China Law Vision

360 vs Tencent impels the growing up of private antitrust litigation in China

Dr. Zhan Hao — Wed, 16 May 2012 13:31:56 +0800

On 18th April, 2012, the case of dispute on the abuse of dominant market position filed by Qihoo 360 (NYSE: QIHU) against Tencent (HKEX: 700) was heard in the Superior People’s Court of Guangdong Province, with the claim of 150 million RMB. It should be recognized that, whether in terms of the claim amount or close involvement in people’s everyday life of the goods or services provided by the two parties, the fact that 360 vs Tencent case has aroused wide attention is not a surprise.

Parties of the Case

The Plaintiff:

Qihoo 360 Technology Co Ltd (referred to as “Qihoo 360”), is engaged in the operations of Internet services and sales of third party anti-virus software in the People's Republic of China. It provides Internet and mobile security products in China. In January 2011, the Company had 328 million monthly active Internet security product users, representing a user penetration rate of 83.9% in China.

The defendant:

Shenzhen Tencent Computer Co Ltd , Tencent Technology (Shenzhen) Co Ltd (together referred to as “Tencent”), Tencent's diverse services include social networks, web portals, e-commerce, and multiplayer online games. It operates the well-known instant messenger Tencent QQ and runs one of the largest web portals in China, QQ.com.

As of December 31, 2010, there were 647.6 million active Tencent QQ IM user accounts, making Tencent QQ the world's largest online community. The number of simultaneously online QQ accounts has sometimes exceeded 100 million.

Main Disputes

In this trial, Qihu 360 alleged that Tencent abused its dominant position in the instant messaging software and services market in China to force users to uninstall 360 software, therefore, constitutes violation of article 17 of the Anti-monopoly Law of PRC. However, two sides have divergence from the starting point of definition of relevant market to market share information and further to whether the defendant possesses a dominant position.

Highlight in this Case

Different from the past, the two sides both invited expert witnesses to the Court this time. Qihu 360 engaged David Stallbass, who served for the Fair Trade Office in London and Tencent engaged Jiang Qiping, who is the Secretary-General of Information Research Center in Chinese Academy of Social Science. Would the points of experts have significant influence on the result of antitrust case in the absence of jurisprudence and necessary data is eagerly expected.

After a “persistent verbal war” lasting for 7 hours, this trial ended up with an adjournment. According to relevant sources, 360 vs Tencent case would be a “protracted war” and a second trial is expected.

The First Judicial Interpretation on the Anti-monopoly Private Litigation in China

Dr. Zhan Hao — Wed, 16 May 2012 13:27:52 +0800

On 4th May, 2012, the People’s Supreme Court issued the Regulations on Several Issues Concerning the Application of Law in relation to Trials of Monopoly Civil Disputes arising from Monopolistic Conducts (The “Judicial Interpretation”). This new Judicial Interpretations of Anti-Monopoly Law will take effect on 1st June, 2012. As the first issued judicial interpretation on the field of Anti-Monopoly law, it began to be drafted early since 2009. On 25th April, 2011, the People’s Supreme Court of China released the Draft version of the Judicial Interpretation to solicit public comments. Based on various public opinions, the official Judicial Interpretation freshly baked is different from the Draft version in some facets to some extent.

It is a fact that since 1st August 2008, when the Anti-Monopoly Law of PRC came into force, civil monopoly dispute cases have gradually become a very important type of lawsuits of People’s Courts. According to the Supreme Court’s records, as of the end of 2011, local courts in China have accepted 61 civil actions as courts of first instance under the Anti-Monopoly Law and have closed 53 of them. However, the civil monopoly dispute cases are normally difficult and complicated for the court proceedings whether in terms of anti-competitive agreements or abuse of dominant position. legal problems in such cases usually closely intertwine with economic data and analysis. Good understanding of specific field of economy is necessary with the view to analyze monopoly dispute cases. Indeed, some provisions of the Anti-Monopoly Law are highly principled and abstract. Provisions that refer to the operation of the People's Court are stipulated relatively simple. Therefore, the issue of the Judicial Interpretation undoubtedly has a significant influence on the practical operation of the People’s Courts.

The Judicial Interpretation stipulates various provisions such as filing the lawsuit, jurisdiction, plaintiff qualification, burden of proof, civil liability and relationship between public enforcement and private litigations, etc. They established a basic framework for the anti-monopoly private proceedings. In the following some details of the Judicial Interpretation will be illustrated with the hope to shed some light on the readers.

1. The Qualification of Plaintiff

Who can file the civil monopoly lawsuit? Not only the counterparties to the undertakings, who implement a monopolistic agreement or abuse their market dominant position, but also the purchasers may be harmed directly or indirectly by monopolistic conducts. Article 1 of the Judicial Interpretation provides that the natural person, legal person or other organizations can file a suit for the losses coming from the monopoly and the violation against the Anti-Monopoly law by the contract or the rules of industry associations. Nevertheless, the issue of whether consumers are vested plaintiff qualification is still not very clearly articulated.

2. Two ways of filing the suit

In Accordance with Article 2 of the Judicial Interpretation, the plaintiff can file suits directly to the Court and also have the choice to file the lawsuit after antitrust enforcement authorities’ decisions on the determination of the monopoly conducts become effect.

