What kind of remedies are acceptable to the authority? How often are behavioural remedies accepted in comparison with major merger control jurisdictions, such as the EU or US?
Typical remedial measures
Remedies accepted and approved by MOFCOM typically include the following restrictive conditions:
- Structural conditions, namely asset and/or business disposals, including divestiture of tangible assets and/or intangible assets, such as intellectual property rights.
- Behavioural conditions, such as opening infrastructure, licensing key technology, terminating exclusive agreements and “hold separate”, among which “hold separate” is a unique type of behavioural condition which seems to be favoured by MOFCOM.
- Comprehensive conditions which include both behavioural and structural conditions.
In practice, MOFCOM has traditionally tended to prefer behavioural remedies to structural remedies, making China the most prolific user of non-structural remedies.
Requirement for divestment remedies
An up-front buyer is required under certain circumstances
Under any of the following circumstances, MOFCOM may require a party under divestment obligations to find suitable buyers and to sign a binding sales agreement before a concentration transaction can be executed: (i) where there are greater risks for maintaining the competitiveness and marketability of the business to be divested before divestment; (ii) where the identity of a buyer is determined based on whether the business under divestment may regain competitiveness in the market; or (iii) where a third party claims rights on the business under divestment.
The third party purchasers of the businesses to be divested require MOFCOM approval for suitability
The party required to divest has either a 6 month deadline or a timeline as set out in MOFCOM's decision to find a suitable purchaser and enter into the final binding agreements related to the disposal. Unless it is otherwise agreed by MOFCOM, a party under divestment obligations shall nominate at least three potential buyers for MOFCOM to choose from.
Generally speaking, third party purchasers shall satisfy the following conditions to be a qualified buyer: (i) they should be independent of the parties to the concentration, (ii) they should possess the necessary resources and capabilities, and be willing to use the business to be divested to participate in market competition, (iii) they have obtained the approval of other regulatory authorities, (iv) they shall not borrow funds from the business operators participating in the concentration to purchase the business to be divested, and (v) they should meet other requirements raised by MOFCOM, depending on the specific circumstances of the concentration transaction.
In general, the DCCA can require the parties to take appropriate measures in order to secure stable and efficient competition. The remedies acceptable to the DCCA include a full or partial disposal of assets, companies, subsidiaries and other proprietary interests. Furthermore, the DCCA can request the parties to grant third party access to any supply systems, production machinery or distribution channels. As in the EU, the DCCA has a preference towards structural remedies as opposed to behavioural remedies, and behavioural remedies are generally only used in combination with structural remedies.
The CCPC has not published any formal guidelines on its approach to remedies. However, its practice to date has indicated a strong preference for structural (divestiture) remedies over behavioural remedies in merger cases. This is consistent with the approach taken by the European Commission and other international merger control agencies.
In determining the scope of divestitures, the CCPC approach follows closely that of the European Commission, in seeking to ensure that the divested business constitutes a viable standalone business that, if acquired by an appropriate purchaser, would have both the means and incentive to compete with the merged parties on a long-term basis (Premier Foods/RHM). The CCPC has not laid down any specific criteria by which it would assess a suitable purchaser, although the purchaser would need to demonstrate that it had the resources and capability of running the divestment business on a long-term basis. Similarly, while the CCPC has not adopted any general policy in relation to upfront buyers, it has previously required parties to suspend closing a transaction until an agreement with an approved purchaser for the divestment business was in place (Communicorp/SRH).
The CCPC is generally reluctant to accept behavioural remedies, but has done so in a small number of cases, where the imposition of a structural remedy would be disproportionate, inappropriate or unfeasible. The acceptability of such remedies is dependent on the facts of the particular case. For example, in eircom/Meteor, the CCPC’s predecessor, the Competition Authority, cleared the acquisition of Meteor Mobile Communications by eircom subject to eight conditions designed to address concerns regarding the transparency of cost allocation and internal transfers within eircom. These conditions allowed the Communications Regulator to obtain specific information about allocation of costs and internal transfers, as well as detailed accountancy statements from Meteor.
