Voidable Transactions in the Context of Insolvency

FEATURE

Competition Laws in the Asian Giants

The last 12 months have seen competition laws take afoot in the two Asian giants, China and India. The two countries have taken fairly different approaches to the introduction of the laws, and the details of the specific matters that are to be covered. Yet, given how competition laws generally operate, the rules do reflect considerably, the existing broad principles that are abound in the United States ("US"), the European Union ("EU"), Australia and Singapore. Apart from China and India, a number of other Asian countries already have competition laws, including Japan, Korea, Vietnam, Thailand, Indonesia and Singapore. Hong Kong and Malaysia have been talking for some time about introducing competition laws.

This article provides a quick insight into the competition law provisions of the two giants, identifies areas of comparability with various other jurisdictions, and provides a broad overview of what it means for businesses conducting commercial transactions in Asia and specifically in these two countries. Given space constraints, this article does not look at the merger provisions in both jurisdictions (which will, however, be the subject of a future article) nor does it touch on the other Asian jurisdictions.

The Relevant Laws

China

The Chinese Anti-Monopoly Law ("AML") came into force on 1 August 2008. The AML contains the three main prohibitions present in most competition/ antitrust jurisdictions, ie. the prohibition of anti-competitive agreements, the prohibition of abuses of dominance and the prohibition of mergers, which will or will likely have adverse impact on competition in the relevant market(s) ("merger regulation"). Additionally, the AML also addresses the issue of Administrative Monopolies, prohibiting the "abuse of administrative power to eliminate or restrict competition".

The Anti-Monopoly Bureau ("AMB") of the Chinese Ministry of Commerce and ("MOFCOM"), the Chinese authority tasked with overseeing merger regulation in China, published filing guidelines for mergers and draft guidance on market definition in January 2009. On 27 April 2009, the State Administration of Industry and Commerce ("SAIC") published draft guidance papers on Monopoly Agreements ("Draft Guidance on Monopoly Agreements") and the Prohibition of an Abuse of a Dominant Market Position ("Draft Guidance on Abuse of Dominance"). These have since come into force but are nevertheless still known as Draft Guidance.

On 5 June 2009, China's Administration of Industry and Commerce ("AIC") of the SAIC, which is tasked with non-price related matters in relation to anti-competitive activities and market dominance, published the following two sets of procedural rules:
1. Monopoly Agreements and Abuses of Dominant Market Position; and

2. Abuse of Administrative Power for the Purpose of Eliminating or Restricting Competition.

The confusing aspect of the competition laws in China is the seemingly
overlapping provisions that have been introduced by the SAIC and the AIC. Anyone needing to advice on the Chinese position will need to review all the guidelines.

Most recently, on 7 July 2009, the AMB issued finalised Guidelines for Defining the Relevant Market. The Guidelines suggest that the AMB will be influenced by established principles in other jurisdictions which in turn reflect economic theory. In particular, it makes clear that the effects of competition will be reviewed in the context of a "market". On identifying what the relevant market is, the Guidelines make clear that it will be based on "substitutability", ie. it will include all products or services that are close substitutes, which in turn relies on the hypothetical monopolist test.

India

Enacted in 1970, the Monopoly and Restrictive Trade Practices Act ("MRTP Act") established the MRTP Commission long before India's economic reforms of the 1990s. Its mandate is, therefore, obsolete and ineffective in the current day and age. In an effort to keep up with global advances in competition law, the Government of India appointed a review committee in 1999 and passed the Competition Act ("Competition Act") in 2002 with a view to realign its regulatory focus from curbing monopolies to promoting competition. The Competition Act established the Competition Commission of India ("CCI") as the new statutory authority in-charge of regulating anti-competitive behaviour.

However, due to inter alia constitutional challenges, it was only in May 2009 when the operative sections of the Competition Act came into force following various amendments made to it in 2007. For now, only ss 3 and 4 of the Act (anti-competitive agreements and abuse of dominance respectively,) are in force. Sections 5 and 6 (the merger regime) have not been brought into operation as yet.

The Scope of Coverage

China

Article 13 of the AML prohibits "Monopoly Agreements" among competing undertakings:
1. which fix, maintain or change prices of products (price-fixing agreements);

2. which limit the production volume or sales volume of products;

3. which segment the sales markets or the raw material purchasing markets;

4. which limit the purchase of new technology or new facilities or development of new products or new technology;

5. which jointly boycott transactions; and

6. as decided by the SAIC.

Paragraph 6 of the Draft Guidance on Monopoly Agreements lists additional types of Monopoly Agreements the SAIC considers may fall within the prohibition. These are bid-rigging arrangements, territorial restrictions, and certain types of non-compete provisions.

The Draft Guidance on Monopoly Agreements at paragraph 3 provides that "Monopoly Agreements" may be written or oral, tacit or express, or a concerted act or practice. The definition of "Agreement" here, therefore, is very wide. This is similar to the position in other Competition Law jurisdictions such as the European Union and, indeed, Singapore and India too.

