The Chinese merger review agency, Ministry of Commerce (MOFCOM), has been active in releasing draft merger regulations for public comments and conditionally approving merger deals.
1. MOFCOM Solicitation for Public Comment on the Interim Provisions on the Applicable Standards in Simple Cases of Concentrations of Undertakings (Consultation Draft)
On April 3, 2013, MOFCOM released the Interim Provisions on the Applicable Standards in Simple Cases of Concentrations of Undertakings (Consultation Draft) (Draft Standards) for public comment. The consultation period ended on May 2, 2013.
The Draft Standards is a follow-up action of an announcement of the policy initiative regarding simplified procedures for certain mergers by MOFCOM in 2012. It is noteworthy that the proposed rules merely deal with the definition of simple cases, and do not touch on procedural issues.
As per Article 2 of the Draft Standards, the following concentrations will be treated as simple cases:
(i) in the same relevant market, the total market share of all parties is less than 15%;
(ii) where there is an upstream or downstream relationship between the parties, the market share in each of the upstream and downstream markets is less than 25%;
(iii) where there is no upstream or downstream relationship between the parties, the market share in each of the markets is less than 25%;
(iv) where the parties propose to establish an off-shore joint venture that are not intended to engage in business in China;
(v) where the parties propose to conduct an off-shore acquisition in which the target will not engage in business in China; or
(vi) where a joint venture controlled by two or more undertakings comes under the control of one or more of those undertakings through a concentration.
Nevertheless, according to Article 3, the following concentrations will not be treated as simple cases despite that they can fulfill the Article 2 requirements mentioned-above:
(i) where a joint venture controlled by two or more undertakings comes under the control of one of those undertakings, and the controlling undertaking competes against the joint venture in the same relevant market;
(ii) it is difficult to define the relevant market;
(iii) the concentration may adversely affect market entry or technological progress;
(iv) the concentration may adversely affect consumers or other relevant undertakings;
(v) the concentration may adversely affect economic development; or
(vi) other circumstances where MOFCOM holds that the concentration may adversely affect market competition.
Pursuant to Article 4, MOFCOM may revoke its decision to treat a concentration as a simple case if:
(i) the notifying parties conceal important facts or provides fraudulent or misleading information;
(ii) a third party alleges that the concentration has or may have the effect of eliminating or restricting competition, and provides relevant evidence; or
(iii) MOFCOM finds that the circumstances surrounding the concentration or competition in the relevant market have changed significantly.
Additionally, Article 5 stipulates that if the notifying parties conceal important facts or provides fraudulent or misleading information, MOFCOM shall deal with it according to Article 52 of the Anti-Monopoly Law of China, that is, MOFCOM shall order the parties to make rectification, and impose a fine of less than 20,000 RMB on individuals, and a fine of less than 200,000 RMB on entities; and in case of serious circumstances, the merger review agency may impose a fine of 20,000 to 100,000 RMB on individuals, and a fine of 200,000 to one million RMB on entities; where a crime is committed, the relevant individuals and undertakings shall assume criminal liabilities.
2. MOFCOM Solicitation for Public Comment on the Regulations on Imposing Restrictive Conditions on Concentrations of Undertakings (Consultation Draft)
On March 27，2013, MOFCOM released the Regulations on Imposing Restrictive Conditions on Concentrations of Undertakings (Consultation Draft) (Draft Regulations) for public comment. The consultation period ended on 26 April 2013.
The Draft Regulations were made on the basis of the 2010 Interim Provisions on the Divestiture of Assets or Business in the Concentration of Undertakings. The proposed regulations seek to provide legal ground for making, assessing, and supervising restrictive conditions.
The Draft Regulations cover the types of restrictive conditions that MOFCOM may exert, the execution of merger remedies, the monitoring of conditions, the alteration or withdrawal of decisions on restrictive conditions, and the legal liabilities of breach.
Article 5 of the Draft Regulations provides that MOFCOM may impose structural, behavioral, or hybrid remedies. Among others, structural remedies include the divestiture of tangible assets, intellectual property or relevant rights or interests; behavioral remedies refer to granting access to essential facilities, licensing of essential technologies including patents, know-how or other intellectual property, or terminating exclusive agreements. According to Article 13, behavioral remedies shall last 10 years, unless otherwise stated in MOFCOM’s conditional clearance decision.
According to Section II of the Draft Regulations, upon the receipt of the notification of MOFCOM stating that the concentration will or is likely to eliminate or restrict competition, the parties shall submit proposed remedies within the time limit prescribed by MOFCOM, otherwise the concentration may run the risk of being banned. The parties shall submit the final version of the proposed remedies at least 20 days prior to the review deadline. When evaluating the proposed remedies, MOFCOM may
(i) consult with relevant government departments, industry associations, businesses, and consumers;
(ii) issue questionnaires; or
(iii) hold hearings.
