Divestiture of assets or businesses is a critical relief measure in consolidation reviews. Since the Ministry of Commerce (MOFCOM) started to review consolidations after PRC Anti-Monopoly Law became effective in August of 2008, the MOFCOM has imposed conditions on clearance of consolidations in at least five cases. For example, in October of 2009, the MOFCOM required substantial divestments as a condition on its clearance of the acquisition of Sanyo Electric Co., Ltd. by Panasonic Corporation.
On July 5, 2010, the MOFCOM promulgated the Provisional Regulations for Implementing Divestitures of Assets or Businesses in Consolidation of Business Operators (the “Divestiture Regulations”), the key contents of which are as follows:
1. Timeline for Divestiture
The Divestiture Regulations establish a two-stage divestiture process: voluntary divestiture phase and entrusted divestiture phase:
- Voluntary divestiture phase: The divestiture obligor (the party in a consolidation that has an obligation to divest its assets or businesses pursuant to the MOFCOM’s review decision) shall, within the time limit specified in the MOFCOM’s review decision, find a suitable purchaser and enter into a sale and purchase agreement and other relevant agreements.
- Entrusted divestiture phase: In the event the divestiture obligor fails to complete a voluntary divestiture within the specified time limit, the divestiture trustee (appointed by the divestiture obligor) shall find a suitable purchaser within the time limit specified in the MOFCOM’s review decision and reach an agreement on a sale and purchase agreement or other relevant agreements.
Once the sale and purchase agreement is signed, the divestiture obligor is required to complete the transfer of the divested business and go through all the legal procedures relating to ownership transfer within three months. The MOFCOM may extend the time limit for such business transfer based on the specific circumstances and per the request and explanation of the divestiture obligor.
2. Monitoring Trustee
The divestiture obligor is required to appoint a monitoring trustee to carry out thorough supervision on the business divestiture. A monitoring trustee can be an individual, legal entity or other organization equipped with the resources and capabilities necessary for conducting the entrusted business, and shall be independent from and have no substantial interest in the business operator participating in the consolidation or the purchaser of the divested businesses.
Monitoring trustees are accountable to the MOFCOM. Their responsibilities include:
- Monitoring divestiture obligors’ performance, performance of sale and purchase agreements, any disputes arising from the divestiture, and submitting various monitoring reports relating to the business divestiture to the MOFCOM, and
- Assessing purchaser candidates recommended by divestiture obligors and proposed sale and purchase agreements and other related agreements, and submitting assessment reports to the MOFCOM.
3. Purchaser of Divested Business
The purchaser of the divested business shall satisfy the following requirements:
- Maintain independence from and have no substantial interest in any business operator participating in the consolidation;
- Possess necessary resources and capabilities and willing to maintain and develop the divested business;
- Their acquisition itself shall not eliminate or restrict competition;
- Where the operation of the divested business requires any additional approval from other government authorities, the purchaser shall meet the requisite conditions for obtaining such approval.
4. Assessment of MOFCOM
During the divestiture procedures, the MOFCOM will assess the proposed candidates for the monitoring trustee, divestiture trustee, purchaser of the divested business, entrustment agreement and sale and purchase agreements and other relevant agreements for the proposed business divestiture to ensure compliance with the requirements of the review decision. The time spent by the MOFCOM on such assessment will not be included in the time limit for the divestiture.
5. Duties of the Parties to the Consolidation to Maintain Value of Business
Prior to the consummation of divestiture, the business operator participating in the consolidation shall perform the following obligations to ensure the value of the divested business:
- Keep the divested business independent of other businesses, and manage the divested business in a manner that is in the best interest of the divested business;
- Abstain from any acts that may have a negative impact on the divested business, including hiring of employees away from the divested business and/or obtaining trade secrets and other confidential information of the divested business;
- Designate a specific manager to manage the divested business, with its appointment and replacement subject to the consent of the monitoring trustee;
- Ensure that the purchaser is able to obtain adequate information regarding the divested business in a fair and reasonable manner;
- Provide necessary support and assistance required by the purchaser to ensure the smooth transition and stable operation of the divested business; and
- Promptly transfer the divested business to purchasers and go through relevant legal formalities.
- Provisional Regulations for Implementing Divestitures of Assets or Businesses in Consolidations of Business Operators
- Issuing Authority: the Ministry of Commerce
- Date of Issuance: July 5, 2010 / Effective Date: July 5, 2010