By Susan Ning, Hazel Yin, Ziqing Zheng, Kailun Ji
August 1st, 2008 marks the fifth anniversary of China’s Anti-Monopoly Law (“AML”). Along with debates and controversies, the AML is gradually taking root and has contributed to shaping the economic landscape and competition status in China.
During the past 5 years, the Ministry of Commerce (“MOFCOM”), the authority in charge of merger control, has cleared more than 640 cases, including 19 cases that were cleared with conditions and 1 case that was denied.1 MOFCOM has been making continuous progress in improving its enforcement capabilities, which are highlighted by the increasingly mature merger remedy regime. This article presents an overview of the merger control regime, in particular the merger remedies regime in China from the perspective of practitioners.
1. Overview of Merger Control Regime and Cases Cleared with Conditions
As of June 30, 2013, MOFCOM received 754 cases in total, officially accepted 690 cases and cleared 643 of them, including 18 conditionally approved cases and 1 forbidden case (Coca Cola’s acquisition of Huiyuan). The following chart indicates the yearly statistics of all cases cleared (with or without conditions) and cases conditionally approved by MOFCOM.2
1.1 Industries Involved in Cases with Conditions and Types of Concentration
According to the Industrial Classification for National Economic Activities (GB/T 4754-2011) of the National Bureau of Statistics, 5 industry categories are involved in the 18 cases with conditions, including “manufacturing”, “production and supply of electricity, heating, gas and water”, “information transmission, software and information service industry”, “wholesale and retail”, and “mining industry”. In particular, a total of 12 cases relate to the manufacturing industry. (See Table 1 below)
Horizontal mergers usually are considered more likely to cause competition concerns. Similar as law enforcement authorities in other jurisdictions, MOFCOM pays closest attention to horizontal mergers. Among the 18 conditionally approved cases, 11 cases relate to horizontal mergers, and 1 case relates to both horizontal and vertical relationship. Only 4 cases relate to vertical relationship and the other 2 cases concern conglomerate relationship. (See Table 1 below)
Table 1: Industries Involved in Cases with Conditions and Types of Concentration
Industry |
Sub-Industry |
Case |
Types of Concentration |
Manufacturing Industry | Alcohol, drinks and refined tea manufacturing industry | Acquisition of Inbev N.V./S.A. by Anheuser-Busch Companies Inc. (2008) |
Horizontal |
Chemical raw materials and chemical manufacturing industry | Acquisition of Silvinit by Uralkali (2011) |
Horizontal |
|
Acquisition of Lucite by Mitsubishi Rayon (2009) |
Horizontal + Vertical |
||
Establishment of Joint Venture between HenkelHong Kongand Tiande Chemical (2012) |
Vertical |
||
Pharmaceutical manufacturing industry | Acquisition of Alcon by Novartis (2010) |
Horizontal |
|
Acquisition of Wyeth by Pfizer (2009) |
Horizontal |
||
Specialized device manufacturing industry | Acquisition of Savio by Penelope (2011) |
Horizontal |
|
Automobile manufacturing industry | Acquisition ofDelphiby General Motor (2009) |
Vertical |
|
Electric machinery and equipment manufacturing industry | Acquisition of Sanyo by Panasonic (2009) |
Horizontal |
|
Computer, communications and other electric device manufacturing industry | Acquisition ofSamsung Hard Disk Driveby Seagate (2011) |
Horizontal |
|
Acquisition ofHitachiGlobal Storage Technologies by Western Digital (2012) |
Horizontal |
||
Manufacturing of railway, shipping, aircraft and other transportation equipment | Acquisition of Goodrich by United Technologies (2012) |
Horizontal |
|
Production and Supply of Electricity, heating power, gas and water | Production and supply of gas | Establishment of Joint Venture between General Electric and Shenhua (2011) |
Conglomerate |
Information Transmission, Software and Information Service Industry | Telecommunication, broadcasting and satellite transmission service | Acquisition of Motorola Mobility by Google (2012) |
Vertical |
Software and information technology service | Establishment of Joint Venture between ARM Holdings, Giesecke & Devrient and Gemalto (2012) |
Vertical |
|
Wholesale and Retail | Retail | Acquisition ofNew HavenHolding by Walmart (2012) |
Conglomerate |
Wholesale | Acquisition of Gavilon by Marubeni (2013) |
Horizontal |
|
Acquisition of Xstrata by Glencore (2013) |
Horizontal |
||
Mining Industry | Non-Ferrous Metal | Acquisition of Xstrata by Glencore (2013) |
Note: The rejected acquisition of Huiyuan by Coca Cola (2009) is a conglomerate concentration related to “alcohol, drinks and refined tea production industry”.
