- Provisional Regulations on the Implementation of Divestiture of Assets or Businesses for Concentrations of Business Operators
- September 16, 2010 | Authors: John V. Grobowski; Yiqiang Li; Wendy Yan
- Law Firm: Faegre & Benson LLP - Shanghai Office
The Ministry of Commerce (MOFCOM), the major agency responsible for enforcing China's Anti-Monopoly Law, issued the Provisional Regulations on the Implementation of Divestiture of Assets or Businesses for Concentrations of Business Operators (Provisional Divestiture Regulations) on July 5, 2010, in an attempt to clarify the requirements and procedures for the divestiture of assets or businesses by companies participating in a proposed concentration. These Provisional Divestiture Regulations supplement two other sets of MOFCOM-issued rules related to merger control, the Measures on the Notification of Concentrations of Business Operators and the Measures on the Review of Concentrations of Business Operators, both of which took effect on January 1, 2010.
In accordance with the Measures on the Review of Concentrations of Business Operators, MOFCOM may, as an alternative to prohibiting a proposed concentration, impose restrictive conditions to reduce or eliminate the adverse effects of the concentration on competition. While MOFCOM is by law allowed to impose a variety of restrictive conditions, requiring the divestiture of assets or businesses has proved to be a major weapon in the agency's arsenal. Since the Anti-Monopoly Law took effect in August 2008, MOFCOM has required divestiture in such prominent deals as General Motors' acquisition of Delphi, Pfizer's acquisition of Wyeth, and Mitsubishi Rayon's purchase of Lucite International.
In the Provisional Divestiture Regulations, the term divestiture of assets or businesses refers to the sale of assets or businesses by enterprises seeking to engage in a proposed concentration as the result of a decision by MOFCOM to require divestiture after a review of the proposed concentration (Review Decision). Business operators who are required in a Review Decision to divest their assets or businesses are referred to as "divestiture obligors," and the assets or business to be divested are "businesses to be divested."
Direct Divestiture and Divestiture Through a Trustee
In a direct divestiture (in the regulations, "divestiture through business operators themselves") the divestiture obligor itself locates an appropriate buyer, signs a sales agreement and other related agreements within a timeframe specified in the Review Decision, then transfers control of the assets or businesses and completes all necessary legal procedures to finalize the transfer within three months of signing the sales agreement. MOFCOM has the discretion to extend the timeframe for the transfer based on the divestiture obligor's application and the agency's assessment of the practical situation.
If a divestiture obligor fails to locate a buyer and enter into a sales agreement within the prescribed timeframe, the obligor must select a "divestiture trustee" to step in and carry out the sale of assets or businesses. The Provisional Divestiture Regulations require the divestiture obligor to notify MOFCOM of the trustee's identity. The divestiture trustee is responsible for finding an appropriate buyer and entering into a sales agreement and other related agreements under MOFCOM's supervision.
If a divestiture is carried out through a trustee, the divestiture obligor must enter into a written entrustment agreement with the divestiture trustee whereby the divestiture obligor authorizes the trustee to independently carry out the sale of the company, companies, or assets. In addition, the divestiture obligor is required to provide necessary support to the trustee for completing the sale. The divestiture trustee should periodically report on developments in the divestiture to MOFCOM. The trustee may not disclose any information related to the divestiture to the divestiture obligor without MOFCOM approval.
Monitoring Trustee and Divestiture Trustee
The Provisional Divestiture Regulations require divestiture obligors to select a "monitoring trustee" to supervise the entire process of a divestiture. Divestiture obligors must choose and notify MOFCOM of the identity of the monitoring trustee within 15 days of when MOFCOM makes its Review Decision. If the Review Decision's deadline for divestiture passes and a divestiture obligor is required to name a divestiture trustee, it may ask the monitoring trustee to serve as divestiture trustee, subject to MOFCOM approval.
Both a monitoring trustee and a divestiture trustee must meet the following requirements:
- The trustee must be an individual, legal person or other organization with the necessary resources and capability for engaging in the entrusted business; and
- The trustee must be independent of both the business operators engaging in the concentration and the buyer of the businesses to be divested, with no substantial interest (i.e., as shareholder, creditor, customer, or supplier) in any of those businesses.
The divestiture obligor is required to enter into written agreements with the monitoring trustee and the divestiture trustee, and the divestiture obligor must not change or terminate those entrustment agreements without MOFCOM's consent. As mentioned above, the monitoring trustee and the divestiture trustee may be the same individual, legal person or other organization. The divestiture obligor should pay the monitoring trustee and the divestiture trustee (if there is one) for its or their work. The payment amounts and methods of payment should not be detrimental to the monitoring trustee's and divestiture trustee's independence and working efficiency.
Status of Buyer
A buyer of the businesses to be divested should meet the following requirements:
- It must be independent of the business operators engaging in the proposed concentration, with no substantial interest in any of them.
- It must have the necessary resources, capability, and intent of maintaining and developing the businesses to be divested.
- The buyer's purchase of the divested businesses will not eliminate or restrict competition.
- The buyer has obtained approval from other regulatory agencies, if required.
Maintaining Value of Businesses to be Divested
Before completion of a divestiture, business operators should perform the following duties to maintain the value of the businesses to be divested:
- Maintain independence between the business (or businesses) to be divested and other businesses, managing those which are being divested in the best interests thereof.
- Refrain from performing any acts that might have an adverse effect on the businesses to be divested, including the hiring of staff from those businesses and the obtaining of commercial secrets and other confidential information.
- Appoint a special administrator to oversee the businesses to be divested, under supervision of the monitoring trustee.
- Ensure that the potential buyer can obtain sufficient information about the business or businesses to be divested on a fair and justifiable basis so as to assess its or their value, scope, and potential.
- Provide the buyer with necessary support and help in order to ensure the smooth transfer and steady operation of the businesses to be divested.
- Perform relevant legal procedures and transfer the business to the buyer in a timely manner.
The issuance of these divestiture rules should prove helpful in increasing the transparency of the divestiture process during a proposed concentration. The Provisional Divestiture Regulations should also improve enforcement of China's relatively new and still-evolving Anti-Monopoly Law. As these new rules remain untested, however, we will keep a watchful eye on their implementation in future deals.