China Law Insight : China Law Insight: China Commercial and Intellectual Property Lawyers and Attorneys, Full Service Law Firm: King & Wood

 The market for the supply of potash is highly concentrated, with Potash being one of the large players globally. According to Potash’s 2009 annual report, Potash currently supplies 20% of world production. According to media reports, China is one of the largest importers of potash in the world (along with India, the United States and Brazil) and it appears that chinese companies buy up approximately 7% of the output of Potash(3). In this regard, the sale of PotashCorp is likely to have some impact on Chinese potash buyers and in the fertilizer industry in China.

The media has reported that there has been a lot of concern amongst the players in the Chinese agriculture industry in relation to the bid. This is not BHP’s first bid to buy up a potash company – in 2008 and early 2010, BHP acquired Canadian potash explorers Anglo Potash Limited and Athabasca Potash Inc. Hence, if the bid is successful, BHP will become a major player in the global potash industry. Chinese agricultural industry players (including fertilizer distributors, industry associations and even farmers) are concerned that BHP will significantly raise potash prices – and in light of the level of concentration in the global potash market – customers would not have many other choices. In light of this, Chinese agricultural industry players are currently urging the antitrust authorities in China to investigate into this potential acquisition and specifically into the acquisition’s impact on the potash industry in China.

Pursuant to the Anti-Monopoly Law (AML), merging companies which meet specified turnover thresholds (in relation to their global turnover and turnover within China) are required to seek clearance in respect of their mergers from the Ministry of Commerce (MOFCOM).

It is unclear if BHP and/or Potash meet the turnover thresholds and would subsequently be required to file a merger control notification in China. If so, this would be an interesting case to follow, given the highly concentrated global potash market.

Even if BHP and/or Potash did not meet the turnover thresholds in China, pursuant to the merger control regulations in China, MOFCOM would still have the right to commence investigations into this acquisition (provided they had a reason to believe that the acquisition has or may have the effect of eliminating or restricting competition in the relevant market in China). At the conclusion of any such investigations (and at the conclusion of the acquisition), if MOFCOM is of the view that the acquisition has or may have the effect of eliminating or restricting competition in China, then MOFCOM would be able to apply a variety of remedies, including fines on the merging parties.

Currently, it is unclear if the BHP-Potash deal will go ahead. There is some speculation that Chinese state owned enterprise Sinochem Group, could launch a competing bid. Potash, owns a 22% stake in Sinofert (a Sinochem subsidiary), one of China’s largest fertilizer producer.

It will be interesting to follow the developments in relation to this BHP-Potash bid – it appears that significant antitrust issues may arise in relation to this proposed deal.

[1] BHP Billiton is made up of BHP Billiton Plc (based in the UK) and BHP Billiton Limited (based in Australia).

[1] Potash is short for potassium carbonate it is a globally traded commodity used in fertilizers. 

[1] See for instance: http://www.reuters.com/article/idUSTRE67G1R620100902

 The following are some salient features of these recently enacted divestiture regulations:

• the objective of the regulations are to ensure that any divestiture or assets or business pursuant to the merger control regime is conducted smoothly (Article1);
• business operators who are required to divest assets pursuant to the merger control regime (known as “divestiture obligors”) would have to divest their assets within a time limit stipulated within a merger control decision by MOFCOM (including finding a purchaser and enter into the relevant sales agreements) (Article 3);
• divestiture obligors may appoint a “supervision trustee” and a “divestiture trustee” to assist in the divestiture process. The former will supervise the divestiture process and the latter would assist with locating a purchaser as well as assist with the actual sale process (Article 4);
• supervision trustees and divestiture trustees must
  • be equipped with the resources and capabilities necessary for conducting trust businesses; and
  •  not possess substantial interests in any of the business operators participating in the merger under scrutiny.

