To increase clarity and transparency on the merger remedy regime under the Anti-Monopoly Law (“AML“), China’s Ministry of Commerce (“MOFCOM“) published the draft Rules Regarding Imposition of Restrictive Conditions on Concentrations of Undertakings (the “Draft Rules“) on 27 March 2013 for public comments.
Under the AML, MOFCOM may attach restrictive conditions to reduce the negative impact a concentration of business operators will bring on competition in the relevant market. On 5 July 2010, MOFCOM published the Provisional Rules on Divestiture of Assets or Business to Implement Concentrations of Undertakings (the “Divestiture Rules“) which was the first set of rules specifically dealing with divestiture remedies. The Draft Rules are intended to cover not only divestiture, but also conduct remedies and will replace the Divestiture Rules once adopted.
The Draft Rules consist of seven chapters and thirty eight provisions. Compared with the Divestiture Rules, it sets out a streamlined framework for the imposition of merger remedies, including the determination of remedies, implementation of remedies, supervision of remedies, change and cancellation of remedies, as well as the legal responsibilities for various parties.
Set forth below are some newly introduced provisions that merit attention.
Types of Remedies
The Draft Rules provide for three types of remedies: (i) structural remedies, (ii) behavioral remedies and (iii) a hybrid of both structural and behavioral remedies. Nevertheless, the Draft Rules are mainly focused on structural remedies. For example, there was a non-exhaustive list of the specific types of conduct remedies in an earlier draft, which was entirely removed from the Draft Rules. One of the likely reasons for such a change could be that behavioral remedies may take various forms and more unpredictable, such that a general provision will allow the parties involved more flexibility in coming up with different forms of remedy proposals.
Notice of Competition Concerns
The Draft Rules provide that in order to facilitate the filing parties’ proposal of merger remedies, MOFCOM should explain its competition concerns and the reasons in a timely manner. It is the first time that MOFCOM introduces such a clause to “commit” to inform the parties its concerns timely.
Meanwhile, the Draft Rules also set a deadline for the parties to submit the final remedy proposal no later than twenty days before the expiry date of the review period. It is not clear, though, whether the review period here refers to the normal review period of 120 days (Phase I and Phase II) or 180 days (Phase I, Phase II and extended Phase II).
The Draft Rules include detailed procedures and timeline on the divestiture process. Same as the Divestiture Rules, the Draft Rules set a time limit whereby a divesting party should complete all closing formalities within 3 months from the date the sales agreement is executed. The Draft Rules, however, provide that the period can only be extended for 1 month at the most at the discretion of MOFCOM, unlike the Divestiture Rules where there is no such 1-month limit. For complicated transactions, it might be difficult to complete the divestiture process in just four months.
Upfront Buyer and Crown Jewel Provisions
The Draft Rules also introduce two new provisions – an up-front buyer provision (Article 18) and a crown jewel provision (Article 19).
Pursuant to Article 18, under the following circumstances, MOFCOM is entitled to require the divesting party to locate a buyer and execute a sales agreement before the implementation of the concentration under review: (i) the competitiveness and salability of the business being divested is at great risk; (ii) the buyer’s identity has a decisive influence on whether the business being divested can regain competitiveness in the market; (iii) the divesting obligor cannot locate a qualified buyer within the set time frame; (iv) a third party claims rights in the business being divested; or (v) other scenarios identified by MOFCOM.
In case a divesting party cannot locate a suitable buyer, Article 19 provides that the divesting party must agree to an alternative set of assets for sale. This “crown jewel” mechanism in fact has been adopted in the most recent Glencore/Xstrata case, where Glencore is required by MOFCOM to propose an alternative set of assets to be divested in case Glencore cannot complete the divestiture process within the prescribed time limit.
Pursuant to the Draft Rules, the duration of behavioral conditions shall be 10 years unless otherwise provided by MOFCOM in its decision. The Draft Rules also introduce a review mechanism, under which MOFCOM may amend or repeal the conditions, if it finds that the restrictive conditions can no longer lessen the negative impact on competition or otherwise when the original competition concerns have been released and there is no ground for maintaining the restrictive conditions.
In some of the past cases, MOFCOM already included such a review mechanism that allows the parties to request MOFCOM to re-evaluate whether there continues to be a need to have the remedies in place. Cases where MOFCOM included such a review clause include Seagate/Samsung, Western Digital/Hitachi, Google/Motorola Mobility, and ARM, Giesecke & Devrient/Gemalto. For example, in this last case—concerning the establishment of a joint venture among three companies—the parties are entitled to apply for release of the remedies if the environment or the situation of the joint venture has undergone a significant change.
The Draft Rules contain a separate chapter on the liability on various parties. The sanctions on a divesting trustee are particularly harsh. To ensure a trustee’s independence, if a divesting trustee provides false information or fails to perform its duties, MOFCOM can confiscate the divesting trustee’s remuneration and disqualify him as a divesting trustee; where the violations are serious, MOFCOM may even cancel the trustee’s qualifications for future appointments.
It is encouraging to see MOFCOM stepping up its efforts in introducing a more comprehensive guideline on the determination and implementation of merger remedies. We are looking forward to more progress in the legislation of merger remedies.