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August will be an eventful month for the People’s Republic of China. Not only will Beijing host the 2008 Summer Olympic Games, but its first comprehensive antitrust law will go into effect. China’s antitrust law, titled the Anti-Monopoly Law of the People’s Republic of China, becomes effective August 1. With this looming deadline, companies should already be making preparations to ensure that they are in compliance.

China, with its population exceeding 1.2 billion people, has the second largest and fastest growing economy in the world. For any international company, China provides a high ceiling for growth and a plethora of business opportunities. Given the sheer size of the country’s economy and the rate of economic growth, it is surprising that China enacted its first comprehensive antitrust law only recently, in August 2007. The Anti-Monopoly Law, as written, has been applauded by the international community.

Like most antitrust laws, the Anti-Monopoly Law comprehensively covers the traditional antitrust topics, including abuse of monopoly power, restrictive trade agreements, mergers and acquisitions and trade cartels. In fact, prior to its enactment, the Anti-Monopoly Law received the benefit of suggestions and criticisms from the international community, including from antitrust authorities and experts in the United States, Russia, Germany, South Korea and Japan, as well as the American Bar Association and the International Bar Association. The enacted Anti-Monopoly Law incorporates many of the suggestions garnered in that process, particularly with regard to monopolies and mergers and acquisitions.

The Anti-Monopoly Law also covers areas not normally addressed by most antitrust laws, including abuse of administrative power by government officials that results in an anticompetitive impact on the market. Further, the Anti-Monopoly Law attempts to harmonize the socialist market economy and the principles underlying free competition by providing that one of the fundamental purposes of the law is to promote “the healthy development of the socialist market economy.” The Anti-Monopoly Law further provides measures for reviewing and examining certain mergers and acquisitions that raise “national security” concerns.

The Anti-Monopoly Law is broad in scope, and its terms are somewhat vaguely defined. Companies that intend to complete a business transaction that falls within its scope should become familiar with these provisions, which can significantly increase a transaction’s time and costs and which also pose certain related risks.

The Enforcement Authority

General policy decisions emanating from the Anti-Monopoly Law will be made by the so-called Anti-Monopoly Law Committee. Interestingly, the Anti-Monopoly Law appears to authorize some type of a private right of action. Given these points, however, the main guardian of the Anti-Monopoly Law will be the Anti-Monopoly Law Enforcement Authority, which will enforce this law on a day-to-day basis.

Under the Anti-Monopoly Law, the enforcement authority is empowered to perform on-the-spot inspections, question interested parties, examine and copy relevant data, retain evidence and inquire after a company’s bank accounts. Further, the enforcement authority is authorized to delegate its powers to other government agencies, thereby making it logistically possible to increase the overall enforcement of the Anti-Monopoly Law.

While the Anti-Monopoly Law broadly empowers the enforcement authority with intrusive methods of investigation, the enforcement authority is also specifically charged with keeping commercial secrets confidential. The implementing measures that will and have already been published can provide companies with a preview of the types of behavior and transactions that will attract the enforcement authority’s attention.

Recent Developments

In light of the Anti-Monopoly Law’s broad scope of coverage and somewhat vague provisions, particularly those empowering the enforcement agencies, companies should be paying close attention to the related regulations and implementation measures released by Chinese government authorities. These regulations and implementation measures should clarify the types of transactions that the enforcement authority will investigate. For example, implementation measures dealing with mergers and acquisitions (collectively called “concentrations” under the Anti-Monopoly Law) were published recently for public comment and provide a glimpse of what is to come.

Measures Regarding “Concentrations”

Under the Anti-Monopoly Law, if proposed concentrations meet certain threshold standards, the enforcement authority must be notified and will review and approve the deal. However, rather than providing those threshold standards, the Anti-Monopoly Law only states that the threshold standards will be set by the state council.

