By Susan Ning, Hazel Yin, Al Wu, Sarah Eder and Lingbo Wei King & Wood Mallesons’ Antitrust Group
On 4 December 2014, the Provisions of the Ministry of Commerce on Imposing Additional Restrictive Conditions on the Concentration of Business Operators (for Trial Implementation) (hereinafter the “Provisions of Restrictive Conditions”) was officially enacted by the Ministry of Commerce of the People’s Republic of China (MOFCOM), based on its 2013 draft version (hereinafter the “2013 Draft Provisions”). Restrictive conditions in merger reviews are also referred to as “merger remedies”. Pursuant to Articles 28 and 29 of the Anti-monopoly Law (hereinafter “AML”), where a concentration of business operators will or may eliminate or restrict competition, MOFCOM may decide to attach restrictive conditions to its clearance decision in order to reduce the adverse impacts on competition. MOFCOM has given conditional clearance in 24 cases since AML came into effect. Given that the imposition of restrictive conditions on proposed transactions may impact heavily on the parties and the nature of the transaction, even altering the relevant market and development of the relevant industry, the publication of the Provisions of Restrictive Conditions will be of great significance not only to the merger review process, but also to the business decisions of the relevant companies.
The Provisions of Restrictive Conditions came into effect on 5 January 2015. At the same time, MOFCOM’s Interim Regulations on Implementing the Divestiture of Assets or Businesses in Concentrations of Business Operators dated 5 July 2010 (hereinafter “the Regulations on Divestiture”), were repealed. The Provisions of Restrictive Conditions will become an important reference point for the enforcement of restrictive conditions. The Provisions of Restrictive Conditions contain 7 chapters addressing restrictive covenants, including when such covenants will be imposed, the mechanisms for supervising their implementation, the consequences of failing to comply, the procedure for amending them and when the obligations will come to an end .
A. Types of restrictive conditions
Article 3 of the Provisions of Restrictive Conditions describes three types of restrictive conditions which MOFCOM can impose on business operators: structural conditions, behavioural conditions and hybrid conditions that involve both structural and behavioural conditions. The structural conditions stipulated in Article 3 include the divestiture of tangible assets, intangible assets or relevant rights and interests. These permanently impact the structure of the relevant business. In contrast, behavioural conditions involve constraints on the future market conduct of the operators. Article 3 stipulates that behavioural conditions include making infrastructure available to the public, licensing key technologies and terminating exclusive agreements.
To date, in the 24 published cases which have been conditionally approved by MOFCOM, 15 cases involved behavioural conditions, 4 cases involved structural conditions and 5 cases involved hybrid conditions. The behavioural remedies stipulated in Article 3 of the Provisions of Restrictive Conditions have all already been applied in previous cases. For example, in the Acquisition of Motorola by Google (2012), a condition was imposed requiring Google to licence the Android platform free of charge and on an open-source basis; in the Acquisition of Nokia’s Devices and Services Business by Microsoft (2014), a condition was imposed requiring the licensing of key technologies; in the Acquisition of Alcon Inc. by Novartis AG (2010), a condition was imposed requiring the termination of a sales and distribution agreement. Furthermore, a number of other behavioural conditions have been imposed in previous case, including prohibiting operators from increasing their shareholding in a company; requiring disclosure of competitive confidential information; requiring operators to make specific products available on the Chinese market; substantially changing the current business model of a company; and requiring operators not to sell their products at an unreasonably high price or to bundle the sale of their products. There were also conditions requiring operators to notify MOFCOM of any changes in equity holdings and to abide by obligations of FRAND.
B. Process overview of imposing structural conditions
According to the Provisions of Restrictive Conditions, the notifying party can propose restrictive conditions either before or after competition concerns are raised by MOFCOM. MOFCOM will then consult with the notifying parties in respect of such restrictive conditions, seeking relevant opinions and conducting an evaluation before making a decision. Once MOFCOM has made a decision to accept structural remedies, the operator which has agreed to divest part of its business (“the divestment obligor”) will either arrange the relevant divestiture itself or, if it is unable to find an appropriate buyer, it will appoint a divestiture trustee to conduct the divestment in the relevant timeframe. MOFCOM can initiate a further review of the restrictive conditions, pursuant to an application by one of the parties concerned or of its own accord, to decide whether to vary or terminate the restrictive conditions.
We summarize the process for reviewing and terminating structural conditions below:
In addition, the Provisions of Restrictive Conditions also contain specific rules which address the requirements for selecting the potential buyer and supervising/divestiture trustee in the divestiture process. When selecting a buyer, the Provisions of Restrictive Conditions stipulate that: (1) the buyer must be independent of the business operators participating in the concentration; (2) the buyer must possess the necessary resources and abilities, and must be willing to use the divestiture to participate in market competition; (3) the buyer must have obtained any necessary approvals from other regulatory authorities; (4) the buyer must not purchase the divestiture using debt financing; (5) the buyer must comply any other requirements specified by MOFCOM. Where either a supervising trustee (in voluntary divestments) or a divestiture trustee (in entrusted divestments) is necessary, the trustee needs to be independent and have the necessary professional experience. The trustee and the notifying party need to sign a written agreement and comply with the responsibilities stipulated in the Provisions of Restrictive Conditions. The notifying party must submit the list of potential buyers and the signed purchase agreements, as well as the proposed supervising/divestiture trustee to MOFCOM. MOFCOM will then review the potential buyers and proposed trustee to ensure that all requirements are met.
