China: China Issues New Guidelines on the Implementation of Divestiture Commitments

Last Updated: 17 August 2010
Article by Colin Liu, Steve Yu and Nicolas Zhu

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.

To view the article in full, please see below:




Full Article

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.

Divestiture process

The Provisions divide divestiture into two stages as follows:

Stage I

Reaching a transfer agreement, which requires that the party who is asked by MOFCOM to divest its business or assets ("Divesting Party") must identify 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.

Stage II

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.

Purchaser

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 organisation.

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 honour the results of the mediation.

If the Divesting Party fails to identify 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.

Conclusion

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.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 05/08/2010

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions