Regarding a Merger of Two ‘Giants’ in the Mining Sector

On April 16, 2013, the Ministry of Commerce of the People's Republic of China ("MOFCOM") granted conditional approval to the proposed acquisition of Xstrata plc ("Xstrata") by Glencore International plc ("Glencore"), one year after MOFCOM was notified of the proposed acquisition. MOFCOM provided a detailed competition analysis in its 15-page long Glencore/Xstrata decision, and for the first time, published a detailed set of post-merger commitments from the parties involved, in the forms of structural and behavioral remedies (among other things, an extraterritorial divestiture of crown jewel mining assets) to its conditional clearance decision.

Background

Glencore, the world's largest nonferrous metal and mining product supplier, owns 33.65% of Xstrata, the world's fourth largest copper producer. After the proposed acquisition, Xstrata will become a wholly owned subsidiary of Glencore.

The merging parties first submitted their merger control filing application on April 1, 2012, which was withdrawn on November 6 after MOFCOM rejected two remedial plans proposed by the parties to resolve the concentration concerns held by MOFCOM. The parties re-submitted their merger control filing application on November 23, and the case was officially re-accepted on November 29. After two rounds of extension of the review period, MOFCOM finally issued a conditional decision to the proposed acquisition. In the MOFCOM decision, MOFCOM provided detailed competition analysis regarding the implications of the proposed acquisition on the production, supply and trade and third-party trade of copper concentrate, zinc concentrate and lead concentrate in the global market.

Despite the fact that the merged entity's market shares in China's copper concentrate, zinc concentrate and lead concentrate markets are relatively small (they held, respectively, 17.8%, 33.3% and 21.7% of China's imports in 2011), MOFCOM determined that the proposed acquisition will eliminate and restrict competition in the China markets because China's demand for these products largely depends on imports. MOFCOM imposed both structural and behavioral remedies in this transaction. Glencore is requested to:

  • Divest all of its equity interests in Las Bambas, a copper mine located in Peru that is owned and being developed by Xstrata, by June 30, 2015 (more specifically, publish a bidding announcement prior to July 16, 2013, try its best to inform MOFCOM of the potential buyer(s) of the Las Bambas project prior to August 31, 2014, reach a binding purchase and sale agreement with the MOFCOM-approved buyer prior to September 30, 2014 and close the sale by June 30, 2015);
  • Auction, without a reserve price, all the equity interests it owns in one of a few alternative Xstrata projects (i.e. Tampakan, Frieda River, El Pachon and Alumbrera projects) should it fail to complete the sale of the Las Bambas project by June 30, 2015;
  • Supply to Chinese customers specified minimum annual volumes (subject to adjustment based on Glencore's actual production) of copper concentrate products until December 31, 2020 at a regulated price; and
  • Provide fair and reasonable market terms consistent with the then prevailing terms in the global markets with respect to supplies of zinc concentrate and lead concentrate products to Chinese customers during the period from 2013 to December 31, 2020.

Comments

This decision is thus far the most detailed merger control ruling published by MOFCOM. This case may set an example for how MOFCOM will review similar types of mergers in the future – particularly global deals in metal, raw materials, energy and agricultural commodities. There are a few lessons to learn from this case:

  1. Unnecessary Withdrawal and Re-filing: MOFCOM took almost twice the normal maximum statutory period allowed for merger reviews under China's Anti-Monopoly Law, which can last up to 180 days. MOFCOM's lengthy review was partly attributable to the merging parties' withdrawal and re-submission of the merger control filing, which reset the clock on the review time line and provided MOFCOM with extra time to review the transaction. As the merging parties are often listed companies in several stock exchanges and long-term pending decisions usually frustrate investors' confidence in the listed stock, the participants should engage experienced merger control lawyers to carefully draft the merger control filing documents in the first place so as to avoid unnecessary withdrawal and re-filing.
  2. China's Unique Multi-layered Consultation Process: Peers criticize that MOFCOM is less independent than its counterparts in other jurisdictions such as the U.S. and the EU. This case reveals a unique multi-layered consultation process for a merger control review in China, which means that MOFCOM has to consult opinions from China's economic planning ministry, the National Development and Reform Commission (NDRC), relevant industry associations and even major market players. Although MOFCOM may have a weaker political status than its counterparts have, this is not unusual in the world-wide merger control practice.
  3. Considering Non-competition Factors: Others criticize that MOFCOM's rulings reflect not just anti-monopoly concerns but also China's own industrial policies and its concerns over access to natural resources as MOFCOM imposed a supply contract as part of the remedies. It should be noted that China's Anti-monopoly Law specifically requires MOFCOM to take non-competition issues into account – particularly a transaction's impact on national economy and national security. The fact that MOFCOM asked Glencore and Xstrata to submit two rounds of remedial commitment plans before the withdrawal, reveals that MOFCOM is more willing to work out creative and pragmatic solutions with the merging parties to clear off its concerns than simply rejecting the transaction.
  4. MOFCOM's Recent Release of Draft Regulations: In the Glencore/Xstrata transaction, MOFCOM requested the merging parties to dispose of an alternative set of assets in case the parties fail to divest the original asset package on time. This type of remedy should be considered in the context of MOFCOM's recent release of the draft Regulations on Imposing Restrictive Conditions on Concentrations of Undertakings (the "Restrictive Condition Rules") for public consultation. The Restrictive Condition Rules provide for three types of remedies: (i) structural remedies (such as a divestiture and sale of alternative assets), (ii) behavioral remedies (such as a supply contract) and (iii) a hybrid of both structural and behavioral remedies. The remedies set forth in the draft Restrictive Condition Rules are not common in China. MOFCOM may want to set the Glencore/Xstrata transaction as an alarming and vivid example for these new strict merger control requirements.

Conclusion

The Glencore/Xstrata transaction might just be a starting point of a more rigorous merger control in China. The remedies imposed by MOFCOM under the draft Restrictive Condition Rules can be more far-reaching. This case highlights the importance of obtaining early-stage merger advice from an experienced merger control law firm specializing in merger clearance in China.