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New Regulations of MOFCOM on Conditional Clearance

20/01/2015

On 4 December 2014, the PRC Ministry of Commerce (“MOFCOM”) issued the Provisions on Imposing Restrictive Conditions on Concentration of Undertakings (Trial Version) (the “Trial Provisions”). They have come into effect on 5 January 2015 and replaced the Interim Provisions on Implementing Divestiture of Assets or Business in Concentration of Undertakings. The Trial Provisions provide more detailed rules on restrictive conditions for merger control clearance, in particular on divestiture.

  1. Under PRC law, MOFCOM may grant its clearance with restrictive condition(s) to a concentration in order to reduce the adverse impact of the concentration on competition. Possible restrictive conditions include divestiture, opening up infrastructures such as network and platform, licensing key technologies and termination of exclusive agreements, etc. 
  2. The Trial Provisions introduce the concept of “Crown Jewel Provision” into the Chinese merger control regime. According to the Trial Provisions, the notifying party may submit a proposal on restrictive conditions. If MOFCOM is of the opinion that the risk exists that the primary proposal cannot be enforced, it may request the notifying party to submit a back-up proposal providing stricter conditions. The back-up proposal may cover different kinds of core assets, such as tangible and intangible assets as well as relevant rights and interests. It remains to be seen how MOFCOM will apply and implement the “Crown Jewel Provision” in practice. 
  3. The Trial Provisions for the first time officially define the scope of the “business to be divested”. It refers to all factors necessary for the undertakings to conduct effective competition in the relevant markets, including rights and interests of the party having the divestiture obligations, such as tangible assets, intangible assets, equity interests, key personnel as well as customer agreements or supply agreements. Business to be divested may be a subsidiary, branch or business department of the undertaking(s) to the concentration.
  4. In case the restrictive condition for a concentration is divestiture, unless otherwise required by MOFCOM, the purchase agreement for the business to be divested shall be concluded within 6 months after obtaining the conditional clearance (in case of divestiture without divestiture trustee) or 6 months after the commencement date of the divestiture (in case of divestiture with divestiture trustee). Such 6 months period for self-actuated divestiture can be extended by another 3 months at the maximum upon the approval by MOFCOM. The Trial Provisions also empower MOFCOM to request the party having the divestiture obligations to conclude the purchase agreement for the business to be divested before the implementation of the concentration in question (“Pre-Closing Divestiture”), if any of the following circumstances exist: (1) there is a high risk to maintain the competitiveness and marketability of the business to be divested before its divestiture
    (2) the identity of the buyer has a decisive impact on whether business divestiture can restore the market competition; or 
    (3) a third party has claims against the business to be divested.

Two days before issuance of the Trial Provisions, MOFCOM published its punishments in four cases which violated the merger control regulations. This is the first time that MOFCOM officially published punishment decisions. Among the four cases, two are related to failure to fulfill the restrictive conditions which MOFCOM imposed at the time of granting the conditional clearance to the concerned concentrations. These actions show that MOFCOM intends to strengthen its control and supervision over the conditional clearance on concentration of undertakings.

Source
China Insight - Competition
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Authors

Kevin Wang
Kevin Wang, LL.M.
Jie Lin
Jie Lin, LL.M.