China Issues Anti-Monopoly Guidelines for Internet Platform Economy
On 7 February 2021, the Anti-Monopoly Commission of the State Council of China issued the Anti-Monopoly Guidelines for the Platform Economy (国务院反垄断委员会关于平台经济领域的反垄断指南, "Guidelines") with immediate effect, with an intent to regulate China's fast-growing digital economy to: (i) prevent and stop monopolistic behaviours; and (ii) promote the sustainable and healthy development of online commerce.
The Guidelines consist of six chapters with 24 articles. Compared to its earlier draft Guidelines which were released for public comments on 10 November 2020, the final Guidelines generally adopt a similar scope and structure as the draft version, but appear to adopt a more balanced approach with respect to some controversial issues, such as the role of market definition and effects analysis. The final Guidelines emphasise that defining the "relevant market" is usually required when investigating monopoly agreements, abuse of dominance and merger control in the Internet platform sector, as opposed to the draft Guidelines which provided that the authorities may not need to clearly define the relevant market when, amongst others, investigating (i) horizontal monopoly agreements which fix prices or divide markets, or (ii) vertical monopoly agreements which fix resale prices or limit minimum resale prices.
For the Variable Interest Entities ("VIEs") related mergers and acquisitions ("M&As"), the Guidelines expressly state that transactions involving VIEs are subject to merger control in China in the normal way, which remains unchanged since the draft Guidelines. It is worth noting that before the final Guidelines were released, the PRC State Administration for Market Regulation had already taken enforcement actions against three VIE-related M&As by Alibaba Investment Co., Ltd., Tencent-backed China Literature Group, and Shenzhen Fengchao Network Technology Co., Ltd., respectively, imposing the statutory maximum fine (RMB 500,000) on each entity for their failure to notify of their respective transactions for merger control.
The Guidelines clearly signal that a radical overhaul in antitrust enforcement approach to Internet platforms is underway, but there is still a long way to go as the State Administration for Market Regulation must first ensure that the Guidelines are properly implemented.
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China Expands Foreign Investment Security Review Rules
On 18 January 2021, the Measures for Security Review of Foreign Investment (外商投资安全审查办法) ("SR Measures"), which was jointly issued by the PRC National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") on 19 December 2020, took effect. The SR Measures consist of 23 rules, covering among others the types of foreign investment which will be subject to review, the regulatory authority, scope of national security review, review procedures and timelines, and implementation and consequences of violations.
Compared with the existing PRC national security review mechanism introduced in 2011 that focused exclusively on the mergers and acquisitions of domestic enterprises by foreign investors, and the national security review trial regime launched in 2015 applicable only in the free trade zones, the SR Measures have introduced a revised national security review regime, expanding its application nationwide for different types of foreign investment. These include not only direct investment through acquisitions, but also indirect investment and "greenfield" investment in the form of establishing a wholly foreign-owned subsidiary or a joint venture. As for the sectors covered by security review, the SR Measures segregate them into two categories: (i) military-related industries and investments in areas of proximity to military facilities regardless of the element of control; and (ii) critical/important non-military sectors where foreign investors may exercise "actual control". The sectors in the second category include agricultural products, energy and resources, equipment manufacturing, infrastructure, transportation services, IT and Internet/online products and services, financial services, and critical technologies.
There are still a number of issues to be clarified under the SR measures, including without limitation (i) how to define "critical/important" in the above-mentioned sectors, and (ii) the distance requirements for "proximity" to military facilities, leaving a wide discretion to the regulators in interpreting the SR Measures. Therefore, it is advisable for the interested parties who are currently investing or proposing to invest in China to seek legal advice or consult the regulators at an early stage to evaluate whether their proposed investment in China may be subject to the national security review.
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MOFCOM’s First Order of 2021 – Rules on Counteracting Unjustified Extra-territorial Application of Foreign Laws
On 9 January 2021, the Ministry of Commerce of China ("MOFCOM") issued the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (阻断外国法律与措施不当域外适用办法, "Blocking Rules"), which came into force on the date of its promulgation.
The Blocking Rules consist of 16 articles, which establish blocking mechanisms against the improper application of the "long-arm jurisdiction" of foreign laws and sanctions ("Foreign Sanctions") on Chinese entities through various measures. These measures include the following:
- Imposing reporting obligations on Chinese citizens, legal entities and other organisations adversely affected by the Foreign Sanctions within 30 days;
- Establishing a working mechanism to assess and determine the existence of unjustified extra-territorial application of the Foreign Sanctions;
- Issuing prohibition orders ("Prohibition Orders") declaring the Foreign Sanctions unjustifiable and unenforceable, and prohibiting the acceptance, execution, or observation of relevant foreign legislation and other measures;
- Allowing Chinese entities to apply to MOFCOM for exemption from compliance with the Prohibition Orders; and
- Allowing Chinese entities adversely affected by the Foreign Sanctions to seek civil recourse in Chinese courts from entities which have infringed such Chinese entities' legitimate rights and interests by complying with the Foreign Sanctions.
As the Blocking Rules have been released early this year and their terms are general in nature, it is difficult to predict how they may be enforced. It is expected that the Chinese government will issue more detailed implementing regulations to clarify the uncertainties found in the Blocking Rules, as they typically do with similar general regulations. At the same time, there have also been heated discussions recently on whether boycotting cotton from the Xinjiang Uyghur Autonomous Region based on alleged enforced labor will trigger the issuance of a Prohibition Order under the Blocking Rules.
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Please note that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only
intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice.