China: Unusual Remedies a Feature of Mofcom’s 6th Conditional Clearance Decision

Last Updated: 23 August 2010
Article by Hannah C. L. Ha and Gerry P. O'Brien

China's Ministry of Commerce (Mofcom) has approved the proposed acquisition by Swiss pharmaceutical company Novartis AG ("Novartis") of world-leading eye care company Alcon Inc. ("Alcon"), subject to conditions.

The decision, announced on 13 August 2010, is Mofcom's first published merger control decision in almost 10 months, and the sixth time that Mofcom has included conditions in its approval of an M&A transaction under China's Anti-Monopoly Law. Notably, all of these decisions have applied to transactions between foreign multinationals (and the single prohibition decision that has been announced concerned a foreign takeover of a domestic Chinese business).

The latest decision has attracted particular scrutiny because of the unusual nature of the conditions attached to Mofcom's approval. In this legal update, we examine the decision and identify the key learnings that the business sector can draw from it.

Background: The Novartis/Alcon transaction

Novartis purchased a 25% stake in Alcon during 2008, and subsequently announced that it intended to purchase a controlling stake in the company.

One of the key commercial drivers of the deal was the incentive of combining Alcon's world-leadership in ophthalmic surgery products with Ciba Vision – a Novartis subsidiary specialising in contact lenses and related products. According to the Novartis' takeover plan communicated to Mofcom, Alcon would be established as a new Novartis eyecare division, and Novartis would cease some minor overlapping operations in the relevant sector.

Originally published August 20, 2010

Keywords: antitrust agencies, clearance decision, Mofcom, Novartis, China

The proposed transaction was required to be notified to antitrust agencies in several jurisdictions, including the US, Canada, EU, Singapore and China. Singapore's Competition Commission issued an unconditional clearance decision in relation to the deal in May this year, while the European Commission and Canada's Competition Bureau cleared the deal in early August after Novartis offered to divest its eye care businesses to address competition issues identified in those jurisdictions. The US regulators reached a settlement agreement with Novartis just a few days after Mofcom's decision was published, with Novartis agreeing to sell off a cataracts drug to a third party under that agreement.

Notification to Mofcom and identified competition concern

According to Mofcom's decision notice, Novartis formally notified the proposed transaction in China on 20 April 2010.

After preliminary review, Mofcom determined that the transaction may have the effects of eliminating or restricting competition in relation to two product markets in China:

i. The product market relating to ophthalmic anti-inflammatory and anti-infective compounds (a drug that can be used for the treatment of eye inflammation or infections, especially after ophthalmic surgery, and hereafter referred to for convenience as "medicated eye-care products"); and

ii. The product market relating to contact lens care products,

and thus decided to initiate further review on 17 May 2010. Overall, Mofcom's formal review process in relation to the transaction took just under four months.

According to the decision notice, Mofcom's concerns about the impact of the proposed transaction on these product markets were as follows:

i. Medicated eye-care products

Mofcom determined that the combined market share of Novartis and Alcon in the product market relating to medicated eye-care products would, post-completion, exceed 55% globally and 60% in China. It is notable, however, that the China market share figure was based on Mofcom's determination that Alcon's current China market share was over 60% - while Novartis' share of this China market was less than 1%.

Although Novartis advised Mofcom of its decision to withdraw its existing operations in the global and Chinese market for this type of product, Mofcom appears to have been concerned about the prospect of Novartis seeking to strengthen its position in the relevant market in China by reversing this decision after completion of its acquisition of Alcon.

ii. Contact lens care products

Mofcom determined that the combined market share of Novartis and Alcon in this product market would reach nearly 60% post-completion, which was much greater than the global market share of the parties' main competitors. Additionally, Mofcom determined that the parties would have a market share in China of nearly 20%, making it the second largest player by market share (behind Taiwanese company Haichang Contact Lens Co. Ltd. ("Haichang"), which has a market share in China exceeding 30%).