In 2011, the Commissioner issued Opinion 2/11 Guidelines on Remedies to Mergers, which Raise Reasonable Concern of Significant Harm to Competition (the "Remedies Guidelines"). According to the Remedies Guidelines, the Israeli Antitrust Authority prefers structural remedies which secure permanent change to the market. Structural remedies require less follow-up and enforcement compared to behavioural remedies, which control the conduct of the merged firm. Per the Remedies Guidelines, the Israeli Antitrust Authority may stipulate behavioural conditions as a temporary solution when:
- The competitive concerns involve a specific, well-defined behaviour which is easy to detect;
- A failing company will exit the market entirely without the merger; or
- Structural conditions are irrelevant.
In practice, there have been cases where the Israeli Antitrust Authority accepted certain behavioural remedies, including semi-structural remedies such as Chinese walls and personal separation between certain activities of the merged companies.
In cases where divestiture was required, the Israeli Antitrust Authority has been known to require an up-front buyer in some instances, but settled for later sale in other cases. In some cases, when the parties were allowed to perform the divestiture after the merger occurred, the parties had to sign documents that would allow the automatic transfer of the assets to the hands of a trustee who would perform the sale in case they failed to divest the assets within the allocated time-frame. In past cases of divestiture, it was required that the buyer be pre-approved by the Commissioner.
The JFTC states in its merger guidelines that the remedies should be considered on a case-by-case basis, but in principle should be structural (e.g., divestiture of assets) so as to maintain competition which would otherwise be harmed by the transaction. However, the JFTC also states that behavioural remedies may be appropriate or sufficient in some cases. Behavioural remedies include: (i) supply of relevant products to the competitors at production cost so that the competitors can compete with the parties; (ii) license of IP which is necessary to enter into the relevant market and compete with the parties; and (iii) measures to maintain competition between the parents of the joint venture (e.g., setting firewalls between the parents and the joint venture company).
For divestment remedies:
- does the authority require an up-front buyer, i.e. a requirement that the parties refrain from closing their transaction until they have signed a binding agreement for the sale of the divestment to a third party? If so, how often?
- does the authority require that third party purchasers of divestment businesses are approved by the authority as suitable? If so, what criteria does the authority apply when assessing whether a buyer is suitable?
As per the Guideline on Remedies Acceptable in Mergers and Acquisitions the parties can submit behavioural or structural remedies. The Remedies Guideline explains acceptable remedies such as:
- ending connections with competitors;
- remedies that enable undertakings to access certain infrastructure (eg, networks, intellectual property and essential facilities); and
- remedies on amending a long-term exclusive agreement.
The board conditions its clearance decision on the application of the remedies. Whether the parties may complete the merger before the remedies have been complied with depends on the nature of the remedies. Remedies may be either a condition precedent for the closing or an obligation post-closing of the merger. The parties may complete the merger if the remedies are not designed as a condition precedent for the closing.
Under Turkish merger control regime the structural remedies take precedence over behavioural remedies. To that end, the behavioural remedies can be considered in isolation only if (i) structural remedies are impossible to implement and (ii) behavioural remedies are beyond doubt as effective as structural remedies (Remedy Guideline, paragraph 77).
While there are few decisions (see e.g. Bekaert/Pirelli 22.01.2015, 15-04/52-25, Migros/Anadolu Endüstri Holding 09.07.2015, 29/420-117) where behavioural remedies were recognized, a great majority of the conditional clearance decisions rely on structural remedies (see e.g. AFM/Mars, 22.11.2012, 12-59/1590-M; ÇimSA/Bilecik, 02.06.2008, 08-36/481-169; Mey İçki / Diageo, 17.08.2011, 11-45/1043-356; Burgaz Rakı / Mey İçki, 08.07.2010, 10-49/900-314). In some of these cases (see e.g. Cadbury/Schweppes, 07-67/836-314, 23.08.2007), the parties initially proposed purely behavioural remedies, which ultimately failed.
The form and content of the divestment remedies vary significantly in practice. Examples of the Board’s pro-competitive divestment remedies include divestitures, ownership unbundling, legal separation, access to essential facilities, obligations to apply non-discriminatory terms, etc.
As per the Remedy Guideline, in the case of a divestiture, a monitoring trustee is appointed by the parties to control the divestment process, and such an appointment must be approved by the Authority (e.g. AFM, 09.08.2012, 12-41/1164-M).
