24 April 2009, the Chinese Ministry of Commerce (MOFCOM), the authority responsible for merger control review under the Anti-Monopoly Law (the AML), published its decision granting conditional clearance for the US$1.6bn acquisition by Mitsubishi Rayon (MRC) of the British chemicals producer Lucite International (Lucite).
This is the third time since the AML came into force in August 2008 that MOFCOM has intervened in a transaction. This time the transaction is a foreign-to-foreign deal between a Japanese purchaser and a British target and the outcome is a clearance conditional on a set of detailed requirements. As in its previous decisions, MOFCOM gives very little detail about the evidence on which it reached its conclusions. Conversely, there is a relatively significant amount of detail about the conditions to which the parties agreed, including information about the timetable for implementation of the remedies, which may have been thought to be sensitive. The form of the remedy itself is essentially a divestiture requirement, although MOFCOM has allowed some flexibility in achieving this, in a manner that is to be welcomed.
MOFCOM’s previous decisions to grant conditional clearance to the InBev/Anheuser-Busch transaction and to prohibit the Coca-Cola/Huiyuan transaction had already given deal-makers a glimpse of the seriousness with which China’s AML would need to be regarded. This further intervention leaves no doubt that MOFCOM considers itself ready and able to assume a role as one of the active merger control enforcers in the world.
Review process and timing
MRC submitted the notification materials to MOFCOM on 22 December 2008. MRC supplemented the notification materials as required by MOFCOM. On 20 January 2009, MOFCOM accepted the notification materials as complete and officially initiated the phase 1 review. On 20 February 2009, after the expiration of the phase 1 review period, MOFCOM decided to conduct further review in phase 2, initiating a 90-day timetable with the end date of 20 May 2009. With the conditional clearance decision published on 24 April 2009, the MOFCOM review finished ahead of the phase 2 timetable.
During its investigation, MOFCOM solicited opinions from the relevant trade associations, producers of the relevant products and the parties to the concentration by means of issuing invitations for written comments, holding consultation meetings and hearings.
According to MOFCOM’s decision, MRC and Lucite overlapped in a number of product markets, including a significant overlap in the market for a chemical substance called methyl methacrylate (MMA), and this was the key reason cited by MOFCOM as to why it chose to open phase 2. To a lesser extent, the parties also overlapped in the markets of the related products SpMAs, PMMA pellets and PMMA boards. The geographic market was found to be China.
The decision held that because the parties’ combined market share is 64 per cent in MMAs in China, and that this was much higher than the number 2 and 3 players, the parties would have a controlling position in the MMA market, leading to the possibility of MRC being able to eliminate and restrict competitors in the MMA market post-transaction. Furthermore, vertically, as MRC is active both in MMA as well as a downstream product market, it would have the ability, post-transaction, to foreclose downstream competitors due to its dominance in the MMA market.
However, apart from the limited market share information above, very little evidence or explanation of the basis of MOFCOM’s conclusions is included in the decision.
In essence, MOFCOM accepted a remedies package from MRC that amounted to a disposal of at least part of Lucite’s business. However, MOFCOM allowed MRC a degree of flexibility in how to achieve this. The details are as follows.
- Separation packages: the parties agreed to implement one of the two remedies packages:
- ‘capacity separation’: Lucite’s Chinese entity is to sell – in a one-off transaction – 50 per cent of its annual MMA output to one or more independent third-party buyers for a period of five years, at cost (such cost figures to be verified by an independent auditor); or
- ‘complete separation’: if within six months after the completion of the transaction (this six-month period extendable by MOFCOM by another six months), the merged entity is not able to sell 50 per cent to such independent third parties, the parties agree that MOFCOM may appoint an independent trustee to oversee the sale of 100 per cent equity interest of the specified Lucite Chinese entity.
- Operational restrictions until completion of the separation: between completion of the transaction to the completion of the capacity separation remedy or complete separation remedy, Lucite China and MRC agreed to operate independently, with separate management teams and boards of directors (the independent operation period). During the independent operation period, parties will continue to compete with one another in the sale of MMA in China, and they are prohibited from exchanging information relating to prices in China, customer information and other competitively sensitive information. Material infringement of any of the remedies provisions during the independent pperation period will result in penalties between RMB250,000 to RMB500,000.
- Restrictions on merged entity in the next five years The merged entity agreed not to, without the prior approval of MOFCOM, in the five years following completion of the transaction:
- acquire a manufacturer in China of MMA and PMMA and related products; or
- establish facilities to manufacture MMA, PMMA and related products in China.
While imposing for the first time what is essentially a divestiture remedy, MOFCOM has demonstrated some welcome flexibility in allowing MRC to achieve this end through the sale of capacity – in a type of ‘tolling arrangement’ – rather than a full business disposal. It has also allowed the parties to complete their transaction before finding a buyer, rather than adopting the ‘buyer up-front’ model that has been used in the US and, increasingly, in Europe. It is perhaps surprising, however, that the public version of the decision makes available the time periods during which MRC has to achieve compliance, given the commercial advantage this information could bestow on a potential buyer, particularly considering the more drastic nature of the alternative complete separation remedy that becomes applicable if capacity separation is not achieved.
As for further acquisitions of Chinese MMA manufacturers, the condition restricting MRC’s future conduct would appear to cover a concern that MRC might undertake transactions too small to trigger merger control in China in their own right, but that MOFCOM might nevertheless consider problematic given MRC’s share following the transaction. However, to the extent that this condition relates to non-MMA products (which were not found to be problematic) and to the establishment of new MMA facilities (ie organic growth), this condition appears difficult to justify on antitrust principles and may therefore be an indication of industrial policy considerations at play below the surface.
It is regrettable that, again, very little information about the nature of evidence that MOFCOM found to be persuasive in raising concerns is made available and that the decision includes merely a simple summary of conclusions. Nevertheless, the sum total of MOFCOM’s third intervention under the AML is to give yet further indication that China is now a merger control jurisdiction that must be taken seriously, and whose procedures need to be carefully considered at the outset of multinational transactions.