The Chinese government has fined Alibaba and two other companies for not reporting past deals, closing a regulatory grey area that China’s foreign-listed tech companies have enjoyed for more than a decade.
China’s market regulator said on Monday it had fined Alibaba, Tencent-backed online bookstore China Literature and logistics group Shenzhen Hive Box for failing to ask for regulatory approval for deals made as early as 2014.
The move signals Beijing’s determination to bring China’s tech giants to heel after a decade of fairly unrestricted growth. Last month, regulators unveiled draft antitrust regulations that sent Chinese tech stocks crashing. Before that, regulators suddenly halted Ant Group’s Shanghai public offering, which would have been the world’s largest.
While big Chinese tech companies such as Alibaba and Tencent make hundreds of acquisitions every year, they have so far not had to seek explicit antitrust approval for deals.
“The rule has always been there, it’s just not been enforced. This is a clear signal that companies structured as variable interest entities are not exempted any longer,” said Scott Yu of law firm Zhong Lun.
Although China’s Monopoly Law states all companies should first notify authorities of deals above a certain size, firms using the “variable interest entity” (VIE) legal structure have so far not suffered enforcement and have also avoided filing for approval.
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The VIE structure has commonly been used by tech groups such as Tencent and Alibaba to get round restrictions on raising foreign capital, and thus list on foreign stock exchanges. It has also been used by foreign companies to enter the Chinese market.
“The regulators have never pursued a failure-to-notify case against a VIE before. This is saying: ‘You can’t do whatever you want now, and you can’t hide behind the VIE structure,’” said a Beijing-based lawyer who wished to remain anonymous.
The State Administration for Market Regulation said on Monday that although the fines of Rmb500,000 ($76,000) per company were “relatively low”, it hoped the penalties would act as a “deterrence” and “send a signal to society of strengthening internet antitrust law, to dispel the attitudes that some companies have — that they can wait and see and enjoy flukes of luck”.
Regulators have warned in recent months of the problems of increasing market concentration of online platforms and the need to act against monopolies, in a move widely read by analysts and lawyers as being aimed at Alibaba and its payments affiliate Ant Financial.
“Antitrust complaints against platforms are increasing by the day, and makes clear that the development of the online economy has come with some risks for competition,” SAMR said on Monday.