On December 4, 2014 the Ministry of Commerce (“MOFCOM”) promulgated the Provisions on Imposing Restrictive Conditions on the Concentration of Undertakings (for Trial Implementation) ("2014 Provisions") which came into force on January 5, 2015 replacing the Tentative Provisions on Implementing Divestiture of Assets or Business in Concentration of Undertakings("2010 Provisions"). These new provisions significantly change the procedures related to restrictive conditions including adding new procedures for the determination and cancellation of restrictive conditions, updating the procedures for implementing and supervising the implementation of restrictive conditions, and adding legal liabilities for a failure to follow the procedures and duties properly. This paper summarizes those changes.

I. Background

In 2008 the Anti-Monopoly Law of the People's Republicof China ("AML") came into force and, among other things, created a system of approvals for mergers based on whether or not a proposed merger would (likely) harm competition. Proposed mergers that were deemed "concentrations"and met certain thresholdsmust be submitted to MOFCOM for approval. If MOFCOM determines that the concentration will (likely) harm competition, it may either forbid the merger or, far more often, impose a restrictive condition to mitigate the harmful effects.

The basic steps in the procedure under both the 2010 Provisions and the 2014 Provisions are the same: 

1. Determine the restrictive conditions.
2. Self-Actuated Divestiture: The declarer is given time to find an appropriate buyer under the supervision of a "supervising trustee".
3. Entrusted Divestiture: If the declarer fails to find a buyer, the "divestiture trustee" will find an appropriate buyer.
4. Sale of Business: The declarer sells the business to the buyer.

    However, the 2014 Provisions significantly change all of these steps, add the possibility of later canceling restrictive conditions and create legal liabilities for the various parties for violating their duties.

 II. Determination of Restrictive Conditions

    Perhaps the most significant change in the 2014 is the creation of a formal process for the determination of restrictive conditions. The 2010 Provisions do not deal with this at all, the merely treat the restrictive conditions as a given in the Examination Decision handed down by MOFCOM.

    The 2014 provisions, however, create a procedure for determining the restrictive conditions. The declarer, the party declaring a concentration, files for antimonopoly review and MOFCOM decides if the concentration will (likely) harm competition. If so, the declarer can suggest possible restrictive conditions; if the declarer fails to suggest such conditions, MOFCOM will forbid the concentration. The conditions can also be recommended in advance of MOCCOM’s decision to as to whether or not the merger will harm (likely) harm competition. If the suggested conditions are risky MOFCOM can require a set of alternative conditions. Once these suggestions are submitted, MOFCOM and the declarer will negotiate them and, in the end, MOFCOM will give a final decision. Thus, under the 2014 Provisions, the declarer is formally a necessary party in the determination of restrictive conditions.

III. Implementation of Restrictive Conditions

    As stated in Section I, above, both the 2010 Provisions and the 2014 Provisions have a 2 step process in the implementation of restrictive conditions: (1) self-actuated; and (2)entrusted (if needed). The self-actuated divestiture is under the supervision of a supervising trustee and the entrusted divestiture is carried out by a divestiture trustee.

    There are, however, a number of additions in the 2014 Provisions. In the beginning of the self-actuated divestment, the declarer must submit at least three candidates for buyers, supervising trustees and entrusted trustees to MOFCOM for approval. When submitting the three potential buyers, the declarer must also submit the sales agreements and other relevant agreements that have been concluded with the buyers.

    With respect to the buyers, there are two new restrictions. The first is that buyers of the divested business cannot be using financing to buy it. The second relates to the question of whether the acquisition of the divested business by the buyer will itself harm competition. The 2010 Provisions stated that the purchase is allowed only if it "will not result in elimination or restriction of competition". The 2014 Provisions, however, take a broader view and requires that if the purchase of the divested business by the buyer is a 3 concentration and meets the thresholds (see section I above), then a second MOFCOM anti-monopoly reviewis necessary.

    Finally, with respect to the timing of the divestiture, under general circumstances the MOFCOM decision will provide a time period within which a sales agreement must be completed (if no time is provided, the default is six months). However, under certain circumstances, MOFCOM can require the declarer to "to find a proper buyer and conclude a sale agreement therewith before implementation of concentration."

IV. Supervision over Restrictive Conditions

    The 2014 Provisions did not significantly change the supervision of restrictive conditions. It is the duty of the supervising trustee to oversee the self-actuated divestiture. However, the 2014 Provisions added an important provision regarding "whistle blowing". If a divestiture obligor fails to divest the business as required, entities or individuals may report this to MOFCOM. MOFCOM is required to keep the information about such informers confidential.

V. Change and Cancellation of Restrictive Conditions

    Under the 2014 Provisions, restrictive conditions can be changed or canceled. A party can apply for a change or cancellation in the restrictive conditions or MOFCOM can unilaterally make the decision. In either event, MOFCOM will consider: (1) if the parties have changed a great deal; (2) if the market has changed a great deal; (3) if the conditions are impossible or unnecessary; and (4) any other factors.

VI. Legal Liabilities

    The 2010 Provisions did not discuss legal liabilities at all, but the 2014 provisions create legal liabilities. If an operator participating in the concentration breaches the examination decision, MOFCOM shall order it to make corrections within a specified period. If the circumstances are serious, the MOFCOM shall order the operator to stop concentration, dispose of shares or assets within the specified period, transfer the business within the specified period and take other necessary measures to return to the status before concentration. MOFCOM may also impose a fine of up to RMB500,000. If a trustee, fails to perform his/her obligations, with due diligence, MOFCOM may order the trustee to make corrections. If the buyer of the divested business violates the Provisions, MOFCOM shall order the buyer to make corrections.

 VII. Conclusion

The 2014 Provisions changed the procedures for restrictive conditions. On the one hand, the 2014 Provisions create a higher burden in that the declarer must submit three possible buyers, supervising trustees and divestiture trustees to MOFCOM. What’s more, sales agreements with all three possible buyers must be negotiated and submitted for approval. Finally, there are explicit penalties for a failure to comply with the restrictive conditions. On the hand, the 2014 Provisions allow the declarer to suggest restrictive conditions to MOFCOM and negotiate with MOFCOM. This should allow the declares the ability to work with MOFCOM to craft the solution that works best for them while still mitigating the competition eliminating effects.