chinas-competition-law-under-starters-orders

China's competition law: under starter's orders

China passes a new anti-monopoly law. We talk to Clifford Chance lawyers to find out how it works.
China's new Anti-Monopoly Law (AML) was adopted on August 30, 2007, and will come into effect on August 1, 2008. Kelly Gregory, senior associate at Clifford Chance in Shanghai, talks to FinanceAsia about the law's implications.

How will this new law impact businesses?
When the law comes into force, any company taking control of another will have to prove that the acquisition will not eliminate or restrict competition in that industry in China by notifying the deal to the authorities. Failure to obtain proper clearance could lead to the deal being unwound by the regulators.

The AML will also restrict day-to-day business practices that could harm consumers in China. It will stop companies fixing prices or controlling supply and distribution - for instance, by restricting output or sales or dividing markets. Companies with a dominant market position in China will be prevented from taking advantage of this dominant position, for instance by selling products at unfairly high or low prices, by buying products at unfairly low prices, or by refusing to trade with trading parties without justification.

The law also contains substantial penalties for non-compliance - up to 10% of a company's sales within the relevant market in the preceding year - and may also result in additional scrutiny of the increasing number of foreign acquisitions of domestic Chinese businesses.

How so?
Debate has raged inside and outside China as to whether the AML could be used politically to prevent foreign acquisitions of Chinese companies on "national security" grounds.

The AML clearly states that there will be a separate examination of deals on national security issues, a provision that also exists under the Regulations for the Acquisition of Domestic Enterprises by Foreign Investors.

It is therefore clear that reviews carried out under the AML should not be used to directly regulate foreign investment into China unless a purchase has a direct effect on market competition.

So who does this law apply to?
The AML applies to company purchases within and outside of China, and to all entities, with exceptions for the agricultural sector and state-controlled monopolies according to Chinese law.

The exact thresholds that will require a deal to be notified will be specified in the upcoming implementing rules, but penalties for a failure to notify a transaction include fines of up to Rmb500,000 (around $66,000) and a potential order to unwind the transaction.

How quickly do people need to come up to speed on the notion of whistle-blowing?
While much of the detail of the new law is yet to be unveiled in the implementation rules, businesses in China have just one year in which to train staff and implement systems to ensure compliance with the new law. A company or individual may report suspected monopolistic conduct confidentially to the authority (ie, whistle-blowing). The authorities have been given wide-ranging powers to make on-the-spot inspections, question, examine or copy documents, seal up and retain evidence, and investigate bank accounts. There are fines for individuals and for enterprises that obstruct investigations or submit fraudulent information during an investigation.
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