As per Article 14, divestiture may be carried out by the parties or a divestiture trustee where the parties are not able to complete the divestiture within the specified time period. Article 15 sets out the requirements that the buyer of the divested assets or businesses must meet. The parties must find a buyer and sign a sales agreement within six months of MOFCOM’s conditional clearance decision which can be extended by a maximum of three months by MOFCOM, unless otherwise stated in the decision. In some circumstances, however, MOFCOM may require the parties to find a suitable buyer and enter into an agreement before the completion of the notified transaction. The parties must complete the divestiture within three months of signing the purchase agreement which can be extended by a maximum of one month by MOFCOM. The parties are required to maintain the independence and separateness of the business to be divested prior to its divestment.
As per Article 23, the parties must submit a list of candidates for the monitoring trustee to MOFCOM within 15 days of MOFCOM’s conditional clearance decision and, if applicable, a list of candidates for the divestiture trustee 30 days before entering the divestiture period. Where the parties do not think it necessary to have a monitoring trustee, they must provide explanations to MOFCOM. The Draft Regulations also outline the duties and responsibilities of the parties to sign written contracts of mandate with trustees, pay for the services provided by the trustees, and furnish necessary supports to the trustees.
With regard to the requirements that a qualified monitoring trustee or a divestiture trustee has to satisfy, Article 25 stipulates that a trustee has to satisfy the following requirements:
(i) stay independent from the divestiture obligor and the buyer of the divested assets or business;
(ii) have professional team with professional knowledge, skills and experience that are required to fulfill trustee responsibilities;
(iii) present feasible plans;
(iv) other factors that MOFCOM may consider.
The merger remedies may be varied or withdrawn at the parties’ request or by MOFCOM. When assessing the parties’ request, according to Article 32, MOFCOM shall consider the following conditions:
(i) whether the fundamental deal on which the merger review decision was based has changed significantly;
(ii) whether the competition conditions in the relevant market have changed materially;
(iii) whether the proposed alteration or withdrawal is in line with public interest;
(iv) other factors.
Pursuant to Article 34, if any party breaches MOFCOM’s conditional clearance decision, the authority shall order the breaching party to rectify the breach within a certain period of time. If the breach is serious, the implementation of the notified transaction will be stopped. MOFCOM may also impose a maximum fine of 500,000 RMB on the breaching party. If a trustee does not properly perform its duties prescribed in the Draft Regulations, MOFCOM may order it to rectify the breach or return the remunerations, forfeit the remunerations, or disqualify the trustee for the current deal. In case of serious breach, MOFCOM may disqualify the trustee for all future deals.
3. MOFCOM Conditionally Clears Glencore’s Acquisition of Xstrata
On April 16, 2013, MOFCOM released its conditional approval of the Glencore/Xstrata deal.
After a year-long review process, MOFCOM approved the deal with certain restrictive conditions, following the merger review agencies of other relevant jurisdictions, such as the EU, South Africa and Australia.
According to MOFCOM, Glencore and Xstrata have horizontal overlaps and vertical relations in several relevant markets. The relevant markets were defined as copper concentrate, zinc concentrate, and lead concentrate and that the proposed acquisition would have a significant impact on the international and Chinese markets.
In the competitive analysis of copper concentrate market, MOFCOM concluded with the following six points: the concentration
(i) will increase the amount of copper resources controllable by Glencore;
(ii) will increase the controlling force of Glencore on the copper concentrate market;
(iii) will strengthen Glencore’s integration of cooper supply chain;
(iv) may alter the contract terms in the existing competitive landscape;
(v) will increase the entry barrier of the copper concentrate market; and
(vi) will weaken the bargaining power of Chinese downstream enterprises, and hence harm consumer interests in the copper concentrate market.
As for zinc and lead concentrate markets, MOFCOM held that the concentration will not only increase the controlling power of Glencore on zinc and lead concentrate markets, but also strengthen Glencore’s integration of zinc and lead supply chain.
Based on the above-mentioned assessments, MOFCOM and the concentration parties had several rounds of negotiations upon how to remedy the MOFCOM’s competitive concerns. The final result reached by both sides is a clearance with several restrictive conditions.
Ex post the transaction, Glencore shall divest the Las Bambas copper mine in Peru before the date specified by MOFCOM. In case that Glencore cannot complete the divestiture before the specified dates, one of alternative copper mines, including the Tampakan, Frieda River, El Pachón and Alumbrera mines will be designated by MOFCOM to be auctioned without reserve.
(i) Post-merger, Glencore shall supply Chinese customers with the long-term contract offer of no less than the minimum quantity of the copper concentrate form 2013 to 2020. In 2013, the minimum quantity is 900,000 metric tonnes of copper concentrate.
(ii) Post-merger, the transaction, Glencore shall continue to provide Chinese customers with long-term contracts and spot contracts offer of zinc and lead concentrate at fair and reasonable rates, and also keep the offer in line with prevailing international market terms by taking into account the product quality, the number of cross-delivery, payment terms, buyer credit and other relevant factors.
