China's Ministry of Commerce ("MOFCOM") today announced that it has approved a proposed 1.6 billion dollar takeover by Japanese group Mitsubishi Rayon Co., Ltd ("Mitsubishi Rayon") of unlisted UK acrylics market Lucite International Group Limited ("Lucite"), subject to several significant conditions.
In particular, Mitsubishi Rayon has agreed that several aspects of Lucite's existing operations in China will continue to be operated independently until they can be divested - effectively to ensure a sufficient degree of competition is maintained in relevant Chinese markets. Additionally, Mitsubishi Rayon has agreed not to expand relevant aspects of its operations in China for five years by acquisition of capacity expansion.
This decision comes just five weeks after MOFCOM's rejection of Coca-Cola's proposed acquisition of China's Huiyuan Juice Group, and is a further reminder to the business sector about the importance of considering China's Anti-Monopoly Law ("AML") when making decisions on the viability, structure and timing of M&A deals.
Background of the deal
Mitsubishi Rayon announced the proposed takeover in November 2008, after reaching an agreement with Lucite's top shareholder, Charterhouse Capital Partners, to buy all the shares of Lucite.
Although neither Mitsubishi Rayon nor Lucite is based in China, both have considerable sales and manufacturing operations in China. Accordingly, the deal triggered the mandatory reporting and review processes under the AML.
Notification materials were submitted by Mitsubishi Rayon on 22 December 2008, and after supplemental information requests, the notification was accepted on 20 January 2009. The deal was also notified in other jurisdictions beyond China. After approval was obtained by Korea's antitrust regulator in February, China was left as the only regime not to have approved the deal prior to 24 April 2009.
MOFCOM's concerns about the deal
After a 30-day preliminary analysis period ending 20 February 2009, MOFCOM notified the parties that it was exercising its right under the AML to conduct 'second stage' review. This indicated that MOFCOM believed there were some significant competition issues warranting further investigation.
Prior to release of its decision on 24 April 2009, MOFCOM had not publicly indicated what concerns it had about the transaction. However, it was widely recognised that overlaps in relation to several aspects of the parties' operations could give rise to anti-competition issues. This was confirmed by the decision statement, in which MOFCOM note that while several areas of overlap were not considered to raise concern (namely, specialty monomers, polymethyl methacrylate ("PMMA") and PMMA acrylic moulding compounds and PMMA acrylic sheet), the overlap in relation to production and sales of methyl methacrylate ("MMA") was viewed as raising significant anti-competitive issues:
- MOFCOM believes that the transaction would very possibly have a negative impact on efficient competition in China’s MMA market, due to the horizontal overlap in the parties MMA operations. The statement notes that the market share of Mitsubishi Rayon post-merger would be approximately 64% - a far greater market share than that of the second and third largest market participants in China (Jilin Petrochemical and Heilongjiang Longxin Company respectively).
- Since Mitsubishi Rayon operates in both the MMA market and two downstream markets, MOFCOM was concerned about possible 'vertical' impacts of the transaction. In particular, MOFCOM was concerned that, post-merger, Mitsubishi Rayon would be capable of producing 'blocking effects' to its competitors in the downstream markets via the dominant position it had acquired in the upstream market of MMA.
According to the decision statement, MOFCOM asked Mitsubishi Rayon and Lucite to propose feasible remedies to address the competition-related concerns it had identified. After the parties submitted initial and then revised remedies proposal to MOFCOM, MOFCOM determined that these would fully eliminate the anti-competitive aspects of the deal, and therefore approved the deal subject to restrictive conditions reflecting those remedies.
The relevant conditions are as follows:
- Capacity Divestment
Lucite International (China) Chemical Industry Co., Ltd. ("LICC") will conduct an upfront divestment (the "Capacity Divestment") of 50% of its annual MMA production capacity for five years to one or more unaffiliated third party purchasers (the "Third Party Purchasers").
The Third Party Purchasers will have the right to purchase 50% of LICC’s annual MMA products produced by LICC for five years at a unit cost equal to the production and management cost per unit (i.e., cost price, with no added profit margin), which shall be verified by an independent auditor on an annual basis.
In the event that the Capacity Divestment is not completed within the divestment period, the parties agree that MOFCOM will have the option to appoint an independent trustee which will be authorized to sell 100% equity interest in LICC to an independent third party (a "Full Divestiture").
The Capacity Divestment will be completed within six months from the closing of the proposed transaction, which may be extended by MOFCOM at its discretion for six months if requested by LICC with reasonable justifications for the extension.