3. Jurisdiction over civil monopoly dispute cases

In Article 3 of the Judicial Interpretation, the principle of centralized jurisdiction is further clarified, namely, civil monopoly dispute cases of the first instance usually shall be heard by intermediate courts of the capital cities of the provinces and autonomous regions, of the municipalities directly under the central People’s government, of the cities under state independent planning and the intermediate courts designated by the Supreme People’s Court. Besides, by approval of the Supreme People’s Court, some basic People’s Court can also have jurisdictions on the monopoly disputes cases as the first instance court.

4. burden of proof

The Judicial Interpretation distinguishes different types of monopolistic behaviors in provisions on burden of proof.. For specific horizontal monopoly agreements that seriously eliminate or restrict competition, the defendant shall undertake the burden of proof; For the cases of abuse of dominant market position by public enterprises as well as other operators with exclusive business qualification, the Judicial Interpretation has appropriately reduced the burden of proof for a plaintiff in a civil lawsuit.

Nestlé's filing of acquiring China' largest listed confectionery company has been accepted

Dr. Zhan Hao — Fri, 30 Mar 2012 14:41:59 +0800

A spokeswoman from the Ministry of Commerce publicly declared in the recent, that the Ministry has officially accepted the notification on Nestlé’s acquisition of Hsu Fu Chi. If the Ministry turns on the green light for this filing it could be one of the biggest foreign takeovers of a Chinese undertaking historically.

Founded in 1866 by Henri Nestlé in Vevey, Switzerland, Nestlé is the world's leading Nutrition, Health and Wellness company. Nestlé’s product lineup covers from baby food, bottled water, cereals, chocolate & confectionery, coffee, culinary, chilled & frozen food, dairy, drinks to food service, healthcare nutrition, ice cream, petcare, sport nutrition, and further to weight management.

Hsu Fu Chi is China’s largest listed confectionery company, with more than 16,000 sales outlets and 100 sales affiliates. In connection to its revenue, the first quarter of 2011 alone was Rmb1.51bn ($234m). Hsu Fu Chi focuses itself on chocolates, pastries and other sweets markets, and particularly is famous for a breakfast bar called Sachima. It should be recognized that Hsu Fu Chi already developed into a national brand within two decades. Voices from different communities, hence, expressed their worry that this event may ignite nationalist outcries just as it did with Coca-Cola's negotiations with Huiyuan.

From a legal point and preliminary view, this concentration may bring about many anticompetitive effects. Firstly, both Nestlé and Hsu Fu Chi are strong market players in Chinese market with regard to their own products, respectively. (Without exact and concrete market share statistics though). Secondly, there is horizontal overlap between the two “Mr big”, namely, on the product market of confectionery. In a further consideration, the occurrence of penetrating effects between different markets of Nestlé and Hsu Fu Chi cannot be excluded from concerns in any means. Therefore, Nestlé’s action also triggered a school of worries that it may encounter the same judgment as Coca-Cola (KO) and juice maker China Huiyuan Juice Group in 2009.

As far as the author concerned, nevertheless, Hsu Fu Chi harbors still the hope of being cleared given that the following grounds:

Firstly, Hsu Fu Chi has not such a powerful market position as Coca cola has in consideration of the situation of confectionary market. (6.6% in 2009) Besides, it has been seen that the trend of mergers and acquisitions in China's confectionery industry recent years has facilitated cooperation in many creative levels, and accordingly inflamed more fierce competition and more pressure on local players. Consequently, concerned acquisition here also give rise to many precompetitive effects on the relevant market.

All in all, how the Ministry assess and balance the concentration at issue is still of full suspicion.

Updates in Anti-Monopoly

Dr. Zhan Hao — Fri, 30 Mar 2012 14:36:57 +0800

On 15^th February of 2012, several fundamental policies for economic reform of China in 2012 have been settled down through the Executive Meeting of the State Council (hereinafter referred to as “the Meeting”). To promote the development of diverse forms of ownership, push reforms of strategic adjustment of state-owned economy and turning state-owned enterprises into standard joint-stock companies, to improve and implement the policies and measures in order to promote development of non-public ownership economy, encouraging private capital to enter the railway, municipal, financial, energy, telecommunications, education, medical and other fields. The above slogans have been highlighted in the Meeting.

Meanwhile, the Meeting also concluded 5 priority areas and crucial links that the reform on economic structure of China should focus on, among them deepening the reform of monopoly industries has been depicted as the primary task. As a matter of fact, early in the panel discussion previously held by the Premier Wen Jiabao from 6^th to 10^th of February, Wen Jiabao emphasized, after listened to the views from all circles of the society on the Draft Government Work Report, that pushing reforms on the monopoly industries forward is the priority of reforms of economic structure in the current phase for China. Mr. Wen also made a clear expression that the expected“New Thirty-six rules”enforcement regulation must be adopted in the first half of this year.

According to a source close to NRDC, part of the “New Thirty-six rules”on allowing private capital to enter into monopoly fields has been finalized, however, it is still unknown that when the rules would be made public and what would be the practical effect of the“New Thirty-six rules”, which remains subject to the test of market. The same source expressed in a further degree, “With regards to the long-standing ‘glass door’ in front of monopoly industries, we should make most efforts on the policy design on one hand, but the shift on conception and consciousness of governmental departments is equally significant on the other hand.”