What’s worth noting for enterprises is that, the Glencore /Xstrata took more than one year to obtain the final decision from MOFCOM since the filing was officially accepted. It used to be thought that the longest time window for MOFCOM’ merger review is 180 days, given that the time limit for phase I, II and III is respectively 30 days, 60 days and 90 days. According to the decision made by MOFCOM in this case, however, the parties withdrew the filing near the end of phase III and resubmitted it shortly. So the actual time consumed was much longer than the 180-day time window.
Interestingly, it is by no means the first time that concentration parties withdraw the filing when it is near to the MOFCOM’s statutory time limit. The Western Digital/ Hitachi case and Marubeni/Gavilon case have also witnessed the phenomenon of withdrawal and resubmission.
4. MOFCOM Conditionally Clears Marubeni’s Acquisition of Gavilon
On April 22, 2013, MOFCOM announced its conditional approval of Marubeni Corporation (Marubeni)’s acquisition of Gavilon Holdings (Gavilon).
The acquiring company is a comprehensive trading company headquartered and listed in Japan. Marubeni engages in international trade spanning from food materials, food, raw materials, chemicals, energies, metals, mineral resources, to transportation machineries. Having 24 subsidiaries and branches with mature distribution channels and logistics storage facilities in China, Marubeni has been taking the lead in importing staple agricultural products into China in two consecutive years since 2011.
Headquartered in the U.S., the acquired company is a private staple commodity management firm that chiefly deals with grain, fertilizer, and energy products globally. Gavilon ranks third in North America in terms of procurement, storage and trading of grain and has one branch in China.
On May 29, 2012, the two companies entered into an equity interest purchase agreement, according to which Marubeni would acquire all equity interest of Gavilon through Gold Marble, a newly established wholly-owned U.S. subsidiary of Marubeni.
According to MOFCOM, the relevant commodity markets are the soybean, corn, soybean meal, and dried distillers grains import markets; and the relevant geographic market is China.
Given the existing comprehensive advantage of Marubeni in China’s soybean import market and the influence of Gavilon in North American soybean market, MOFCOM held that the proposed deal might lead to enhanced control by Marubeni over China’s soybean import market and thereby having the effect of eliminating or restricting competition.
Accounting for 60% of global soybean trade and 80% of domestic supplies, the soybean import of China tops the list of all soybeans importers. Having almost all of its soybeans exported to China, Marubeni is the largest player in the Chinese market and has competitive edge in market distribution and client resources. Meanwhile, Gavilon has substantial influence in North America in soybean procurement, warehousing and logistics, and owns multiple purchasing platforms in main soybean producing areas and export facilities in Northwest coast of the U.S. Therefore, MOFCOM believed that following the concentration, Marubeni would be able to further expand its supplies of soybeans based on Gavilon’s capacities in North America, and strengthen Marubeni’s control of the Chinese soybean import market by virtue of the well-established distribution network and client resources.
MOFCOM also reasoned that the proposed concentration would make market entrance more difficult, given that access to sourcing channels and marketing networks, and economy of scale are necessary conditions to compete effectively in the market. In the past five years, there has been no important entrant of the global soybean trading market or Chinese soybean import market.
Additionally, MOFCOM noted that the proposed deal might further weaken the bargaining power of Chinese soybean crushers who have low concentration and small scale.
MOFCOM concluded that the proposed acquisition of Gavilon by Marubeni is likely to eliminate and restrict competition in the Chinese soybean import market. Nevertheless, MOFCOM found that it would be difficult for the concentration to eliminate or restrict competition in the Chinese corn, soybean meal, and dried distillers grain markets, considering that the parties’ combined market shares are 6%, 4.5%, and 8.4% respectively, and there are many strong competitors in the markets that can discipline any post-merger anti-competitive conducts.
After rounds of negotiations between the notifying parties and MOFCOM, the agency eventually confirmed that the remedy proposals submitted by Marubeni on April 17, 2013 could address the competitive concerns caused by the proposed concentration.
Within 6 months of the merger clearance date, Marubeni shall set up two separate and independent legal entities and operations teams that are charged with exporting and selling soybeans to China. The “separation” and “independence” refer but are not limited to personnel decisions, procurement, marketing, sales and pricing.
(i) Following the concentration, Marubeni’s subsidiaries shall not purchase soybeans from Gavilon’s U.S. assets unless such transaction is on fair terms;
(ii) Marubeni’s and Gavilon’s soybean subsidiaries shall not exchange information that is competitive in nature.
(iii) Marubeni shall appoint an independent monitoring trustee to oversee its fulfillment of the above-mentioned duties.
It is noteworthy that the parties withdrew the application near the end of Phase III and resubmitted it shortly. As indicated in Marubeni/Gavilon case, recent Glencore/Xstrata case and some others, in the face of complicated and sensitive merger deals, the strategy of withdrawal and resubmission might become a norm for notifying parties in China to avoid direct rejection by MOFCOM and maintain more leeway. However, at this point, it is too soon to tell.