On September 28 and 29, 2009, the Ministry of Commerce of the PRC (MOFCOM) announced that it had conditionally approved two proposed mergers - the proposed acquisition of Delphi Corp (Delphi) by General Motors Co. (GM) and the proposed acquisition of Wyeth Inc. (Wyeth) by Pfizer Inc. (Pfizer) – both with restrictive conditions. These two decisions mark the fourth and fifth times, respectively, that MOFCOM has imposed restrictive conditions on proposed mergers using the powers granted to it by the Anti-Monopoly Law of the PRC (the AML). In this edition of China Antitrust Update, we will summarize the developments in China’s concentration control regime over the past several months. An English translation of the two decisions is attached to this article as Appendixes I and II.

Publication Requirement for MOFCOM’s Decision

Under the AML, MOFCOM is only required to publicize decisions to block transactions or which imposes restrictive conditions on a transaction. Previously, MOFCOM rejected Coca Cola’s bid for the juice maker Huiyuan, and approved with restrictive conditions Inbev’s acquisition of Anheuser-Busch and Mitsubishi Rayon’s acquisition of Lucite.

Since MOFCOM has not chosen to disclose its decisions in cases of unconditional approval, the five publicly announced decisions offer limited guidance for market players on how MOFCOM will apply the AML and its current implementing rules to proposed transactions. Some have called for MOFCOM to publish all its decisions, in response to which Mr. Shang Ming, Director of the Anti-Monopoly Bureau of MOFCOM, explained at a seminar that MOFCOM does not publish decisions of unconditionally approved cases because they usually involve proprietary information of the transacting parties. He further stated that MOFCOM may not be justified in publishing such cases unless the AML is amended in the future to expressly allow MOFCOM to do so.

Developments Reflected in the Two Decisions

Parties to the transaction may have input in remedies

As in the previous Mitsubishi-Lucite case, MOFCOM again demonstrated in the two decisions its willingness to consider the remedies proposed by the parties to the transaction. While it is a common practice for antitrust regulators around the world to clear a transaction with certain restrictive conditions, and the AML authorizes MOFCOM to do so, it is not clear under all AML related laws and regulations what specific conditions MOFCOM should impose on a transaction with anticompetitive effects. MOFCOM also did not reveal much detail in the first two announced decisions. To be specific, the InBev-AB ruling merely states the conditions attached to the InBev/AB transaction without explaining how these conditions came about. In the Coca Cola-Huiyuan case, MOFCOM required Coca Cola to propose conditions that would eliminate the proposed transaction’s potential adverse competitive effects, but did not find any of the proposed solutions satisfactory, therefore the proposed acquisition was blocked. These two cases gave little detail about the evidence on which the final remedies were based.

In both the GM-Delphi and Pfizer/Wyeth decisions, the announced remedies were first proposed by the parties to the acquisitions. MOFCOM then assessed whether the suggested remedies would be able to eliminate the anticompetitive effects, and if not, required the parties to make necessary revisions, until the remedies are satisfactory to MOFCOM. It is interesting that MOFCOM in the GM-Delphi case opted for behavioral remedies rather than structural remedies which are more commonly adopted in other jurisdictions. Such behavioral remedies, according to the decision, were proposed by the parties to the transactions, and after revisions at MOFCOM’s request, finally accepted by MOFCOM.

In its willingness to negotiate over the remedies in the two decisions, MOFCOM continued to show a welcome flexibility, which suggests that business operators may have opportunities to reach remedies acceptable to them to the best possible degree. The two decisions, together with the Mitsubishi-Lucite case, send a positive signal that while unconditional clearance will probably be impossible in cases that raise complex competition issues, business operators may still be able to obtain approval from MOFCOM with conditions acceptable to them, by proactively and constructively communicating with MOFCOM.

Review may be finished within the initial stage, even with considerable antitrust concerns

Under the AML, the initial review stage for a pre-concentration notification is 30 calendar days, which MOFCOM considers to be a relatively short period. As a result of this time restriction and due to reasons such as insufficient staffing, it is not unusual for MOFCOM to move a proposed transaction into the second review stage even though the case does not raise substantial anticompetitive concerns. Nevertheless, MOFCOM conditionally approved the GM-Delphi transaction within the first review stage even though it made clear in the decision that the proposed merger raised considerable competitive concerns. Typically such concerns would lead to further review.

