MOFCOM issues new merger remedy rules

Nate Bush
[email protected]

On December 4 2014, the Ministry of Commerce (MOFCOM) issued the Provisions for the Imposition of Restrictive Conditions on Concentrations of Business Operators (商务部经营者集中附加限制性条件的规定) (Remedy Regulations), which took effect on January 5 2015 and superseded the 2010 Tentative Provisions for the Implementation of Asset or Business Divestitures of Concentrations of Business Operators (关于实施经营者集中资产或业务剥离的暂行规定). The Remedy Regulations largely codify MOFCOM's current practice for adopting, implementing, enforcing and amending conditions imposed on concentrations pursuant to the PRC Anti-monopoly Law (AML), but several new provisions introduce novel rules.

Hybrid remedies

Whereas the 2010 rules only addressed divestitures, the new Remedy Regulations apply to structural, behavioural and hybrid conditions. Hybrid conditions are defined as “combining structural and behavioural conditions,” apparently referring to MOFCOM's unique practice of requiring buyers to “hold separate” key commercial functions of target businesses until MOFCOM permits the integration of the target business. While these indefinite hold separate orders ostensibly aim to preserve market structures (like structural remedies) by restraining buyers from exercising control over targets (like behavioural remedies), foreign regulators and scholars have criticised this approach for vitiating efficiency gains and perpetuating market uncertainty. Including hybrid conditions in the new rules may signal MOFCOM's continued willingness to consider this controversial remedy.

Timing of remedy proposals and divestitures

The Remedy Regulations introduce new rules on the timing of remedy proposals and divestitures. The new rules direct MOFCOM to advise the notifying party of its views regarding any “actual or likely” anticompetitive effects of the transaction and the reasons for its conclusions “in a timely manner,” but there is no fixed deadline. However, the notifying party faces a firm deadline to submit its final remedy proposal no later than the 20th day before the “further review” period ends. The AML divides the review process into an initial 30 day review period and a further review (进一步审查 or Jinyibu Shencha) period of 90 days which MOFCOM may extend for an additional 60 days. As a practical matter, parties must continue to confer with MOFCOM on the timing of any substantive conclusions or extension of the further review period in order to ascertain the deadline for final remedy proposals. If MOFCOM finds the remedy proposal insufficient, it may allow the parties to submit alternative proposals. Parties may also expedite the process by pre-emptively proposing remedies to anticipated antitrust concerns without waiting for MOFCOM to state its objections.

The Remedy Regulations also set a default schedule for divestiture remedies, generally requiring the identification of a suitable buyer and execution of sales agreement within six months of the review decision and the completion of the divestiture within three months of the final divestiture agreement. MOFCOM may extend these deadlines, and time spent by MOFCOM in evaluating the parties' proposals for trustees to supervise the remedies or for suitable buyers for divested assets do not count against these deadlines.

Upfront buyer divestitures

MOFCOM's previous decisions requiring divestitures allowed parties to proceed with the concentration before finalising the sale of the divested assets. The new Remedy Regulations allow MOFCOM to require the parties to locate a suitable buyer and execute the sales agreement before consummating the concentration where:
the competitiveness or saleability of the divestiture business is in jeopardy before the sale;
the buyer's identity may decisively influence the competitive viability of the divested business; or
if a third party has asserted rights to the divested business.

Review and amendment of remedies

The Remedy Regulations introduce new procedures enabling MOFCOM to review, amend or repeal restrictive conditions after a decision becomes effective. In determining whether to amend or repeal restrictive conditions, MOFCOM should consider factors such as changes affecting the parties to the concentration or competitive conditions in the relevant market and the necessity or feasibility of maintaining the restrictions. The new rules allow business operators to apply in writing for the change or repeal of restrictive conditions as well as require MOFCOM to respond “promptly” in writing to the applicant and publish any amendments to restrictive conditions.

For example, MOFCOM cleared Google's 2012 acquisition of Motorola Mobility on several conditions, including Google's commitment to honour Motorola Mobility's existing obligations to license its patents on fair, reasonable and non-discriminatory (FRAND) terms. In 2013, Google sold Motorola Mobility to Lenovo (in a transaction cleared unconditionally by MOFCOM), and Google requested the modification of the restrictive conditions. MOFCOM issued an order repealing Google's obligations with respect to the licensing of Motorola Mobility patents no longer under Google's control on January 6 2015 – the day after the new Remedy Regulations took effect.

However, the literal text of these new rules does not limit the business operators eligible to apply for amendments to the merger parties themselves (as opposed to third parties) or limit possible amendments to the relaxation or rescission of conditions. Reopening past decisions on closed transactions (whether in response to third party complaints or at its own initiative) and imposing stricter conditions than those originally accepted by the parties would undermine the entire remedy negotiation process. It remains to be seen whether MOFCOM will interpret the new rules narrowly, only allowing the merger parties themselves to seek relief from outstanding remedial commitments due to changed circumstances as in Google's case.