Article 17 of the AML prohibits undertakings from individually or collectively abusing a dominant market position to eliminate or restrict competition. Examples of such abuse include the following:

1.	Monopoly pricing, ie. selling products at unfairly high prices or buying products at unfairly low prices;
2.	Predatory pricing, ie. selling products at prices below cost "without valid reasons";
3.	Refusing to trade with trading partners "without valid reasons";
4.	Mandatory trading or exclusive trading, ie. "compelling trading partners to trade with undertakings, or without valid reason, restricting trading partners to trade only with the undertaking or the undertakings designated by the undertaking";
5.	Tying and imposing other unreasonable trading conditions "contrary to the will of the trading partners";
6.	Differential treatment without valid reasons, ie. applying differentiated treatment with regard to transaction conditions such as trading prices to equivalent trading partners; and
7.	Other abuses of a dominant market position as decided by the SAIC.

In relation to differential treatment without valid reasons, the Draft Guidance on Abuse of Dominance states that factors such as transaction volume, quality grade, payment and service terms, etc will be considered before establishing discriminatory treatment. The Draft Guidance on Abuse of Dominance, however, is silent on what constitutes "valid reasons" for the abuses listed.

Under the AML, a dominant market position refers to "a controlling market position held by one undertaking or several undertakings as a whole, which is capable of controlling the price or quantity of products or other trading conditions in the relevant market or restricting or affecting other undertakings in entering into the relevant market". Undertakings which fulfil the following market share thresholds are deemed to hold a dominant market position:
1. The market share of one undertaking in the relevant market accounts for more than half of the market;

2. The joint market share of two undertakings as a whole in the relevant market accounts for more than two-thirds of the market; or

3. The joint market share of three undertakings as a whole in the relevant market accounts for more than three-quarters of the market.

However, an undertaking with a market share below one-tenth of the relevant market will be presumed not to have a dominant position, as provided by Paragraph 6 of the Draft Guidance on Abuse of Dominance.

What is particularly unique about the Chinese laws is that under Chapter V of the AML, any administrative organ or organisation empowered by a law or administrative regulation to administer public affairs may not abuse such administrative power to eliminate or restrict competition by the following means:

1.	Discriminating against commodities "from outside the locality";
2.	Imposing on commodities "from outside the locality" such standards, terms or conditions which differ from those standards, terms or conditions which are applied to local commodities of the same classification;
3.	Restricting or preventing business operators from outside the locality from participating in, tendering for or bidding on projects or investing or establishing branches in the locality by any means, direct or indirect; or
4.	Coercing business operators to engage in monopolistic practices.

This means that businesses in China will be protected from localism and other unfair trade practices by administrative authorities. This provision has already been used in China. One illustration is the action filed with the Beijing No.1 Intermediate People's Court in August 2008 by four companies against the General Administration of Quality Supervision, Inspection and Quarantine ("GAQSIQ"), a governmental body. The plaintiffs alleged that GAQSIQ abused its administrative power in violation of the AML by requiring companies to pay annual fees to register for an online quality monitoring network administered by a commercial company in which GAQSIQ holds a 30 per cent ownership stake.

India

Anti-competitive agreements, as defined under the Competition Act, cover a wide range of arrangements between
enterprises that replace competitive forces between them with some form of cooperation. Similar to other jurisdictions such as the United Kingdom and Singapore, the Competition Act prohibits any agreement between "enterprises" that causes, or is likely to cause, an "appreciable adverse effect on competition in India". One unique feature of the Act, however, is that the term "enterprise" explicitly includes business undertakings in the private sector and any department of the Government. An exception is made, however, for an activity of the Government that relates to its sovereign functions. The term "sovereign function" has not been defined in the Act and leaves room for interpretation and judicial precedents. Do note, however, that this is not the same as the provisions contained in Chapter V of the AML.

The Act also does not define "appreciable adverse effect" but recognises a distinction between agreements which are presumed to cause such an effect from those that do not. The agreements that create such a presumption are those between enterprises operating at the same level in the supply chain (horizontal) and result in certain anticompetitive arrangements, including:
1. Fixing purchase or sale prices;

2. Limiting or controlling production, supply, markets, technical development;

3. Sharing or allocating markets; or

4. Bid rigging.

Businesses should note that horizontal agreements are directly prohibited without the need for the CCI to show any appreciable adverse effect on the market. Already there is a case of alleged cartel before the CCI. This involves a complaint lodged by the Multiplex Association of India against the United Producers and Distributors Forum, Association of Motion Pictures and TV Program Producers; and Film and TV Producers Guild of India film producers, alleging cartel behaviour.

