China: China Conditionally Approves Thermo Fisher/Life Technologies Merger: MOFCOM Continues To March To Its Own Drumbeat

The January 2014 conditional clearance decision by the Chinese competition authorities regarding the acquisition by Thermo Fisher Scientific Inc. ("Thermo Fisher") of Life Technologies Corporation illustrates some of the key features of the Chinese merger control regime and their implications for global M&A transactions. In particular, the design of any remedy package required to secure competition approval in China may need to take into account Chinese industrial policy considerations, which can lead to more onerous remedies than may be required in, for example, the EU and the US.

In this regard, the Thermo Fisher decision fits very much within the pattern of merger control enforcement which has been developing since China introduced its regime in August 2008. The decision reinforces the need for global, integrated competition advice, particularly where substantive competition issues may impact Chinese consumers.

China's Merger Control Regime

The Anti-Monopoly Bureau of the Ministry of Commerce of the People's Republic of China ("MOFCOM") is the governmental body with sole responsibility for enforcing the merger control provisions of the Anti-Monopoly Law ("AML").1 "Concentrations of undertakings" (essentially, mergers or acquisitions of control) which satisfy specified turnover-based thresholds2 must be notified to MOFCOM and cannot be completed without receiving prior clearance. The review period can last up to a maximum of 180 days from the date when the notification is accepted by MOFCOM as complete, although, as discussed below, there have been cases where the review has lasted significantly longer, with the parties encouraged to withdraw and resubmit their filing, thereby extending the review period. Failure to notify a concentration which meets the thresholds gives rise to potential sanctions, including fines of up to RMB 500,000 (approximately € 60,000 / US$ 80,000) and the ability of MOFCOM to order the parties to cease implementation, dispose of shares/assets or implement other measures necessary to restore the pre-merger conditions of competition. According to the 2013 Annual Antitrust Report issued by MOFCOM in December 2013, by the end of October 2013, MOFCOM had initiated nine investigations into un-reported concentrations and has completed two investigations and imposed penalties on the relevant parties thereof (details not disclosed). It has also been seen that MOFCOM has intervened in a number of high-profile transactions notified under the AML, imposing strikingly onerous and intrusive remedies as conditions to clearance in a number of cases, and issuing one prohibition decision involving a foreign purchaser and a high-profile Chinese target.

In parallel to the merger control regime, there is also a separate notification and clearance regime for transactions involving sensitive/strategic sectors, which are reviewable by inter-ministerial bodies with the power to block proposed transactions on national security grounds (similar to the review by the Committee on Foreign Investment in the United States (CFIUS), for example).

Thermo Fisher/Life Technologies Decision

MOFCOM's review of the merger between the two US-based life science companies lasted just over six months,3 culminating in a clearance decision issued on January 14, 2014 that attached five conditions, three of which were structural and two behavioral. Overall the remedies were significantly more onerous than those agreed with the US and EU agencies, which carried out parallel merger reviews.

The US Federal Trade Commission and European Commission both issued clearance decisions subject to the divestiture of Thermo Fisher's gene modulation and cell culture businesses. The European Commission also required a divestment of Thermo Fisher's polymer-based magnetic beads business, together with a two-year transitional agreement to supply magnetic beads to the divestment purchaser.

However, in addition to the divestiture of Thermo Fisher's cell culture and gene modulation businesses, MOFCOM required (i) the sale of Thermo Fisher's 51% shareholding in China's Lanzhou Minhai Bioengineering Co. Ltd., (ii) a commitment by Thermo Fisher to reduce catalogue prices for two specified product categories by 1% each year over the next ten years, without lowering the discount rates offered to Chinese distributors, and (iii) a commitment to supply those products to third parties under original equipment manufacturer (OEM) terms or, at the third party's option, offer a perpetual, non-exclusive technology license in respect of those products.