It is worth mentioning that the Provisions of Restrictive Conditions allow the buyer to “apply to MOFCOM for necessary modifications to the scope of the divestiture.” This did not feature in the 2013 draft for consultation. However, since MOFCOM’s review decision will set out the scope of divestiture, it is unclear what will happen to the review decision if a buyer applies to modify the scope of the divestiture.
C. Special rules on imposing structural remedies
- Divestment before the concentration
Article 14 of the Provisions of Restrictive Conditions provides that the divestiture may be required to take place before the merger is completed. Generally, as shown in chart 1, the divestment is implemented after the publication of the review decision and the execution of the concentration. However, MOFCOM may require the divestment obligor to find a potential buyer and sign the sale and purchase agreement before the concentration is executed (see chart 2) or even before the publication of merger review decision[1] (see chart 3), including cases where:
- the divestment involves particular risks (for example, the relevant industry is unstable or there is a risk that the employees will be unsettled by the change of control);
- the identity of the buyer has a significant influence on if the divestiture can restore competition in the market; and
- a third party has brought legal proceedings against the business being divested.
In fact, the EU and US regimes both include similar provisions which enable the divestment to take place before the concentration is completed, known as “upfront buyer” or “fix-it-first”, which are intended to lower the risks involved in structural remedies in order to protect and maintain competition in the market after the concentration has been implemented.
- Crown Jewel Rule
According to Article 7 of the Provisions of Restrictive Conditions, where the first choice of remedy submitted by the notifying party involves some risk, MOFCOM may require the notifying party to propose alternative solutions. Alternative solutions involve conditions that are more stringent than those in the remedy of first choice. The purpose of the Crown Jewel Rule is to urge the seller to submit a better solution which ensures that the divestment proceeds successfully.
MOFCOM applied the Crown Jewel Rule in the Glencore/Xstrata Case (2013), requiring Glencore to submit an alternative solution to avoid the risk that the divestiture would not proceed.
- Duration for behavioral conditions
The 2013 Draft Provisions included a provision that MOFCOM must specify the time period for implementing the behavioral conditions or, in the absence of such specification, the time period would be assumed to be ten years. This stipulation has been removed in the Provisions of Restrictive Conditions. This deletion is reasonable because development and innovation in different industries varies, and various factors need to be taken into account when determining the duration for implementing behavioral conditions. Therefore, the deletion enables MOFCOM to have more flexibility by taking into account the situation in different industries.
D. Conclusion
The Provisions of Restrictive Conditions set out the relevant concepts and rules for the merger remedy regime in a systematic and comprehensive way. In addition, the Provisions of Restrictive Conditions enables MOFCOM to require divestment before the concentration is implemented and introduces the “Crown Jewel Rule”, which codifies MOFCOM’s pre-existing practice. This not only ensures the stability of MOFCOM’s review process, but also leaves room to continue developing the rules.
However, the Provisions of Restrictive Conditions do not particularly address behavioral remedies. Instead, the provisions state that the implementation and supervision of behavioral conditions shall comply with existing regulations applicable to structural conditions. The reason for this could be that there are numerous varieties of behavioral conditions, for which it is hard to provide an exhaustive list, and the imposition of behavioral remedies is very case-specific making it hard to provide general rules.
The Provisions of Restrictive Conditions significantly improve the regime for reviewing concentrations of business operators. They not only provide clear regulations for MOFCOM’s future law enforcement, but also provide guidance for notifying parties to fully prepare for the review process based on the specific circumstances of their proposed transaction. Although the AML is relatively new to China compared with other jurisdictions, MOFCOM has shown that it is prepared to carry out a detailed analysis of the competition concerns raised by proposed cross-border concentrations, and to adopt remedies which it considers appropriate, rather than simply following the same approach of more established authorities in other jurisdictions. Therefore, parties to proposed transactions which may raise competition concerns in China should consider whether and when to propose additional restrictive conditions as part of the global strategy in accordance with the Provisions of Restrictive Conditions, in order to ensure the timely progress of their transaction.
[1] MOFCOM Anti-monopoly Bureau’s Interpretation of Provisions of the Ministry of Commerce on Imposing Additional Restrictive Conditions on the Concentration of Business Operators (for Trial Implementation), dated 17 December 2014. See http://www.mofcom.gov.cn/article/zhengcejd/bl/201412/20141200835988.shtml.