China Law Insight : China Law Insight: China Commercial and Intellectual Property Lawyers and Attorneys, Full Service Law Firm: King & Wood

• First, Cai Jiming (a CPPCC representative and an academic from Tsinghua University) called for the relevant authorities to consider "breaking up" Baidu into two business segments: its online search engine business; and all other online services.  Cai said that this was to ensure that Baidu does not abuse its dominant status in the online search engine industry;

• Second, some 30 NPC representatives submitted a proposal to amend the Anti-Unfair Competition Law²– in order to ensure that  "anti-unfair competition conduct" in the IT industry in China are being dealt with.

In relation to Cai's comments, we note that Hudong's Chief Executive Officer (Hudong is a company which also runs an online search engine; amongst other online services and platforms) made similar comments in the context of their allegation that Baidu has abused its dominance in the online search engine industry (see our article Wiki-Hudong against Wiki-Baidu – an abuse of dominance? dated 25 February 2011).

Pursuant to the Anti-Monopoly Law (AML), the only remedy available to the antitrust authorities for a breach of the prohibition against an abuse of dominance are fines (see Article 47, AML).  There isn't a divestiture or "separation of business" remedy in respect of breaches in relation to the prohibition against an abuse of dominance.  However, Article 45 of the AML provides that in the context of an investigation of an alleged monopoly act, antitrust authorities possess the power to cease such an investigation provided the business operator undertakes to adopt specific measures to eliminate the consequences of such conduct.  Thus far, there have been no public reports in relation to the operation of Article 45. If the antitrust authorities wish to "break up" Baidu as it were; then there is scope to rely on Article 45 as a source power for this outcome.  However, the "breaking up" of Baidu is by international standards quite a severe remedy and one which would indicate that antitrust and competition law is being run with an "iron hand" here in China.

Similar noises have been made in Europe in relation to Google.  From an economic policy perspective: we think there needs to be a balance between letting the "invisible hand" work its way around within an economy and imposing severe structural remedies such as the one listed above.

In relation to the proposal to amend the AUCL – it will be interesting to see what the proposed amendments are and how this would impact on the IT industry in China.  Of note is the fact that many private actions in relation to the AUCL and the AML in China have been taken up against IT companies.
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¹Specifically, these sessions are: the fourth session of the 11th National People's Congress; and the fourth session of the 11th National Committee of the Chinese People's Political Consultative Conference.

²The Anti-Unfair Competition Law (AUCL) was enacted with 1993 with the objectives of safeguarding the development of China's socialist market economy; encourage and protect market competition; prohibit unfair competition and to safeguard the legal rights and interests of business operators. The AUCL deals with many issues including: counterfeiting, commercial bribery, false representation, false propaganda; commercial defamation and restrictions on competition. As such, there are some overlaps between the prohibitions set out in the AUCL and the AML (but note that the financial penalties for a breach of the AUCL are lower than those pursuant to the AML)

 The following are some salient features of these recently enacted divestiture regulations:

• the objective of the regulations are to ensure that any divestiture or assets or business pursuant to the merger control regime is conducted smoothly (Article1);
• business operators who are required to divest assets pursuant to the merger control regime (known as “divestiture obligors”) would have to divest their assets within a time limit stipulated within a merger control decision by MOFCOM (including finding a purchaser and enter into the relevant sales agreements) (Article 3);
• divestiture obligors may appoint a “supervision trustee” and a “divestiture trustee” to assist in the divestiture process. The former will supervise the divestiture process and the latter would assist with locating a purchaser as well as assist with the actual sale process (Article 4);
• supervision trustees and divestiture trustees must
  • be equipped with the resources and capabilities necessary for conducting trust businesses; and
  •  not possess substantial interests in any of the business operators participating in the merger under scrutiny.

In addition, supervision trustees and divestiture trustees may be the same natural person or legal entity (Article 5); and

• purchasers of divested business must satisfy the following requirements;
  • they must not possess substantial interests in any of the business operators participating in the merger under scrutiny;
  • they must be equipped with the necessary resources and capabilities and must be willing to maintain and develop the business to be divested; and
  •  the purchase of the business to be divested must not result in eliminating or restricting competition (Article 8).

It is timely that MOFCOM has enacted these divestiture regulations. These regulations provide some sort of structure from which business operators can expect to divest their assets pursuant to a merger control decision issued by MOFCOM. In our view, these regulations are consistent with the divestiture regulations in the more experienced antitrust jurisdictions such as the European Union.

In practice, it is important to work closely with MOFCOM when a business has been told to divest pursuant to a merger control decision. Regular consultations with MOFCOM will ensure that the divestiture process goes smoothly. In our experience, it takes approximately 6 months for a business to find a suitable purchaser for the divested business and to reach the relevant agreements for the sale. It is also noteworthy that MOFCOM has stipulated that divested businesses should be transferred to the purchaser within 3 months after the execution of the sales and other agreements, although this time limit may be extended with MOFCOM’s consent.