MOFCOM’s expedient decision in the GM-Delphi case may ease the anxiety of future notifying parties. Market players have been calling for the establishment of expedited pre-concentration procedures, but as Mr. Shang Ming has stated, MOFCOM may not introduce a formal expedited review mechanism without express authorization under the AML. The GM-Delphi transaction sends a positive signal to the business community that MOFCOM is willing to render speedy review results on a case-by-case basis in the absence of a formal expedited review process. It shows that even if a proposed merger involves complicated competition issues, MOFCOM may still be able to complete the review in the initial review stage. The key is that the notifying party must ensure that it maintains efficient and effective communication with MOFCOM, through which the notifying party may persuade MOFCOM that no significant anticompetitive effect exists, or make satisfactory remedy proposals to eliminate the possible anticompetitive effect(s).

More in-depth analysis of potential anticompetitive effects

Since the Coca Cola-Huiyuan decision, MOFCOM has evolved to adopt a consistent format in its decisions. In a decision, MOFCOM will define the relevant market(s) and discuss the potential anticompetitive effects of the proposed concentration, these two items being the core part of a decision.

MOFCOM’s previous decisions laid out the review process without offering much information regarding the reasoning behind the decisions. For example, the Inbev-AB and Coca Cola- Huiyuan decisions merely state the proposed mergers may result in anticompetitive effects, or cursorily analyze how anticompetitive effects will be caused. Since MOFCOM failed to elaborate its reasoning behind the Coca Cola-Huiyuan decision, MOFCOM had to make amends by posting a record of a Q&A session with the media on its Web site to discuss certain key issues concerned with its decision in response to voiced public calls for more information.

In contrast, the GM-Delphi and Pfizer-Wyeth decisions show increased sophistication on MOFCOM’s part. In the GM-Delphi decision, MOFCOM specifically discusses aspects the possible anticompetitive effects, as it does in Pfizer-Wyeth. For example, in the Pfizer-Wyeth decision MOFCOM concludes that Pfizer’s acquisition of Wyeth will substantively change the structure of market competition for swine mycoplasma pneumonia vaccine, resulting in restrictions on or elimination of competition. To support its conclusion, MOFCOM uses specific data to demonstrate that the market share of the merged company and the resulting concentration in the market of swine mycoplasma pneumonia vaccine, which will be significantly increased and, consequently, render it more difficult for other companies to enter the relevant market.

In addition, the decisions show that MOFCOM is catching up with internationally accepted approaches in its analysis of market competition. In the Pfizer-Wyeth decision, MOFCOM uses the significant increase in the Herfindahl-Hirschman Index to prove that the concentration in the market of swine mycoplasma pneumonia vaccine will be significantly higher after the merger. The Herfindahl-Hirschman Index is a common analytical tool used by the antitrust authorities in the U.S. and EU, but it does not appear in any of China’s laws, regulations or guiding rules relating to anti-monopoly enforcement. MOFCOM’s use of the Herfindahl-Hirschman Index demonstrates that it is open to taking advantage of methods or tools which have been proved effective in other jurisdictions.

Observations

Both the GM-Delphi and Pfizer-Wyeth decisions are consistent with the activist approach that MOFCOM took in the previous cases. For example, similar to the Mitsubishi Rayon-Lucite ruling, these two cases reflect again MOFCOM’s openness and flexibility in finding suitable remedies for potential anti-competitive problems while accommodating the business goals of the transacting parties.

In addition, the GM-Delphi and Pfizer-Wyeth decisions signal several additional positive steps that MOFCOM is now taking in its pre-concentration reviews. In particular, the GM-Delphi transaction reflects MOFCOM’s willingness and capability to reach a final decision in a relatively speedy way. Moreover, MOFCOM is making efforts to reveal more details of the reasoning behind its decisions. While these decisions may still lack clear analytical standards, MOFCOM has shown improvement in its pre-concentration review practices.

As MOFCOM is moving forward to finalize some of its rules and formalize its practice on concentration notification and review, market players need to monitor these developments closely. We will continue to closely follow developments in China’s pre-concentration regime and keep you updated.