In addition, supervision trustees and divestiture trustees may be the same natural person or legal entity (Article 5); and

• purchasers of divested business must satisfy the following requirements;
  • they must not possess substantial interests in any of the business operators participating in the merger under scrutiny;
  • they must be equipped with the necessary resources and capabilities and must be willing to maintain and develop the business to be divested; and
  •  the purchase of the business to be divested must not result in eliminating or restricting competition (Article 8).

It is timely that MOFCOM has enacted these divestiture regulations. These regulations provide some sort of structure from which business operators can expect to divest their assets pursuant to a merger control decision issued by MOFCOM. In our view, these regulations are consistent with the divestiture regulations in the more experienced antitrust jurisdictions such as the European Union.

In practice, it is important to work closely with MOFCOM when a business has been told to divest pursuant to a merger control decision. Regular consultations with MOFCOM will ensure that the divestiture process goes smoothly. In our experience, it takes approximately 6 months for a business to find a suitable purchaser for the divested business and to reach the relevant agreements for the sale. It is also noteworthy that MOFCOM has stipulated that divested businesses should be transferred to the purchaser within 3 months after the execution of the sales and other agreements, although this time limit may be extended with MOFCOM’s consent.

Novartis and Alcon (the parties) are global suppliers of pharmaceutical products. Post-acquisition, Novartis would become the majority shareholder in Alcon. This transaction is worth approximately US$28 billion.

King & Wood acted as the sole Chinese legal counsel in respect of the antitrust aspects (including the antitrust filing) of this transaction.

Antitrust issues

During consultations with Novartis, Alcon and other stakeholders, MOFCOM was of the view that there were antitrust concerns in the following relevant markets: (a) the market for ophthalmic anti-inflammatory and anti-infective combination products; and (b) the market for lens care products. (2)

MOFCOM was concerned about the impact of the acquisition on the markets described in (a) and (b) above (in light of Novartis’ and Alcon’s market shares in the relevant markets both globally and in China).

Ophthalmic anti-inflammatory and anti-infective combination products

MOFCOM noted that the combined global shares of the parties in relation to ophthalmic anti-inflammatory and anti-infective combination products was over 55%. The parties’ combined shares for the same product market in China was over 60% (Alcon’s share is over 60%; whereas Novartis’ share is less than 1%).

In its antitrust submission to MOFCOM, Novartis articulated that it had planned to cease manufacturing and supplying its ophthalmic anti-inflammatory and anti-infective product known as “Infectoflam” (both in China and globally).

As a condition of clearance, MOFCOM made it mandatory that Novartis cease to supply Infectoflam in China by the end of 2010.(3)   MOFCOM stipulated that Novartis was not to supply Infectoflam in China for a period of 5 years. In addition, Novartis is also not to supply a different version or type of product like Infectoflam under a different brand-name in China.

Lens care products

The parties’ combined global shares in relation to lens care product is almost 60%. In addition, the parties’ combined shares for the same product market in China is almost 20%. Post-acquisition, the parties would become the second largest supplier of lens care products in China.

MOFCOM noted that one of Novartis’ subsidiaries (Shanghai Ciba Vision Trading Co., Ltd) (Shanghai CV) has in place a distribution agreement with Haichang Contact Lens Co., Ltd (Haichang) to distribute lens care products in China. Haicheng is currently the largest manufacturer and supplier of lens care products in China (its share in China is over 30%).

MOFCOM was concerned that the parties would be able to collude on pricing and other issues with Haichang (via the distribution agreement), post-acquisition. According to MOFCOM, such collusion would restrict or exclude competition in the lens care product market in China. In light of this concern, MOFCOM stipulated that Novartis terminate its distribution agreement with Haichang, within 12 months after closing.

Comments

In its public announcement, MOFCOM did not take a stand as to whether the relevant geographic markets for the ophthalmic anti-inflammatory and anti-infective combination product market as well as for the lens care product market was global or China-wide. However, it appears that MOFCOM might have taken the parties’ shares in both the global context as well as in the China context into consideration, in determining whether the acquisition would eliminate or restrict competition in China.

