China proposes increased penalties for gun-jumping in Anti-Monopoly Law

15 April 2020

The People’s Republic of China’s State Administration for Market Regulation (“SAMR”) conducted a public consultation on proposed amendments to its Anti-Monopoly Law (“AML”) from 2 to 31 January 2020.

The draft amendments to the AML (“Draft Amendments”) mark the first time that there has been a proposal to amend the AML since it came into effect in 2008. In particular, there are changes contemplated in relation to the merger review process and penalties for gun-jumping which could have wide-ranging implications for transactions that technically trigger notifications in China. Parties to transactions, and who have a presence in China, should, in particular proceed with caution and seek advice on whether their transactions are required to be notified in China. This article sets out some of the key proposed amendments.

Reform of penalties

• Merger control infringements: Presently, the maximum penalty for merger control infringements (including gun-jumping) stands at RMB500,000 (approximately S$100,000). The Draft Amendments propose to peg the maximum penalties for merger control infringements to the turnover of the undertakings concerned, with a fine of up to 10% of the turnover of the undertaking concerned for the preceding year. This penalty would cover all merger control infringements, such as: 
  • where the undertaking implements a concentration which exceed the turnover thresholds specified in the AML without obtaining approval from the SAMR; 
  • where the undertaking implements a concentration after notifying the SAMR but prior to receiving approval;
  • where the undertaking breaches the conditions imposed in a conditional clearance; or
  • where the undertaking implements a concentration in violation of a decision prohibiting such concentration.

• Cartel regulation: While the Draft Amendments do not propose to amend the penalties for undertakings which have entered into and implemented monopoly agreements, it proposes to fine undertakings which have entered into but not implemented monopoly agreements, including undertakings with no sales turnover in the preceding year, up to RMB50,000,000 (approximately S$10 million). This is a sharp increase from the present maximum fine of RMB500,000 (approximately S$100,000). This penalty also applies where an undertaking organises or facilitates other undertakings to conclude monopoly agreements.
•  Criminal sanctions: The Draft Amendments seek to clarify that criminal liabilities can arise where an infringement of the AML also constitutes a crime pursuant to other statutes. For instance, bid rigging is a criminal offence under Article 223 of China’s Criminal Law. The Draft Amendments confirm that criminal liabilities for such conduct can also be pursued.

Reform of merger review process

Presently, the AML stipulates that pre-merger notifications for “concentrations of undertakings” must be filed with the SAMR if certain turnover thresholds are exceeded. The current definition of “concentration of undertakings” in the AML encompasses two general categories of transactions: (i) mergers and (ii) the acquisition of control over one or more undertakings (via an acquisition of shares or assets or other means). However, the AML does not provide a definition of control. Importantly, the Draft Amendments propose a definition of control which will provide greater clarity on whether transactions may need to be considered for a merger notification in China.

• Codification of a definition of control: The SAMR issued the Guiding Opinion on the Notification of Concentration of Undertakings in 2018 (“SAMR Guiding Opinion”) to explain the definition of control. The Draft Amendments propose to codify most of the SAMR Guiding Opinion’s definition of control and define “right to control”, in relation to determining a concentration of undertakings, to mean the right or actual status of undertakings to, directly or indirectly, individually or jointly, exert a decisive or potentially decisive influence on the business activities or other major decisions of other undertakings.
• “Stop the clock” mechanism: While the Draft Amendments do not propose to amend the current timeline for merger review, it proposes to add a “stop the clock” mechanism which will suspend the review procedure in certain circumstances, such as where the parties apply for or agree to a suspension of the review, or where the parties and SAMR are negotiating the remedies for conditional approvals.
• Revocation of prior merger review decisions: The Draft Amendments propose to include a provision which will allow the SAMR to revoke a merger review decision if it later finds that the information submitted is inaccurate.

Reforms pertaining to the internet sector

The Draft Amendments also aim to regulate China’s internet sector, which, in recent years, is characterised by significant internet and technology companies. This is aligned with the shift in scrutiny and focus on the internet sector by antitrust regulators globally.

• Reform of regulations for dominant firms: In addition to the existing factors that need to be considered when determining if an undertaking is dominant in the relevant market, the Draft Amendments will also require the consideration of the following factors when the relevant market is in the internet sector:
  • network effects;
  • economies of scale; 
  • lock-in effects; and 
  • the ability to control and process data.
• Reform of cartel regulation: The Draft Amendments also propose the addition of a new provision which expressly prohibits an undertaking from organising or facilitating other undertakings to conclude monopoly agreements. This would likely capture hub-and-spoke arrangements and also regulate the behaviour of internet and technology firms which operate digital platforms.
• Encourage innovation: Despite the increased scrutiny on the internet sector, the Draft Amendments propose to modify the objectives of the AML and include the objective of “encouraging innovation”. This reflects the fine line which antitrust regulators, including SAMR, have to tread when balancing antitrust enforcement priorities and the need to maintain incentives to innovate.