On June 2, 2011, the Chinese Ministry of Commerce (MOFCOM)
announced conditional approval of the merger between Russian potash
producers Silvinit and Uralkali. Since the PRC Anti-Monopoly Law
("AML") entered into force in 2008, MOFCOM has published
only eight decisions, as it makes public only prohibition decisions
and decisions imposing remedies. As of the end of 2010, MOFCOM had
reviewed 189 concentrations under the AML.
This new decision confirms that, even in global markets, MOFCOM
will ensure that a concentration does not adversely affect Chinese
buyers, particularly where it involves products that are essential
for China's economic development.
Review process
MOFCOM moved quickly in this case. It received Uralkali's initial merger filing on March 14, 2011. On April 12, MOFCOM decided to open its second phase investigation for further review. On June 2, well within the 90-day phase II investigation period, MOFCOM issued its decision.
Relevant markets
MOFCOM determined that the product market relevant to the proposed merger was the potassium chloride market. What geographic market it relied on is uncertain. MOFCOM looked at market shares at both the global and national level. While parts of the decision seem to acknowledge the global nature of the market, MOFCOM states that the merger would have anticompetitive effect in the Chinese market.
Effect on competition
In its competition analysis, MOFCOM discussed the high market
concentration in the potassium chloride market. According to the
decision, potassium resources are concentrated geographically and
the supply of potassium chloride is concentrated in a small number
of companies. The merger would then lead to further concentration.
The combined company would account for over one-third of global
market share and become the second largest supplier. After the
merger, the combined firm together with the market leader would
supply around 70% of the global market.
About half of Chinese demand for potassium chloride is met by
imports. MOFCOM determined that the proposed merger would increase
the likelihood that global suppliers could coordinate their
activities, possibly to the detriment of market competition.
Further, MOFCOM found that about one-third of China's potassium
chloride imports come from border trades with the merging parties
and that the merger would restrict competition in the Chinese
border trade market. MOFCOM also found that the merger would affect
Chinese industries, which rely significantly on imported potassium
chloride.
Restrictive conditions
MOFCOM conditioned its approval of the merger on compliance with
four obligations, intended to mitigate the adverse effects of
restricted competition in the Chinese market.
First, after the merger, the combined entity must continue its
existing sales practices, continue selling to Chinese markets by
direct trading, and continue to stably, reliably, and with
"utmost efforts" supply potassium chloride to the Chinese
market. The requirement of doing its "utmost"
(尽心尽力) to supply the
Chinese market suggests a certain flexibility and subjectivity in
this condition.
Second, the combined company must supply a complete array of
potassium chloride products to the Chinese market, in sufficient
quantities. It also must continue to supply Chinese customers so as
to meet their requirements for every use. The language here is more
definite than that in the first condition, and disconcertingly
unqualified. It is unclear to what extent MOFCOM will imply a
reasonableness inquiry into this condition, for example partially
relieving the company of its compliance obligations when they would
be impossible or commercially impracticable, such as during periods
of unexpected increases in demand.
Third, the combined company must maintain its customary negotiation
process, "fully considering the history, current
circumstances, and uniqueness of the Chinese market," for both
spot sales and contract sales. The full implications of the
"uniqueness" (特殊性)
inquiry are unclear.
Fourth, the combined company must report on its adherence to these
commitments. It must appoint a trustee to supervise its
performance, and MOFCOM reserves the right to inspect, monitor, and
oversee the company to ensure that it meets those commitments.
Observations
1. It is unclear whether this decision is based on a finding of
coordinated or unilateral effects. That is, it is not clear whether
MOFCOM is more concerned with the likelihood that the remaining
suppliers will tacitly coordinate output and price or that the
combined Silvinit/Uralkali will have the ability unilaterally to
increase price by restricting its output. The decision indeed
refers to coordination by the major producers, but also notes that
the merging parties would "gain a stronger market
power."
2. For determining coordinated effects, under the AML there is a
rebuttable presumption of collective dominance where two
undertakings have 67% of the market. It appears from the decision
that the mere "likelihood" that the parties will adopt a
common policy would be sufficient for MOFCOM to conclude the
existence of coordinated effects. This contrasts with the position
in Europe, where collective dominance requires that there be (1)
market transparency, so that the members of the oligopoly can
detect deviation from the common policy, (2) mechanisms to deter
such "cheating," and (3) the inability of competitors and
consumers to disrupt the common policy. In China, it may be crucial
for undertakings merging in a highly concentrated market to submit
detailed economic evidence to exclude the likelihood of coordinated
effects.
3. One result of this decision is that it imposes behavioral
remedies on the second-largest player, but leaves the largest
player free to compete without comparable marketing restrictions,
although collectively they are found to be dominant. Obviously,
MOFCOM did not have jurisdiction in this case to impose any remedy
on the largest player, as it was not part to the concentration. One
question is whether, in a merger leading to collective dominance,
any remedy would be effective short of prohibition or a divestiture
enabling entry by a new player capable of upsetting coordination
between the largest surviving players. Similarly, if the basis of
the decision is single dominance on the part of the second largest
player, the paradox is that the second player would actually be
hampered in its ability to compete against the largest
player.
4. The behavioral remedies imposed here echo, but are less narrowly
tailored than, those in GM/Delphi, where MOFCOM also
imposed conditions to protect domestic trading partners. MOFCOM
prohibited the combined GM/Delphi from discriminating
against domestic customers, and required it to continue supplying
goods of reliable quality in a timely manner, but only at market or
contract prices and quantities. In contrast, the combined
Uralkali/Silvinit is required to meet the demands of Chinese
customers for all applications, a more stringent requirement.
Further, the other conditions imposed in GM/Delphi were
narrow and specific (no sabotaging other car manufacturers during
the transition period, no sharing trade secrets of domestic
companies, no discriminating against unaffiliated suppliers). Here,
the requirements that the combined company continue doing its
utmost to supply potassium chloride and consider the uniqueness of
the Chinese market are broader and highly subject to
interpretation.
5. The main lesson from this decision is that, more than any other
major jurisdiction, MOFCOM will pay close attention to the effect
of a global merger on domestic buyers, especially for products
viewed as essential for economic development. This is made clear in
the AML itself, which requires MOFCOM consider "the effect of
the concentration on national economic development."
Similarly, the recently adopted national security review procedure
permits the PRC to block the acquisitions of Chinese assets when
they would affect national security, including the stability of the
national economy (see our February 2011 Alert, "
China's New National Security Review Will Examine Foreign
Investment in Chinese Companies").
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