Emerging Trends in Chinese Merger Control Enforcement

Over the past five years of merger control in China, the following characteristics and trends have been observed:

Uncertain Duration of Formal Review Period

Merger reviews by MOFCOM can last longer overall than parallel review processes in the US or the EU, for example, which must be factored into overall transaction planning where a China merger filing is required. There are three possible stages in MOFCOM's review process: Phase I (30 days), Phase II (a further 90 days) and Phase III (a further 60 days). It is important to bear in mind that the 180-days clock does not start running until MOFCOM confirms that the filing is complete. There is a recent trend that the pre-review period (i.e., the period from the date the parties make the initial filing to the date MOFCOM confirms the filing is complete) is becoming longer: in 2011, the pre-review period generally lasted two to three weeks, whereas in 2013 it was about two months. In some cases, MOFCOM may ask for additional information to prolong the review period in order to allow it to process the backlog of merger filings that it has received.

If a merger raises at least some substantive competition issues, it is to be expected that MOFCOM will initiate a Phase II investigation. However, unlike the EU Merger Regulation regime, for example, it is possible to have a truncated Phase II investigation in China, with a decision being issued well before the end of the formal Phase II period. A minority of cases (i.e., those raising the most significant competition concerns) enter Phase III. According to MOFCOM's 2013 Annual Anti-trust Report, MOFCOM cleared 161 merger filings in the first ten months of 2013. Only 21 out of the 161 cases (13%) were cleared during its Phase I investigation, 130 cases were cleared after a Phase II investigation, and the other ten cases were subject to a Phase III investigation. In certain cases, MOFCOM appears to have encouraged the merging parties to pull and refile their merger filings if a satisfactory outcome could not be achieved by the end of Phase III (i.e., within the maximum period of 180 days), in order to engineer additional time for MOFCOM to complete its review over and above the statutory timetable. This was the case in Glencore/Xstrata, Marubeni/Gavilon and MediaTek/MStar, for example. In Glencore/Xstrata, MOFCOM's decision was issued more than one year from notification (and almost six months after the European Commission had reached its decision).

Similarly, the planned merger between advertising giants Omnicon and Publicis, announced in July 2013, is not expected to close before the third quarter of 2014, due in part to the ongoing merger review in China. Notably, other relevant regulators have already cleared the transaction unconditionally (including the European Commission and regulators in the United States, South Korea, Canada, India, Turkey and South Africa).

On a more encouraging note, a recently introduced fast-track process for straightforward cases should assist in alleviating the regulatory burden. On February 11, 2014, MOFCOM published the Interim Regulations on Standards for Simple Cases of Concentrations between Business Operators, which categorise certain cases as "simple" mergers, likely to benefit from a simplified review process. Nevertheless, the Standards are only the first step towards MOFCOM's long stated goal of accelerating the AML review procedure. So far, MOFCOM has not yet given a timetable regarding when the simplified review process for the simple cases will be issued.

Lack of Transparency of MOFCOM's Reasoning

MOFCOM only publishes decisions in cases where it intervenes in a merger (i.e., imposes conditions to clearance or issues a prohibition); to date there have been only 21 conditional clearances and one prohibition (out of a total of more than 749 mergers understood to have been notified since August 2008). Consequently, the lack of detailed reasoning available to parties and their advisors in the form of precedent decisions means that there is very limited visibility as to the approach that MOFCOM can be expected to take on substantive issues (e.g., market definition, theories of harm and possible defence arguments).

On the other hand, there are signs that MOFCOM is making its procedures and substantive review principles more transparent, in particular by making more frequent statistical updates available on its website and publishing guidance and regulations on how it will generally conduct its review (including, for instance, the 2009 Measures on the Notification of Concentrations between Business Operators, the 2010 Provisional Regulation on Implementation of Divestiture of Assets or Businesses in Concentrations between Business Operators and the 2011 Provisional Regulation on the Assessment of the Impact on Competition of Concentrations between Business Operators).

Increasingly Sophisticated Assessment

There is a growing perception that MOFCOM has substantiated its decisions with more detailed reasoning on substantive competition issues in its more recent cases (see for example the unilateral effects analysis in United Technologies/Goodrich, the discussion of coordinated effects in Western Digital/Hitachi and the analysis of foreclosure effects in Google/Motorola Mobility) than in some of its earlier decisions (for example, MOFCOM justified its imposition of remedies in InBev/Anheuser-Busch on the basis that the market share of the merged entity would be "relatively large" and its competitive strength "increases significantly," without giving further justification). Further, in 2009, published decisions averaged 2,275 words and took 148 days to reach, whereas in 2013 they averaged 9,610 words and 331 days.4 MOFCOM is also understood to be carrying out increasingly sophisticated merger assessments, in particular via greater use of detailed econometric evidence by its specialist Economic Division.

