On April 22, 2013, the Ministry of Commerce (“MOFCOM“) cleared the proposed acquisition of Gavilon Holdings, LLC (“Gavilon“) by Marubeni Corp (“Marubeni“) (the “Transaction”) with conditions. This is the second case conditionally cleared by MOFCOM in April, coming just days after the conditional clearance of Glencore/Xstrata. To obtain the clearance, Marubeni shall keep separate and independent China soybean import and distribution businesses between Marubeni’s and Gavilon’s.

Review Timeline

The conditional clearance was issued by MOFCOM almost 11 months after Marubeni’s first submission of the notification. According to MOFCOM’s announcement, the first submission was made on June 19, 2012, and officially accepted on July 31. MOFCOM raised its concerns in Phase II and decided to open extended Phase II, expiring on January 27, 2013, upon the filing parties’ consent. During this period, the parties submitted remedy proposals, which were found as insufficient for removal of MOFCOM’s concerns. In order to have sufficient time to negotiate the remedies, the parties withdrew the filing on January 25, 2013 and refiled the case on January 31. MOFCOM officially accepted the case again on February 5 and issued the conditional clearance about one and a half months after the case entered the second round of Phase II period.

Relevant Markets

Taking into account the business scope and business model of the parties, the characteristics of the commodities, as well as supply and demand substitution, MOFCOM found the relevant markets to be imported soybean, corn, soybean meal and distiller’s dried grain (DDG). The relevant geographic market of the above-mentioned businesses was found to be within the boundaries of China, considering the actual trading flows, consumption habits, transportation model, customs duties and etc. In the meantime, the businesses on a global basis were also considered by MOFCOM when making the decision.

Competitive Assessment

MOFCOM provided detailed competition analysis regarding China’s soybean import market, because China’s demand for soybean largely depends on import and China is the No.1 soybean importer in the world.

MOFCOM found that the Transaction may substantially strengthen Marubeni’s control power in China soybean import market and may eliminate and restrict competition in this market due to the following reasons:

Marubeni currently is the No.1 exporter of soybean in China, as it exported 10.5 million tonnes, or about 18 percent of China’s total soybean imports in 2012, while the other rivals, such as ADM, Bunge, Cargill, Louis Dreyfus, and Toepfer International, were quite behind of Marubeni. MOFCOM considered that through the Transaction, Marubeni may expand its source of soybean supplies by taking advantage of Gavilon’s capability in purchase, storage and logistics of soybean in North America. Meanwhile, Marubeni may materially enhance its export of soybean in the China market, and further strengthen its leading position in the China soybean import market, via its rich and comprehensive distribution network and client base in China.

MOFCOM also analyzed market entry and found it quite difficult for new entrants to enter the market and effectively pose competition constraint on Marubeni. Last but not the least, MOFCOM found that China’s soybean crushers are mainly small enterprises having weak bargaining power, and the Transaction may further undermine the downstream enterprises’ ability to bargain.

Remedies

MOFCOM imposed the so-called hold-separate remedy in this deal. Marubeni was requested to:

  1. establish two independent legal entities to operate the China soybean import and distribution business. Marubeni shall export and sell soybean to China via Marubeni’s soybean subsidiary (“Marubeni Soybean Sub”). Gavilon shall export and sell soybean to China via Gavilon’s soybean subsidiary (“Gavilon Soybean Sub”).
  2. hold the two soybean subsidiaries separate from each other. Marubeni shall keep Marubeni Soybean Sub and Gavilon Soybean Sub separate and independent, including but not limiting to the separation and independence in terms of human resources, procurement, marketing, distribution, pricing, etc.
  3. keep the Marubeni Soybean Sub and Gavilon’s US asset at arm’s length. Marubeni Soybean Sub shall not, upon the closing of the Transaction, purchase soybeans from Gavilon US Assets (assets located in the US and solely owned by Gavilon for procurement and export), unless such transactions are based on fair market terms. If, upon the completion of the Transaction, Marubeni is to transfer and combine its products procurement and export assets in the US with the assets of Gavilon, Marubeni Soybean Sub’s obligation to procure soybean on the fair and reasonable principle shall be extended to these transferred assets. To ensure the implementation of the fair and reasonable principle, relevant safeguard measures shall be formulated by Marubeni and Gavilon in advance (including the possible China Wall between Marubeni Soybean Sub and Gavilon US Assets).
  4. prevent exchange of competition-related information between Marubeni Soybean Sub and Gavilon Soybean Sub. Competition-related information means any information that may lead to coordination of the business operation between Marubeni Soybean Sub and Gavilon Soybean Sub, including but not limited to China soybean price, any information regarding commercial terms in sales and purchase, cost, current or potential customers, negotiations as well as customers list, marketing and strategic planning. Marubeni and Gavilon shall formulate ex ante safeguard measures, including the China Wall between Marubeni Soybean Sub and Gavilon Soybean Sub to make sure they will not exchange any competition-related information.

MOFCOM also clearly requested Marubeni to appoint a supervising trustee to supervise the abovementioned commitments.

MOFCOM set a 24-month time period for these commitments. Upon the lapse of the 24 months, Marubeni can apply to MOFCOM to revoke Items (1) to (4) of the commitments.

This is the third time MOFCOM used the “hold separate” remedy, the other two being the Samsung/Seagate deal (2011) and the West Digital/Hitachi deal (2012). It seems that the “hold separate” approach may be adopted by MOFCOM in those cases which MOFCOM considers may raise significant competition concerns but do not yet warrant divestiture.