- Independent Operation of LICC Until Completion of Capacity Divestment
LICC will be managed independently from the MMA monomer business operations of Mitsubishi Rayon in China ("MRC China") with independent management and board membership during the period from the closing of the transaction to the completion of the Capacity Divestment or, if applicable, the Full Divestiture (the "Independent Operating Period").
During the Independent Operating Period, LICC and MRC China will continue to sell MMA in competition with each other in China and will not share pricing, customer and other competitive information in relation to the China market.
LICC and MRC China undertake to pay penalties in a combined amount between RMB 250,000 and RMB 500,000 (with the amount determined by MOFCOM based on the nature of the violation and its impact on market competition in China) for material violation of the undertakings during the Independent Operating Period.
- No Acquisition and No New Plant in China For Five Years
Without the prior approval of MOFCOM, during a period of five years from the closing of the transaction, the post-merger MRC will not:
(i) acquire a domestic Chinese producer of MMA monomer, PMMA polymer or cast sheet in China, or
(ii) complete a new plant for MMA monomer, PMMA polymer or cast sheet in China.
Learnings from this case
A number of important lessons can be drawn from this decision, as set out below:
- Understanding the broad reach of the AML merger control regime
The decision highlights the broad reach of the AML's merger control regime. Although neither Mitsubishi Rayon nor Lucite is based in China, their significant sales and operations in China provided MOFCOM with the right to review the deal and impose significant conditions. Given the increasingly important status of Chinese markets for many international businesses, more and more companies will find that the benefits of increased participation in Chinese markets may be tarnished by the risk of having relevant M&A deals they conduct subject to MOFCOM's review.
- Considering AML issues at an early stage in deal development
In a previous client alert we published in relation to MOFCOM's decision to prohibit Coca-Cola proposed acquisition of Huiyuan Juice Group, we noted how AML merger control review can dramatically impact deal timetables. It is understood that MOFCOM's review of the Coca-Cola transaction took almost six months (from the date that the parties first approached MOFCOM with notification materials), while for this Mitsubishi Rayon deal, MOFCOM's decision took approximately four months (and it is now six months since the deal was first publicly announced).
This demonstrates that businesses whose transactions may be subject to merger filing requirements under the AML should prioritise the preparation of the filing, and consult with MOFCOM at an early stage to determine precisely what data they require to be included. Additionally, ensuring open lines of communication with MOFCOM at an early stage will assist parties to obtain 'early warnings' about concerns that may need to be addressed.
Further, there will be circumstances in which it is prudent to consider alternative deal structures at an early stage, or even implementing proactive divestments or the giving of undertakings to MOFCOM, to address potential areas of concern and facilitate prompt approval.
- Consulting with concerned parties
MOFCOM now regularly consults with interested parties about deals that are under review, and MOFCOM's decision statement makes it clear that some extensive consultation with trade associations and relevant industry participants occurred before reaching its decision.
Accordingly, it will be prudent for parties submitting merger filings in China to conduct advance discussions (where feasible) with relevant competitors, customers and industry associations, to brief them on positive aspects of a deal that is to be notified. This may increase the prospect of regulatory consultation with these parties proceeding promptly and smoothly.
- Assisting MOFCOM by explaining complex products and markets
This transaction concerned, in part, some complex chemical products. It is likely that MOFCOM officials were required to undertake some significant education about the products to properly understand the parties' business and the impact of the acquisition on relevant markets in China.
Businesses reporting deals to MOFCOM that involve complex products or markets should be conscious of the need to ensure they can provide the regulator with relevant and 'plain English' explanations of matters such as the manufacturing process and commercial uses for their products. This is especially important in emerging competition law jurisdictions, where it is not uncommon for regulatory authorities to use the merger review process as an opportunity to study an industry and conduct analysis and education - so that they are better placed to review deals relating to the industry in the future.
- Ensuring there is scope for 'last minute' changes to deal structures
From this ruling, and MOFCOM's previous decision to place restrictive conditions on its approval of Belgian brewer InBev's acquisition of US brewer Anheuser-Busch, it is clear that MOFCOM is willing to consider and discuss with parties how their deals may be altered to address identified competition concerns. Indeed, MOFCOM has made it clear that it sought (but was unable to agree) a 'compromise' position with Coca-Cola before rejecting its proposed acquisition of Huiyuan Juice Group.
Going forward, it is important that parties submitting merger filings in China are attuned to the prospect that MOFCOM may want to negotiate 'last minute' changes to the deal structure, or to impose forward looking conditions restricting the market behaviour of the transaction parties after the deal is implemented. Advance consideration should be given to the kinds of negotiated outcomes that may be acceptable.
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