China: China´s Competition Regulator Imposes Conditions On Two Proposed Mergers Under The AML

Last Updated: 12 October 2009
Article by Martyn Huckerby and Malcolm Leong

China's Ministry of Commerce (MOFCOM) has continued its recent trend of taking an activist approach to merger control in imposing conditions under the Anti-Monopoly Law (AML) on the clearance of two proposed mergers, Pfizer/Wyeth and General Motors/Delphi.

General Motors' Acquisition Of Delphi Subject To Conditions - 28 September 2009

On 28 September 2009, MOFCOM announced its decision to clear General Motors Company's (GM) acquisition of Delphi Corporation (Delphi). The clearance is subject to conditions placed on both GM and Delphi.

Background And Merger Review Process

GM is a US car manufacturer with a leading position in the global and Chinese car market. GM manufactures and sells passenger cars and commercial vehicles in China. Delphi is a US manufacturer of automotive components which was spun off from GM in 1999 and filed for bankruptcy in 2005. In China, Delphi is an exclusive supplier to a number of vehicle manufacturers.

The sale of Delphi to GM has been approved by US and EU courts and the transaction obtained clearance from the European Commission under the EU Merger Regulation on 13 August 2009.

GM submitted a merger filing to MOFCOM on 18 August 2009. MOFCOM commenced a preliminary review on 31 August 2009 and on 28 September 2009 it announced it had cleared the transaction, subject to conditions.

MOFCOM's Competition Concerns And Conditions Of Clearance

MOFCOM identified that although there is no horizontal overlap between the products and services provided by GM and those of Delphi, the parties do have a vertical relationship in the upstream and downstream automotive markets. Considering both parties are in a leading position in their respective relevant market in China, MOFCOM determined that the transaction could have an adverse impact on competition in both the Chinese vehicle market and the upstream automotive components market.

However, the parties to the transaction provided a remedy proposal which MOFCOM believes is sufficient to address its competition concerns and to alleviate any negative impact. MOFCOM therefore accepted the remedy proposal of the parties and granted approval subject to conditions. The table below illustrates the competition issues identified by MOFCOM and the relevant remedies imposed on GM and Delphi.

MOFCOM's Competition Concerns

Remedies Imposed By MOFCOM

As Delphi is the exclusive supplier to many Chinese vehicle manufacturers, the concentration may result in an adverse impact on the supply of components to Chinese vehicle manufacturers in terms of supply stability, price and quality, which would have the effect of eliminating or restricting competition in the Chinese car market.

After the concentration is completed, GM and Delphi must guarantee that Delphi and its controlling affiliates shall continue to supply products to Chinese vehicle manufacturers without any discrimination. The parties shall also undertake that Delphi and its controlling affiliates will guarantee a timely, reliable and quality delivery as usual, and will guarantee the price and quantity of supply to be determined by market rules or agreements. Further the supply must not be subject to any unreasonable conditions which may directly or indirectly eliminate or exclude market competition.

Considering GM's possible participation on Delphi's board of directors, GM may be able to obtain from Delphi sensitive information of other Chinese vehicle manufacturers, such as R&D technology and car model material, which would have the effect of eliminating or restricting competition in the Chinese car market.

After the concentration is completed:

  • GM must not illegally seek confidential information of other Chinese vehicle manufacturers from Delphi
  • Delphi must not illegally reveal to GM any confidential information of other Chinese vehicle manufacturers which is under its possession, and
  • Both parties must not formally or informally illegally exchange or communicate third parties' confidential information that is in relation to competition.

Where Chinese vehicle manufacturers intend to switch to other automotive components suppliers, Delphi may not be cooperative and thus may increase the cost of doing so. This will also have the effect of eliminating or restricting competition in the Chinese car market.

After the transaction is completed, GM and Delphi must guarantee that Delphi and its controlling affiliates will cooperate with clients in changing their suppliers upon each client's legitimate request. The parties must also guarantee that Delphi and its controlling affiliates would not deliberately delay clients changing or impose restrictive conditions in order to increase the cost for such change.

GM may increase its procurement of automotive components from Delphi after the concentration is completed, which may make it more difficult for other automotive components enterprises to access GM's procurement channel. This will have the effect of eliminating or restricting competition in the Chinese automotive components market.

After the concentration is completed, GM must continue to procure automotive components from various sources without any discrimination. GM shall not impose unreasonable conditions which are in favour of Delphi and unfavourable to other suppliers.

Pfizer's Acquisition Of Wyeth Subject To Conditions - 29 September 2009

On 29 September 2009, just one day after the GM/Delphi decision, MOFCOM announced another clearance, with restrictive conditions, for Pfizer Inc.'s (Pfizer) acquisition of Wyeth Corporation (Wyeth).

Background And Merger Review Process

Pfizer is a US pharmaceutical company with global operations in the human health and animal health sector, as is its rival, Wyeth. Both companies supply a number of human health and animal health products in China, including J1C (penbritin), N6A (anti-depressants), a vaccine for swine mycoplasma pneumonia, and a vaccine for swine pseudorabies and mixed vaccine for dogs.

