Background

On 2 May 2017, China’s Ministry of Commerce (MOFCOM) announced its conditional clearance of the proposed US$130 billion all-stock merger of equals between the Dow Chemical Company (Dow) and E.I. du Pont de Nemours and Company (DuPont), marking the first conditional clearance that MOFCOM has granted this year. MOFCOM imposed structural and behavioural remedies on both parties — which are active in plastics, chemicals and agro-chemicals, among other sectors — to address various competition-related concerns. The transaction has been subject to merger control clearance from more than 25 competition authorities globally, including the European Commission, which granted conditional clearance on 27 March 2017.

MOFCOM’s concerns

MOFCOM found that the parties horizontally overlapped in nine different national agrochemical markets and seven different global material sciences and specialty products markets. MOFCOM also found that vertical relationships existed between the parties in an additional nine relevant global material sciences and specialty products markets. MOFCOM identified four markets where it believed that there was a risk of competition being eliminated or limited: (i) Chinese rice selective herbicides ,(ii) Chinese rice pesticides,(iii) global acid co-polymer market, and (iv) global ionomer market.

MOFCOM found that the parties had a high combined market share in the Chinese markets for rice selective herbicides and rice pesticides and identified three key factors as contributing to the risk of competition being eliminated or limited: (i) high barriers to entry (due to high R&D costs, shortened patent protection periods and onerous environmental standards), (ii) increased risk of reduction in global R&D due to the parties’ significant individual contributions, and (iii) the negative impact on downstream distributors (due to the increased geographic penetration of the merged entity reducing the need for distributors).

MOFCOM found the parties had a prominent combined market share in the global acid co-polymer and ionomer market. Furthermore, on MOFCOM’s analysis, the parties also accounted for nearly 100% of the Chinese ionomer market and approximately 75% of the Chinese acid co-polymer market.

Remedies

Structural and behavioural remedies were required from both parties to address MOFCOM’s concerns.

DuPont was required to divest all rice selective herbicides containing either of two active ingredients (Metsulfuron or Azimsulfuron) and all rice insecticides containing any of three active ingredients (cyantraniliprole, chlorantraniliprole or indoxacarb), as well as all related tangible and intangible assets and employees relating to any of the aforementioned products. In addition, DuPont was required to divest all related global R&D capabilities, including two pipeline products.

Dow was required to divest the entirety of its global acid co-polymer and ionomer businesses, including all related tangible and intangible assets, licenses and permits, customer and supply contracts.

MOFCOM required the parties to guarantee that the merged entity would:

  • Supply Dow’s existing sulfoxaflor product (used to control the rice plant hopper pest) to third parties on a non-exclusive basis at a reasonable price (i.e., not higher than the average price of the product in the past 12 months) for five years after completion
  • Supply certain of DuPont’s existing rice selective herbicide and rice pesticide products (containing any of bensulfuron-methyl, bensulfuron-methyl-oxazolone or pyrazosulfuron-ethyl) to third parties on a non-exclusive basis at a reasonable price (not higher than the average price of the product in the past 12 months) for five years after completion
  • Refrain from requiring Chinese distributors to supply products containing any of seven named active ingredients on an exclusive basis

Commentary

MOFCOM’s structural remedies largely conformed to the remedies that the parties had entered into with the European Commission. The parties had submitted to the European Commission the divestment of DuPont’s entire global R&D organisation (excluding a limited section relating to pesticides), all rice selective herbicide and rice insecticide products containing the same aforementioned active ingredients (as well as products containing seven other additional active ingredients), and all related tangible and intangible assets and personnel underpinning the divested products.

However, MOFCOM’s three behavioural remedies addressed concerns distinct to China. These concerns largely contributed to the lengthy review process that spanned more than 400 days. The imposition of these remedies reflect the strong concerns that third parties raised locally.

This transaction reflects a broader trend of consolidation in the global agrochemical industry, including ChemChina’s planned acquisition of Syngenta (conditionally cleared by the US Federal Trade Commission in April 2017, although still being reviewed by several other antitrust regulators). MOFCOM’s conditional clearance of Dow/DuPont overcomes a tricky hurdle in the merger control process of this transaction, with potential competition implications for the other transactions in this industry.