Appendix I

Announcement No. 76 (2009) of the Ministry of Commerce of the PRC

September 28, 2009

The Ministry of Commerce of the PRC (MOFCOM) has received the pre-concentration notification of the proposed acquisition of Delphi Corp. (Delphi) by General Motors Co. (GM). We hereby publish this announcement according to Article 30 of the Anti-Monopoly Law (the AML):

  1. Case Initiation and Review Process. On August 18, 2009, GM submitted notification materials to MOFCOM, and supplemented those materials on August 28 and 31 respectively upon MOFCOM’s request. On August 31, MOFCOM decided that the materials conform with the requirements set forth in Article 23 of the AML, conducted the initial review and notified GM. During the course of its review, MOFCOM assessed the impact on market competition posed by the concentration and completed its review by September 28, 2009.
  2. Issues under Review. In accordance with Article 27 of the AML, MOFCOM comprehensively reviewed this concentration of business operators from the following aspects:
  1. Market shares in the relevant market and control over the markets of the business operators participating in the concentration;
  2. The degree of market concentration of the relevant market;
  3. The impact of this concentration of business operators on market access and technological advancement;
  4. The impact of this concentration of business operators on consumers and on other relevant business operators;
  5. The impact of this concentration of business operators on the development of the national economy; and
  6. The impact of other factors on market competition.

 

  1. The Review. After having begun its review of the case, MOFCOM conducted the review according to law, carefully reviewed the materials submitted, conducted an indepth analysis of the important issues with which this notification is concerned. In addition, MOFCOM solicited comments from relevant governmental agencies, industry associations, automakers, as well as parties to the concentration by means of soliciting written comments, holding seminars, and having consultations with the parties involved.
  2. The Relevant Market. There is no horizontal overlap between the products and businesses of the two parties to this concentration, but the parties have a vertical relationship in the upstream and downstream markets. Therefore, the relevant markets in question are defined based on the respective products of the parties. For GM, the relevant product markets are the markets of passenger cars and commercial vehicles, and the relevant geographic market for both relevant product markets is the Chinese domestic market (i.e., mainland China, excluding Hong Kong, Macau and Taiwan). For Delphi products, the relevant product markets are defined as ten independent auto parts markets, which include the auto electric and electrical transmission system market, auto connection system market, auto electric center market, auto heating system market, auto entertainment and communication market, auto control and safety market, auto security system market, auto gasoline engine management system market, auto diesel engine management system market, and the auto fuel supply and evaporator product market. The relevant geographic market of all of the above ten relevant product markets is the Chinese domestic market
  3. The Competition Issue. MOFCOM conducted a comprehensive assessment on this concentration and preliminarily concluded that this concentration raises the following concerns: given GM’s leading position in the global and Chinese auto manufacture markets, and the leading position and growth of Delphi in the global and Chinese auto parts markets, and considering the competition existing in the relevant Chinese markets, the concentration in question may have the following effects that would eliminate and/or restrict competition:

 

  1. Delphi is the exclusive auto parts supplier to many domestic automakers. Considering the share-controlling relationship and the consistency in the two parties’ interests after the concentration, it is necessary to eliminate the possible negative impacts on the stability of supply, prices and quality of other domestic auto makers supplied by Delphi caused by the concentration, so as to avoid the concentration’s eliminating or restricting competition in the domestic automobile market;
  2. Considering the share-controlling relationship and the consistency in the two parties’ interests after the concentration, and GM’s participation in the Delphi board of directors, it is necessary to ensure that GM will not acquire other domestic automakers’ R&D technologies, model information and other competition/trade secret information possessed by Delphi, so as to avoid the concentration’s eliminating or restricting competition in the domestic automobile market;
  3. Considering the share-controlling relationship and the consistency in the two parties’ interests after the concentration, when other domestic automakers switch their parts suppliers it is necessary to ensure that Delphi will not use stalling tactics or refuse to cooperate to increase the costs of switching, so as to avoid the concentration’s eliminating or restricting competition in the domestic automobile market;
  4. Based on the share-controlling relationship and the consistency in the two parties’ interests after the concentration, it is possible that GM may expand its procurement of auto parts from Delphi in the future, make it more difficult for other domestic auto parts makers to enter GM’s purchase channel, thus putting other domestic auto parts makers in an inferior position compared with Delphi, therefore eliminating and restricting competition in the domestic auto parts market.