If notification is required under the Anti-Monopoly Law, a company must submit a notification letter, a description of the effects on the competition status in the relevant market, the actual merger or acquisition agreement and a financial accounting report for the previous year of the companies involved in the concentration. Notably, the enforcement authority can require companies to submit “other documents and information” in order for the concentration to be approved. These submissions, particularly the open-ended “other documents and information,” could substantially increase the burden and costs of pursuing a merger or acquisition in China.

The Anti-Monopoly Law further provides two exemptions that would allow companies to avoid submitting a concentration for review. Under the first exemption, no notification is required when a company possesses more than 50 percent of the voting shares or assets of each of the other companies involved in the concentration. To qualify for the second exemption from notification, a company not involved in the concentration must possess more than 50 percent of the voting shares or assets of each company that is involved in the concentration. Under the Anti-Monopoly Law as enacted, absent these two circumstances, companies must notify the enforcement authority of the concentration and submit the requisite documentation. Please note that, like other provisions of the Anti-Monopoly Law, the provisions dealing with concentrations received criticism from international observers for defining terms only vaguely and not clearly setting forth the threshold standards.

Recently, China’s State Council released for public comment draft implementation measures for reviews of concentrations. The draft implementation measures attempts to clarify certain terms and set the threshold standards triggering the requirement for notification. For example, the implementation measures attempt to clarify the definition of what qualifies as a “concentration” under the Anti-Monopoly Law. As the Anti-Monopoly Law currently stands, a concentration is loosely defined as a merger, an acquisition or the capability of exercising control or decisive influence over companies by contract or other means. The draft implementation measures narrow the definition of concentration by limiting the last category to the exercise of decisive influence over another company’s decision-making with regard to production and operation.

Perhaps most significantly, the draft implementation measures specify the threshold standards triggering the requirement for notification to the enforcement authority. The threshold standards largely depend upon the size of the concentration or transaction, measured in terms of revenue. The implementation measures provide that notification is required if:

(1) the global sales revenue during the previous fiscal year of the companies involved in the concentration exceeded RMB 9 billion and two or more of the companies involved had sales revenue in China during the previous fiscal year exceeding RMB 300 million;
(2) the sales revenue in China during the previous fiscal year of the companies involved in the concentration exceeded RMB 1.7 billion and two or more of the companies involved had sales revenue in China during the previous fiscal year exceeding RMB 300 million; or
(3) the concentration will allow a company involved in the concentration to acquire a market share of 25 percent or more in the relevant market in China.

Any concentration meeting one of these threshold standards cannot be implemented without first providing the enforcement authority notification along with the other requisite documentation. All submitted documents must be in Chinese.

In addition to releasing the draft implementation measures for concentrations, China is preparing to join the International Competition Network, an international body of competition agencies and authorities and hopes to join the network within a year. Further reflecting its willingness to entertain suggestions from countries with well-established antitrust laws, China has declared that its goal is to bring its enforcement of the newly enacted Anti-Monopoly Law into conformity, or at least to make it fairly consistent, with the antitrust regulations of other countries in the network.

Preparing for the New Law

With the Anti-Monopoly Law set to come into effect August 1, 2008, companies doing business in China should already be making preparations to ensure they are in compliance with the new law, particularly with regard to monopolies and restrictive trade agreements. Furthermore, for companies with plans to merge with or acquire another company in China, the draft proposal of the implementation measures for concentrations provides a peek at the types of transactions that will fall under the scrutiny of the enforcement authority.

A company that fails to take the Anti-Monopoly Law and its developments into careful consideration could easily fall into the hands of the enforcement authority. This will be a precarious place indeed, given the likelihood that the first violator of the Anti-Monopoly Law may be made into a high-profile example, allowing China to deter other violators while demonstrating it is serious about antitrust regulation. Don’t let the first casualty be you.

Working with Cheng Liu of our Beijing office, Mr. Hittinger and Mr. Huh have also prepared a thorough and comprehensive review of the Anti-Monopoly Law. Please read it here.

An unofficial translation of the law, prepared by Mr. Liu, may be found here.

An earlier version of this article appeared in the Philadelphia Legal Intelligencer in May 2008.