On the contrary, agreements between enterprises that are at different levels in the supply chain (vertical) do not create such a presumption under the Competition Act. Some types of vertical agreements mentioned in the Competition Act include tying, exclusive dealing, the refusal to deal, and resale price maintenance and will be prohibited only if it is proven by the CCI that they cause or are likely to cause an appreciable adverse effect on competition in India. In other words, the CCI bears the burden to prove that a vertical agreement is anti-competitive and should be prohibited. This approach is in accordance with most other jurisdictions including the recent change in the United States where the US Supreme Court overturned a 100-year-old legal principle by stating that resale price maintenance is no longer a per se violation of the US Sherman Act.

The abuse of a dominant position by an enterprise is also prohibited under the Competition Act. The Competition Act defines "dominant position" as having market power that gives an enterprise the ability to operate independent of competitive forces or to affect its competitors in its own favour. Similar to other jurisdictions, a number of factors, such as market share, barriers to entry into the market and the extent of effective competition will be considered by the CCI in determining whether an enterprise enjoys a dominant position. Section 4 of the Competition Act enumerates conduct that may amount to the abuse of a dominant position. This list of prohibited conducts is consistent with that in other jurisdictions and includes:
1. Imposing unfair or discriminatory sale or purchase prices;

2. Predatory pricing;

3. Limiting or restricting production of goods or provision of services;

4. Denying market access to competitors; and

5. Using a dominant position in one market to access or protect another market.

Unlike anti-competitive agreements (such as target pricing or bid rigging), which are prohibited across jurisdictions, the abuse of dominance prohibitions only kick-in if the party is in a dominant position in the relevant market. It should be noted that competition commissions from two different countries may look at different aspects of an enterprise when assessing whether a particular company is dominant. For instance, the Competition Commission of Singapore will consider a company to be dominant if it has market power either in Singapore or elsewhere. On the contrary, the Indian Competition Act defines "dominant position" to mean a position of strength enjoyed by an enterprise only in a relevant market in India. And again, the scope of the definition in China differs. As a result, certain conduct that is considered harmless in one jurisdiction may be viewed as anti-competitive in another. Businesses should, therefore, be cautious when supplying products or services to multiple countries, since they may have to modify their product or service for some markets.

Interesting Comparisons and Implications for Businesses

Although the current economic downturn has severely affected industry projections, more businesses are engaging in cross-border expansions, transactions and agreements than ever before. Enterprises looking to set up or expand businesses in China or India should be cautious and keep in mind that the slight differences in the competition laws between jurisdictions could translate into heavy fines. For instance, vertical agreements have been excluded from the ambit of Singapore's anti-competitive provision under the Third Schedule of its Competition Act, but are caught by the Indian Act. As a result, certain distribution agreements that may not attract scrutiny in Singapore could lead to monetary penalties in India or in China. Similarly, certain businesses that may not be considered as having market power in India could be considered as holding a dominant position in Singapore or China, prohibiting them from undertaking certain conduct in the Singapore or Chinese market.

Apart from this, whilst many of the principles are based on international competition law principles, it is well known that competition law is applied on given facts as defined within specific markets. Determining the relevant markets in themselves often pose tremendous challenges. Couple this with the fact that there remains considerable discretion on how those principles are applied in practice from jurisdiction to jurisdiction, and whether they will indeed be applied consistently over time and across different transactions means that businesses must be thorough in their due diligence.

A further difference between the laws of China and India and that of Singapore involves the fact that in the latter, you can lodge a notification with the Competition Commission requesting for Guidance or a Decision to be issued in a matter. In China and in India, however, such an avenue is not available. This will require businesses to do thorough self-assessments before engaging in their activities in these jurisdictions.

Concluding Remarks

The true effectiveness of the competition laws in China and India will take time to surface. Questions do arise as to the effectiveness when governments nevertheless take steps which appear to be anti-competitive. A recent example is an order passed by the Government of India mandating that all government related travel had to be on the national carrier, Air India, which has been losing substantial business. Additionally, the Government has provided financial aid to the airlines. There have been various criticisms on these measures, including that both "these measures are anachronistic in the current era of promoting healthy competition, and also goes against the principles of competitive neutrality". However, whilst boosting and protecting competition is a critical aim of competition laws, there are frequent national agendas which go beyond mere competition between businesses. There needs to be recognition for this, particularly in Asia, for the immediate future.

Practically, however, as the number of countries with a structured competition regime increases, businesses will have to be extra alert as to their business practices, since, what may seem harmless in one country may be a serious offence in another. It may be said that the Indian Competition Act and the Chinese Anti-Monopoly Laws have only added another dimension to this matrix of factors that ought to be considered by any multinational enterprise. Finally, although the various Competition laws may seem to create a hurdle for business expansions in Asia, it should be remembered that such legislation are here to protect businesses and their interests, and should be welcomed.

Kala Anandarajah
Corinne Chew
Ajinkya Tulpule
Sarah Lam
Rajah & Tann LLP
E-mail: kala.anandarajah@rajahtann.com