As set out within the Remedy Guideline, the aimed effect of the divestiture will take place only and only if the divestment business is assigned to a suitable purchaser which is capable of creating an effective competitive power in the market. To make sure that the business will be divested to a suitable purchaser, the proposed remedy must include the elements that define the suitability of the purchaser in a way to cover the following requirements as well.
The decision of the Board within the framework of the commitments is also based on the presumption that a business that is viable in the market will be transferred to a suitable purchaser in a defined period of time. In terms of remedies that involve the divestiture of a business, it is the responsibility of the parties to find the suitable purchaser for the said business and to submit the said purchaser, together with an agreement to be signed with it, to the approval of the Board. Therefore, unless the parties commit that they will not carry out the transaction that is covered in the remedy with a purchaser that has not been approved by the Board; the Board shall not authorize the acquisition.
Approval of a possible purchaser by the Board is basically dependent on the following requirements:
- The purchaser must be independent of and not connected to the parties.
- The purchaser must have the financial resources, business experience, and the ability to become an effective competitor in the market through the divestment business.
- The transfer transaction to be carried out with the purchaser must not cause a new competition problem. In case such a problem exists, a new remedy proposal shall not be accepted.
- The transfer to the purchaser must not cause a risk of delay in the implementation of the commitments. Therefore, the purchaser must stand capable of obtaining all the necessary authorizations from the relevant regulatory authorities as concerns the transfer of the divestment business.
The above-mentioned conditions may be revised on a case-by-case basis depending on the particularities of the situation. For instance, in some cases an obligation may be imposed such that the purchaser is not one that seeks financial investment but that is active in the sector.
As per Remedy Guideline there are two methods that are accepted by the Board. The first method is for a purchaser fulfilling the above mentioned conditions to acquire the divestment business, within a limited period of time following the authorization decision, upon the approval of the Board. The second method is the signing of a sales contract with a suitable purchaser before the authorization decision (fix-it-first).
Determination of the method depends on uncertainties relating to the implementation of the remedy proposal and the divestiture of the business, i.e. the nature and scope of the divestment business, the risk of the business to lose its value during the transition period up to the divestiture, the risk that a suitable purchaser may not be found.
If the AMC reveals that the proposed transaction may result in the monopolisation or substantial restriction of the competition in any Ukrainian market, it may apply divestment/behavioural remedies to the concentration participants, such as:
- divestment of undertakings (assets, integral property complexes);
- prohibition to increase prices without reasonable grounds;
- prohibition to reduce the volume of production;
- prohibition to create barriers for new competitors;
- request to provide the AMC with certain data on the volume of production/supply during a specified time period, etc.
The AMC may apply the divestment remedies only in exceptional cases, if the proposed transaction may result in the monopolisation or substantial restriction of the competition in any Ukrainian market.
Historically, the FTC and DOJ have a strong preference for structural remedies (divestitures) as opposed to conduct remedies that would require ongoing oversight. More recently, however, the agencies have obtained conduct relief as well as structural relief.
For structural remedies, the agencies require that the divestiture be sufficient to remedy the identified competitive concern. The agencies require a binding commitment by the parties to divest the assets, and have a preference for an upfront buyer. In some circumstances the agencies may permit the parties to close their transaction subject to a commitment to find a buyer at a later date, but typically will require the ability to appoint a trustee to sell the divested assets if a sale is not completed in a timely way. In either event, the agencies require that a divestiture buyer be approved to ensure that the buyer is financially stable, will compete going forward, and that the divestiture will restore the competition lost through the transaction.
The merger control legislation provides for two kind of remedies:
- determination of the conditions that shall be fulfilled by the parties before clearance (e.g., adoption of access conditions to production facilities or IP rights, requirements on sale of certain assets to the third parties). This instrument applies only to mergers or incorporation of a company and is rather rare (only a few cases when the FAS has determined such conditions).
- possibility of issuing an order (behavioural or structural) together with the clearance decision. Such a possibility is rarely used by the authority.
The FAS is free to determine the conditions of the specific order, so the content always depends on the deal in question. Most orders are behavioural, contain preventive provisions and also reporting obligations on key changes in the activity of the company (pricing policy, cancellation of current agreements with customers, etc.). Structural orders are also possible when one party to the deal is a dominant company and the market is not sufficiently competitive.
Such orders may prescribe divestment obligations; in practice, however, the FAS does not define in detail the conditions of a future sale; it only determines the deadline for this. This means that, generally, closing of the deal is not conditional upon such sale.
Where competition problems are identified, remedies in the form of structural, behavioural or a combination of structural and behavioural, undertakings may be negotiated.
Remedies offered at the end of the first-phase review (see paragraph 5.4 above) with a view to avoiding a second-phase investigation are known as 'undertakings in lieu'. These need to be 'clear cut' solutions to the competition concerns. As such, structural remedies, in particular divestments, are likely to be considered more suitable than behavioural remedies. There is also a stated preference for structural remedies during the second-phase investigation.
There are examples of behavioural remedies being accepted by the CMA and its predecessors and, generally, the CMA is reasonably flexible regarding remedies.
Where divestments are required, but the CMA has doubts regarding the attractiveness of the divestment business to purchasers, or otherwise doubts the availability and interest of suitable purchasers for the business, the CMA will usually seek an 'up-front buyer' remedy. Where an up-front buyer remedy is required, the CMA will not issue its clearance decision unless and until the parties have entered into a legally binding agreement for the sale of the divestment business to a third party before the end of the period within which first-phase remedies must be finalised, such third party having been approved by the CMA as a suitable purchaser (see paragraph 7.2 below – that period will usually be extended to 90 working days where an up-front buyer is required). If a binding agreement for sale of the divestment business to a suitable purchaser cannot be concluded within the requisite timeframe, the CMA will proceed to open a second-phase investigation.
In principle, the CMA can require or accept remedies in respect of foreign-to-foreign mergers. In one case, a predecessor of the CMA (the Competition Commission) held that prohibition of a merger would be neither appropriate nor practicable given its global nature and because manufacturing took place overseas.
The Belgian Competition Authority will accept either behavioural or structural commitments – or a combination of both – in order to remedy competition concerns raised by a concentration. The Authority has no clear preference for either type of remedy and will accept the most suitable form of commitments in each case.
Pursuant to the Cartel Act, the Cartel Court may not prohibit the concentration in case the concentration can be combined with commitments or restrictions which prevent the creation or strengthening of a dominant position or by means of which a justification of the concentration is realized. If after the imposing of certain restrictions or commitments by the Cartel Court, the relevant circumstances change, the Cartel Court may alter or revoke restrictions or commitments upon application of an undertaking involved in the concentration.
In practice, commitments and restrictions are often offered in order to avoid Phase II proceedings or resolve them.
While the Austrian authorities have accepted behavioural remedies, there is a preference towards structural remedies. In comparison with the EUMR, the conclusion or imposing of remedies is more flexible in Austria, as there are no strict rules or deadlines governing them.
Both structural and behavioural remedies have been entered into. Structural remedies are preferred to cure competition issues while behavioural remedies are most often reserved for public interest concerns.
For divestment remedies:
- the Commission has not generally required an up-front buyer. It is anticipated that "fix it first" remedies may become a preferred mechanism in the future.
- the Commission will generally require that third party purchasers of divestment businesses are approved by the Commission. The parties will need to satisfy the Commission that the buyer will be able to maintain the competitive position of the business in the market, and that no substantial competition or public interest concerns are introduced.
In order to remedy any competition concerns identified, the FCA may accept two types of remedies in Phase 1 (Article L.430-5, II of the FCC) or in Phase 2 (Article L.430-7, III of the FCC): structural or behavioural remedies (or a combination of these two types of remedies). In each situation, the FCA will analyse the specific context to find the measures that best resolve the competition problems. In practice, the FCA prefers structural remedies but in certain cases, behavioural remedies may either remedy the competition issues on a standalone basis or supplement structural remedies. For instance, in the decision Altice/SFR (2014), Numéricable, Altice’s subsidiary, took both structural and behavioural undertakings (i.e., the commitment to allow competing operators to access its cable network).
Concerning divestment remedies, the Merger Control Guidelines provide that third party purchasers of divestment businesses must be approved by the FCA as suitable. Notably, the buyer must be independent from the parties and have the adequate competence and financial capacity in order to develop the divested activity (para. 535). The buyer can be identified by the parties either (a) during the FCA’s investigation – in this case the FCA decides upfront if the buyer is appropriate before issuing its decision; (b) after the FCA issues its decision but before the actual completion of the transaction; or (c) after the clearance decision and the completion of the transaction within a prescribed timeframe as from the clearance decision (para. 536).