With respect to which areas are monopoly industries in China, Article 7 of AML generally answered the question and it reads that , the State protects lawful business activities of undertakings in sectors that affect the national economic lifeline and state security and are controlled by the state-owned part of economy as well as sectors in which exclusive operation and exclusive sale are implemented……Per AML, theoretically speaking, sectors that affect the national economic lifeline and state security and controlled by the stated-owned part of economy mainly included two types of sectors: natural monopoly industries and policy monopoly industries. The former includes industries such as telecommunication, energy, water, aviation and railway, ect and the latter is mainly determined in compliance to periodical policies of the state due to considerations such as national defense, politics, foreign trade, ect. As to sectors in which exclusive operation and exclusive sale are implemented, tobacco and salt industries, for example, belong to this group in the present time.

The slogan of promoting reforms on monopoly industries also reminds people of the big event in Telecommunication industry, happened last year. That is, NRDC commenced the official investigation on China Telecom and China Unicom, on the ground that they are suspected as abuse of dominant position. Now the settled down policies have been formally laid on the paper, people cannot help guessing which would be the next sector and who would be the next target and so on. It also causes panic among big giants in other industries.

It is also anticipated by many domestic and international commentators that, reforms in monopoly industries of China in 2012 would make people impressive.

Coming out after a long wait

Dr. Zhan Hao — Fri, 30 Mar 2012 14:26:42 +0800

The Provisional Measures on Investigating and Penalizing Violation of Notification Obligations for Concentrations of undertakings (hereinafter referred to as “Provisional Measures”) was officially published on 30^th December 2011 by MOFCOM and will come into effect on 1^st February 2012.

Such regulation has been for a long time called on given that not just a few undertakings often choose to escape MOFCOM’s jurisdiction in the antitrust review on concentrations, which reached the threshold by AML and relevant regulations, thus, has derogated MOFCOM’s enforcement effects.

In pursuance to Article 3 of the Provisional Measures, as expected, MOFCOM is the authority concerned in investigating and penalizing concentrations that are not notified in compliance with the law, and where necessary, provincial commence departments can be commissioned to assist MOFCOM regarding its work.

With the born of the Provisional Measures, undertakings’ escape encounters higher chance to be caught due to MOFCOM shall verify reports against concentrations that are not notified in compliance with the law.

Furthermore, Article 13 in the Provisional Measures answered the question paid most attention by enterprises, namely, of which level of penalty shall be imposed on violating enterprises. According to Article 13, MOFCOM could issue a fine not exceeding 500,000 RMB to the violating undertakings and order invested undertakings to restore their status as concerning concentration was not implemented, by taking the following measures:

(1) stop the process of concentration;

(2) dispose shares or assets within limited time dimension;

(3) transfer the business within limited time dimension;

(4) other necessary measures

It is not hard to be observed that the fining threshold in the Provisional Measures is too tiny-weenie compared to that in US and EU competition laws. In EU, the Commission has power under Article 14(2)(a) of the EUMR to impose fines, not exceeding 10 percent of the aggregate turnover of the undertakings concerned, on a party that intentionally or negligently, fails to notify a concentration prior to its implementation, therefore, would have more deterring force. However, it is argued that the reputational punishment based on Article 15 would possess more significance to the enterprises in China. Pursuing to Article 15 of this Provisional Measures, MOFCOM could publicize its decision on concentrations, which are not notified in compliance with the law prior to its implementation.

In addition, the Provision Measures also have procedural provisions on how to conduct the investigation by MOFCOM, confidentiality provisions, provision on remedying the invested and so forth.

Another Conditional Clearance on Hard Disk Industry Concentration

Dr. Zhan Hao — Fri, 30 Mar 2012 14:18:15 +0800

On 2^nd March of 2012, MOFCOM publicized another conditional clearance on concentration in the hard disk industry, which comes three months after MOFCOM imposed similar conditions on Seagate's acquisition of Samsung's hard drive business. At this time, the concentration parties are Western Digital’s and Viviti Technologies, and the relevant market is defined by MOFCOM as the worldwide market for hard disk drive.

In process of appraising effects out of concerning concentration, MOFCOM took the following factors into account: competitive situation of the relevant market, purchase model, capacity utility, product innovation, bargaining power from the buyer side, market entry, and effects on consumers and the relevant product market, by analysis of which MOFCOM reached the conclusion that Western Digital’s/Viviti concentration probably will create the effect of eliminating and restricting competition in the market for hard disk drive in China.

Through several rounds of negotiation with the concentration parties, MOFCOM accepted the divestiture that had been imposed, as EU and U.S competition authorities did, and meanwhile additional remedies are imposed as well:

1. Maintain Viviti as an independent competitor and independently operating business;

2. Viviti is required to continue to market hard disk drive independently by using the original team, under the same brands as before;

3. A firewall need to be set up between the parties for the purpose of preventing the exchange of information;

4. Both parties are required to conduct R&D activities as before;

5. A trustee needs to be appointed for supervising the implementation of all obligations under the conditional clearance

What’s worth noting for enterprises is that , the whole process from submitting filing documents at the first time to obtain the final decision from MOFCOM lasts around 11 months long, which is even longer than the 7 months in the Seagate/ Samsung transaction.

China Unicom and China Telecom submits application for suspension of investigation to NRDC

Dr. Zhan Hao — Fri, 30 Mar 2012 14:12:25 +0800

The Price Supervision, Inspection and Antitrust Bureau of NRDC has confirmed to the public on 2^nd December 2011, that they have received applications from China Unicom and China Telecom for the suspension of probe on alleged abuse of dominant position by the parties in last month. In addition, China Telecom also submitted a proposal of rectifying and reforming to NRDC, with the expectation to be awarded a leniency treatment. The proposal of rectifying and reforming is comprised of mainly the following aspects:

First, China Telecom undertakes to expand the capacity which is connected to other backbone telecommunications operators such as China Unicom and China Tietong as soon as possible.

Second, China Telecom undertakes to lower the price of connecting to China Tietong and enhance the quality of interconnection in the further step, so as to achieve a full-degree of interoperability.

Third, it will standardize the tariff management of ISP, conduct commercial activities in accordance with fair trading principle on the market and review currently existed agreements to cut the tariff level in a proper degree,

Fourth, China Telecom will immediately take measures to enhance the fiber access penetration and the broadband access rate, with the end of lowering the price for per unit of bandwidth for public customers of internet access by around 35%.

Whether NRDC would be charitable to the state-owned enterprises and suspend concerning investigation after above-mentioned application and proposal, is still open and the response of NRDC thereto is looked forward to.

MOFCOM's Anti-Monopoly Investigation on Google/Motorola Mobility Concentration in the process

Dr. Zhan Hao — Fri, 30 Mar 2012 14:09:29 +0800

MOFCOM hosted a press conference on Feb 16^th, 2012, in which it announced updates and news on Chinese business affairs for the previous month of January 2012.

In the announcement, Google’s recent acquisition of Motorola Mobility Holdings Inc came to focus. Shen Dan Yong, a spokesperson from MOFCOM, confirmed that the Anti-Monopoly Bureau of MOFCOM was continuing its investigations of the American internet search giant’s recent take over of Motorola Mobility and is still yet to make a decision regarding its approval.

According to media reports, Google has already received ratification from the U.S. Department of Justice and European Commission DG Comp concerning its acquisition which is worth $12.5 billion, of which for Google, has been the biggest acquisition by far in the company’s history.

Statistical reports also show that the take over has also been the biggest acquisition of the last 10 years in the wireless devices industry.

While the investigation carries on and its outcome remains pending, Shen noted that any updates or decisions made by the Anti-Monopoly Bureau of MOFCOM would be promptly published to the public.

Important numbers released by MOFCOM

Dr. Zhan Hao — Tue, 27 Mar 2012 11:42:06 +0800

According to the information released by MOFCOM in its news conference at the end of 2011, statistics indicate that in the year of 2011, MOFCOM received 194 notifications for antitrust review on concentration in total, the amount of received cases increased by 43% compared to last year. Among them, the number of accepted cases by MOFCOM in the year of 2011 altogether are 179, which increased by 52%. Besides, there are 160 cases completed by MOFCOM, which increased by 40% compared to 2011.

In connection to the rapid growth on the number of notification on concentration to MOFCOM, the Director of Anti-Monopoly Bureau, Mr. Shang Ming explained three reasons thereof: first, the popularization of AML of China is gradually strengthened; second, more and more enterprises reach the threshold for antitrust notification in the wake of average scale of enterprises getting larger; third, most of international investors take prudent attitude, hence mainly choose the means of concentration to increase their market shares and competitive strength.

Among the 160 cases completed by MOFCOM, cases in manufacturing industries account for the most, 64%; cases in computer service, information transmission and software industries account for 8% in together; and cases in electricity, gas and water industries account for 6%. As far as the outcome of the case concerned, MOFCOM make the decision of unconditional clearance on 151 cases (account for 94%). Besides, there are four conditional clearance and 5 withdraw of cases after acceptance by MOFCOM, which account for 3%.

MOFCOM conditionally cleared Samsung and Seagate hard disk drive deal

Dr. Zhan Hao — Tue, 27 Mar 2012 11:19:57 +0800

On 12th December 2011, MOFCOM publicly disclosed its decision to clear Samsung and Seagate hard disk deal by imposing several conditions. According to the Asset Purchase Agreement, Seagate Technology intends to acquire control of Samsung Electronics’ hard disk business by purchasing all relevant assets. The acquiring party, Seagate Technology, is a multinational enterprise, engaging in the manufacture and sales of hard disk and other digital storage products. The target assets are all plants, equipments and other assets specifically for R&D, manufacture and sales of Samsung Electronics’ hard disk.

From MOFCOM’s point of view, the market for manufacture and sales of hard disk constitutes a separate and distinct market by taking considerations on both demand and supply side. Moreover, the geographic scope of competition for hard disk is worldwide. Consequently, relevant market in this case is determined as worldwide market for manufacture and sales of hard disk.

MOFCOM examined a variety of facets in this transaction for the purpose of avoiding a restriction or elimination of workable competition on relevant market, including market situation, procurement structure, rate of capacity utilization, products innovation, buying power, potential influence on Chinese consumers and market entry.

Through thorough investigation, MOFCOM reached the conclusion that concerning transaction triggers potential competition concerns. For one thing, it reduces the number of players in the already highly concentrated market; hence increases market concentration in a further degree. As a result, it may eliminate or restrict competition on the market for manufacture or sales of hard disk. For another, the said transaction would increase the possibility of exclusion or restriction of competition on the market by collusion between competitors.