Likelihood of Intervention

With the notable exception of the 2009 Coca-Cola/Huiyuan attempted merger, which was blocked somewhat controversially on the grounds of "leverage theory" (otherwise known as conglomerate or portfolio effects), the vast majority of cases notified to MOFCOM have been cleared; of the 749 filings MOFCOM had reviewed during the period from August 1, 2008 (when the AML came into effect) to the end of 2013, 728 were unconditionally cleared, 20 were conditionally cleared and only one was blocked.5 Nevertheless, it is crucial from a transaction planning perspective that intervention risk in China is identified early on in the process. This is particularly so given that, if intervention appears likely, the wide-ranging and onerous nature of remedies which can be imposed by MOFCOM would clearly need careful consideration prior to being agreed and implemented.

Influence of Industrial Policy on Remedial Action

The Thermo Fisher decision is by no means the first remedies package which MOFCOM has imposed with an explicitly China-facing component. For instance, in the Glencore/Xstrata merger, as well as a divestment remedy, MOFCOM also required the merged entity to continue supplying zinc, copper and lead concentrates to Chinese customers on fair, reasonable and non-discriminatory (FRAND) terms until 2020. In the Marubeni/Gavilon merger, MOFCOM imposed a "hold separate" remedy requiring Marubeni to (i) refrain from integrating the Gavilon soya bean business with respect to exports to China and (ii) ensure that transactions between Marubeni's soya bean subsidiary and Gavilon's US assets reflect "fair market terms." Notably, the obligation is reviewable after 24 months, after which MOFCOM may release the parties – although it is not obliged to do so, giving rise to considerable legal uncertainty even after clearance has been given.

Arguably, the imposition of remedies tailored to the Chinese market should come as little surprise to merging parties and their advisors; the AML specifically allows MOFCOM to take into account "development of the national economy" in its substantive merger review. In addition, the degree of interaction between MOFCOM and other governmental ministries is higher than in, say, the US or EU – competition is considered as part of a national economic policy rather than as a completely independent area. Consequently, there is a perception that merger review in China is not necessarily independent of other government ministries and it is to be assumed that MOFCOM will have regard to the wider interests of Chinese industry and consumers – particularly when reviewing foreign-to-foreign transactions.6 Indeed, none of the intervention cases to date involve mergers between purely domestic companies. It has been reported by some commentators that certain notifiable domestic mergers (such as China Telecom/China Unicom) may not have been notified for prior clearance by MOFCOM (although in this case both state-owned enterprises were subsequently investigated by another government body with competition enforcement powers, the National Development and Reform Commission (NDRC), for alleged anti-competitive practices).

Wide-ranging Remedy Design

MOFCOM's remedies – as in Thermo Fisher – can be broader and more intrusive than those agreed with or imposed by other regulators. In large global mergers, MOFCOM can be the last competition regulator to issue a clearance decision, seemingly engineering the process where necessary to ensure that its remedies are at least as onerous as those agreed with its US and EU counterparts. In practice, this has resulted in remedies that are even more onerous, including in mergers where the market shares would not normally indicate serious competition concerns (for example, in Glencore/Xstrata and Marubeni/Gavilon the combined shares in markets where MOFCOM found concerns were less than 20%: 18% up from 7% in Glencore/Xstrata and 19% up from 16% in Marubeni/Gavilon). Further, MOFCOM is seemingly undeterred from being the only regulator to impose remedies (for example, in both Google/Motorola and Samsung/Seagate the US and EU agencies cleared the transactions unconditionally, whereas MOFCOM imposed remedies).

