MOFCOM fails to deal with behaviour problem

The Ministry of Commerce (MOFCOM) issued the Provisions for the Imposition of Restrictive Conditions on Concentrations of Business Operators (Remedy Regulations) on December 4 2014 to replace the 2010 Tentative Provisions for the Implementation of Asset or Business Divestitures of Concentrations of Business Operators.

“The new rules do not provide more information on what types of behavioural remedies are acceptable and under what circumstances MOFCOM is willing to impose them,” said Michael Han of Fangda Partners. “Parties can take reference from the divestiture remedy rules, but more specific guidance is needed.”

The lack of clarity on what causes MOFCOM to impose behavioural remedies has created uncertainty for mergers that have potential anti-competitive effects. Out of the 24 conditional clearances MOFCOM has granted so far, 20 involved behavioural remedies.

More guidance on the different kinds of behavioural remedies and what MOFCOM hopes to achieve would be helpful, said François Renard of Allen & Overy. Elaborating on the reasons why these measures are applied, the type of supervision to expect and the exact role of the supervising trustee would have increased transparency and helped parties understand the substance of these remedies as well as the risks borne by potential transactions.

“They added some new requirements but haven't tackled the real challenges for companies, which is understanding how MOFCOM currently handles and supervises behavioural remedies,” said Renard.

Upfront buyer and crown jewels

Two new concepts have been introduced in the new regulations that show MOFCOM is looking at its international peers as it develops its merger control regime.

The first asks parties to arrange for an upfront buyer before deal closure for certain divestitures to prove to MOFCOM that the assets can be sold.

“Companies need to find a third party acquirer immediately after clearance and before closing their main transaction, which also normally involves finding three potential buyers, conducting reviews and due diligence and negotiating with the buyers in a very short period of time,” said Renard.

MOFCOM also requires parties to provide an alternative proposal – known as the crown jewel – to their primary divestiture. “The second offer should be much stricter, which puts pressure on parties to divest other assets if the first fails,” said Han. These practices are similar to those in the EU and US.

Proposals and amendments

Parties now have a deadline to submit final remedy proposals, which MOFCOM says is 20 days before the end of Phase II. This raises more questions, as final remedy offers occurred after Phase II in 17 out of the 24 cases while only three were 20 days or more before the end of Phase II.

“We have consulted with MOFCOM, which said that the 20-day period potentially starts from Phase III,” said Han. “It isn't clear in writing, but it appears that in practice it will be extended.”

He added that parties shouldn't be too worried because MOFCOM generally wants to clear transactions – even with remedies – and has asked parties to file and refile in a number of cases. “While this deadline puts pressure in terms of schedule, I would be surprised if failing to meet the deadline leads to prohibition of the deal.”

Renard said the 20-day deadline may not be enough time to get investors and third parties together to discuss complex behavioural remedies, which require a lot of assessment and discussion. Refiling would only delay the transaction.

The ongoing Tokyo Electron/Applied Materials proceeding is an excellent example of the time that MOFCOM can take to decide on the behavioural remedies it wants to impose, he explained. A precedent may have been set yesterday when rumours arose that the deal will have to be refiled for the second time, presumably because the regulator could not figure out how to settle the remedy. The transaction was initially filed in September 2013, refiled in July 2014 and now faces another filing.

While other jurisdictions also have problems in finding an adequate solution, they follow a pre-determined agenda. The problem in China is that despite the strict clearance period set forth in the law, parties are at times encouraged to refile until MOFCOM is satisfied with a set of remedies, said Renard. This means the proceeding can theoretically take years.

Parties can apply for amendments to restrictive conditions, but this procedure was not clarified in detail. Generally, parties submit an explanation to MOFCOM on why the remedies should be lifted, and the ministry analyses whether market conditions have changed so that that the terms are not required, said Han.

MOFCOM had imposed remedies on Google when the company acquired Motorola Mobility in 2012. These included honouring the commitment to license Motorola's standard essential patents on fair, reasonable and non-discriminatory (FRAND) terms. Google asked MOFCOM to modify the conditions when it divested Motorola Mobility to Lenovo in 2013. MOFCOM lifted the remedy the day after the new rules took effect.


By Katherine Jo