Antitrust Law Daily Wrap Up, ANTITRUST NEWS: ABA Sections Comment on China Regulations on Restrictive Conditions for Mergers, (May 13, 2013)

By Tobias J. Gillett, J.D., LL.M.

The American Bar Association Sections of Antitrust Law and International Law have submitted comments to China’s Ministry of Commerce (MOFCOM), recommending greater specificity in MOFCOM’s draft regulations concerning the Imposition of Restrictive Conditions for Concentrations of Business Operators.

The Sections begin by commending MOFCOM for clarifying that it would expect a divestiture obligor to enter into a binding purchase agreement with a proposed buyer and then present the buyer for MOFCOM’s approval, but suggest that the draft regulations would benefit from further clarification "of the timing of the many steps in the merger remedies determination and implementation process."

The Sections then identify concerns with the draft regulations on an article-by-article basis. The comments suggest that the regulations should identify the conditions under which a behavioral remedy will be imposed, and that the remedy should address solely competition-related concerns and not be unduly burdensome. Moreover, they suggest that the regulations either omit the remedies of "requiring access to networks or platforms and compulsory licensing of key technologies," or limit them to extraordinary circumstances. The regulations also note that key personnel cannot be required to accompany assets, and suggest that the regulations prohibit the parties from soliciting such employees or provide for incentives for the seller to encourage employees to accept employment with the buyer.

The Sections note that the regulations do not specify the time period in which MOFCOM would typically expect notifying parties to submit a proposal for restrictive conditions on their merger. The comments urge MOFCOM to provide greater specificity regarding the time frame, and to require parties, when they submit a proposal for restrictive conditions before MOFCOM states its concerns, to identify "special circumstances" justifying such early submission when they submit their proposals. The comments also recommend revising the regulations to state that MOFCOM "may" reject the merger if the parties fail to submit conditions within the time period, rather than stating that MOFCOM "shall" reject it. In addition, the comments suggest stating a general time period during which MOFCOM would provide feedback regarding the proposed conditions.

The comments also advise inserting an additional prohibition against misuse of confidential information, and establishing a procedure for the parties to identify confidential information that will not be provided to third parties. The Sections also advocate retaining flexibility regarding the appropriate time frame for a divestiture, noting that the particular circumstances of a divestiture, such as locating an appropriate buyer, performing due diligence, and complying with various regulatory requirements, may require such flexibility.

With respect to "fix-it-first" (requiring a divestiture to be completed prior to completion of the merger) and "up-front-buyer" (permitting the actual divestiture to follow the merger’s completion) remedies, the Sections acknowledge that such requirements may be necessary under some conditions, but advise that the regulations state that the remedies "will be carefully and infrequently applied." Furthermore, the Sections suggest that they should provide guidance on when a fix-it-first remedy may be considered more appropriate than an up-front-buyer remedy. The comments also suggest omitting provisions that require a divestiture agreement under conditions where such an agreement would be unlikely to be possible.

The Sections also express their opposition to the inclusion of crown jewel divestitures, noting that they are "disproportionate and unnecessary" where there is an up-front buyer or a requirement to divest an entire business. The comments recommend avoiding provisions that would encourage buyers and third parties to manipulate the process and extract unwarranted concessions from the merging parties. In addition, the comments suggest eliminating a requirement that a divestiture that exceeds a notification threshold must undergo a separate merger review, noting that it would be "unduly burdensome and superfluous" when MOFCOM would have already determined the suitability of the buyer.

The comments also oppose requiring all divestiture obligors to obtain a supervising trustee, advising instead a "case-by-case assessment" of the need for a trustee, and contending that, except with respect to certain behavioral remedies, there would generally be "little need for a supervising trustee," since MOFCOM must review and approve the divestiture. The Sections also call for more clarification of "(1) MOFCOM’s role in supervising the implementation of the conditions and the activities of the trustee, (2) the parties’ duties and obligations in relation to the trustee, and (3) the procedure for replacing a trustee."

Moreover, the Sections express their concern with a provision permitting MOFCOM "to impose more burdensome remedies on the parties after a conditional approval has been granted and after the remedies have been implemented," noting that the provision "is a significant departure from international norms." The comments suggest eliminating a clause allowing such remedies when changes in market conditions would make restrictive conditions unable to reduce adverse impacts on competition, and instead including, on a case-by-case basis, a modification clause in the commitments providing for modifications only under specific circumstances.

The Sections also recommend that MOFCOM should adopt "a formal and transparent review procedure and schedule for the post-implementation modification review process," and list a number of questions that the procedure should address. The comments suggest that further specifics would provide transparency and lend legitimacy to a modification decision.

Finally, the comments discuss the draft regulations’ remedies for violations of review decisions and for damage to the competitiveness of a divested business prior to issuance of a review decision. The Sections recommend that the regulations should articulate "the procedure and standards under which a determination of violation will be made." The comments suggest greater guidance regarding what might be considered a serious breach, under what circumstances various sanctions might be imposed, and the types of remedies that might be imposed in different situations. The comments suggest employing remedies such as disgorgement of profits where it may be impossible to revert to the situation prior to a merger, and also question the usefulness of requiring re-notification where a divestiture obligor has adversely affect the competitiveness of divestiture assets before the conditional approval decision was issued.

News: Antitrust