In November 2009, the Ministry of Commerce of China ("MOFCOM") issued the decision to clear the Panasonic/Sanyo deal with conditions, one of which is for Panasonic to divest its nickel-hydride car batteries business in Japan. On February 9, 2011, the sale was sealed with Panasonic selling this business to Hunan Corun New Energy Co., Ltd. for about RMB 40 million.
Similarly in 2009, the Pfizer/Wyeth deal and the Mitsubishi Rayon/Lucite deal were also cleared by MOFCOM with such conditions that certain business or assets shall be divested. Currently (and since the enactment of the Anti-Monopoly Law in 2008), three of the six merger filings which were conditionally approved by MOFCOM involve merger remedies in the form of business divestiture.
This article outlines several issues to note in relation to undertaking a divestiture as a condition for merger clearance, based on our experience having handled conditional clearance cases in China (and based on what we know of conditional clearance cases overseas).
1 Scope of the Business to be Divested
First, the scope of the business to be divested to a large extent will depend largely on whether the level of competition in the relevant market may be enhanced after a purchaser acquires such a business or a proportion of a business.
The scope of the divested business may be too narrow, if the following factors are not properly addressed:
(1) Life cycle of products. Problems may arise if
potential change in the market demand for the divested business as
well as the products are not taken into full consideration.
For example, for a divested product whose life cycle is short and
already in the decline stage, market demand may shift to updated
products developed by the divestiture obligor.
(2) Intellectual property issues. Problems may arise if the intellectual property rights essential for the divested business are not included in the scope of the divested business. Or the transfer of the intellectual property may be challenged by third parties.
(3) Up-stream/down-stream concerns. The viability of the business may be endangered if the purchaser's demand for the upstream supply of essential raw materials or downstream sales channel cannot be ensured.
2 Finding a Suitable Purchaser
At the time when the competition authorities make the decision to require the seller to divest, the antitrust authorities and the divestiture obligor do not know who exactly the purchaser will be. It therefore is hard to have an accurate evaluation of what will happen post-divestiture. In other words, whether the purchaser of the business is able to develop the business, and whether competition may be enhanced after the purchaser takes over the divested business.
On the other side of the fence the scope of the divested business may not be able to cater to the needs of the final purchaser. For example, some potential purchasers may need to rely on the entire sales channel of the seller, whereas other potential purchasers may only want to take over the key persons to avoid extra cost.
In overseas jurisdictions, we understand that there are cases where purchasers are allowed to have the discretion to identify the scope of the divested business. For example, we have seen cases in EU in which the antitrust authorities only set the scope of the "core" business to be divested, leaving the purchaser some discretion to decide whether to purchase some optional business segments. Given that the purchaser and the antitrust agencies may have vastly different aims, we are of the view that such practices should be supervised in order to ensure the development of the divested business for the benefit of consumers.
3 Degree of Transparency in Description of
Both the purchaser and the seller may be affected by the degree of transparency in the description of the business to be divested. If the seller intentionally outlines a vague description of the business so as to include some non-performing assets in the divested business, the future operation of the purchaser will be negatively affected.
4 Transition period
In order to ensure the smooth take-over of the divested business, normally the antitrust authorities will set a transition period, requesting the seller to provide necessary training and technical support to the purchaser.
A potential issue here is that the purchaser may eventually find itself dependent upon the divestiture obligor one way or the other. It may therefore affect its further conduct in the market and consequently the divested business may be negatively affected by the divestiture obligor.
Overall, we note that China is still very much in its infancy in relation to merger control remedies such as divesting business. The Anti-Monopoly Law (along with the merger control regime) was enacted or became effective only in 2008 and thus far, there are a limited amount of conditional clearance cases to glean from. Much can be derived from the experiences of the more mature antitrust jurisdictions such as the US and the EU.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.