On October 30, 2009, the PRC Ministry of Commerce (MOFCOM), the Chinese regulator responsible for merger control review under the Chinese Anti- Monopoly Law (the AML), cleared an offshore transaction subject to restrictive conditions: the proposed acquisition of Sanyo Electric Co., Ltd. (Sanyo) by Panasonic Corporation (Panasonic), both of which are Japanese companies. The decision adds a transaction to the list of five previous transactions subject to conditional approval or outright prohibition since the law went into effect. This edition of China Antitrust Update summarizes the decision and reveals its implications for future offshore transactions between companies with a China presence. An English translation of the decisions is attached to this article as an Appendix.

Introduction

In November 2008, Panasonic and Sanyo jointly announced that Panasonic would acquire Sanyo at a price of approximately USD 8.87 billion. The proposed deal triggered pre-merger filings in the major jurisdictions around the globe, and required the parities to obtain clearances from various antitrust agencies before consummating the deal. Prior to MOFCOM’s decision, Panasonic obtained conditional approval from the Japanese Fair Trade Commission and the EU Commission. On November 4, 2009, Panasonic through a press release announced that its Board of Directors had resolved to begin the takeover.1 As in previous cases, MOFCOM’s published decision contains little detail about the reasoning behind its conclusions, but it does contain specific descriptions of the conditions imposed on the parties. This case is consistent with previous decisions, but also sheds some new light on the approach MOFCOM is taking in conducting its reviews.

MOFCOM’s Concerns and Remedies

MOFCOM justified its conclusion by specifying several reasons. Most importantly, the above three relevant markets are already highly concentrated; Panasonic and Sanyo jointly have a high market share and a dominant position in these markets. For instance, MOFCOM stated in the decision that in the market for rechargeable coin-shaped lithium batteries, Panasonic and Sanyo represent the largest and second-largest producers in this market respectively; once merged, Panasonic will account for 61.6 percent of the market, a share which will restrict downstream users’ product choices.

In addition, MOFCOM found that several other factors may deepen the possible anticompetitive effect of the acquisition. For example, end users familiar with the well-known Panasonic and Sanyo brands may pressure producers to use only Panasonic and Sanyo batteries in products they produce, refusing products utilizing other brands of batteries. According to MOFCOM, such brand designation would restrain competition by squeezing out other brands, and the potential merger would intensify this adverse effect. Further, MOFCOM found that development of the nickel-hydrogen battery market has been quite slow, making entry into the market by new business operators less attractive, which in turn fails to mitigate the competitive impact of the proposed transaction.

MOFCOM and the parties reached consensus regarding remedies to be enacted by the parties so as to alleviate the possible anticompetitive effects of the transaction. Panasonic or Sanyo must divest a significant portion of their existing businesses related to the three relevant markets and find independent buyers for the businesses to be divested. They must find qualified purchasers for these assets within six months of MOFCOM’s approval, with the deadline extendable for another six months with MOFCOM’s prior approval. Furthermore, Panasonic will reduce its ownership in the Panasonic-Toyota joint venture to 19.5 percent from 40 percent, relinquish its right to appoint directors to the joint venture’s board, abandon voting rights at shareholder meetings, and etc.

Analysis

This decision marks the third time that MOFCOM has resorted to a divestiture remedy to cure the competitive impact of a transaction; the first two transactions requiring divestiture were Mitsubishi Rayon-Lucite and Pfizer-Wyeth , Through its imposition of a divestiture remedy in the Panasonic-Sanyo decision, MOFCOM demonstrated that it is following internationally accepted practices of using remedies such as those used by the EU Commission. However, while the Panasonic-Sanyo decision contains a detailed description of the remedial conditions, specific reasoning behind MOFCOM’s conclusion is absent from the decision.

This decision also demonstrates MOFCOM’s increasing sophistication in using remedies for merger cases, be they structural or behavioral remedies or a combination thereof. Regulators in mature antitrust jurisdictions generally favor the use of structural remedies to alleviate any negative impact that might be caused by a transaction, because behavioral remedies may need intensive follow-up supervision by the regulator. However, MOFOM has tried almost every type of remedy in previous cases. Specifically, MOFCOM has adopted structural remedies in the InBev-AB case and the Mitsubishi Rayon-Lucite case, behavioral remedies in the General Motor-Delphi case, and combined remedies in the Pfizer-Wyeth case and, most recently, this matter.

As reasonably anticipated, an increase in proposed transactions may result in more decisions imposing upon restrictive conditions in the future. Consequently, MOFCOM has begun to consider formalizing how it imposes remedy conditions. To this end, MOFCOM recently held a closed-door seminar and invited a number of antitrust experts to discuss a draft regulation entitled the Provisions on the Imposition of Restrictive Conditions on Concentration Carried out by Business Operators (the “Provisions”). While it is still unclear whether the Provisions will be published to solicit public comments, MOFCOM seems to be preparing for formal and detailed rules intended to provide guidance on conditional approvals.

In terms of timing, the Panasonic-Sanyo decision came about at the close of an additional phase following the regular Phase I and II. This is the first time that MOFCOM has extended its review to an additional phase. The AML allows MOFCOM to extend its review for an extra period of up to sixty days under certain special circumstances.2 According to the decision, on August 26, 2009, close to the end of Phase II, the parties requested that MOFCOM extend the review period. The Panasonic-Sanyo decision, together with previous cases, sends a positive signal that MOFCOM will make efforts to accommodate the business goals of the transacting parties either by reaching a final decision in a relatively speedy way (as in the General Motors- Delphi decision) or by allowing for more time to find suitable remedies for potential anticompetitive problems (as in the Panasonic-Sanyo decision).

Additionally, similar to remedy conditions imposed in the Mitsubishi Rayon-Lucite decision, MOFCOM has given Panasonic and Sanyo a six-month grace period, which can be extended for another six month subject to MOFCOM’s approval, to find a buyer for the divested business. In its willingness to grant the additional review period and extend the period for divestiture, MOFCOM continues to show a welcome sense of flexibility, which suggests that, in the future, business operators may have opportunities to reach the remedies most acceptable to them.

Observations

MOFCOM, through this decision, has demonstrated that it will not refrain from intervening in deals between two foreign companies with presences in China, which highlights the importance of implementing a carefully planned Chinese merger control strategy when a transaction involves two or more firms with operations in the same or related markets in China. Despite MOFCOM having provided only limited grounds and insufficient reasoning for the decision, one fact has become increasingly clear: consideration of a Chinese merger control regime is an important part of multinational companies’ international merger and acquisition strategy.

However, companies do not need to be overly concerned about China’s merger control regime becoming a hurdle to their contemplated transactions, because there are a few ways in which companies may make full use of the regime to achieve the best possible result. First, companies may take advantage of the pre-notification consultation mechanism to solicit MOFCOM’s officials’ opinions on certain important issues, such as whether notification would be required for their proposed transactions. Second, business operators may still be able to obtain approval from MOFCOM with conditions acceptable to them by proactively and constructively communicating with MOFCOM. Transacting parties may need to be prepared for alternative transactions and to come up with solutions to remedy MOFCOM’s doubts.