The most recent conditional merger approval decision by the Ministry of Commerce of the People's Republic of China ("MOFCOM") provides new insights into the development of one of the world's fastest growing merger control agencies. Last week MOFCOM gave conditional approval to Thermo Fisher Scientific's acquisition of Life Technologies. Most notable were the faster speed of MOFCOM's review and the agency's increased use of economic analysis. This decision also highlights how MOFCOM is charting its own course, which often leads it to impose remedies beyond those required by enforcement agencies in other jurisdictions.
Thermo Fischer and Life Technologies both produce and supply analytical instruments and laboratory consumables such as reagents. Thermo Fischer announced its acquisition of Life Technologies in April 2013. MOFCOM's decision was announced on January 14, 2014. The transaction was approved with conditions in other jurisdictions including Australia, Canada, Europe, Japan, New Zealand, and the United States.
Timing of MOFCOM's approval
Businesses and lawyers complain that the MOFCOM approval procedure takes too long, and in fact it often is the last regulatory approval that must be obtained before a merger can close. The lengthy review is sometimes due to MOFCOM having to consult with other interested agencies within the Chinese government, sometimes to a lack of resources within MOFCOM, whose merger control regime still is just six years old. MOFCOM's four conditional approvals in 2013 took 8 months (Baxter/Gambro), 10 months (Marubeni/Gavilon), 12 months (Glencore/Xstrata) and 14 months (Mediatek/MStar).
MOFCOM approved the Thermo Fischer transaction somewhat faster. According to the published decision, it took 6.5 months between filing and approval, despite the heavy use of economic data.
Future MOFCOM merger reviews also could go faster. The anticipated introduction of a simplified procedure for "simple" mergers is expected to free up MOFCOM resources that then can be allocated to more complex transactions.
The parties to transactions that may raise questions for China should as early as possible try to anticipate what remedy might be required and develop a potential remedy that could be presented to MOFCOM if necessary. MOFCOM sometimes expresses its concerns very late in the process, which leaves the parties little time if they wait until then to think about a remedy. This may require the parties to pull and refile to grant MOFCOM more time, which can significantly lengthen the approval process.
Increased use of economics
MOFCOM's published decision in Thermo Fischer / Life Technologies indicates that MOFCOM made a significant use of economic data in its review. MOFCOM used the Herfindahl-Hirschman Index ("HHI"), a standard formula for gauging the increase in concentration brought about by the merger. In the thirteen markets in which the postmerger HHI was above 1500 (a relatively low threshold), MOFCOM applied a second filter in the form of a margin-HHI regression and the "Illustrative Price Rise" test ("IPR"). The IPR test is used by the authorities in the United Kingdom and elsewhere to quantify the possible price impact of a merger. MOFCOM further investigated the twelve markets in which the predicted price increase was above 5%. For four of these markets, MOFCOM came to the conclusion that there were a large number of competitors, unlimited production capacity, and low barriers to entry and therefore did not impose a remedy. This is the first time that a published MOFCOM decision has reflected such use of complex econometrics in the agency's review.
While the HHI does not require extensive data, the calculation of regressions and IPR likely required the parties to provide a substantial amount of data. Unlike the EU and U.S., MOFCOM has not yet established the office of a "chief economist" who can discuss the use of economic tools with the parties and their advisors. It is important for the parties to a complex transaction, where MOFCOM staff are likely to use econometric analysis, to gather and analyze the data themselves as early as possible. This will allow the parties not only to rapidly submit the data to MOFCOM but also to have prepared their own conclusions based on the data. This is more effective than waiting for MOFCOM to come to its own conclusions and then preparing a rebuttal.
China's own remedies
In its most recent conditional approvals of mergers, MOFCOM decisions have reflected its willingness to impose remedies that go beyond what other jurisdictions require, even in markets that are "worldwide" and not limited to China or an Asia region. The same was true in the Thermo Fischer / Life Technologies case. For example, MOFCOM did not focus on the two companies' overlap in polymer-based magnetic beads, which led authorities in the EU and Canada to seek a divestiture. Instead, MOFCOM focused on different products and imposed unique behavioral remedies that were not required in other jurisdictions.
Thermo Fischer and Life Technologies both make SSP Reagent kit and SDS-PAGE Standard protein products. SSP Reagent kit is widely used in organ transplantation, and the parties' combined market share would be 40-50%. The merged company therefore would have market power and the ability to raise price, according to MOFCOM. The parties' combined share for SDS-PAGE Standard protein, used for protein testing, would be 56% in China. According to MOFCOM, the incremental market share would not be substantial, but the increase in market concentration would be "relatively high" and therefore "limit the options of downstream customers." MOFCOM required that the merged company to, for the next ten years:
- Offer to Chinese customers a 1% annual discount off the catalogue prices of SSP Reagent Kit and SDS-PAGE Standard Protein Products and commit not to reduce the discounts to Chinese distributors.
- Give third parties the choice of receiving the SSP Reagent Kit and SDS-PAGE Standard Protein Products through an OEM agreement or a perpetual and non-exclusive IP license relating to these two products.
Where merging parties compete and together would have market share in an overlapping line of business, it is most common for authorities to impose a "structural" remedy such as a divestiture. A structural remedy restores the market structure and therefore restores premerger competition. However, China has shown some preference for behavioral or conduct remedies, which require that the merged company commit to take or refrain from certain actions, such as to provide discounts or not to merge the overlapping parts of the parties' businesses.
China's different approach to merger remedies can be explained by the different role of government and "competition" law in that country.
First, imposition of behavioral remedies is common in China perhaps because it is more a regulatory solution, not despite that. Among the ten conditional merger approvals granted by MOFCOM in the last two years, nine have had a behavioral remedy, sometimes along a structural remedy. Governments in other jurisdictions infrequently use behavioral remedies because it a regulatory solution, not a market-based solution, and because it take agency resources to monitor compliance. However, the Chinese government, which still partially controls that country's economy, will remain less reluctant to micromanage business for the foreseeable future.
Second, MOFCOM's mandate includes an assessment of the impact of a transaction on the development of the national economy. It is not a pure competition analysis. Even in markets that have a worldwide scope, MOFCOM will ask for China-specific data (not always easy to gather) so that it can assess the transaction's affect on China alone. This also helps explain why MOFCOM will not simply adopt the remedies imposed by other governments around the world.
Companies whose deals are subject to merger review in China should anticipate how the economic and regulatory landscape in China can create issues specific to China – sometimes a challenging undertaking given the size of that country.
MOFCOM's decision of January 14, 2014, can be found here (in Chinese).