- Clarification on the types of remedies for merger control.
- Further details on the timeline for negotiation and implementation of remedies.
- Potential buyers of divestiture business must be subject to the approval of MOFCOM, and must satisfy specific conditions.
- Introduction of an “Upfront Buyer” condition.
Since the Anti-monopoly Law of the People’s Republic of China came into effect in 2008, the PRC Ministry of Commerce (“MOFCOM”) has granted 18 conditional clearances of merger cases where they imposed certain restrictive conditions on merging entities for the purpose of eliminating or reducing the anti-competition effect arising out of a merger. In 2010, MOFCOM issued a regulation setting forth the basic requirements of divestitures; however, a general rule clarifying the types of remedies, requirements, and the procedures of remedies available to MOFCOM is yet to be promulgated.
In the absence of clarification on these matters, MOFCOM released a draft Regulation on Remedies in Merger Control (“Draft Regulation”) in March 2013 for comments.
Highlights of the Draft Regulation
Types of Remedies in Merger Control
Similar to the practices in many jurisdictions, remedies in merger control under the Draft Regulation include:
- Structural remedies, e.g., divestiture of business, which may consist of tangible assets, intellectual property rights, and equity interest
- Behavioural remedies, e.g. grant of access to networks or infrastructure, license of technology, know-how, and intellectual property right, and termination of exclusive agreements.
- Hybrid of structural remedies and behavioural remedies.
Behavioural remedies may also include (a) hold-separate requirements with regard to staffing, procurement, sales, and pricing, with no sharing of competitive information, to be implemented through the creation of a fire wall within the merged entity, (b) a commitment with respect to production capacity and output, (c) a commitment of continuing procurement from upstream vendors or continuing supply to downstream customers on reasonable terms and conditions, and (d) a commitment for investment in research and development.
Compared with the competition agencies in the US and the EU, MOFCOM appears to be more inclined to adopt behavioural remedies, as reflected by the fact that divestiture was required only in seven out of the 18 conditional clearances granted to date. In particular, the conditional clearance granted to the Marubeni-Gavilon acquisition in 2013 suggested that MOFCOM may impose a hold-separate requirement as an alternative to divestiture, opposed to other jurisdictions (where a hold-separate requirement is typically used as an interim protective measure pending the completion of divestiture). Despite this, neither the Draft Regulation nor the existing practice shed much light on the circumstances when MOFCOM may prefer divestiture to a behavioural remedy.
Timeline for Negotiation and Implementation of Remedies
According to the Draft Regulation, when requesting for a proposal of remedies from merging entities, MOFCOM should specify the anticompetitive effect that concerns them as well as the reasons for the concern. MOFCOM may assess any remedy proposed by merging entities through consultation with other government agencies, trade associations, enterprises and consumers, and by conducting a questionnaire survey or at a public hearing. The merging entities may negotiate for the remedies acceptable to both the merging entities and MOFCOM, and will be obliged to submit the final proposal of remedies at least 20 days prior to the expiry of the MOFCOM statutory review period.
Unless otherwise agreed by MOFCOM, a behavioural remedy must be implemented for ten years. In the case of divestiture, unless otherwise specified in the MOFCOM’s conditional clearance, a merging entity must find a suitable buyer of the divestiture business and enter into a binding sales agreement with such buyer (subject to the MOFCOM approval) within six months of the MOFCOM conditional clearance. This period may be extended by up to three months if MOFCOM considers it appropriate. Within three months subsequent to the execution of a sales agreement, the merging entity must complete the divestiture, with an extension by one month available if approved by MOFCOM.
Such timeline is generally consistent with the current practice, though there have been previous exceptions. Nevertheless, the three-month limitation for the closing of a divestiture transaction may be impractical if the divestiture transaction itself would be subject to the merger review of MOFCOM or the divestiture package includes certain assets that are subject to time-consuming process for the transfer of title, e.g., trademarks registered in the PRC.
In the event that a merging entity fails to sign a binding agreement for the sale of divestiture business or to complete the divestiture within the statutory time limits noted above, MOFCOM would mandate an independent divestiture trustee to sell the divestiture business to a suitable buyer. In practice, such sales by a divestiture trustee could be made at an unrestricted price.
Buyer Qualifications in Divestiture
Under the Draft Regulation, a potential buyer of divestiture business must be subject to the approval of MOFCOM, and must satisfy all the following conditions:
- Be independent from any merging entity.
- Have necessary resources, expertise, and incentive to be an effective competitor of the merged entity with the divestiture business.
- Be able to obtain any other approvals from government agencies required for the purchase of divestiture business, where applicable.
- Not have financing from any merging entity for the purchase of divestiture business.
- Have satisfied other requirements raised by MOFCOM according to the particularities of the merger case under MOFCOM’s review.
Technically, if a potential buyer’s market power is too weak to effectively compete with the merged entity even if having acquired the divestiture business, the divestiture to such buyer may not restore the competition within the relevant market, and therefore may not be approved by MOFCOM. On the other hand, if a potential buyer has already acquired strong market power, the divesture itself may present substantial anti-competition concern. In practice, however, there is no information indicating MOFCOM has ever challenged the suitability of a potential buyer in the case of a divestiture transaction.
Upfront Buyer and Crown Jewel Alternative in Divestiture
The Draft Regulation provides that MOFCOM may require a merging entity to identify a suitable buyer of a divestiture business and sign a binding agreement for the sale of the divestiture business with such buyer before it may proceed with the merger, which is commonly known as an “Upfront Buyer” requirement, in the following situations:
- The competitiveness and viability of the divestiture business may be subject to a high risk before the divestiture, i.e., a perceived risk of degradation of the divestiture business.
- The identity of the buyer is crucial for the restoration of competition in the market, e.g., a buyer must have certain special expertise to effectively operate the divestiture business in competition with the merged entity.
- There is a perceived risk that a suitable buyer of the divestiture business may not be found within the statutory post-clearance time limits.
- The divestiture business is subject to third party rights, e.g., the transfer of divestiture business is subject to the consent of a third party, which consent may be withheld.
- Other situations determined by MOFCOM.
The foregoing clauses appear to be generally consistent with the Upfront Buyer requirements in the EU.
According to the Draft Regulation, if there is a perceived risk that a merging entity may not find an Upfront Buyer prior to the closing of merger, MOFCOM may require a merging entity to propose an alternative and more attractive divestiture package to divest in the event that the merging entity fails to find a suitable buyer of the original divestiture package. Such requirement, commonly known as a “Crown Jewel Alternative” requirement, is present in the practice of merger control in the US and EU.
On the other hand, the Draft Regulation did not address another requirement present in the practice of merger control in the US and EU which is similar to the Upfront Buyer requirement, i.e., the “Fix‑it‑first” requirement where a merging entity is required to complete the divestiture, as opposed to the execution of a binding sales agreement for divestiture business, before it may proceed with the merger in certain situations. It will be no surprise if MOFCOM includes the “Fix‑it‑first” provision in the final version of the Draft Regulation.