1. Competition review before promulgation of rules
Ministries, departments and agencies at all levels of government, as well as organisations tasked with the administration of public affairs, are required to conduct a competition review before introducing rules, regulations, policies or other administrative measures(together, Rules) that affect or would affect the economic activities of market participants, to ensure that the proposed Rules do not have the effect of eliminating or restricting competition. While the idea of competition review was first raised by the State Council back in 2016,1 its formal introduction under the AML further highlights the important role fair competition will play in China’s market economy.
2. Competition issues in platform/digital economy
From a legislative standpoint, the amended AML formally extends the competition regulatory regime to the platform economy. A new article 9 outlines the general principle2 that businesses must not engage in anti-competitive activities by, for example, taking advantage of data and algorithms, technological capabilities, capital strength3 or platform rules. The amended AML also specifically prohibits businesses from abusing market dominance by using data and algorithms, technology, platform rules, etc. These new provisions reflect and codify the increasingly stringent competition enforcement policies and practices in this sector.
3. Substantially increased penalties for violation
The amended AML substantially increases penalties for violation of the AML. Specifically:
(a) Entering into and implementing anti-competitive agreements4
- In addition to the confiscation of any illegal gain, businesses that enter into and implement anti-competitive agreements will be subject to a fine ranging from 1 per cent to 10 per cent of sales revenue in the last financial year. If there was no sales revenue in the last financial year, a fine of up to RMB 5 million will be imposed. If the anti-competitive agreement has not yet been implemented, a fine of up to RMB 3 million5 may be imposed.
- The legal representative and/or ‘principally responsible person’ of the business, as well as any other ‘person who is directly responsible’ for the business entering into the anti-competitive agreement, may be fined up to RMB 1 million.6 The precise scope of persons who might be liable and elements of such personal liability under this new provision are subject to further interpretation by the competition enforcement agency.
- Any business that arranges for other businesses to enter into an anti-competitive agreement or that provides substantive assistance to other businesses in concluding an anti-competitive agreement will face the same legal liabilities as those applicable to the parties to the agreement.
(b) Business concentration in violation of the AML7
- If, without first filing for competition clearance, a company completes a merger, acquisition, joint venture or other transaction leading to a concentration of business (Covered Transaction) that will have or is likely to have the effect of eliminating or restricting competition, in addition to other remedial measures (divesture, rolling back the transaction, etc.), a fine of up to 10 per cent of the preceding year’s sales revenue will be imposed.
- If the Covered Transaction completed by the company without first filing for clearance does not have the effect of eliminating or restricting competition, a fine of up to RMB 5 million8 will be imposed.
Failure to cooperate with the competition enforcement agency by refusing to provide information or documents, or otherwise obstructing the agency’s investigation, will attract a fine of up to 1 per cent of sales revenue in the last financial year, or a fine of up to RMB 5 million.9
In the case of a flagrant violation of the AML that has serious consequences, the fine under the AML may be further increased to between two and five times the corresponding amount.10 For the first time, the AML, as amended, contemplates general criminal liability arising from anti-competitive activities,11 pending amendments to the PRC penal code.
4. ‘Safe harbour’ and ‘effect test’ for vertical anti-competitive agreements
Article 18 of the amended AML provides that a vertical anti-competitive agreement is not prohibited, if the parties’ respective market share in the relevant market is lower than such market share percentage and that any other conditions established by the competition enforcement agency are met. While this ‘safe harbour’ regime is limited to vertical anti-competitive agreements, it is a welcome development and expected to alleviate the compliance burden for small businesses operating in China.
Article 18 of the amended AML also provides that a vertical anti-competitive agreement will not be prohibited, if the company can prove that such an agreement does not have the effect of eliminating or restricting competition. This new provision clarifies that establishing or fixing the minimum resale price constitutes anti-competitive agreement prohibited unless it can be proved that such agreement does not have the effect of eliminating or restricting competition. While article 18 provides with businesses another defence for establishing or fixing the minimum resale price arrangement, in practice it may be difficult to prove that such an arrangement has no effect of eliminating or restricting competition.
5. Concluding remarks
In light of the severe penalties under the AML (including executives being potentially held personally liable), a company may be at risk if it engages in anti-competitive activities, and so it is advisable for businesses to keep abreast of the detailed rules and regulations that the competition enforcement agency – the State Administration for Market Regulation (SAMR) – will soon introduce in order to implement the amended AML.12
It is anticipated that, following the introduction of the amended AML, the competition enforcement agency will pay more attention to the platform and digital economy. It is therefore recommended that businesses in this sector enhance awareness of AML compliance in their day-to-day operations and take precautionary measures when evaluating business opportunities and business models, in order to ensure compliance and avoid investigations and penalties.
- Opinions of the State Council on Establishing the Fair Competition Review System in the Development of the Market System issued by the State Council on 1 June 2016.
- For detailed guidelines on competition enforcement in the platform economy, please refer to the Anti-Monopoly Guidelines for the Platform Economy issued by the Anti-Monopoly Commission of the State Council in February 2021.
- ‘Capital strength’ is an undefined policy term open to further interpretation by the competition enforcement agency.
- Article 56 of the amended AML.
- Under the current AML, the fine is up to RMB 500,000.
- Article 56 of the amended AML.
- Article 58 of the amended AML.
- Under the current AML, the maximum fine is RMB 500,000.
- Article 62 of the amended AML.
- Article 63 of the amended AML.
- Article 67 of the amended AML.
- On 27 June 2022, SAMR issued six draft rules under the amended AML for public comment.
Client Alert 2022-172