1.2 Review Timeline for Conditionally Approved Cases
All conditionally approved cases, but for the earliest two, were closed at Phase II or extended Phase II, showing that MOFCOM has become increasingly cautious when imposing conditions. (See Table 2 below)
Table 2: Timeline for Cases Conditionally Approved by MOFCOM
Year |
Number of Cases |
||
Phase I |
Phase II |
Extended Phase II |
|
2008 |
1 |
— |
— |
2009 |
1 |
2 |
1 |
2010 |
— |
1 |
— |
2011 |
— |
2 |
2 |
2012 |
— |
1* |
5 |
2013** |
— |
1* |
1* |
** Statistics updated as of Q2 of 2013.
In November 2008, when the first conditional case (AB/Inbev) was issued, information disclosed in the final decision was very limited. Five years later in the Glencore/Xstrata (2013) case, not only did MOFCOM provide detailed competition analysis of market share, market power, market entry and influence upon consumers, but also disclose, for the first time, the full text of the parties’ final commitment proposals. This shows that MOFCOM has made great progress in merger remedy practice, and has been making efforts to increase transparency of its law enforcement.
2. Types of Remedies
Although the AML is largely influenced by EU experiences, MOFCOM has gradually developed its own methodology and distinguished itself from its foreign counterparts. For example, MOFCOM was the only antitrust authority imposing conditions upon such global transactions as General Motor/Delphi (2009), Seagate/Samsung (2011), Google/Motorola (2012) and Marubeni/Gavilon (2013). In other transactions, such as WD/Hitachi (2012) and Glencore/Xstrata (2013), MOFCOM imposed conditions different from other jurisdictions. We hereby analyze the structural and behavioral conditions as follows:
2.1 Structural Remedies
MOFCOM has been relatively cautious in the application of structural conditions, which usually mandate the divestiture of the parties’ assets or businesses. Such reluctance may be prompted by MOFCOM’s intention to preserve the original structure of a transaction to the extent possible. Of the 18 conditionally cleared cases, 7 cases involve structural conditions and all of them are horizontal mergers.
Structural conditions in these cases include not only typical ones, i.e. divesture of existing independent business unit, but also relatively less common ones, such as divesture of assets, production capability, shares in affiliates and shareholders’ interests that do not constitute independent business unit. (See Table 3 below)
Table 3: Cases Involving Structural Remedies
Types of Structural Conditions |
Cases |
|
Typical Structural Conditions | Divesture of existing independent business unit | Acquisition of Wyeth by Pfizer |
Acquisition of Sanyo by Panasonic | ||
Atypical Structural Conditions | Divesture of assets, production capability, shares in the affiliates and shareholders’ interests that do not constitute independent business unit | Acquisition of Lucite by Mitsubishi Rayon |
Acquisition of Savio by PenelopeAcquisition of Sanyo by Panasonic | ||
Acquisition of Sanyo by Panasonic | ||
Acquisition ofHitachiGlobal Storage Technologies by Western Digital | ||
Acquisition of Goodrich by United Technologies | ||
Acquisition of Xstrata by Glencore |
2.2 Behavioral Remedies
In contrast to the experiences in some other major jurisdictions, MOFCOM employs a more receptive approach to conduct remedies. The majority of the 18 conditionally cases involve behavioral conditions. Some of the behavioral conditions are also frequently used by foreign authorities, such as the opening up commitment, non-discrimination terms, termination of exclusive contracts, and transitional assistance obligations. Some, on the other hand, are less common, such as the commitment of supply and service standard, prohibition of market expansion, hold-separate and prohibition of certain market behaviors. (See Table 4 below)
Table 4: Cases Involving Conduct Remedies
Types of Conduct Remedies |
Cases |
|
Typical Conduct Remedies |
Opening up commitment |
Acquisition of Sanyo by Panasonic |
Acquisition of Motorola by Google |
||
Establishment of JV between ARM Holdings, Giesecke & Devrient and Gemalto |
||
Non-discrimination |
Acquisition ofDelphiby GM |
|
Establishment of JV between Henkel and Tiande |
||
Acquisition of Motorola by Google |
||
Acquisition of Gavilon by Marubeni |
||
Establishment of JV between ARM Holdings, Giesecke & Devrient and Gemalto |
||
Firewall |
Acquisition ofDelphiby GM |
|
Acquisition ofSamsung Hard Disk DriveBusiness by Seagate |
||
Acquisition ofHitachiGlobal Storage Technologies by Western Digital |
||
Acquisition of Gavilon by Marubeni |
||
Termination of exclusive contracts |
Acquisition of Alcon by Novartis |
|
Transitional assistance obligation |
Acquisition of Wyeth by Pfizer |
|
Acquisition of Goodrich by UTC |
||
Commitment to refrain from abuse of dominance |
Establishment of JV between General Electronics and Shenhua |
|
Acquisition ofSamsung Hard Disk DriveBusiness by Seagate |
||
Acquisition ofHitachiGlobal Storage Technologies by Western Digital |
||
Establishment of JV between ARM Holdings, Giesecke & Devrient and Gemalto |
||
Atypical Conduct Remedies |
Commitment of supply and service standard |
Acquisition of Silvinit by Uralkali |
Acquisition ofSamsung Hard Disk DriveBusiness by Seagate |
||
Acquisition ofHitachiGlobal Storage Technologies by Western Digital |
||
Acquisition of Xstrata by Glencore |
||
Prohibition of market expansion |
Acquisition of Anheuser-Busch by Inbev |
|
Acquisition of Lucite by Mitsubishi |
||
Acquisition of Alcan by Novartis |
||
Hold-separate |
Acquisition ofSamsung Hard Disk DriveBusiness by Seagate |
|
Acquisition ofHitachiGlobal Storage Technologies by Western Digital |
||
Acquisition of Gavilon by Marubeni |
||
Prohibition of certain market behavior |
Acquisition ofNew HavenHolding by Walmart |
In Seagate/Samsung (2011), WD/Hitachi (2012) and Marubeni/Gavilon (2013), MOFCOM imposed “hold separate” conditions requiring the merged parties to maintain operations independently. While the “hold separate” condition may be categorized as behavioral, MOFCOM has publicly expressed that such condition was intended to achieve similar effects as structural conditions.
