Key takeaways

Similar Scope 

The Guidelines broadly adopt the same scope and structure as the draft version. They deal with a broad range of issues related to:

• Agreements/collusion between competitors, including information exchange and collusion furthered by platforms or other technical means.
• Agreements between non-competitors, including resale price maintenance (RPM) and most favoured nation clauses (MFNs).
• Abuse of dominance, including exclusivity obligations, or restrictions precluding counter-parties from dealing with rival platforms ("either or"/ "one from two" type arrangements); personalized pricing (i.e. discrimination) on the part of dominant platforms without justification; potential application of the essential facilities doctrine to platforms, and refusal to supply, tying or bundling conducted through technical means and novel forms of abuse, e.g. penalizing certain operators via search downgrades, traffic restrictions and/or technical barriers.

Some Signs of a Softening of Approach

There are some subtle signs of a softening of tone when compared with the November consultation draft, with more emphasis placed on:

• The role of market definition and effects analysis: the Guidelines emphasise that market definition is usually required in assessing all aspects of competition law (anticompetitive agreements; abuse of dominance and merger control), whereas the draft stated that market definition would be of lesser importance when assessing horizontal collusion and RPM.
• The possibility of objective justifications for conduct that may constitute abuse of dominance. For example, the list of potential justifications for predatory pricing has been expanded to include short term price promotions.

There is also an express clarification that parallel behaviour that results from operator's independent decision making is not sufficient basis on its own to establish an anticompetitive agreement.

These changes appear to be deliberately designed to respond to concerns expressed during the consultation, that the SAMR should not overregulate the tech sector, and the risks that heavy handed enforcement pose to innovation and development.

Broader Policy Goals

In addition to maintaining fair market competition, stimulating innovation and creativity, and safeguarding the legitimate interest of all parties, the Guidelines highlight that the competition authority's enforcement should pay attention to the equal treatment of all market players and enhancing their international competitiveness.  While this may signal a desire to let China's tech champions grow, in order to compete internationally, it remains to be seen how this will play out against the other policy goals in day to day enforcement.

Interestingly, the Guidelines further expand enforcement principles by adding in the prevention of the disorderly expansion of capital, as well as strengthening the coordination of anti-monopoly law enforcement and industry supervision. This appears to be in response to the Central Bank's recent actions against online payment platforms and fin-tech operators for maintaining financial safety and preventing financial risks. 

Online Platforms & Merger Control

(a)  VIEs in SAMR' s Sights

The Guidelines expressly state that transactions involving variable Interest Entities (VIEs) are subject to merger control in China in the normal way. This is unchanged since the draft.

Moreover, SAMR has already taken enforcement action against three companies with VIE structures, imposing the statutory maximum fine (RMB 500,000) for failure to notify their respective transactions for merger control.

(b)  Reviews of Non-Notifiable Deals

The Guidelines confirm that SAMR may conduct ex officio investigation on tech deals below turnover thresholds, in particular transactions involving start-ups or an emerging platforms, the revenues of a party to the concentration below the turnover thresholds due to the free or low price model, the market concentration of the relevant market is high or the number of competitors is small.

This again is unchanged since the draft, and reflects a global debate about the extent to which merger control regimes are well placed to appropriately review acquisitions of competitively significant businesses whose turnover falls below conventional thresholds for mandatory notification. Certain jurisdictions have responded by introducing new transaction value thresholds (e.g., Germany and Austria), whereas other jurisdictions (e.g. Singapore, which operates a self-assessment/voluntary regime) have decided that their rules are already adequate.

(c)   Revenue Calculation for Online Platforms

The Guidelines also recognize that, according to industry practices, charging methods, business models, the role of platform operators etc., revenues calculation by internet platform operators for China merger control jurisdiction analysis might be different from traditional industries. That being said, the Guidelines emphasize that revenues being captured in principle should include sales of either product or service:

• for platform operators who only provide information matching and receive commissions or service fees, revenues may be calculated from the service fees charged by the platform operator and other revenues generated by the platform operator;
• for platform operators who specifically participate in competition on one side of the platform or taking a lead in such market, revenues may also include the transaction amounts involved in the platform.

Recommended Actions

Platform operators in China should take the opportunity to assess their conduct; put in place robust compliance programmes, and refresh existing programmes if necessary².

Parties to VIE structures going forward will need to assess whether the thresholds are met in the normal way. Parties to transactions involving platforms and tech start-ups will also need to weigh the risk of ex officio investigations, even where a transaction falls outside of the normal revenue thresholds.