The Novartis and Alcon transaction is a cross-border or global deal. The parties have filed merger review applications in some 19 jurisdictions. Currently, the acquisition has been cleared by antitrust authorities in most of these jurisdictions.

(1) The first 5 mergers that were approved with conditions were: (a) the acquisition of Lucite International Group Limited by Mitsubishi Rayon Co; (b) the acquisition of Anheuser Busch Companies Inc by InBev NV/SA; (c) the acquisition of Delphi Corp by General Motors Company; (d) the acquisition of Wyeth Corp by Pfizer Inc; and (e) the acquisition of SANYO Electric by Panasonic Corporation.

(2) In their announcement dated 13 August 2010, MOFCOM did not stipulate whether the relevant geographic market was global or limited to China only.

(3) Note that MOFCOM did not explain in their announcement how this restriction would assist in reducing any anti-competitive or harmful effect of the acquisition in the global or China-wide ophthalmic anti-inflammatory and anti-infective combination product market.
 

• From 2008 to June 2010, MOFCOM accepted 140 merger review applications for review. Out of these 140 merger review applications, MOFCOM has completed review of approximately 90% of the cases.
• 95% of these merger reviewed were approved unconditionally. In the European Union (EU) and in the United States (US), on average only 93% of mergers are approved unconditionally.
• Thus far, only 5 mergers have been approved with conditions and only 1 merger was rejected (Coca-Cola’s proposed acquisition of Huiyuan).
• The merger control review process in China is divided into 3 stages. The first stage of review lasts no more than 30 days; the second stage of review spans for a further 30 to 90 days; and the third stage of review spans for a maximum of 60 days after the second stage. The entire merger control review process is not to exceed a total of 180 days.
• Out of all the mergers reviewed, more than half of the mergers were cleared within the first stage; the remainder of the mergers were cleared within the second and third stages.
• Shang Ming noted that the proportion of mergers entering the second stage of review was somewhat higher than that in the US or the EU. Shang Ming commented that at times, merger reviews enter the second stage of review not due to antitrust issues but due to process issues (e.g. MOFCOM undertaking public consultations etc).
• 62% of the merger applications received by MOFCOM are horizontal mergers; 14% of the merger applications received by MOFCOM are vertical mergers; and the remainder of the merger applications received by MOFCOM are conglomerate mergers.(2)
• A majority of the cases reviewed by MOFCOM involved business operators in the manufacturing industry. In addition, three-quarters of mergers accepted for review by MOFCOM involved public listed business operators.
• Shang Ming noted that some commentators believe that Chinese State Owned Enterprises (SOEs) obtain “special treatment” from MOFCOM pursuant to merger clearances. Shang Ming emphasised that this was not the case. All business operators, including SOEs, privately-owned companies and foreign companies are treated equally by MOFCOM.
• MOFCOM has received more merger clearance applications which involve foreign companies (as opposed to merger clearance applications which involve domestic companies only). Shang Ming said that this could be because the “financial strength” of these multinational foreign companies trigger the turnover notification thresholds more easily. In addition, Shang Ming also noted that since the global financial crisis, foreign multinational companies have been quite active acquirers.

It is timely for MOFCOM to conduct a stock-take of the merger control process in China, since its inception in 2008. It is interesting that a significant number of merger applications received by MOFCOM spill into the second stage of review. Shang Ming’s explanation that some of these “second stage review” merger applications do not necessary involve complex antitrust issues, but rather “process” issues, is also interesting.

In light of the above, companies that are interested in mergers or acquisitions that meet the turnover thresholds pursuant to the AML should ensure that they factor in the notification and review periods into their planning processes.

(1) The AML was enacted on 1 August 2008.

(2) The term “conglomerate mergers” refers to mergers involving businesses that operate in different product markets (i.e. they are neither “vertical” nor “horizontal” mergers).