Mofcom also noted that a Novartis subsidiary had in place a strategic partnership agreement with Haichang, under which Haichang was the exclusive distributor in China of relevant contact lens care products produced by the Novartis subsidiary. Mofcom expressed concern that coordination between Haichang and Novartis/Alcon post-completion could also produce restrictive effects in the market.

Negotiation and determination of remedies

It is clear from the decision notice that Mofcom and Novartis engaged in extended negotiation of remedies with Mofcom to allay the regulator's concerns about the impact of the transaction on relevant product markets in China. Indeed, the notice states that the finalised remedies were reached by consensus. Those remedies are as follows:

1. In order to address Mofcom's concerns about the impact of the transaction in respect of the product market relating to medicated eye-care products, Novartis is required by the end of 2010 to cease its own sales of such products in China. The restriction on such sales will last for a period of five years from the date of Mofcom's decision.

2. In order to address Mofcom's concerns about the impact of the transaction in respect of the product market relating to contact lens care products, Novartis must terminate its strategic partnership agreement with Haichang within 12 months of Mofcom's decision.

In accordance with interim rules that Mofcom published in July regarding the implementation process for merger control remedies, Novartis is required to report to Mofcom regarding its fulfilment of the above conditions, and to appoint a trustee to conduct supervision in respect of the same.

Mofcom's unusual and under-explained remedies

Mofcom's decision to require that Novartis withdraw its medicated eye-care products from the China market may be seen as unusual given Novartis's tiny share of the relevant market in China. Although Novartis had already communicated to Mofcom its intention to effect such withdrawal, it is difficult to ascertain (and certainly the decision notice does not explain) why Mofcom would identify a need to make this a binding commitment for a five year period given that Novartis' existing market share was minor enough to suggest that the merged entity would not be able to materially increase its market power if Novartis continued with its participation in the market in conjunction with Alcon.

Even if Mofcom had legitimate concerns regarding this issue, a more favourable remedy (in terms of benefiting consumers by increasing market choice) may have been to order Novartis to sell its business in the market rather than withdraw it altogether. Again, while there may have been sound reasons for not pursuing this remedy, they are not explained in Mofcom's decision notice.

Mofcom's decision to require that Novartis terminate its strategic partnership agreement with Haichang is perhaps more understandable, given its concern about the potential for ongoing market coordination between two significant players in relation to the supply of contact lens care products in the region. However, while few antitrust analysts would question the validity of Mofcom exploring these concerns during its review process, the decision notice provides little evidence of intensive investigation of the issue. The notice simply states that the relevant agreement may lead to coordination on pricing, sales volumes, and sales regions - and thereby restrict competition - without providing the kind of considered analysis of the actual likelihood and actual market impact of such coordination that is commonplace in the merger review decisions of regulators in more mature competition law jurisdictions.

Conclusion

Notwithstanding the unusual and under-explained remedies imposed by Mofcom in relation to this transaction, there are some encouraging elements to the decision for the wider business sector. In particular, many business operators will welcome the fact that Mofcom continues to be keen to negotiate remedies with parties to transactions that it identifies as raising competition concerns, and is flexible enough to accept proposed remedies that address such concerns even if they are more favourable to the transaction parties than alternatives which could be construed as beneficial to consumers and the broader competitive process of the market.

However, many observers of China's antitrust regime will also have noted the irony in the fact that this decision was announced just a day after Mofcom held a news conference in which it defended its treatment of foreign businesses under the merger control system - notwithstanding that only foreign companies had been subject to remedies in merger clearance decisions until that point. Mofcom's latest merger decision continues that record, and may lead to further questions from foreign commentators regarding whether political pressure is restricting Mofcom's ability to subject domestic transactions to the same level of scrutiny as foreign deals.

Copyright 2010. JSM, Mayer Brown International LLP and/or Mayer Brown LLP. All rights reserved. Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: JSM, a Hong Kong partnership, and its associated entities in Asia; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and Mayer Brown LLP, a limited liability partnership established in the United States. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions