By Susan Ning, Chai Zhifeng and Angie Ng
On June 2, 2011, Ministry of Commerce (MOFCOM) publicly announced the first conditional merger clearance in 2011. At its  No. 33 Announcement, MOFCOM cleared Uralkali’s proposed acquisition of Silvinit (the Parties) (both potash producers based in Russia) with conditions. This is the 7th conditional merger clearance since the enactment of the Anti-monopoly Law (AML) in 2008. MOFCOM is obliged by statute to publish conditional clearances.
The following are the salient points to note vis-à-vis this conditional clearance:
- MOFCOM officially accepted the Parties’ merger control submission on 14 March 2011. This filing entered into Phase 2 review on 12 April 2011. MOFCOM decided to clear this transaction with conditions on 2 June 2011.
- During the merger control review, MOFCOM requested that the Parties submit the following information: information to do with overlaps in relation to the types of quantity of potash products produced by the parties; information to do with pricing and the sales model of both parties; market share information (both Chinese and worldwide market shares); information to do with the potash industry.
- MOFCOM sought opinions from the following third parties: government departments, trade associations, suppliers, traders and industry experts in order to obtain a better understanding of the relevant products, distribution of potash, market definition, market structure as well as the production, operation and trading patterns of the potash industry.
- MOFCOM held that the relevant product market was the market for potassium chloride. MOFCOM took into consideration that China is one of the largest importer of potassium chloride in the world, relying on import for nearly 50% of its domestic consumption. MOFCOM further noted that more than 50% of China’s import of potassium chloride is derived from Uralkali, Silvinit and their affiliates.
- MOFCOM noted that potassium chloride is a natural resource concentrated in a few jurisdictions. The top 3 potassium chloride jurisdictions in the world possess more than 80% of the world’s potash resources. Global production and sales of potassium chloride are concentrated in the hands of a few companies. The Parties’ concentration would result in the world’s second largest export supplier of potassium chloride. The Parties’ combined global market share will exceed 1/3 of the world’s supply of potassium chloride.
MOFCOM was of the view that the transaction is likely to restrict or exclude competition. In order to counter these anticipated anti-competitive effects, MOFCOM has imposed the following four conditions on the Parties:
a) the combined entity should continue to maintain its current sales practices and procedures. The combined entity should continue to supply potassium chloride to China via direct trade. In addition, the combined entity should continue to channel potassium chloride to China via rail or sea in a reliable and diligent manner;
b) the combined entity should continue to meet China’s demands for potassium chloride (both in terms of volume and range of potassium chloride products), including potassium chloride containing 60% and 62% of potassium oxide. In addition, the combined entity should continue to supply its customers in China the types and quantities of potassium chloride required for a variety of uses, including for agricultural use, industry use and "special industry" use;
c) in relation to price negotiations with Chinese customers, the combined entity should keep to the usual consultation processes (including taking into account the history of customer transactions and the unique features of the Chinese market). The usual negotiations, including price negotiations in relation to spot trading or trading by contract (six months or a year) should apply;
d) every six months (or upon request), the combined entity should report to MOFCOM that it has complied to this list of conditions and commitments. MOFCOM possesses the power to supervise and inspect the implementation of the above restrictive conditions. MOFCOM also has the right to impose sanctions on the combined entity, should it fail to adhere to any of the above conditions.
The four conditions listed above are behavioral conditions drafted in very broad terms. This leaves a lot of scope for MOFCOM to interpret these conditions as they see fit going forward.
It is clear that the objective of these conditions are to ensure the stability of the adequate supply of potassium chloride into China.
It is interesting to note that while MOFCOM has determined product market definition, they did not express a view on geographic market definition – however, in MOFCOM’s decision, there are many references to the global nature of the potassium chloride industry – thus it is likely that MOFCOM analysed the deal from a global perspective.
Pursuant to the AML, if the combined entity does not adhere to the conditions listed above, they are at risk of facing a range of sanctions including: a fine of not more than RMB500,000; orders to cease implementing the transaction; and orders to divest within a stipulated period.