In light of above-mentioned competition concerns, MOFCOM and the concentration parties finally agreed several conditions to be imposed with the clearance of Samsung and Seagate hard disk drive deal, with the view to avoid potential detrimental effects on competition on the market for manufacture and sales of hard disk.

MOFCOM's second conditional clearance on concentration after the release of its guidance on analysis of competitive influence

Dr. Zhan Hao — Tue, 27 Mar 2012 09:53:48 +0800

MOFCOM is getting more and more efficient upon dealing with its own work. Only 10 days after the Alpha V/Savio conditional clearance, MOFCOM imposed conditions on another proposed concentration between General Electric (China)., Ltd (hereinafter referred to as GE China) and China Shenhua Coal to Liquid and Chemical Co., Ltd (hereinafter referred to as CSCLC) on 10th, November, 2011. It is noticed that GE China/CSCLC is already the NO.2 conditional clearance on concentration only two months after the “Provisional Regulation on the Assessment on the Competitive Effects of Concentration of Undertakings” is officially released in the end of August (hereinafter referred to as “Provisional Regulation”). That to some extent gives people the impression that the Provisional Regulation does not only give administrative counterparts guidance, but also standardized and facilitated MOFCOM’s antitrust reviewing work on concentration in some degree.

1. Procedures

On 13th April 2011, GE China and CSCLC officially submitted notification filing to MOFCOM regarding proposed concentration by means of establishing Joint venture. After examination, MOFCOM found that submitted documents and materials were not complete and hence required a further supplementary submission. On 16th May 2011, MOFCOM confirmed that the supplemented documents satisfied requirements provided in Article 23 of AML, and therefore officially accepted the filing and meanwhile initiated a preliminary assessment.

Through preliminary review, MOFCOM established that concerning concentration may produce effects of excluding or restricting competition on the relevant market, thus decided to commence the second-phase review in a further step on 15th, June. Furthermore, on 13th September, MOFCOM made another decision of extending the reviewing period.

After such a long road of nearly 6 months, nevertheless, the said concentration still hasn’t escape being imposed conditions by MOFCOM. Finally on 28th October, after several rounds of negotiation, MOFCOM and the filing parties agreed on the solutions that CSCLC and Shenhua Group undertook not to force licensees of coal-water slurry (CWS) gasification technology to employ JV's technology by the threat of restraining the supply of raw coal or simply not supplying, nor to raise the cost of such supply for those using other technologies.

2. Competition Concerns

MOFCOM explained the conditional clearance on GE China/CSCLC in the No.74 Notice, mainly by relying on 4 grounds.

High market share

Pursuant to Article (3) paragraph (1) of the Provisional Regulation, the market share and market power of concentration parties on the relevant market are one factor that should be taken account on primarily when reviewing concentration of undertakings. In GE China/CSCLC case, MOFCOM established that GE's CWS gasification technology has the highest share in the relevant market--(CWS) gasification technology market, together with the fact there are only three main suppliers in the relevant market, which is therefore an oligopolistic market.

Highly concentrated market

In pursuing Article (3) paragraph (2) of the Provisional Regulation, the market concentration level is another factor that should be assessed in reviewing the competitive influence of a concentration. Back to the said case, it is readily noticed that the (CWS) gasification technology market in the territory of PRC is highly concentrated with only three main suppliers: GE Infrastructure Technology, Yankuang Group ＆East China University of Science and Technology, and the Northwest Research Institute of Chemical Industry.

Entry barriers

According to Article (3) paragraph (3) of the Provisional Regulation, MOFCOM will consider the extent to which entry barriers exist and the possible influence on technology development that the concentration may produce. By investigation, MOFCOM reached the conclusion that there is high-degree entry barrier existed in the relevant market owing the following facts. First, (CWS) gasification technology is a collection of a number of complex technologies, most of which demand long period of practice to be mature. Second, the new technology without adequate test bears high commercial risks. Third, this technology is involved with large amount of patents protection. Fourth, R＆D and industrialization application period is very long.

Power on raw material procurement

In view of Article (5) paragraph (4) of the Provisional Regulation, the undertaking’s power on raw material procurement will be considered as one main indicator of market power possessed by undertakings. In GE China/CSCLC, CSCLC is the largest supplier of raw coal in China; therefore, concerning combination would confer on GE China the market power in (CWS) gasification technology market by giving it the controlling power on raw coal’s procurement. Consequently, CE China may levy its controlling power on the upstream market of supply of raw coal on the relevant market of (CWS) gasification technology market.

Tips for enterprises

a. To prepare and submit adequate information to MOFCOM

As we have observed in many concentration filings, MOFCOM often required supplementary submission, which therefore would delay MOFCOM‘s official acceptance of notification filing. For the purpose of guaranteeing transaction schedule, it is highly suggested enterprises prepare and submit as adequate information as possible to MOFCOM.

b. To ask professional lawyers to prepare several solutions for conditional clearance in advance.

For those highly suspicious cases, we suggest enterprises to prepare several solutions (such as Plan A, Plan B, Plan C) in advance, instead of after MOFCOM makes the final conclusion that there are competition concerns existed, so as to decrease the negotiation time with MOFCOM.

MOFCOM announced the another conditional clearance on concentration

Dr. Zhan Hao — Mon, 26 Mar 2012 16:08:44 +0800

On 31st October 2011, MOFCOM posted the No.73 Notice in its website, announcing to clear proposed concentration between Penelope Co., Ltd and (referred to as “Penelope” hereinafter) and Savio Macchine Tessili S.p.A. (referred to as “Savio” hereinafter) with certain conditions. Without doubt, the reasoning and analytical instruments utilized by MOFCOM would shed some light on of what attitude and approach hold by MOFCOM when facing anti-monopoly review of concentration.

According to MOFCOM’s notice, the proposed acquiring party (Penelope) is established as a tool specifically for the sake of this concentration transaction. Alpha Private Equity Fund V (referred to as “Alpha V” hereinafter) is Penelope’s wholly-owned controlling shareholder (the “parent”), which is a private equity fund and invests in non-ferrous metal recycling, production and sales of home textile and textile machinery. Meanwhile, being the largest shareholder, Alpha V holds 27.9% equity shares of Uster technologies Co., Ltd (referred to as “Uster” hereinafter)

Proposed acquired party in the said concentration (Savio) is a manufacturer of textile machinery, engaging in the production of electronic yarn clearers for winders, twisters and rotor-spinning frames. Beside, Phenanthrene Brothers Co., Ltd (referred to as “Phenanthrene Brothers” hereinafter).is a wholly owned subsidiary of Savio.

Through preliminary investigation, MOFCOM found that Uster and Phenanthrene Brothers are the only two manufacturers of electronic yarn clearers for automatic winders worldwide with the predominant market shares 52.3% and 47.7% respectively. Furthermore, it is established by MOFCOM that the market for electronic yarn clearers for automatic winders constitutes an independent relevant market. For a further step of MOFCOM’s reasoning, there is the possibility existed that Alpha V coordinates the business operation of Uster and Phenanthrene Brothers post this concentration, thereby to eliminate or restrict competition of the market for electronic yarn clearers for automatic winders. And vice versa, Uster and Phenanthrene Brothers also are possible to conduct anticompetitive practices to eliminate or restrict competition in above-mentioned market, through the intermediary Alpha V.

In the early October, MOFCOM and the concentration parties had several rounds of communication upon the measures to remove MOFCOM’s competition concerns. The final consensus agreed by them is clearance by MOFCOM with several conditions illustrated as following:

First, Alpha V shall transfer its equity in Uster to one or more independent third parties within 6 months;

Second, Alpha V must report to MOFCOM the identity of transferee, transaction volumes and trading date so as to ensure the transfer would not produce effects of new elimination or restriction of competition;

Third, Alpha V shall not participate or influence the business operation of Uster prior to the transfer and

Fourth, Alpha V shall appoint an independent supervising trustee to supervise the equity transferee.

Nestlé's filing of acquiring China' largest listed confectionery company has been accepted

Dr. Zhan Hao — Mon, 26 Mar 2012 15:56:04 +0800

As far as the author concerned, nevertheless, Hsu Fu Chi harbors still the hope of being cleared given that the following grounds:

All in all, how the Ministry assess and balance the concentration at issue is still of full suspicion.

The first guideline for reviewing concentrations in China has been freshly baked

Dr. Zhan Hao — Mon, 26 Mar 2012 15:24:21 +0800

With already more than 3 years of practice experience concerning antitrust review to concentrations, the Ministry of Commerce of the People’s Republic of China in recent publicly announced its first set of guideline thereof on August 29, 2011, namely, “Provisional Regulation on the Assessment on the Competitive Effects of Concentration of Undertakings ( it would be abbreviated as “the Regulation” hereinafter)

It should be recognized that the Regulation reflects great significance in many facets without doubt. For one thing, the substantive process of reviewing and assessing concentrations by the Ministry of Commerce is tranparentized in a large degree. As a result, relevant competitors, consumers and other stakeholders of interest could obtain much more convenience for the purpose of supervising antitrust enforcement.

In the second place, the Ministry took this opportunity to standardize in the Regulation, which factors that they will take the most account into in principle, which interests they will consider principally when balancing the pro-competitive and anti-competitive effects of concentration concerned. In this connection, the Regulation would possess the function of conducting, standardizing as well as facilitating the work of antitrust control to concentrations of the Ministry.

For another, as the role of “Guidelines on the Assessment of Horizontal Mergers” of EU, the Regulation is also anticipated to take the responsibility of directing enterprises themselves to pre-assess competitive effects of their concentrations before notification in a proper way, therefore, is meant to lower the cost of concentration as much as possible, both for enterprises and for the Ministry (administrative costs). In any sense, consequently, we have to say that this Regulation fresh out of the oven on August, 29, 2011 is good news, meanwhile, enhances the enforcement of China’s control of concentration to a new phase.

Taking a closer sight on its content, throughout the Regulation, no other articles occupy more importance than Article 3 and Article 4, which are the soul and core of this guideline. Article 3 sets out the main factors specifically, by which the Ministry assesses the competitive effects of concentrations.

In Article 4 the Ministry highlights the most commonly occurring example of a significant impediment to effective competition, that is, the creation or strengthening of ability, incentive and possibility to prevent and restrict competition. What worth noting is that Article 4 paragraph 2 clarifies that, for oligopolistic market, it is sufficient for a refusal to clear a concentration if the above-mentioned ability, incentive and possibility to prevent and restrict competition are collectively possessed by two or undertakings. In other words, the creation or strengthening of a collective dominant position is also the target of Chinese control of concentration.

