Adapting to a New Climate of Antitrust Investigations in China

August 13, 2014 Posted by China Briefing Reading Time: 4 minutes

SHANGHAI – Antitrust investigators from China’s State Administration for Industry and Commerce have conducted two raids in as many weeks on Microsoft’s offices across China in connection to software compatibility, bundling and file verification in Windows and Office. A recent spate of such investigations, especially targeting foreign technology firms and automakers, has set off concerns of a new climate of protectionism operative in the country. In this article, we survey the PRC legal framework connected with these investigations and review response strategies adopted by foreign firms under investigation.

The present environment of heightened scrutiny is connected with the Anti-Monopoly Law of 2008, which targets three types of monopolistic practices:

Monopolistic agreements—divided between “horizontal” and “vertical” agreements. The former deal with issues such as price fixing, artificial limitations on production or sales, or boycotts of competitors or customers; vertical agreements are defined as those in which two or more companies agree to manipulate resale prices.
Abuses of market position—includes selling at unfairly high prices, selling below costs, or imposing unreasonable trading conditions. A business is deemed to be dominant in a market if it has a market share of 50 percent or higher. However, even smaller firms may be implicated as “dominant” players if their market share plus that of a single other company is 66 percent or more (or plus that of two other companies is 75 percent or more).
Anti-competitive mergers—Mergers exceeding certain thresholds, or those with repercussions for national security, require clearance from the governing authorities, a process which can take 30 to 180 days.

The monitoring and enforcement of these provisions is the responsibility of three government agencies: the Ministry of Commerce, National Development and Reform Commission (NDRC), and State Administration for Industry and Commerce. Generally, an inquiry by the NDRC is the most serious of the three, owing to the agency’s reach and backing resources; last year, the NDRC hit six companies in the infant formula industry with fines totaling US$109 million for anticompetitive behavior.

As seen in the case of Microsoft, enterprises under antitrust investigation typically become aware of the allegations against them only during a surprise raid in search of related evidence. Therefore, it is integral that companies seeking to minimize the disruption to their operations incurred during a potential investigation prepare themselves ahead of time, even if a case has yet to be filed against them. Where even politically well-connected companies like Microsoft are fair game for investigation, preparedness rather than prevention should govern the thinking of foreign investors.

In this regard, investors are recommended to review the accessibility and comprehensiveness of company documents. In all cases, it is easier to cooperate with the demands of an investigation, lest a company be hit with additional fines for obstructing the progress of the inquiry.

For example, during the recent raid on its offices, Microsoft complied with interviews of senior management and the confiscation of a large amount of information in the form of contracts, financial records and internal communications. The Anti-Monopoly Law also gives investigators access to company bank accounts.

When assessing the risks of an antitrust suit, companies should take into account the potential duration of an investigation (months or even years) and the risk of fines totaling 1 to 10 percent of annual revenue from the year previous. Unfortunately, in the face of a guilty verdict, there is little recourse for appeal to any agency other than the original investigator.

However, the Anti-Monopoly Law does provide that if a company under investigation takes steps to eliminate the monopolistic behavior in question, the suit may be dropped prior to the issuance of a fine. This is the strategy adopted by BMW, Mercedes and Audi, who, in response to antitrust investigations, cut the prices of components delivered by their respective distributors in China by an average of around 25 percent.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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