With the second anniversary of the Anti-Monopoly Law ("AML") approaching in August, new developments regarding merger control and cartel conduct may shed light on China's future antitrust policy.
In July 2010, two of the three authorities entrusted with enforcing the AML - the Ministry of Commerce ("MOFCOM") and the National Development and Reform Commission ("NDRC") - were active on the legislative front. The published legal texts may indicate the authorities' enforcement priorities.
MOFCOM's new regulation on merger control remedies
On July 8, MOFCOM - the authority in charge of merger control in China - issued the Interim Regulation on the Implementation of Asset or Business Divestiture in Concentrations between Undertakings ("Interim Regulation"). The regulation came into force with immediate effect.
Scope of application. Although few in absolute numbers, some transactions subject to MOFCOM merger control may have anti-competitive effects. If the parties in such transactions realize that MOFCOM is unlikely to grant unconditional approval, they can put forward proposals to "remedy" the concerns MOFCOM may have. In addition to more subtle behavorial commitments, the parties can propose structural remedies - that is, essentially the sale of parts of the merged entity's business.
The Interim Regulation aims to lay down the basic procedural framework for the merging parties to divest a part of their business.
Reliance on third parties to police divestiture. With its relatively stretched resources, MOFCOM appears keen to delegate the responsibility to oversee the sometimes lengthy and cumbersome divestiture procedure. The Interim Regulation makes clear that MOFCOM plans to rely on third-party "monitoring trustees" and "divestiture trustees", as the antitrust authorities in other jurisdictions.
The merging parties are entitled to propose the trustees -both organizations and individuals are possible - subject to MOFCOM's approval, but also need to pay their compensation.
Search for a suitable buyer. The Interim Regulation splits the divestiture procedure into three main phases. First, the merging parties attempt to find a suitable buyer for the business to be divested. The exact conditions for that step will be set in MOFCOM's conditional clearance decisions, and can thus vary from case to case. In past cases like Pfizer/Wyeth, the relevant time period was six months. During this first phase, the monitoring trustee will supervise the parties' actions.
If the parties fail to find an appropriate buyer, a divestiture trustee will be put in charge of that task. Again, the clearance decisions are meant to give details about the length of this second phase. In contrast, the Interim Regulation itself sets a (steep) deadline for the last phase: Following signature of the sales agreement, the divested business must be transferred to the new owner within three months (although MOFCOM may grant extensions).
Timing challenges. Many transactions require filings in multiple jurisdictions, and coordinating the timing of procedures across borders is a major challenge for companies. Ambitious deadlines set in the clearance decisions have the potential to increase time pressure upon merging parties. Hence, beyond the Interim Regulation, companies will hope that MOFCOM shows sufficient flexibility to make divestiture feasible in practice.
NDRC targets price hikes
On July 13, NDRC circulated for public comment a draft version of the Special Regulation on Penalties for Illegal Pricing Conduct during Periods of Abnormal Fluctuation of Market Prices ("draft Special Regulation").
The draft Special Regulation is the last in a series of efforts undertaken by NDRC and other government bodies to react to perceived market failures in certain sectors of the economy. In particular, NDRC aims to curb price gouging of important basic commodities, especially food products. In May 2010, NDRC, MOFCOM and the State Administration for Industry and Commerce issued an order requesting local government officials to better protect the "normal market order." Earlier in July, the three authorities announced having conducted several investigations into illegal pricing by companies in the past. Local government branches in Jilin, Inner Mongolia and Henan are reported to have investigated and fined a number of companies found to have manipulated prices of garlic and green beans. In part, the draft Special Regulation seems to be an attempt to codify the May order and the recent investigation practice.
Scope of application. The draft Special Regulation is meant to apply only in times of crisis, namely when important goods and services experience abnormally high price rises. While NDRC might have had recent natural disasters in mind, there is little guidance as to when exactly a situation becomes "abnormal" and what "important goods" are.
Fight against price gouging. The draft Special Regulation essentially targets four types of conduct:
- fabrication and dissemination of news on price hikes;
- hoarding of products;
- driving up prices and reaping excessive profits; and
- price collusion.
The draft Special Regulation also contains a new 'toolbox' for local officials to fight price hikes: It provides for abbreviated procedures (conversely limiting rights of defence) and higher penalties vis-à-vis those of the Price Law, a comprehensive law on price regulation which includes a few antitrust provisions.
By-passing the Anti-Monopoly Law? Although the draft Special Regulation mentions that the provisions of the AML - China's main antitrust text - take priority, it prohibits "price collusion" between companies and subjects it to new sanctions and abbreviated procedures.
Here, the concern for businesses will not only be that essentially the same conduct would be illegal under three different legal texts - i.e., the AML, the Price Law and the Special Regulation - with their specific sets of sanctions and procedures. But more generally, the drafting of the Special Regulation casts doubts about NDRC's commitment to addressing anti-competitive conduct under the systematic and unified approach of the AML provisions.
The authorities' enforcement priorities
Over the past few months, MOFCOM has held workshops on remedies and focused a good part of its legislative efforts on this issue. Thus, although more than nine months have past since the last transaction was cleared by MOFCOM subject to remedies, the issue appears to remain on the regulator's mind.
MOFCOM's focus on remedies may well be due to the relatively sparse legal basis in the AML for configuring complex remedies. The adoption of the Interim Regulation may thus be a kind of codification of past practice. Equally possible, however, is that MOFCOM is setting the groundwork for future cases where divestiture will be required in order to get its green-light. Merging parties in future transactions notifiable to MOFCOM are well advised to take note.
The main focus of NDRC's enforcement activities in the antitrust field (in a large sense) is also emerging: NDRC investigations appear to center on hardcore price-fixing and related activities. While many of NDRC's recent activities have focused on food products - which may also have been an important reason for drafting the Special Regulation - its enforcement priorities may expand rapidly. Hence, companies in China - especially those selling consumer goods - should make sure their compliance keeps up with NDRC's increased level of activism in this area.