 

  1. Negotiations on Restrictive Conditions. In order to eliminate the competition concerns identified in the review, MOFCOM held discussions with the two parties to the concentration regarding the imposition of restrictive conditions. During the negotiations, MOFCOM requested that both parties to the concentration propose feasible remedies to the competition concerns arising from the concentration. Both parties to the concentration presented their respective views regarding the competition concerns raised by MOFCOM, and proposed preliminary remedies and amended remedy proposals. Upon assessment, MOFCOM concluded that the solutions proposed by both parties regarding the competition concerns arising from the concentration are capable of adequately remedying this concentration’s potential anti-competitive effects.
  2. Decision after Review. Based on the above reasons and according to Articles 28 and 29 of the AML, MOFCOM concluded that the concentration of business operators in question may have the effect of eliminating or restricting competition, and may impact competition in the Chinese automobile market and its upstream auto parts market. Given the fact that the two parties to the concentration have made remedy proposals sufficient to reduce the concentration’s negative impact on competition within the prescribed period, which essentially dissipates the competition concerns raised by MOFCOM, MOFCOM decided to accept the parties’ remedy proposals and approve the concentration in question subject to the following restrictive conditions:

 

  1. After consummation of the concentration, GM and Delphi must ensure that Delphi and the affiliates in which Delphi holds controlling shares or actual control must continue to supply domestic automakers without discrimination, must undertake to ensure the timeliness, reliability and quality of the supplies, and must also ensure that the price and volume of supplies will be determined by market rules and previously reached agreements, without imposing any unreasonable conditions that will directly or indirectly eliminate or restrict competition;
  2. After consummation of the concentration, GM may not illegally seek competitive confidential information of other domestic automakers in the possession of Delphi. Delphi may not illegally disclose to GM competitive confidential information of other domestic automakers in its possession, and the parties may not formally or informally exchange or communicate, in violation of law, the competitive confidential information of third parties;
  3. After consummation of the concentration, GM and Delphi must ensure that Delphi and the affiliates in which Delphi holds controlling shares or actual control will, upon customers’ lawful requests, assist in the smooth switching of suppliers by its customers, and may not willfully stall the process, or impose or claim restrictive conditions for the purpose of increasing the costs of switching for other automakers, so as to achieve the effect of restricting competition; and
  4. After consummation of the concentration, with regard to its procurement of auto parts, GM must maintain its policies of using multiple supply sources and making nondiscriminatory purchases in accordance with GM’s relevant requirements, and may not adopt unreasonable conditions in favor of Delphi at the expense of other suppliers.

As of the effective date of this announcement, GM and Delphi must regularly report to MOFCOM the status of their compliance with the above restrictions. MOFCOM will impose penalties according to law upon the parties’ violation of the above restrictive conditions. This decision is effective as of the date of its announcement. MOFCOM September 28, 2009

Appendix II

Announcement No. 77 (2009) of the Ministry of Commerce of the PRC

September 29, 2009

The Ministry of Commerce of the PRC (MOFCOM) has received the pre-concentration notification for the proposed acquisition of Wyeth Inc. (Wyeth) by Pfizer Inc. (Pfizer), both of which are U.S. companies. After review, MOFCOM has decided to approve this concentration subject to several restrictive conditions. MOFCOM hereby makes the following announcement in accordance with Article 30 of the Anti-Monopoly Law of the PRC (the AML):

  1. Case Initiation and Review Process. MOFCOM received the pre-concentration notification for Pfizer’s proposed acquisition of Wyeth on June 9, 2009 and supplementary materials on June 11 and 14, and began its review of the case on June 15. In accordance with the AML and MOFCOM’s relevant rules on preconcentration review, MOFCOM conducted the initial review on this case, the deadline of which was July 15. During the course of the review, MFOCOM found that the proposed concentration may restrict or eliminate competition in the area of animal health products. Therefore, before the initial review period expired, MOFCOM decided to further review this case. The deadline for the further review is October 13, 2009.
  2. Issues under Review. In accordance with Article 27 of the AML, MOFCOM conducted a comprehensive review of this concentration of business operators from the following aspects:

 

  1. Market shares in the relevant market and control over the markets of the business operators participating in the concentration;
  2. The degree of market concentration of the relevant market;
  3. The impact of this concentration of business operators on market access and technological advancement;
  4. The impact of this concentration of business operators on consumers and on other relevant business operators;
  5. The impact of this concentration of business operators on the development of The national economy; and
  6. The impact of other factors on market competition.

