Interview: Ken Dai – Partner, Dentons Dacheng Law Offices

Author: InnoXcell

October-14 2016

Ken Dai speaks to InnoXcell ahead of his participation in the IAS China Series in Shanghai on October 27th. Featuring additional contributions from Jet Deng.

Hi, Ken. At our upcoming conference, you’ll be discussing anti-monopoly legislation, among other key topics. In what ways has China’s anti-monopoly law transformed since its inception?

The anti-monopoly law (AML) was promulgated on 30 August 2007, and went into effect 11 months thereafter. Its development can be divided into three stages:

  • The first stage was from 2007 to 2012, when supporting legislation played a primary role. A batch of administrative regulations, guidelines and judicial interpretations were introduced successively, which made the AML more operable and predictable. At this stage, anti-monopoly enforcement was barely focused on, except for the fact that the Ministry of Commerce (MOFCOM) dealt with a number of notifications of concentrations. The people’s courts accepted quite a few civil anti-monopoly cases, which didn’t leave much of an impression on the public, either.
  • The second stage was from 2013 to 2014. Relevant legislation was on the way to perfection. The remarkable sign within this stage was the strengthened anti-monopoly enforcement. Anti-monopoly law became a daily topic. In the same period, civil litigation in anti-monopoly areas broke out, making AML a powerful weapon for enterprise to protect their own rights and implement their business strategies.
  • The third stage began in 2015, with anti-monopoly stepping into the normalization and refinement period. Systematic legislation is becoming further entrenched, while legislative activities, such as amendments to the AML and the formulation of six anti-monopoly guidelines, have been launched. As for the enforcement and judicature, the number of anti-monopoly cases increased steadily due to the rich experience gained by enforcement authorities and courts, as well as the popularity of anti-monopoly culture in society.

 

Could you tell us about the legislative trends within the AML and its relevant regulations?

The AML consists of 57 articles, most of which are principle provisions, so supporting legislation is urgently required. To date, there exist more than 30 laws, administrative regulations, guidelines, departmental regulations, local regulations and measures, making the Chinese anti-monopoly legal system one of the most complicated law departments. In spite of this, it is still under-developed compared with other mature anti-monopoly jurisdictions.

The long-term legislative trend remains the improvement and refinement of detailed rules through amendment and systematic legislation. In the short term, special attention should be paid to the drafting of six anti-monopoly guidelines. All six guidelines are expected to be promulgated successively in late 2016 or early 2017. Amendment to the AML has also been added to the State Council’s legislative plan.

What’s the relationship between industry regulation and anti-monopoly enforcement?

In the macro context of economic systemic reform, industry regulation and anti-monopoly enforcement share common objectives – to promote the sound development of industry, to protect fair competition, and to safeguard the rights and interests of consumers. In some instances, objectives are achieved effectively through industry regulation alone, while anti-monopoly enforcement may be more effective at other times. Certain industrial problems are so conspicuous that the relationship between industry regulators and anti-monopoly enforcement authorities becomes much closer. Under this circumstance, the approaches mentioned above would complement and coordinate each other. Until now, we have witnessed a “joint force” in the telecommunications, auto, Internet, insurance, and pharmaceutical industries. Enterprises should identify the trends of industry development and their own potential problems, and be adequately prepared in compliance to avoid becoming the subject of anti-monopoly enforcement.

What are the hot industries within recent anti-monopoly investigation?

Anti-monopoly enforcement authorities pay special attention to industries closely related to consumers as well as people’s livelihood. Industries essential to the national economy are also within the scope of anti-monopoly investigation now and then.

Recently, it has become clear that industries involving pharmaceutical and medical equipment, auto, and public utilities are hot spots in anti-monopoly investigation. Moreover, with the surfacing of intellectual property rights (IPR) in China, the number of disputes concerning IPR is skyrocketing, while standard essential patent cases are also on the rise.

Let’s discuss the high-profile acquisition of Uber China by DiDi Taxi. Should MOFCOM have been notified?

There are two pre-conditions for a transaction to be notified. The first is that the transaction constitutes a concentration, while the second requires turnover of relevant enterprises to reach a certain threshold. As for DiDi Taxi’s acquisition of Uber China, the former obtained control of business over the latter, which makes the transaction a concentration. However, huge uncertainty exists with regard to whether the turnover threshold has been reached. Some argue that the turnover of DiDi Taxi and Uber China should include the income of drivers, while others think not.

Due to the hysteretic nature of laws, there is no explicit provision on this issue. We can only rely on the discretion of anti-monopoly enforcement authorities. To date, MOFCOM has consulted with DiDi Taxi twice for further explanations on the non-notification. What’s more, according to current laws, even if the turnover threshold is not met, MOFCOM still have the right to open an investigation against a transaction, if such a transaction is likely to exclude or restrict competition.

Can the non-compete clause commonly seen in M&A transactions trigger anti-monopoly risks?

Generally speaking, parties to M&A or joint ventures usually choose to add a non-compete clause into relevant agreements, aiming to prevent the seller from engaging in similar business in competition with the buyer, or to restrain both parties from engaging in similar business in competition with the joint venture.

Under most circumstances, it is reasonable to agree on this kind of restraint, which is necessary for the transaction. One could imagine that a potential buyer would never choose to purchase relevant business if it knew that the seller would re-open the same business soon after the transaction.

However, since non-compete clause restricts competition to some extent, such clauses should be reasonable. For example, the restrictions on time limit, business scope and territory, and other elements, should be set only when necessary, thus avoiding anti-monopoly risks. Chinese anti-monopoly enforcement authorities have analyzed and assessed non-compete clauses in detail during the review of concentration notifications and administrative investigations. As for enterprises, they should observe and study relevant legal standards and business practices meticulously.

Would the establishment of an anti-monopoly compliance program help alleviate anti-monopoly penalties?

Ordinarily, the establishment of an anti-monopoly compliance program could help enterprises fight anti-monopoly risks systematically, raising employees’ consciousness of risk, detecting and responding to monopolistic issues in time. In foreign countries, including the UK, Korea, Australia and the US, anti-monopoly compliance programs could be the basis for the alleviation of anti-monopoly penalties.

However, there is no explicit provision in the current Chinese anti-monopoly laws, regulations, administrative penalty law, or the draft of the Guidelines on Recognizing the Illegal Gains Obtained by Business Operators from Monopolistic Conducts and Determining the Amount of Fine.

In practice, Chinese anti-monopoly enforcement authorities would take a subjective analysis of the enterprises into consideration when making penalty decisions. If an enterprise has an established anti-monopoly compliance program, but faces potential penalties due to individual employees’ non-compliance, then it could strive for alleviation in this regard.

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