Today, the new Regulation on the Attachment of Restrictive Conditions for Concentrations between Business Operators (Trial) (Remedies Regulation) came into force. The Remedies Regulation was issued by the Ministry of Commerce (MOFCOM) on 4 December 2014. It replaces the Interim Regulation on the Implementation of Asset or Business Divestiture in Concentrations between Business Operators, enacted back in 2010 (2010 Interim Regulation).

In a nutshell

The Remedies Regulation has seven chapters and 32 provisions. Despite its broader title, the Remedies Regulation focuses on divestiture – a particular structural remedy consisting in the sale of entities or assets to an independent third-party – similar to the 2010 Interim Regulation.

The key parts of the Remedies Regulation contain some guidance on the process of divestiture within the overall merger control procedure; the implementation and supervision of the divesture; and the procedure to modify the remedies after the conditional clearance decision.

Divestiture within merger procedure

The Remedies Regulation provides that the parties must submit the final remedy proposal 20 days prior the end of the "in-depth review" stage and, in the case of failure to meet the deadline or an insufficient proposal, MOFCOM is to prohibit the transaction. Under the Remedies Regulation, the parties can also submit remedy proposals before MOFCOM indicates it has competition concerns.

The 20-day deadline before the end of the "in-depth review" is a novelty, as the 2010 Interim Regulation did not specify any deadline.

The Remedies Regulation does not state whether the end of the "in-depth review" period includes a possible extension of that period. Under the Anti-Monopoly Law (AML), the merger procedure goes through the "initial review" period of 30 days (usually called phase 1), followed by the "in-depth review" period of 90 days (typically called phase 2), which can be extended by another 60 days (the extended period is usually referred to as phase 3). The Remedies Regulation does not make it clear if the 20-day count refers to the end of phase 2 or phase 3.

If the regulation were to have the end of phase 2 as benchmark, the obligation to submit the final remedy proposal 20 days before may prove to be a real challenge for merging parties. Looking at MOFCOM's 24 remedy decisions under the AML so far, according to our count, only three of them mentioned that the final remedy offer had been tabled 20 days or more before the end of phase 2, while in 17 cases the offer had occurred at a later, at times much later, moment in time (and four decisions did not mention the time of the last remedy offer). The difficulty for merging parties to submit their final remedy offer 20 days ahead of the end of phase 2 is in part due to the circumstance that MOFCOM's practice – and the new Remedies Regulation – do not impose an equivalent obligation upon MOFCOM to inform the parties of its competition concerns by a certain deadline. Hence, if past practice can serve as a benchmark, MOFCOM's concerns may be conveyed at a relatively late stage; if so, the parties would have a very limited window of opportunity to offer the final remedy proposal. If the end of phase 2 is the benchmark, then the deadline may have the effect of tilting the bargaining power in the remedy negotiations even further toward MOFCOM. Potentially, merging parties may try to pull and re-file their transactions before the deadline draws close, an approach that at present merging parties in some cases pursue at the end of phase 3.

Separately, the Remedies Regulation stipulates that where there are high risks associated with the divestiture proposal, MOFCOM may require the parties to propose alternatives – the second offer is sometimes referred to as "crown jewels" due the high value of the proposed business to be divested within the parties' asset portfolio.

Furthermore, the Remedies Regulation provides for an option of third-party input on the viability of the proposed divestiture by way of questionnaires, hearings or expert consultation. Reminiscent of the "market testing" process in other antitrust jurisdictions, the process is however less transparent in China where merging parties may often not be informed at all of the steps taken. Yet this provision may be viewed as codifying existing practice in China.

In somewhat of a departure from existing practice, the Remedies Regulation requires MOFCOM to explicitly specify in the conditional clearance decision whether a trustee is required and which procedure is to be followed.

Implementation and supervision of divestiture

The Remedies Regulation provides for a two-step process: first, the merging parties themselves can seek a buyer for the business to be divested, subject to supervision by a monitoring trustee; second, if that fails, then MOFCOM appoints a divestiture trustee which sells the business to a suitable buyer.

The Remedies Regulation sets out the conditions that potential buyers need to fulfill, and the basics of the divestiture process including its timing. For certain circumstances, MOFCOM reserves the right to require an "upfront buyer," imposing an obligation on the merging parties not to close the deal before the buyer is found and the sale and purchase agreement is signed.

As a further novelty, if the buyer's acquisition of the divested business triggers the AML merger thresholds, a new merger filing is needed and the sale cannot be completed before clearance – even where MOFCOM had previously approved the buyer as the future owner of the divested business.

Rules on the trustee's qualifications and obligations are also described in the Remedies Regulation.

More generally, on many aspects, the Remedies Regulation provides more detail than the 2010 Interim Regulation, yet the structure of the remedy implementation and supervision processes are similar.

Remedy modification process

Perhaps one of the Remedies Regulation's most interesting aspects concerns the remedy modification process. Through some past cases, MOFCOM has developed a practice providing parties subject to ongoing behavioral remedies with a possibility to request MOFCOM for a waiver or alteration of the remedies under certain circumstances. To the best of our knowledge, MOFCOM may reportedly have only once decided to lift or amend one remedy, imposed in the Mitsubishi Rayon/Lucite International transaction. Such a "waiver" option is in principle consistent with some foreign antitrust laws, such as those of the European Union.

Now, the Remedies Regulation has a dedicated chapter with four provisions on the "alteration and waiver" of remedies. Article 26 essentially codifies existing practice by giving parties the right to apply for alteration of waiver of remedies. Yet Article 25 states that MOFCOM can "conduct a review of the [remedies] afresh" to alter or waive them, without mentioning any request or application by the affected parties.

The relationship between these two provisions is not entirely clear. Hopefully, future cases will show that Article 25 complements Article 26, and that any change of remedies is possible only if the beneficiary parties explicitly apply for it. The alternative interpretation – namely, that MOFCOM could unilaterally decide to alter the remedies – would not only seem to be contrary to legal certainty and run against one of the basic principles underlying the Administrative Licensing Law, which prevents government bodies from altering "administrative licenses" after issuance at their discretion. But this interpretation would also make it very difficult for any merging parties in discussions with MOFCOM to decide to put forward a firm remedy proposal in the first place, if they know that MOFCOM would later be entitled to alter the remedies on its own motion.

Takeaways

As noted, despite the broader title, the Remedies Regulation focuses on divestiture.

Although MOFCOM staff regularly state that they prefer structural solutions, past MOFCOM practice shows a strong tendency towards behavioral commitments – those that regulate the conduct of the merging parties after closing of the transaction during a certain period of time. Indeed, among the 24 conditional clearance decisions so far, according to our interpretation and count, MOFCOM imposed behavioral remedies in 20 of them, while structural remedies/divestitures were only sought in seven (some of the cases saw the imposition of both types of remedies).

Yet the Remedies Regulation limits itself in two provisions to state that the rules on divestiture can be used as "reference" for other types of remedies – that is, essentially behavioral remedies. Hence, one of the biggest questions that remains is what the Remedies Regulation means as far as the substance of behavorial remedies in MOFCOM's conditional clearance decisions is concerned.