Shaping the future of Chinese competition policy: Insights into SAMR's draft rules for calculating fines for gun-jumping

The Chinese antitrust regulator SAMR (State Administration for Market Regulation) recently released for public consultation a draft of its "Discretionary Benchmark for Imposing Administrative Penalties for Violating the Anti-Monopoly Law by Implementing Concentrations of Undertakings" (Draft Rules). The Draft Rules constitute SAMR's first attempt to clarify the methodology for calculating fines for gun-jumping violations in the context of merger control and set out a series of proposed benchmark fines for different scenarios.

The maximum statutory fines for gun-jumping violations under Chinese merger control rules are set out in the Anti-Monopoly Law (as amended in 2022) (AML). This provides that for violations without anti-competitive effects, the maximum fine is no more than CNY 5 million. For violations that have or may have the effect of eliminating or restricting competition, the maximum fine is no more than 10% of the turnover of the previous fiscal year, with a minimum fine of no less than CNY 5 million. In cases of severe violations with particularly serious consequences, SAMR may impose an aggravated fine of 2 to 5 times the amount stipulated in the AML.

SAMR has stated that the Draft Rules are strategically designed to refine and standardise the calculation of fines for gun-jumping and SAMR’s approach to the exercise of its discretion, while aligning it with the stipulations of the AML. Acting as a pivotal safeguard, the Draft Rules underscore the importance of transparency in competition law enforcement and seek to cultivate a business environment that is market-oriented, guided by the rule of law and internationally competitive.

Approach in line with trend towards a more cautious approach to enforcement

We observe that the Draft Rules underscore the current trend towards a more cautious approach to competition law enforcement in China, as reflected by the following aspects in particular:

• Low fine for gun-jumping without anti-competitive effects: the Draft Rules set a relatively low benchmark fine for gun-jumping that does not result in potential or actual harm to competition. They also allow further downward adjustments to be made in light of the undertaking's actual conduct and mens rea. Overall, SAMR is adopting a more flexible and lenient approach to calculation of fines over a stringent one-fits-all model.
   
• Flexibility in adjusting the fine amount: the Draft Rules set out a list of aggravating and mitigating factors that SAMR may take into account to adjust the final fine amount upwards or downwards. These factors may be applied cumulatively. Again, this flexible approach indicates that SAMR is fine-tuning its approach to enforcement and penalties and veering away from a simplistic and harsh regime.
   
• Potential exemptions from fines: the Draft Rules emphasise that undertakings that commit a gun-jumping violation for the first time may be exempt from fines under certain circumstances. The Draft Rules also envisage certain downward adjustment incentives for undertakings that implement effective antitrust compliance regimes (more details below).

Although this document is currently a draft version for  consultation, the underlying rationale offers clear implications for the direction of China's competition policy in the medium-to-long term.

We explore the detail of SAMR's proposed approach to calculation of fines for gun-jumping further below.

Proposed two-step approach to calculating fines for illegally implementing a concentration without anti-competitive effects

The Draft Rules provide that SAMR will follow a two-step approach to calculating the appropriate fine for gun-jumping violations that do not result in anti-competitive effects:

Step 1: Determination of the applicable starting point for calculation of the fine

First, SAMR will decide what base level or starting point for the fine is warranted by the particular facts of the case, with three possible different levels: a lower starting point (CNY 1 million base), a higher starting point (CNY 4 million base), or a standard starting point (CNY 2.5 million base):

• Scenarios with mitigating features that qualify for a lower starting point:
  • The undertaking ceases implementation of the concentration or immediately takes steps to eliminate any anti-competitive effects arising from it as soon as it becomes aware of the SAMR investigation;
  • The undertaking was coerced or deceived into illegally implementing the concentration; or
  • The undertaking self-reports the infringement prior to SAMR's discovery.

• Scenarios with aggravating features that qualify for a higher starting point:
  • The undertaking induces or deceives others into illegally implementing the concentration;
  • The undertaking has previously been penalised for a merger-related violation of the AML within the previous year;
  • The undertaking hinders SAMR's investigation or takes retaliating actions against the investigating officials; or
  • The undertaking tampers with or conceals evidence.

• Scenarios that qualify for the standard starting point:
  • Cases that either do not have any of the mitigating or aggravating features identified for the lower or higher starting points, or that have features of both categories.  

