On July 8th, MOFCOM (Ministry of Commerce of People’s Republic of China) released The Provisional Rules on Implementing Divestiture of Assets or Businesses(“Provisional Rules”). This legislative move can be seen as China’s aggressive while at the same time, practical effort in the perfection of Chinese concentration review regime within the framework of Chinese Anti-monopoly Law (“AML”).
So far, China has only slightly less than two years of antitrust enforcement. Yet some antitrust professionals have already been amazed by how China has quickly become the world’s third most important merger control jurisdictions, and its influence is still ascending. MOFCOM, SAIC and NDRC, China’s three AML enforcement authorities, have issued nearly 20 regulations, guidelines, notices and provisions to implement AML in the areas of concentration, cartels, abusing dominance and administrative monopoly.
Divestiture of assets or businesses is a critical relief measure in concentration reviews. From its conception to birth, the Provisional Rules is unveiled at amazingly fast speed. Based on my personal source of information, there are two reasons that explain the fast-track promulgation of Provisional Rules. The first has to do with its urgent necessity. Since MOFCOM started to review concentrations after AML became effective in August, 2008, MOFCOM has imposed conditions on clearance of concentrations in five cases. Structural reliefs, namely divestiture of assets and businesses, has been applied in those five cases without any official guidance on how those reliefs should be fashioned. This has aroused widespread criticism, prompting MOFCOM to set the agenda for promulgation of specific rules on divestiture as relief measures. The second reason is that MOFCOM is apt to learn from experience of EU and US merger review enforcements, and we can find some trace of influences from these two major antitrust jurisdictions between the lines of Provisional Rules.
To summarize the characteristics of the Provisional Rules, three stand out:
First, the trustee system prevalent in EU and US models has been transplanted into Provisional Rules. It should be noted that according to Chinese Trust Law, trust is dramatically different from common law trust, because in practice, Chinese trust system is limited to financial sector. Provisional Rules invent two types of trustees, namely supervisory trustee and divestiture trustee. Supervisory trustee is appointed to supervise the whole process of divesting assets or businesses, while divestiture trustee is appointed when the concentrating parties fail to divest property or business within prescribed period of time and charged with locating suitable buyer. It remains to be seen whether Trust Law of PRC is applicable to these types of trustees.
Second, ambiguous and contradictory provisions exist in the dual trustee system. In accordance with the Provisional Rules, supervisory and divestiture trustees receive authorizations from trustor, or the concentrating undertakings ordered to divest assets or businesses, while at the same time, they are fully responsible towards MOFCOM, and shall report their works to MOFCOM. Similar to administrator in Chinese Bankruptcy Law, those trustees are paid by trustors, but shall act in the interest of MOFCOM, ultimately the public interest. That’s where conflict of interest may arise, i.e., the trustees assume private interest and public interest at the same time in the course of divestiture.
According to Provisional Rules, qualified individual, legal person or other institution are eligible to become trustees. They shall be recommended by concentrating undertakings and approved by MOFCOM. In practice, the most likely candidates for trustees are law firms, accounting firms, investment banks, consulting companies and antitrust professionals.
The last point noteworthy is who will be qualified buyers of divested assets or businesses. According to Provisional Rules, buyers shall be independent from concentrating parties, and have no substantial interest relations with the concentrating parties. The qualified buyers shall have necessary resources, capacity and aspiration to maintain and develop the divested business or assets. Where necessary, the buyers shall also get approvals from other regulatory authorities.
In the divestiture proceeding, buyers of divested assets or businesses may come up in two situations. Initially, concentrating parties ordered to divest assets or businesses are permitted to find suitable buyer within prescribed period of time, and the qualification of the buyers shall be scrutinized by supervisory trustees. Where such buyer fails to be located, the divestiture trustees will come into play and seek out buyers for the divested assets or businesses. It becomes clear that trustees have large discretion and power in the selection of buyers. To a large extent, a well-chosen trustee is halfway success of divestiture.