Except for Article 3 and Article 4, Article 5 to Article 10 are mainly detailed and unfolded explanation of Article 3. Article 5 is the elaboration of Article 3 (1); it indicates the significance of identifying market share and market power as well as the elements that determination of market power would rely on, such as the substitutability of products or services between undertakings of concentration. Similarly, Article 6 gives more details to Article 3 (2), regarding what is the concept of market concentration degree and two instruments (HHI and CRn index) that usually could be employed to conduct a quantitative analysis of market concentration degree.

In addition, another feature in the Regulation is well-marked, namely, consumer welfare is paid much attention, in line with the revolutionary tendency of antitrust law in a lot of jurisdictions. In recent decades, more and more countries have started to add consumer welfare into the objectives of their antitrust law, even the number one objective in some jurisdictions. Both Article 8, 9 and 10 mentioned that concentrations of undertakings will promote the interests of consumers from different aspects, for example, consumers could benefit from upgraded technologies, higher quality, lower price resulted from concentration of undertakings, and so forth. On the contrary, the Ministry may also take the damage of consumer welfare as the reason not to clear a concentration.

Whether antitrust law should only perform its economic regulatory function, or should also help realize some social goals, like guarantee of employment? This issue is still very controversial in many countries. In Europe, some scholars take the view that antitrust law should not take more load than it is supposed to take, that is, economic aims. However, Article 12 of the Regulation specifically makes clear that public interest is also one factor to assess the competitive effects of concentrations in China. This point should in any means draw the attention of foreign investors. In case that one enterprise is facing bankruptcy, then the acquisition of such an enterprise may solve the potential problem of unemployment, hence is beneficial to public interest. In this case, even concerned concentration would give rise to some anticompetitive effects, clearance is not impossible absolutely.

Last but not least, Article 13 provides that in case the concentration has effect of preventing and restricting competition on relevant market, the Ministry of Commerce shall not be cleared, unless undertakings are able to prove the adverse effects are weighed out by beneficial effects or concerning concentrations are in accordance with public interest.

All in all, this freshly baked regulation set out standards to direct the Ministry’s work in terms of assessing the competitive effects of concentration in Chinese market, which is beneficial both for promoting the enforcement quality and for conducting undertakings’ notification process.

Nestlé's filing of acquiring Hsu Fu Chi is cleared by MOFCOM

Dr. Zhan Hao — Sun, 11 Dec 2011 22:18:51 +0800

On 7th December 2011, Nestlé’s intended purchasing 60% shares of Hsu Fu Chi by Rmb1.51bn ($234m) was cleared by MOFCOM officially. By this news, all clouds of doubt and debates from a variety of societies in last months are dispelled. In particular, Nestlé/Hsu Fu Chi decision from MOFCOM cleans up the school of worries from foreign enterprises that antitrust enforcement of PRC is inclined to protect national brand, as they derived from Coca-Cola/ Huiyuan case. It is believed that MOFCOM’s clearance in Nestlé/Hsu Fu chi must have an encouraging effect on foreign enterprises’ incentive to march into Chinese market by the means of concentration.

Without many disputes, Nestlé’s market share in Chinese confectionary market would be much higher ex post this transaction. According to the market sources, Hsu Fu Chi’s greatest strength lies in bulk sales, while Nestlé is good at package sales. It is highly anticipated that combination of Nestlé and Hsu Fu Chi would give rise to a synergy effect, hence would influence Chinese confectionary market in a significant degree.

A spokesman from Nestlé publicly expressed there would not be major changes on the company’s development direction and employee after the concentration. Nevertheless, when asked if Hsu Fu Chi has the plan to develop high-end product after Nestlé joins in, he said, there existed various possibility.

China Unicom and China Telecom submitted the application for suspension of investigation to NRDC

Dr. Zhan Hao — Sat, 03 Dec 2011 11:21:51 +0800

The Price Supervision, Inspection and Antitrust Bureau of NRDC has confirmed to the public on 2nd December 2011, that they have received applications from China Unicom and China Telecom for the suspension of probe on alleged abuse of dominant position by the parties in last month. In addition, China Telecom also submitted a proposal of rectifying and reforming to NRDC, with the expectation to be awarded a leniency treatment. The proposal of rectifying and reforming is comprised of mainly the following aspects:

First, China Telecom undertakes to expand the capacity which is connected to other backbone telecommunications operators such as China Unicom and China Tietong as soon as possible.

Second, China Telecom undertakes to lower the price of connecting to China Tietong and enhance the quality of interconnection in the further step, so as to achieve a full-degree of interoperability.

High-level MOCFOM Visit to US Antitrust Agencies

Dr. Zhan Hao — Sat, 03 Dec 2011 11:16:28 +0800

On 29th November 2011, an official meeting was held between Chinese delegations led by MOFCOM’s vice minister Gao Hucheng and delegations of US antitrust agencies, Federal Trade Commission (FTC) and Department of Justice (DOJ). It is the first official high-level talk between public enforcement agencies of China and US, since DOJ and FTC signed an antitrust memorandum of understanding (MOU) with China's three antimonopoly agencies in July 2011, therefore, afforded with profound significance in terms of enhancing bilateral communication and cooperation among them.