In depth

Considerations of data, algorithms, innovation and privacy feature throughout the Guidelines, which take the position that:

• Data and algorithms can be used by business operators to enter into illegal concerted behaviors, conduct RPM, or implement other anti-competitive behaviors by way of hub-and-spoke.
• The capability and capacity of obtaining and occupying data are important factors when considering whether a platform is an essential facility.  Data and algorithm can be used to implement refusal to supply, restrictive dealing and pricing discrimination by abusing of dominance.
• Privacy is relevant, e.g., compulsory collection of unnecessary user information might be illegal as abuse of dominance by a dominant market player imposing unreasonable trading conditions.
• Data driving M&As should be taken into account in merger control review. Opening up data access to others, modifying platform rules or algorithms might be considered as behavioral remedies to address competition concerns in conditional clearances.
• Potential impact on innovation has been especially flagged out for merger control.  When conducting merger review on transactions in the platform sector, it is expected that the following factors would be considered thoroughly: competition on innovation of technology and business models, impact on business operators' motivation and capabilities of innovation, and whether acquisitions of startups and emerging platforms will affect innovation.

The Guidelines also suggest that SAMR is conscious of the antitrust scrutiny over tech around the world.  In addition to high profile developments in the EU and US, some regulators in APAC have also advocated for more antitrust regulation in the digital sector e.g. Japan is proposing an EU-like disclosure obligation over digital platforms to improve trading transparency and fairness.³ Sector-specific laws, regulations and guidance are also under review across the region, often with a clearer focus on certain specific perceived anticompetitive practices as compared to the Guidelines e.g. unjustifiable acquisition or use of personal information in Japan;⁴ self-preferencing, multi-homing prevention and MFN s in South Korea,⁵ and self-preferencing in Singapore.⁶

In parallel to legislative efforts, China has started to take enforcement action against certain strategies long employed by China's Internet platforms or tech companies, including the following:

• Three companies with VIE structures received the legal maximum and highest ever fines imposed for failure to notify their respective notifiable transactions for merger control.
• Alibaba was raided for alleged exclusivity requirements.
• Three e-commerce platforms were fined for false or misleading pricing behaviour under China's Pricing Law.
• An e-commerce platform received an unprecedented fine for breach of China's Anti-unfair Competition Law (AUCL) by imposing exclusivity requirements.⁷

A radical overhaul in antitrust enforcement approach to Internet platforms is clearly underway. China already has a large regulatory toolbox at its disposal, including the Anti-monopoly Law, Pricing Law, AUCL, and potentially also the E-commerce Law and Cybersecurity Law.  Although recent developments may have heightened the need for compliance for those engaged in this sector, opportunities remain for business operators to conduct self-assessment and/or adjust their business models in response to an increasingly dynamic market environment.

1 For more details, please refer to our previous alert.

2 SAMR has also recently issued guidelines on setting up antitrust compliance programme, as discussed in our alert.

3 See the Bill for the Act on Improvement of Transparency and Fairness in Trading on Specified Digital Platforms. A brief English outline is available at https://www.meti.go.jp/english/press/2020/0218_002.html.

4 See the draft Guidelines Concerning Abuse of a Superior Bargaining Position in Transactions between Digital Platform Operators and Consumers that Provide Personal Information, etc., available at https://www.jftc.go.jp/en/pressreleases/yearly-2019/December/191217_DP.html.

5 See the official release of "KFTC sets out guidelines for reviewing unfair practices by online platform operators", available at https://ftc.go.kr/solution/skin/doc.html?fn=938f665ba05c235679feba9899b7f9d77b13d5243fdddb6eb32ddea200b7a8fd&rs=/fileupload/data/result/BBSMSTR_000000002402/.

6 See the draft CCCS Guidelines on the Section 47 Prohibition, available at https://www.cccs.gov.sg/public-register-and-consultation/public-consultation-items/2020-public-consultation-on-proposed-changes-to-competition-guidelines.

7 Exclusivity requirement violates both AML (if a dominant market position is established) and AUCL if in the context of e-commerce or internet business sector. The underlying rationale for application of AUCL rather than AML may be that the e-commerce platform concerned does not have a dominant position and it is technically easier for the authority to pursue this case under the AUCL instead of a complicated effect-based analysis on non price related vertical restraints imposed by a non-dominant market player.

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This client alert has been prepared for clients and professional associates of Baker & McKenzie FenXun (FTZ) Joint Operation Office. Whilst every effort has been made to ensure accuracy, this client alert is not an exhaustive treatment of the area of law discussed and no responsibility for any loss occasioned to any person acting or refraining from action as a result of material in this presentation is accepted by Baker & McKenzie FenXun (FTZ) Joint Operation Office.