Although some of the behavioral conditions imposed by MOFCOM are creative, proper supervision of these conditions has become a challenge. In Novartis/Alcon (2010), Uralkali/Silvinit (2011), Seagate/Samsung (2011), Henkel/Tiande (2012), WD/Hitachi (2012), Google/Motorola (2012), Glencore/Xstrata (2013) and Marubeni/Gavilon (2013), MOFCOM requested the parties to engage an independent supervision trustee. In the Walmart (2012) and ARM (2012) cases, the decisions provide that MOFCOM is entitled to supervise either by itself or through the supervision trustee. In AB/Inbev (2008), General Motor/Delphi (2009) and GE/Shenhua (2011), however, the decisions did not specifically mention the requirement for a supervision trustee.
Even in cases with supervision trustees, such difficulty still exists. For instance, in the WD/Hitachi (2012) case, MOFCOM requested the parties to maintain Viviti (Hitachi’s subsidiary operating the relevant business) as an independent competitor and to adopt safeguard measures to avoid exchange of competitive information. This condition places enormous burdens on the parties, in particular in light of integrations that are usually required of merging parties under applicable corporate and securities laws. Therefore, a balance has to be made to ensure that such supervision does not strip the conditions of their substance nor introduce unintended burdens on the obligors’ businesses.
3. Market Survey Instruments Adopted by MOFCOM
MOFCOM has adopted numerous market survey instruments in the merger review process, including written consultation, meetings, hearings, site investigation, entrusted investigation, face-to-face interview with relevant parties, telephone interview and questionnaire. In such market surveys, government authorities, relevant industry associations, competitors, upstream and downstream entities as well industry experts will be consulted on important issues in the cases.
The weight MOFCOM gives to these opinions differs as shown in Chart 2 below.
Chart 2:
Generally, opinions from government authorities are most influential on MOFCOM’s decision. MOFCOM usually seeks the opinion from the National Development and Reform Commission (“NDRC”), sometimes also from competent authorities in charge of different industries, for instance, from the Ministry of Industry and Information Technology (“MIIT”) for filings related to traditional and high-tech industries, and from the Ministry of Agriculture (“MOA”) for filings involving agricultural products. In addition, for filings involving foreign investment, MOFCOM usually consults with the relevant approval authorities for foreign investment, such as the Department of Foreign Investment Administration of MOFCOM and/or local foreign investment approval authorities.
The review timeline and the MOFCOM decision may be affected by the opinions of other government authorities. For example, in the Marubeni/Gavilon (2013) case, the parties are required to “hold Marubeni Soybean Sub and Gavilon Soybean Sub separate from each other”. One could imagine that MOFCOM should have consulted the domestic soybean industry association and the MOA. Considering both MOFCOM and MOA are at the same administrative ranking, MOFCOM would be prone to give substance to MOA’s opinions.
4. Conclusion and Forecast
Looking back upon the past 5 years, MOFCOM’s achievements are widely recognized by domestic and international communities. Going forward, we expect that:
— behavioral remedies will continue to be put equal weight as structural remedies;
— innovation on the types of remedies will continue to be encouraged;
— MOFCOM’s review process may be accelerated by introducing the “fast track” mechanism; and
— Transparency of MOFCOM’s review process will be further enhanced.
With China becoming one of the “major” antitrust jurisdictions alongside the U.S. and Europe, both domestic and international companies should consider the implications of a MOFOM review and identify in advance the competition issues that their transaction may raise, before embarking on major transactions in China.
1On August 13, 2013, MOFCOM issued conditional clearance of Baxter’s acquisition of Gambro. Since most data used in this article dates as of Q2 of 2013, this case was not included in the below discussions.
2The number of conditionally approved cases in year 2013 is updated as of Q2 of this year, while the total case number is an estimate based on cases cleared as of Q2 of 2013.