Mexican enforcers have accepted in the past either behavioural remedies or structural remedies including divestment obligations. Depending on the impact certain transaction might generate, enforcers will generally aim to impose structural remedies given that behavioural remedies have only been imposed in some transactions that did not raise real competition concerns.
Considering that the current merger control regime obligates the enforcers to notify the parties when potential competition concerns have been found, remedies negotiation, specially structural remedies, have been addressed case by case. Therefore, relevant cases where structural remedies and divestiture obligations have been imposed (i.e. Pfizer-Nestle or Soriana-Comercial Mexicana) have not followed specific criteria to be resolved. This means that, for example, in the Pfizer-Nestle deal, the parties agreed the disincorporation of certain infant formula business to a third party before the closing of the transaction and on the Soriana-Comercial Mexicana deal, the parties were able to close months before actually finding third party buyers and actually selling certain stores.
On other cases such as Alsea-Wal-Mart for the acquisition of certain food-chain restaurants, Cofece subjected its clearance not to a divestiture obligation but rather to eliminating certain exclusivity provisions and forced contracting provisions in shopping malls that Alsea had imposed in the past.
Another example where divesture obligations were imposed but the parties were able to close without actually implementing the obligations before closing refers to the case where Cofece, aligned with US authorities, subjected its clearance regarding the Aeromexico-Delta transaction to the obligation of both airlines giving give up certain slots at local Mexican airport and at NY JFK airport and eliminate the duplication of designations on cross-border routes.
The FCO’s Phase II decision can include conditions and obligations that the parties must satisfy to avoid prohibition of the transaction. These will be typically structural in nature. By contrast, German law contains an express prohibition of behavioural remedies to the extent that they would subject the parties to a permanent behavioural control. Behavioural remedies that do not lead to such permanent monitoring of the parties’ conduct are possible, albeit very rare in practice. In most instances, the FCO will be prepared to accept behavioural remedies only if their effect is similar to structural undertakings.
If divestitures are offered, the FCO will ordinarily want to pre-approve the designated buyer so that the FCO’s clearance decision will be conditional on the agency agreeing to the designated buyer. The divestiture will need to be accomplished within a certain period following the conditional merger approval, often within a six-month term, to be extended by a further six months if the business has not been sold and a divestiture trustee will have to effect the sale.
Fix-it-first solutions are possible, but have remained rare exceptions to date.
The ICA can accept structural (such as sale or divestments of assets) or behavioural remedies. On the basis of its decisional practice, the ICA appears to have a preference for structural remedies, due to the difficulties in monitoring the implementation of behavioural remedies.
Violation of the binding commitment contained in the final decision of the ICA might lead to the opening of an investigation by the ICA, and may result in the imposition of fines from 1 to 10 per cent of the worldwide turnover of the entity resulting from the transaction.
The ACCC may accept court enforceable undertakings to address competition concerns.
Accepting an undertaking is a matter of discretion for the ACCC. It has a preference for 'structural' undertakings (for example, divestment, where it will wish to approve a buyer as suitable (for example, independent and having expertise and resources to be an effective long-term competitor)). Divestment is not necessarily required prior to closing, although this is preferred.
While the ACCC can also accept 'behavioural' undertakings, it is generally reluctant to do so where such undertakings will require ongoing supervision after the merger, will be difficult to enforce, or are not accompanied by a structural undertaking.
Both behavioural and structural remedies are possible but the Bureau has expressed a preference for structural solutions as they are easier to implement and administer. The Bureau’s openness to and acceptance of behavioural remedies is similar to the US and EU agencies. While the Bureau does not typically require an upfront buyer, it does express a preference for “fix-it-first” remedies, which have the effect of making the remedy appear more attractive and effective.
Remedy purchasers must be approved by the Commissioner and must meet certain criteria. In particular, the Commissioner will be concerned with whether the buyer (i) has the financial and operational capability to run the business effectively, (ii) is independent of the parties, and (iii) has the intention to be an effective competitor in the relevant market.