MOFCOM received Pfizer's merger filing application regarding its proposed acquisition of Wyeth on 9 June 2009. MOFCOM commenced its preliminary review on 15 June. By 15 July, which was the expected deadline of the preliminary review, MOFCOM identified competition issues regarding the transaction in the area of animal health products and therefore decided to conduct a further review. Finally, on 29 September, MOFCOM announced it had cleared the concentration, subject to conditions.

The European Commission and the Commerce Commission of New Zealand gave approval to the deal in July and August 2009 respectively, while the Australian Competition and Consumer Commission cleared the transaction in September 2009 subject to an undertaking to divest certain assets. The transaction remains subject to regulatory approval in the US and Canada.

Competition Concerns

MOFCOM considered following its investigation that the concentration between Pfizer and Wyeth may have the effect of limiting or excluding competition in the market for swine mycoplasma pneumonia vaccine. According to the information obtained by MOFCOM:

  • The market share of the merged entity would reach 49.4% (Pfizer now holds 38% and Wyeth 11.4%) which is a much larger share than Intervet/Schering-Plough Animal Health, who is second in the market with only 18.35%, and other competitors in the market which hold less than 10% of the market. As such, the merged entity would have the ability to use its scale to expand in the market and to control the market price
  • Market concentration is high and as a result the proposed concentration would have the effect of eliminating or excluding competition in the Chinese market of swine mycoplasma pneumonia vaccine, as evidenced by analysis using the Herfindahl-Hirschman Index (HHI), and
  • Technological barriers to entry into the relevant market would be even higher and the merged entity might limit other companies from development by taking advantage of its scale in the Chinese market.

MOFCOM Decision And Conditions Of Clearance

MOFCOM consulted extensively with relevant government agencies, industry associations, competitors, upstream and downstream entities and also discussed proposed conditions with Pfizer to address its concerns.

MOFCOM imposed a series of conditions on clearance of the merger, whereby Pfizer must divest its swine mycoplasma pneumonia vaccine business in mainland China under its brands of "Respisure" and "Respisure One". The subject matter of the divestiture includes any tangible, intangible assets and intellectual property rights of Pfizer which are necessary to ensure the continuity and competitiveness of the divested business. Within six months, Pfizer must, through a trustee, find an independent buyer that is approved by MOFCOM and execute an agreement for sale of the relevant business. If Pfizer fails to find a buyer within the above prescribed period, MOFCOM may appoint a new trustee to dispose the relevant business with no set minimum price.

MOFCOM has also required that a provisional manager be appointed by Pfizer during the six months divestiture period. The manager is to monitor the divestiture and is to protect the continuity, marketable quality, competitiveness and independency of the business to be divested.

Further, for a period of three years following the divestiture, Pfizer is required, upon the request of the buyer, to provide reasonable technical support, to assist in purchasing materials needed for the production of the swine mycoplasma pneumonia vaccine, and to provide training and consultancy services to the buyer and its staff.

Implications

Both merger decisions highlight the activist role MOFCOM is starting to take, particularly as it seeks to foster a culture of compliance with the AML and position itself as one of the leading competition regulators in the region. It further highlights the importance of implementing a carefully planned Chinese merger control strategy where a transaction involves two or more firms with operations in the same or related market in China.

Both of MOFCOM's merger clearance decisions concern acquisitions by US companies where both parties have businesses in China with considerable market share. It may be seen from the decisions that:

  • For transactions where two or more parties have operations in the same or related markets in China MOFCOM will extensively consult with parties and carefully consider the feasibility of granting merger clearance subject to restrictive conditions as an alternative to outright refusal
  • MOFCOM is adopting internationally-accepted methods for carrying out its investigations, such as the use of the HHI index, and continuing its trend (as per its previous InBev/A-B and Mitsubishi Rayon/Lucite decisions) of considering remedies routinely used in other jurisdictions as a means of alleviating its concerns. An example of this is the use of trustees to effect the sale of the swine mycoplasma pneumonia vaccine business in mainland China by Pfizer
  • The behavioural remedies imposed in both cases are likely to require ongoing monitoring by MOFCOM (and the potential for MOFCOM to need to deal with third party complaints). This suggests that MOFCOM is not yet adopting the approach of other competition regulators in preferring remedies that do not require them to have an ongoing role in enforcement
  • Despite the willingness of MOFCOM to consider the use of behavioural remedies, MOFCOM will be prepared to require divesture as a remedy to alleviate any negative impact that might be caused by a transaction, and
  • Merger clearance by Chinese authorities continues to be an important aspect of international transactions, given the significant number of international businesses with a presence in Chinese markets. The complexity of the process and importance of third party comments suggest that where the merging parties are in the same or related sectors, there will be value in appointing both an external law firm and a public relations agency, which is a strategy frequently employed in other jurisdictions.

While most decisions of MOFCOM do not result in conditions or prohibition of the transaction (and therefore do not need to be reported), the latest two decisions are helpful in understanding the approach MOFCOM will take in less straightforward cases. Following these two "warning shots" merging parties will only ignore the Chinese merger control process at their peril.

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.

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