On April 24, 2009, the Chinese Ministry of Commerce (MOFCOM) announced conditional approval of the proposed acquisition of Lucite International Group Limited by Mitsubishi Rayon Co., Ltd. This is the first MOFCOM decision requiring parties to divest a portion of their production capacity as a condition of approval. Following MOFCOM's significant decision to block the Coca-Cola/Huiyuan deal last month, the Mitsubishi decision is another indication that MOFCOM is taking an aggressive stance in merger enforcement under China's new Anti-Monopoly Law ("AML").

Review Process

Mitsubishi Rayon submitted its initial merger filing in December 22, 2008. After several supplemental submissions, MOFCOM accepted the filing as complete and started its first stage review on January 20, 2009. MOFCOM opened a second-stage review on February 20. MOFCOM announced today on April 24 that it had completed its second stage review before the May 20, 2009 deadline.

According to the announcement, MOFCOM made an extensive investigation, soliciting information from the relevant trade association, other manufacturers of the relevant products, and the parties.

Relevant Markets

The proposed acquisition primarily involved the manufacture and distribution of Methyl methacrylate ("MMA"), a product market in which Mitsubishi Rayon and Lucite have significant overlap. MMA is used in the manufacture of plastics. The two companies have minor overlaps in some specific sulfopropyl methacrylates ("SpMAs") and polymethyl methacrylate ("PMMA") particle and panel products. MOFCOM defined the relevant product markets as MMA, SpMAs, PMMA particle products, and PMMA panel products. The relevant geographic market was defined as China.

Effect on Competition

After its investigation, MOFCOM came to the following conclusions about the competitive effects of the proposed transaction:

Horizontal Effects. MOFCOM found that the proposed transaction was likely to adversely affect competition in the MMA market in China, as the parties would have a significant combined market share post-transaction – 64% – far higher than the shares of Jilin Petrochemical and Heilongjiang Longxin Company, the next two largest MMA competitors. MOFCOM believed that, with that dominant MMA market position, Mitsubishi Rayon would be able to eliminate or restrict other competitors in the China MMA market.

Vertical Effects. Mitsubishi Rayon is active in the MMA market and the two downstream markets for PMMA particle and panel products. MOFCOM concluded that, post-closing, Mitsubishi Rayon would be able to foreclose downstream competitors by using its dominant position in the upstream MMA market.

Restrictive Conditions Imposed

Capacity Divesture. As a condition to approval, MOFCOM has required Lucite International (China) Chemical Industry Co., Ltd. ("Lucite China") to divest upfront 50% of its annual MMA production capacity for five years to one or more unaffiliated third party purchasers (a "Capacity Divestiture"). The third party purchasers will have the right to purchase 50% of Lucite China's annual MMA production for five years at cost (equal to the production and management cost per unit), with no added profit margin, to be verified annually by an independent auditor. If the divestiture is not completed within the specified time period, then MOFCOM can appoint an independent trustee authorized to sell 100% of Mitsubishi Rayon's equity interest in Lucite China to an independent third party (a "Full Divestiture" ).

The Capacity Divesture must be completed within six months from the closing of the proposed transaction, a period that may be extended by MOFCOM at its discretion for six months if requested by Lucite China based on reasonable justifications for the extension.

Independent Operation of Lucite China Until Completion of Capacity Divesture. Under MOFCOM's decision, the China operations of MMA monomer business of Lucite China and Mitsubishi Rayon must be managed separately, with independent management and board membership, from the closing of the proposed transaction to the completion of the Capacity Divesture or, if applicable, the Full Divestiture. During this period, the parties must continue to sell MMA in competition with each other in China and are prohibited from sharing pricing, customer, or other competitive information related to the China market. If the parties breach any of these commitments, a fine of between RMB 250,000 and RMB 500,000 will be imposed.

No further Acquisitions or New Plants in China Within Five Years. Finally, the decision requires that, for five years from the closing of the proposed transaction, the post-merger Mitsubishi Rayon may not acquire producers or build new plants in China that manufacture MMA monomer, PMMA polymer, or cast sheet products, absent MOFCOM's prior approval.

MOFCOM's analysis demonstrates an increasingly sophisticated analysis of relevant markets and competition issues. However, it also raises some concerns. First, it is not clear why MOFCOM prohibited the parties from establishing their own new MMA monomer and PMMA polymer production capacity, which would be output enhancing and procompetitive despite any possible vertical effects. Though the restriction in further growth in upstream MMA production capacity is presumably based on MOFCOM's expressed concerns about potential adverse effects on downstream markets of the combined entities' upstream dominance, those concerns would not seem to justify outright prohibition of subsequent growth in that market through legitimate means.

Second, it remains to be seen whether divesting half of the capacity of Lucite China will solve MOFCOM's concerns about foreclosure effects on downstream markets for MMA in China, given that since the parties could transfer that production to plants outside China and the price of imported MMA appears not to be subject to MOFCOM's decision.

Finally, there is a persistent procedural concern in MOFCOM's recent decisions in the InBev/Anheuser Busch, Coca-Cola/Huiyuan, and Mitsubishi/Lucite mergers. MOFCOM has first identified competitive concerns and then requested the parties to propose solutions (that is, conditions to approval). MOFCOM has then evaluated whether the conditions proposed by the parties would adequately solve MOFCOM's concerns. However, it is unclear what is the standard of proof of anticompetitive effect that MOFCOM believes it must meet before requesting that the parties propose restrictive conditions or changes to the transaction. Some proof requirement for MOFCOM and greater transparency about the arguments and record would be helpful to predictability for parties and the development of AML practice.

Read more on the decision (in Chinese) at the MOFCOM web site.