Step 2: Finalising the amount of the fine via appropriate adjustments

After the base level of the fine has been determined, the Draft Rules provide that SAMR will then proceed to adjust the final amount (upwards or downwards) based on various factors:

• Downward adjustment factors:
  • The post-concentration entity is not yet operational;
  • First-time gun-jumping violation;
  • The infringing party actively cooperates with the investigation; or
  • The infringing party pro-actively establishes or improves a competition compliance programme which substantially raises merger control compliance awareness within the organization.

These downward adjustment factors can be applied cumulatively, with each factor leading to a 10% reduction. However, the cumulative reduction should not result in a final penalty lower than 40% of the initial penalty amount. 

• Upward adjustment factors:
  • Implementing a below-threshold and anti-competitive concentration without notification despite SAMR having called-in the transaction for review;
  • Providing false or misleading information to SAMR; or
  • Failure to cooperate with SAMR during its investigation.

These upward adjustment factors may also be applied cumulatively. If the first factor is present, the penalty is increased by 20%. For the other factors, each will result in a 10% increase.

Calculation of fines for illegally implementing concentrations with anti-competitive effects

As outlined above, for gun-jumping violations involving implementation of a concentration with anti-competitive effects, SAMR may impose higher fines of up to 10% of the infringing undertaking's total turnover in the previous fiscal year (with a minimum fine of CNY 5 million). In addition, SAMR may mandate measures such as an injunction on completion of the concentration or an order unwinding the concentration, disposal of shares or assets, business transfer, or other necessary remedial actions.

The Draft Rules set out that such violations will include scenarios where:

• The undertaking proceeds with implementation of the concentration despite SAMR's warning of anti-competitive effects;
• The undertaking defies SAMR's prohibition decision in respect of the concentration; or
• The undertaking engages in other malicious gun-jumping violations restricting competition.

In cases involving severe violations with particularly serious consequences, SAMR may impose an aggravated fine of two to five times the amount stipulated in the AML. Unfortunately, the Draft Rules do not provide any detailed guidance on what SAMR will consider to be "serious consequences" for this purpose, which is a missed opportunity for further clarification.

Circumstances exempt from fines

In circumstances where gun-jumping does not result in anti-competitive effects, the Draft Rules provide that SAMR may legally forgo penalties and instead opt for educating undertakings, provided that at least one of the following conditions is met:

• The violation is a first-time offence, self-reported by the undertaking before SAMR became aware of it, and the undertaking has taken steps to remedy the anti-competitive effects; or
• The undertaking exercised due diligence, but the violation was due to unforeseeable circumstances.  

General principles of the Draft Rules reflected in recent gun-jumping fine imposed in the Highly/Haier concentration

On 7 June 2024, SAMR issued an administrative penalty decision against Shanghai Highly and Haier Smart Home (Haier) for their failure to obtain merger filing clearance prior to the registration of their joint venture.

This marked the first published gun-jumping penalty decision since the amendment of the AML in August 2022. In the Highly/Haier deal, SAMR found no anti-competitive effect resulting from the concentration and imposed a total fine of CNY 3 million. The decision outlined the considerations taken into account by SAMR in determining the level of the fine, which included the fact that neither party had previously committed a gun-jumping violation, both parties cooperated with SAMR's investigation by proactively offering evidence, and both parties actively established and effectively implemented competition compliance systems.

In our view, the considerations in this case reflect the downward adjustment factors outlined in the Draft Rules now published by SAMR for consultation, even though the case occurred before the publication of the Draft Rules. As such the Draft Rules reflect SAMR's current practice and – taken together – this recent example and the publication of the Draft Rules reflect SAMR's efforts to establish a more technical and precise regime for calculating fines in gun-jumping cases, demonstrating a shift towards a more sophisticated and flexible enforcement approach.

Conclusion

In summary, the release of the Draft Rules by SAMR marks a commendable stride towards refining and standardising the calculation of fines for gun-jumping and SAMR’s approach to the exercise of its discretion in accordance with the revised AML. This initiative provides a more transparent and predictable framework for calculating fines for gun-jumping violations, demonstrating SAMR's commitment to fostering a market-oriented approach, guided by the rule of law, to promote an internationally competitive business environment in China.

The public consultation period in respect of the Draft Rules ends on 14 September 2024. We will be compiling our insights along with those of our clients for SAMR’s reference, contributing to the ongoing development of China’s competition policy.