PRC anti-monopoly law and its application

The PRC Anti-Monopoly Law (AML) was promulgated by the National People’s Congress on 30 August 2007 and came into force on 1 August 2008.

The AML took more than 10 years to develop and represents a major milestone in ensuring fair market competition in China. It borrows from competition laws around the world, especially Europe and, to a lesser extent, the United States. It uses broad and uncertain language, which makes it difficult to predict how it will apply to various agreements and situations.

Regulations containing greater detail and giving further guidance on how the AML will be interpreted and enforced have been released. However, considerable uncertainty still exists. Over time, the meaning of the AML’s provisions will be developed by the government agencies which enforce them.

General overview

The AML regulates three types of anti-competitive acts:
· A concentration of business operators that could have the effect of eliminating or restricting competition;
· Anti-competitive agreements reached between business operators; and
· Misuse of market dominance by business operators.

It is enforced by three government agencies: the Anti-Monopoly Bureau of the Ministry of Commerce (MOFCOM), which reviews business concentrations; the National Development and Reform Commission, which enforces the price-related provisions and offences; and the Anti-Monopoly and Anti-Unfair Competition Bureau of the State Administration for Industry and Commerce, which enforces the non price-related provisions and offences.

Concentration of business operators

Perhaps the most relevant provisions for terminal operators are those relating to business concentrations. “Concentration of business operators” refers to a business operator merging with another business operator, obtaining control of another business operator through the acquisition of equity or assets, or obtaining control or decisive influence over another business operator through contractual or other means.

The key question is whether a transaction results in “control” or “decisive influence” over another business operator. This is obviously the case where there is a complete merger between two companies or where one company acquires the whole or the majority of another company’s equity. Whether a minority investment or asset purchase results in “control” or “decisive influence” will depend on the relationship between the companies and the directorship, management and veto rights obtained by the acquirer.

If there is a concentration of business operators, MOFCOM must be notified where the two or more business operators each have more than RMB400m ($58.8m) of turnover in China and either global annual turnover of the businesses combined exceeds RMB10bn ($1.47bn) or annual turnover in China of the businesses combined exceeds RMB2bn ($290m).

Even if the annual turnovers of the business operators have not reached the prescribed thresholds, MOFCOM can investigate a transaction if the transaction might restrict competition. Therefore, legal advice should be sought whenever a significant merger, equity investment, asset acquisition or joint venture is made involving parties with significant operations in China.

Further, the AML applies where the business being sold is located outside China. So, for example, the sale of a port terminal operation in Europe owned by a global port terminal operator with significant turnover in China would have to be notified to MOFCOM if the buyer was a Chinese or global terminal operator with significant turnover in China.

As a practical matter, where a transaction is unrelated to China or where it is unclear whether “control” or “decisive influence” will be acquired, parties should engage in informal consultation with MOFCOM to determine whether a filing can be avoided.

Monopoly agreements

The AML prohibits agreements between competitors which fix prices, restrict output or the purchase of new technology and equipment, or allocate customers, geographic markets or products. Also prohibited are agreements between a supplier and wholesale customer setting or restricting the price at which goods or services can be sold to customers.

There are currently no reported decisions on the application of the AML to monopoly agreements in the port industry. Below, we look at an example of the provisions commonly seen in concession agreements in the PRC which may trigger the application of the AML.

In the PRC, a local port authority usually receives approval from the central government to develop several terminals within the region. It is then common for the local port authority to develop, manage and operate these terminals jointly with different terminal operators. For example, a local port authority may receive approval from the central government to develop all three sections of a terminal. The local port authority may then sublease section A to terminal operator A with a 50/50 joint ownership, section B to terminal operator B with a 60/40 joint ownership and section C to terminal operator C with a 70/30 joint ownership.

As the local port authority has a shareholding in all three sections of the terminals, it would not be in the interest of the local port authority (or any of the terminal operators) for the terminals to engage in price competition. Hence, the concession agreements between the local port authority and port terminal operators usually contain provisions that terminals A, B and C will not engage in any price competition.

Under the AML, agreements to fix prices between independent business competitors are illegal. However, in this case, terminals A, B and C are not in competition with each other because they are equally or majority owned by the local port authority. The non-compete provisions in the concession agreements therefore do not fix prices between independent business competitors. If the local port authority had only a minority interest in all or some of the terminals, the AML may make the non-compete provisions illegal. However, that would depend on the exact terms of each concession agreement and the nature of the interest owned by the port authority in each terminal.

Misuse of market power

If a business operator has market dominance, the AML restricts some types of agreements with its suppliers and customers. Market dominance is the ability to raise prices or restrict the quantity of goods or services in a market or affect the entry of other business operators into the market.

If a business operator has market dominance, it must have legitimate reasons for conduct such as restricting its trading counterpart to deal exclusively with it or prohibiting its trading counterpart from dealing with its competitors.

In the port industry, terminal use agreements between terminal operators and shipping lines sometimes require a shipping line to use the container terminal exclusively when calling at any container terminal within the region. In return, the line may have priority use of berthing and crane deployment.

An early draft of AML’s regulations suggested that such exclusive use agreements could be unlawful even if the terminal operator has no market dominance. More recent draft regulations released in May 2010 suggest that exclusive use agreements between a terminal operator and shipping line will only be problematic where one of the parties (most likely the terminal operator) has market dominance.

Even if there is market dominance, exclusive use agreements may be lawful where they do not restrict competition and have legitimate commercial reasons.

Conclusion

The release of the AML will have a significant impact on port and terminal investments in the PRC. For concession and terminal use agreements entered into before the release of the AML but remaining in full force and effect, terminal operators should keep the AML in mind when exercising their rights and obligations. For concession and terminal use agreements which are under negotiation, parties should obtain legal advice to avoid the whole transaction or a particular provision of the concession or terminal use agreement being illegal under the AML.

Connie Chen is a consultant and Donny Low an associate in the Ports & Terminals Group at Holman Fenwick Willan. For further information, visit www.hfw.com/sectors/portsterminals or contact Connie Chen at connie.chen@hfw.com or Donny Low at donny.low@hfw.com