How to tackle merger remedies under MOFCOM's new rules

On December 4 2014, the Ministry of Commerce of China (MOFCOM) released the Provisions for the Imposition of Restrictive Conditions on Concentrations of Business Operators (Trial Implementation) (2014 Provisions), which took effect on January 5 2015. As a departmental regulation, the Provisions has superseded the Tentative Provisions for the Implementation of Asset or Business Divestitures of Concentrations of Business Operators (2010 Provisions) previously issued by MOFCOM on July 5 2010.

Compared with the limited content covered in the 2010 Provisions, the 2014 Provisions have been considerably expanded to cover more aspects including restrictive conditions' category, determination, implementation, supervision, modification, rescission and legal liabilities.

Updated and expanded

In terms of the category of restrictive conditions, the 2014 Provisions cover both structural remedies and behavioural remedies set forth in the Measures for the Review for Concentrations of Business Operators released on November 24 2009, rather than being limited to the structural remedy of divestiture of assets or business only. However, for the implementation and supervision of restrictive conditions, the 2014 Provisions' relevant details are still mainly on divestiture, leaving the behavioural remedies yet to be developed.

In terms of the determination of restrictive conditions, the 2014 Provisions set forth procedural details.

Among these steps, the deadline for the filing party to propose restrictive conditions is set to be the 20th day prior to the further review stage (i.e. the 100th day after acceptance of the case). However, the timelines for other steps have not been provided yet. Based on experience and the possibility that MOFCOM may solicit third parties' comments before raising the anti-competitive effects of a concentration, timing remains uncertain. If MOFCOM raises the anti-competitive effects late into the review process, the filing party may lack sufficient time to fully consider and propose restrictive conditions.

In terms of the implementation of restrictive conditions, the 2014 Provisions mainly refer to business divestiture. There are two types: self-divestiture and entrusted divestiture. Where MOFCOM does not make a review decision or grant a deadline extension, the time limit for locating a buyer and signing a sale agreement for either type of divestiture would usually be six months from the date MOFCOM makes its decision or the beginning of the entrusted divestiture. In ordinary circumstances, the divested business is transferred to the buyer within three months after the execution of the sale and purchase agreement. With regard to a buyer's qualification, the 2014 Provisions removed the previous requirement that the purchase of the divested businesses should not create anti-competitive effects. Instead, they set forth that another notification of the concentration must be filed if the purchase of the divested business meets the filing thresholds. Considering the complexity of competition analysis, the 2014 Provisions are a more practicable approach.

As for supervision, the 2014 Provisions provide more detailed rules on the relationship among a divestiture obligor, a monitoring trustee and a divestiture trustee. As to the relationship between these parties and MOFCOM, the Provisions also removed the 2010 Provisions' requirement that the divestiture obligor may not issue any instructions to the monitoring trustee or divestiture trustee without the consent of MOFCOM. This reflects MOFCOM's more detached stance for supervision.

The modification and removal of restrictive conditions are newly added articles in the 2014 Provisions. They reflect the necessity of revising or uplifting conditions due to changed actual circumstances (e.g. MOFCOM's rescission of partial obligations for Google's acquisition of Motorola because of Lenovo's acquisition of the latter on January 6 2015) or due to the time limits set for restrictive conditions.

In terms of legal liabilities, as a departmental regulation, the 2014 Provisions mainly set forth the relevant rules within the scope of the PRC Anti-monopoly Law (AML).

Brand new features

The 2014 Provisions introduced the crown jewel mechanism. Article 7 states that: “If there is a risk that the initial Restriction Proposal plan put forward by the filer is not implementable, the Ministry of Commerce may, in its review decision, require the filer to propose a backup plan based on the initial plan. The conditions of the backup plan shall be stricter than those of the initial plan, and may contain different core assets, including tangible assets, intangible assets, such as intellectual property, or related rights and interests.” The function of the crown jewel is to minimise the risk of uncertainty in implementing restrictive conditions, and simultaneously motivate the filing party to maintain the market value of the preferred proposal and actively search for a proper buyer. In EU and US regulations, this mechanism is mainly applied to divestiture. In comparison, Article 7 of the 2014 Provisions can be applied to both structural and behavioural remedies. Combined with Article 22, which provides that “The divestiture trustee shall have the authority to sell the divestment business without a reserve price,” Article 7 can raise the efficiency of divestiture implementation and put more pressure on the filing party.

Also introduced was the requirement to provide an upfront buyer. Article 14 states that: “The Ministry of Commerce may require the divestiture obligor to search for a buyer and execute a sales agreement before implementation of the concentration if: (1) there is a relatively large risk to the maintenance of the competitiveness and saleability of the divestment business before the divestiture; (2) the identity of the buyer has a decisive impact on whether the divestment business can recover its market competitiveness; or (3) a third party asserts rights to the divestment business.” The purpose of this mechanism is to address the problem of uncertainty in a divested business and facilitate the selection of proper purchasers. It is noteworthy that the 2014 Provisions did not introduce the fix-it-first remedies mechanism (i.e. a party has located a buyer and has signed a binding agreement before the notification case is accepted by the antirust agency or during the case review stage). That said, a filing party with a tight transaction timeline may consider negotiating with MOFCOM about adopting a similar practice.

Issues to iron out

The 2014 Provisions do not address issues surrounding the appropriate types of restrictive conditions for certain cases, for example, MOFCOM's preference between structural and behavioural remedies and the circumstances suitable for either remedy. One theory is that different types of restrictive conditions may be selected for corresponding different types of anti-competitive effects. For instance, in the Tentative Provisions for the Assessment of the Competitive Effects of Concentrations of Business Operators, MOFCOM recognises and differentiates between unilateral effects and coordinated effects. It is hoped that MOFCOM will provide further guidelines on this aspect to increase efficiency in the filing parties' proposals for restrictive conditions.

There are different theories on the nature of MOFCOM's approval of conditions, for instance, whether the transaction involves an administrative license or an administrative agreement. The approval of restrictive conditions is an act that permits the transaction parties to implement deals, which falls within the scope of an administrative license, defined by the PRC Administrative License Law as “an administrative authority's act of permitting, upon application and after review under law, a citizen, a legal person or another organisation to conduct a certain activity.” Therefore, the Administrative License Law may be applicable for some issues that the 2014 Provisions have not covered, such as the hearing procedure.


Janet Hui (Rongrong Xu), Xiaoshu Guan and Stanley Wan, Jun He Law Offices, Beijing