFCOM will also focus on the possibility for new competitors to enter the market and seek opinions from such third parties like government departments, trade associations and upstream or downstream players. Decisions in numerous cases have indicated that MOFCOM referred to the decisions of other foreign competition authorities and considered the particular conditions in the Chinese market. This means that although it adopted a similar methodology for reviewing the same case as other mature jurisdictions, MOFCOM may impose different and even tougher remedies to ease competitive concerns. For worldwide acquisitions subject to merger control review in numerous jurisdictions, such as the US, EU, Japan and Korea, clearance from MOFCOM has usually been the last to be issued.

9. What has been the highlight of your competition cases over the past 12 months and why was it challenging? Does it set any precedents?

There was an antitrust review case on the incorporation of a joint venture in China. At that time the GE and Shenhua joint venture had not been announced and there were no explicit provisions under the AML or the supplemental rules stipulating where a joint venture falls within the scope of concentration of business operators. As such, at the beginning, although the foreign partner insisted on notifying MOFCOM, the Chinese partners decided against this kind of merger filing even though the threshold had been met. After explaining the practice of establishing a joint venture in China and the potential legal consequences of failing to comply, and a pre-consultation with MOFCOM, the Chinese party eventually agreed to handle the notification.

10. What key trends are you seeing develop in competition and anti-trust law and enforcement?

In response to common criticism that MOFCOM takes much longer to complete its review process than other merger control authorities, there could soon be a faster approval process in China, similar to the short form filing used in the EU. In addition, faster and more efficient procedures for merger control approval can be expected due to MOFCOM's continuing cooperation with EU and US regulators through various channels. These include the China-EU Competition Policy Dialogue and the Memorandum of Understanding on Anti-monopoly and Antitrust Cooperation signed in 2011 with the Department of Justice and Foreign Trade Commission of the US.

Both the NDRC and State Administration for Industry and Commerce (SAIC) are expected to launch more investigations in enforcement against anti-competitive conduct and impose fines that could reach up to millions of renminbi.

With the effectiveness of the judicial interpretation, more legal actions can be expected in private antitrust litigations, which will be brought before the competent court, whether technically or strategically.

11. If you had to give one piece of practical advice to foreign clients about the competition regime in China, what would it be?

Keep up-to-date on the introduction of the further implementing rules and the decisions published by the anti-monopoly enforcement authorities in the near future. Always seek legal advice from external counsel when your company encounters issues relating to the AML.

为何工商总局需加快步伐

1. 过去12月，竞争法方面出台了什么主要法规？这些法规对竞争法制度有什么影响？

过去12个月，商务部出台了两项实施细则：2011年9月2日公布的《关于评估经营者集中竞争影响的暂行规定》，自2011年9月5日起施行；2012年1月5日发布的《未依法申报经营者集中调查处理暂行办法》，自2012年2月1日起施行。另外，最高人民法院于2012年5月4日公布的《关于审理因垄断行为引发的民事纠纷案件应用法律若干问题的规定》，自2012年6月1日起施行。最后是商务部于2012年6月6日出台的《经营者集中反垄断审查申报表》（修订）及《填表说明》，自2012年7月7日起施行。

商务部发布的实施细则扩充了中国并购控制的机制。尽管《评估经营者集中竞争影响的暂行规定》被批评为缺乏细节，该规定试图对商务部竞争评估所采用的方法及特定经济工具提供指引，方便并购方进行自我评估及申报前期准备。《未依法申报经营者集中调查处理暂行办法》引入的调查程序较一般并购审查程序的期限更长，加上罚款及责令停止交易等处罚，均显示出商务部对拒绝或未能依法申报的经营者进行处罚的决心。而《关于审理因垄断行为引发的民事纠纷案件应用法律若干问题的规定》则明确了《反垄断法》中如举証责任等有关私人诉讼的事宜，填补《反垄断法》与民事诉讼之间的空白，也为中国反垄断司法审判的发展建立基础。最近颁布的《经营者集中反垄断审查申报表》（修订）及《填表说明》进一步阐明并购方应如何填写申报表。此举显示商务部正进一步规范申报的内容及格式，以减少正式受理案件前要求并购方提供补充资料的需要。