In terms of the types of remedies that have been imposed to date, MOFCOM seems far more willing to consider "hold separate" obligations not merely as an interim solution pending the outcome of a review or implementation of a remedy but rather as (part of) the solution to a perceived competition concern, as demonstrated in its Marubeni/Gavilon, Samsung/Seagate and Western Digital/Hitachi decisions. By contrast, the US and EU agencies' preference for "structural" remedies (i.e., divestments) is well-known. Statistics show that there have been more behavioral remedy cases than structural remedy cases in China: among the 21 conditional clearance cases, 11 cases were subject to behavioral remedies, four cases were subject to structural remedies, and the other six cases were subject to behavioral-structural combined remedies. There is also a recent trend of MOFCOM imposing combined remedies. During the three and a half years from 2008 to 2012, only two out of the 16 conditional clearance cases were subject to combined remedies; from 2013 to February 2014, however, MOFCOM imposed combined remedies in four out of the five conditional clearance cases.

Pending Decisions

There are several important decisions in MOFCOM's pipeline. As well as the ongoing Omnicon/Publicis case discussed above, the recent acquisition by Microsoft of Nokia's mobile phone business (also currently under review by MOFCOM) may create another important precedent. The case has recently entered Phase III and MOFCOM is expected to announce its findings in April. In early 2014, several Chinese mobile phone manufacturers were reported to have expressed concerns that the merger would result in higher patent royalties, to have lobbied MOFCOM to impose conditions such as a royalty cap at the current level and to have raised concerns about the continuing effectiveness of current licensing terms. It will be interesting to observe whether and how such domestic pressures will impact MOFCOM's decision.

Shearman & Sterling offers seamless global coverage in merger control and other antitrust areas, being present in key jurisdictions across the globe and having established relationships with regulators and top-tier local counsel in a number of key jurisdictions (including China).With an extensive track record in merger control in the US, EU and several other jurisdictions, our lawyers have successfully represented clients in some of the most difficult and significant recent merger and acquisition transactions and obtained unconditional clearances for our clients in a number of recent high profile cases. These include Aditya Birla/Columbian Chemicals, Caterpillar/Bucyrus, IntercontinentalExchange/NYSE Euronext and United Airlines/Continental Airlines. In other transactions, our lawyers were instructed late in the case, including after the commencement of a Phase II, yet were able to turn the situation around and obtain successful outcomes for our clients, such as in Syniverse/BSG. Where remedies are required, we have an excellent record in reaching a successful settlement on the basis of innovative remedies which adequately deal with the authority's concern without undermining the commercial value of the acquisition, such as in Schering-Plough/Organon and Thomson/Reuters.

Footnotes

1. Anti-Monopoly Law of the People's Republic of China [2007] Presidential Order No. 68, August 2007.

2. The current thresholds for notification are: the total worldwide turnover of all parties to the transaction in the previous financial year exceeded RMB 10 billion (approx. € 1.2 billion / US$ 1.6 billion) and the turnover in China of each of at least two parties to the transaction in the previous financial year exceeded RMB 400 million (approx. € 50 million / US$ 65 million); or the combined turnover in China of all parties to the transaction in the previous financial year exceeded RMB 2 billion (approx. € 245 million / US$ 325 million) and the turnover in China of each of at least two of the parties to the transaction in the previous financial year exceeded RMB 400 million.

3. In this particular case, MOFCOM reached its decision two weeks before the US review had completed.

4. Calculated with data announced on MOFCOM's official website, www.mofcom.gov.cn.

5. Wang, Xiaoye and Emch, Adrian,"'Five years of implementation of China's Anti-Monopoly Law – achievements and challenges," Journal of Antitrust Enforcement (August 2013). The cases are as follows: 2008: InBev/Anheuser; 2009: Coca Cola/Huiyuan; Mitsubishi Rayon/Lucite; GM/Delphi; Pfizer/Wyeth; and Panasonic/Sanyo; 2010: Novartis/Alcon; 2011: Uralkali/Silvinit; Alpha V/Savio; GE/Shenhua JV; and Seagate/Samsung; 2012: Henkel/Tiande JV; Western Digital/Hitachi; Google/Motorola Mobility; United Technologies/Goodrich; Wal-mart/Yihaodian; and ARM-GD-Gemalto JV; 2013: Glencore/Xstrata; Marubeni/Gavilon; Baxter/Gambro; and MediaTek/MStar.

6. Reports in February 2014 suggested that further MOFCOM regulations are in the pipeline that will give it greater ability to intervene in global merger transactions that may have an impact on domestic customers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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”

Mondaq Advice Centre (MACs)
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
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.