China Issues New Guidelines on the Implementation of Divestiture Commitments When China's Ministry of Commerce ("MOFCOM") approved Pfizer's $68 billion acquisition of rival pharmaceutical company Wyeth in last September, the Chinese anti-trust authority for the first time applied business divestiture as a structural remedy in its merger control review. According to MOFCOM's conditional clearance decision, Pfizer was required to divest its PRC swine mycoplasmal pneumonia vaccine business to an approved third party to address anti-competitive concerns. To satisfy the condition, Pfizer sold its swine vaccine business in China to Harbin Pharmaceutical Group for approximately US$50 million in May. There are however concerns that divestiture has been applied without any official guidance which should have been put into place to ensure consistency of implementation of future divestiture in conditional clearance decisions. To address these concerns, on the 5th of July MOFCOM issued its Tentative Provisions on the Implementation of Assets or Business Divestiture for Concentrations of Business Operators ("Provisions"). By setting forth detailed procedures and requirements, these Provisions provide a clearer procedural guidance on implementation of divestiture commitments.
The Provisions divide divestiture into two stages as follows:
Reaching a transfer agreement, which requires that the party who is asked by MOFCOM to divest its business or assets ("DivestingParty") must indentify a suitable purchaser and enter into a final agreement following negotiations, within the time limit prescribed by MOFCOM ("Self-divestiture"). If the Divesting Party fails to do so, a MOFCOM approved divesture trustee will step in and carry out the divestiture in accordance with the requirements of MOFCOM's clearance decision. In the Pfizer/Wyeth case, the period for Self-divestiture was six months from the date of MOFCOM's clearance decision.
The transferring of legal title, which must be completed within three months of the date of execution of the final transfer agreement. This time limit can be extended if so approved by MOFCOM.
The qualified purchaser must be an independent third party without any existing substantial interest in any parties to the underlying merger transaction. It must have necessary resources and capacity and be willing to maintain and develop the divested business. More importantly, its purchase of the divested business must not be deemed by MOFCOM to have anti-competitive effects. This suggests that MOFCOM's assessment of such qualified purchasers is likely to include a substantial economic review.
Supervisory and divestiture trustees
To ensure effective implementation of the divestiture commitments, the Divesting Party must appoint a trustee to oversee the whole divestiture process ("Supervisory Trustee"). The suggested candidate for the role of Supervisory Trustee must be submitted to MOFCOM for approval within fifteen days of MOFCOM publishing its clearance decision. The Supervisory Trustee can be a natural person, a legal person or any other form of organization.
The Supervisory Trustee is given important tasks to carry out. For example, it will oversee the Divesting Party's performance of its obligations, assess the purchaser's proposal, report progress to MOFCOM (note that such reports cannot be disclosed to the Divesting Party without approval by MOFCOM), monitor the implementation of the transfer agreement and mediate disputes between the Divesting Party and the potential purchaser. It is however not clear what formal procedures the Supervisory Trustee must follow in any mediation process and to what extent the parties must honor the results of the mediation.
If the Divesting Party fails to indentify a suitable purchaser within the prescribed time limit, a MOFCOM approved divestiture trustee will be appointed to dispose of the divested business ("Divestiture Trustee"). If approved by MOFCOM, the Divestiture Trustee can be the same person or organization that was earlier appointed as Supervisory Trustee. Without prior approval from MOFCOM, the Divestiture Trustee should not disclose to the Divesting Party any information about the divestiture process, and the Divesting Party is not allowed to issue instructions to the Supervisory or Divestiture Trustee without MOFCOM's approval.
Obligations of the parties to the underlying merger transaction ("Parties")
Up to the completion of the divestiture, the Parties are required to take measures to preserve the value of the divested business. For example, the Parties are required to hold the divested business independent from other business and operate the divested business in its best interest. The Parties are prohibited from taking any action which may have a material adverse impact on the divested business, such as soliciting employees of the divested business. Furthermore, an administrator, who will perform duties under the supervision of the Supervisory Trustee, must be appointed by the Parties to manage and safeguard the divested business.
Currently, China in-bound M&A transactions account for 8.1% of the total amount of M&A transactions in the world. Many anticipate that the total amount of China in-bound M&A transactions in 2010 will exceed the amount seen in 2009, which was US$127.175 billion. At the same time, China has now developed itself as one of the world's most important merger control jurisdictions. The promulgation of these Divesture Provisions is a welcome step for the Chinese anti-trust authority, through its introduction of structural remedies in its conditional clearance decisions.
There are however many untested issues that remain open. For example, the Provisions created two types of trustees (Supervisory Trustee and Divestiture Trustee). It is not clear how the PRC Trust Law, which is primarily designed to regulate the financial sector, will apply to a divesture process under the anti-trust regime. As a practical matter, it also remains to be seen how conflict of interests and independence issues will be addressed when the trustees are paid by the Divesting Party but are required to report their duties to MOFCOM and act in the interest of the public.