By taking this opportunity, both sides reaffirmed and emphasized the cooperation concurred in the MOU this July, including significant issues of cooperation on investigations of two sides, confidentiality obligations, exchange of information and so on.

Consensus was reached between both sides that this meeting was of help to deepen the mutual understanding of antitrust agencies of two countries, with respect to competition policies and antitrust enforcement, to share experience and promote a further-step cooperation between the two biggest economic territories.

Conditional clearance offers further insight on concentrations

Dr. Zhan Hao — Thu, 01 Dec 2011 11:27:21 +0800

On October 31 2011 the Ministry of Commerce posted Notice 73 in its website, announcing the clearance of a proposed concentration between Penelope Co Ltd and Savio Macchine Tessili SpA on certain conditions. The ministry's reasoning and analysis shed light on its approach to the review of concentrations on anti-monopoly grounds.

The notice states that the would-be acquirer, Penelope, was incorporated specifically as a tool for the transaction. Alpha Private Equity Fund V is Penelope's wholly-owned controlling shareholder - it invests in non-ferrous metal recycling and the production and sale of textile and home textile machinery. Alpha V is the largest shareholder in Uster technologies Co Ltd, holding 27.9% of the equity shares.

Savio, the proposed target, is a manufacturer of textile machinery. It produces electronic yarn clearers for winders, twisters and rotor-spinning frames. Phenanthrene Brothers Co Ltd is a wholly owned subsidiary of Savio.

In its preliminary investigation the ministry found that Uster and Phenanthrene Brothers are the world's only two manufacturers of electronic yarn clearers for automatic winders (with market shares 52.3% and 47.7%, respectively). Furthermore, the ministry found that the market for electronic yarn clearers for automatic winders constitutes an independent relevant market. It confirmed the possibility that Alpha V might coordinate the business operations of Uster and Phenanthrene Brothers following the concentration, thereby eliminating or restricting competition in the market; similarly, Uster and Phenanthrene Brothers might engage in anti-competitive practices to eliminate or restrict competition in the market through their intermediary, Alpha V.

In early October 2011 the ministry and the parties to the concentration engaged in several rounds of communication about measures to alleviate the ministry's competition concerns. The final consensus was sufficient for clearance by the ministry on the following conditions. Alpha V must:

transfer its equity in Uster to one or more independent third parties within six months;
inform the ministry of the identity of transferee, the transaction volumes and the trading date, in order to ensure that the transfer does not result in the further elimination or restriction of competition;
refrain from participating in or influencing Uster's business operations before the transfer; and
appoint an independent supervising trustee to supervise the equity transferee.

Tmall's price rise: free economic behaviour or abuse of dominant position?

Dr. Zhan Hao — Thu, 17 Nov 2011 11:24:46 +0800

On October 10 2011 one of China's largest retail websites, Taobao Mall - known as Tmall - announced a new set of rules, which included the imposition of a high annual technical service fee and an increased security deposit for its vendors. Tmall stated that the new rules were intended to ensure the provision of high-quality goods and services and to discourage counterfeiting and price wars.

The previous minimum annual fees of Rmb6,000 were raised to between Rmb30,000 and Rmb60,000, while the security deposit was raised from Rmb10,000 to Rmb50,000, Rmb100,000 or Rmb150,000, depending on the size of the business-to-consumer vendor. Smaller vendors protested by disrupting the online platform, using communication tools such as YY Voice to attack companies with a larger presence on Tmall. The incident sent ripples through the worlds of business, academia and politics, with many critics arguing that the price-rise policy may constitute an abuse of dominant position under the Anti-Monopoly Law.

Determining dominant position in a given market is problematic; in most cases, it requires comprehensive market research and subtle, detailed analysis. The answer may be the length of an academic paper and may take weeks to compile and express clearly. If it is assumed that Tmall holds a dominant position, there remains the question of whether its behaviour can be deemed an abuse under the law.

Article 17(1) states that an abuse consists in imposing unfairly high sale prices or unfairly low purchase prices. On the sale side, "excessive" prices may be unfair. Excessive pricing is the most obvious way in which a monopolist can exploit its position to the detriment of consumers in the short term. However, it is often argued that a free market economy needs the lure of monopoly pricing. On this analysis, the opportunity to charge monopoly prices - at least for a short period - is what attracts business acumen in the first place, encouraging the risk taking that produces innovation and economic growth.

Furthermore, excessive prices may be pro-competitive, as high prices and profits may act as a signal to attract new competitors to the market. Therefore, high prices - within reasonable limits - should not automatically be deemed excessive or unfair.

It is unquestionably difficult to decide what constitutes an excessive or unfair price. Given that it is rarely possible to ascertain what the price might have been in a more competitive market, what other yardstick can be used? How should competition policies be balanced against state policies in other sectors, given China's macroeconomic background? Should such a policy protect small and medium-sized businesses or encourage emerging business? All of these questions should be considered when deciding whether Tmall's price-rise policy should be classified as abusive.

Nestlé's Filing of Acquiring China' Largest Listed Confectionery Company is Accepted

Dr. Zhan Hao — Thu, 22 Sep 2011 09:50:10 +0800

As far as the author concerned, nevertheless, Hsu Fu Chi harbors still the hope of being cleared given that the following grounds:

All in all, how the Ministry assess and balance the concentration at issue is still of full suspicion.