 

  1. The Review. After having begun its review of the case, MOFCOM carefully verified the notification materials and conducted an in-depth analysis of the important issues with which this notification is concerned. In addition, MOFCOM solicited comments from relevant governmental agencies, industry associations, competitors, upstream and downstream companies by holding expert panels, meetings, hearings, soliciting written comments, conducting on-site investigations, and holding consultations with interested parties. Regarding the issues relating to certain products’ restriction on and elimination of competition as discovered during the review, MOFCOM consulted thoroughly with the notifying party, and reached consensus on the plan for remedying the anticompetitive effect.
  2. The Relevant Market. The geographic market concerned in this concentration is the Chinese domestic market (i.e., mainland China, excluding Hong Kong, Macau and Taiwan). The relevant products in this concentration are human pharmaceuticals and animal health products. Both parties to the transaction have the following overlapping products in the Chinese domestic market: (i) human pharmaceuticals, specifically including J1C (wide-spectrum penicillin) and N6A (anti-depression and mood stabilizing drugs), and (ii) animal health products, specifically including swine mycoplasma pneumonia vaccine, swine pseudorabies vaccine, and combination vaccines for dogs.
  3. The Competition Issues. Investigations show that the merger will not substantially change the structure of market competition for the two types of human pharmaceuticals, and the swine pseudorabies vaccine and combination vaccines for dogs. However, a merger between Pfizer and Wyeth will substantially change the structure of market competition for swine mycoplasma pneumonia vaccine, resulting in restrictions on or elimination of competition.

 

  1. According to the data that MOFCOM has, the two parties will hold a market share of 49.4% after the merger (out of which Pfizer holds 38%, and Wyeth holds 11.4%), which is significantly higher than that of any other competitor. Intervet comes in second by with an 18.35% market share, while the market share of any other individual competitor accounts for less than 10%. The merged new company will be able to increase its market share by taking advantage of its scale, which will lead to its control of product prices.
  2. According to the data that MOFCOM has, the Herfindahl-Hirschman Index after the merger will be 2182, an increase of 336. Given that China’s market of swine mycoplasma pneumonia vaccine is a highly concentrated market, this concentration will restrict or eliminate competition.
  3. Pharmaceutical R&D typically has high costs and long cycles. According to statistics, it takes approximately 3 to 10 years and between USD 2.5 to 10 million to develop a new product. Market surveys show that the technical barrier for entering the market for swine mycoplasma pneumonia vaccine is even higher. After acquiring Wyeth, Pfizer will likely use its advantage in scale to further expand in China, curb other competitors, and restrict other enterprises’ development in this field.

 

  1. Decision after Review. Given the anticompetitive effect of Pfizer’s proposed acquisition of Wyeth on China’s swine mycoplasma pneumonia vaccine market, in order to reduce its negative impact on the market, MOFCOM has decided to conditionally approve this concentration and require that Pfizer fulfill the following obligations:

 

  1. Divest its swine mycoplasma pneumonia vaccine business in the Chinese domestic market (meaning mainland China, excluding Hong Kong, Macau and Taiwan) with respect to the brands of Respisure and Respisure One under Pfizer.
  2. The business to be divested includes tangible and intangible assets that are necessary for the survival and competitiveness of such business.
  3. Pfizer must find a buyer for the to-be-divested business through a trustee and execute a purchase agreement with it within six months after MOFCOM’s approval of this concentration.
  4. The purchaser must be independent from either party to the concentration, meet the pre-set qualifications and criteria, and be approved by MOFCOM.
  5. If Pfizer fails to find a buyer within six months after MOFCOM’s approval of this concentration, MOFCOM has the authority to designate a trustee to dispose of the tobe- divested business with no reserve price.
  6. Within the six-month divestment period, Pfizer must appoint an interim manger to manage the to-be-divested business. The management should be based on the principle of maximizing the interest of the to-be-divested business, to ensure that the to-be-divested business has continuous viability, merchantability and competitiveness, and the business should be independent from other businesses retained by either party.
  7. Within three years of the divestment and upon the buyer’s request, Pfizer has the obligation to provide the buyer with reasonable technical support, assist it in purchasing raw materials necessary for the production of swine mycoplasma pneumonia vaccine, and provide technical training and consulting services to relevant staff members of the buyer.

This decision is effective as of the date of its issuance.

MOFCOM

September 29, 2009