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China's Ministry of Commerce celebrates the second anniversary of its anti-monopoly law by announcing conditional clearance of Novartis' acquisition of Alcon

  • China

    31-08-2010

    On August 13, China's Ministry of Commerce ("MOFCOM") announced its conditional clearance of the acquisition of Alcon Inc ("Alcon") by Novartis AG ("Novartis"). This was the first conditional clearance announced by MOFCOM in ten months and only the sixth to have happened since the enactment of China's first ever comprehensive Anti-Monopoly Law ("AML"). In this edition of China in Focus, we will look more closely at the decision and reflect on some of the key moments in the first two years of China's new, and still developing, antitrust regime.

    Novartis and Alcon

    Novartis and Alcon are both global suppliers of pharmaceutical products. Novartis, headquartered in Switzerland, is a leader in life science products with a broad portfolio across a range of sectors. Alcon, based in Texas and previously owned by Nestle S.A., specialises in the manufacture and provision of eyecare products to the surgical, pharmaceutical and consumer markets.

    The proposed transaction, worth US$28billion (approx £18billion), was notified in 19 jurisdictions, most of which cleared the acquisition without any difficulties. It was brought to the attention of MOFCOM in April 2010, MOFCOM then opened its case file on the same day as it became aware of the proposed transaction. MOFCOM identified initial competition concerns following its 30 day phase 1 review period and decided to proceed to phase 2 and to undertake a detailed investigation of the proposed transaction.

    Affected markets

    Following consultations with Novartis, Alcon and other affected parties, MOFCOM identified that competition issues could potentially arise in two relevant product markets. Firstly, the market for opthalmological anti-inflammatory/anti-infective products; and, secondly, the market for contact lens products. However, MOFCOM did not make any decision on the geographical markets affected by the proposed transaction and whether the market for these products was global or restricted to China wide.

    In the market for opthalmological anti-inflammatory/anti-infective products, the post acquisition aggregate market shares of the two parties is 55 per cent globally and over 60 per cent in China. However, in China, Novartis' share is tiny and represented an increment of less than one per cent to Alcon's existing market share (of over 60 per cent).

    In the market for contact lens products, the transaction results in a combined global market share of 60 per cent for the merged entity, although the share in China is only 20 per cent. The biggest manufacturer and supplier of contact lens products in China is the Taiwanese company, Ginko International, which has a market share of more than 30 per cent. One of Novartis' subsidiaries (Shanghai Ciba Vision Trading Co., Ltd) has entered into an exclusive distribution agreement with Haichang Contact Lens Co., Ltd, a subsidiary company of Ginko International, for the distribution of Novartis contact lens products in China.

    Conditions imposed

    In order to address the concerns of MOFCOM regarding the anti-competitive effects of the transaction on the affected markets in China, the parties offered some undertakings which were accepted by the regulator following two rounds of negotiations.

    Novartis claimed that it had already planned to cease manufacture and supply of its anti-inflammatory/anti-infective product "Infectoflam". However, MOFCOM went one step further by requiring that Novartis do not sell Infectoflam, or any similar products within China for the next five years.

    In relation to the contact lens market, MOFCOM was concerned that the exclusive distribution agreement between Novartis and a subsidiary of Ginko could lead to the two parties being able to collude on issues such as pricing and distribution and may have enabled them to align their behaviour within the Chinese market place. Therefore, MOFCOM required that Novartis terminate the agreement with Ginko within 12 months after MOFCOM's decision coming into effect.

    MOFCOM's clearance timetable

    MOFCOM received notification of the transaction in April 2010 and adhered rigidly to the timetable for reviewing transactions set out by the AML, finalising its phase 1 review after 30 days and passing its final decision one day before the end of the 90 day second phase period. By finalising its review before the end of the second phase, it avoided the need to continue on to a third, and final, phase of review which can last an additional 60 days.

    As mentioned above, MOFCOM opened its case file in relation to the transaction on the same day as notification was received. This represents a huge improvement in the conduct of MOFCOM in responding to notifications, and a radical departure from its behaviour for previous notifications made in the infancy of the AML. With earlier notifications, it could take months for MOFCOM to open a case file and it would often require the parties to submit further information and explanations or to come and provide presentations to its case team members.

    Analysis

    The decision in Novartis/Alcon to prohibit the exclusive distribution agreement between subsidiaries of Novartis and Ginko is the first time that MOFCOM has imposed a condition to react to possible "coordinated effects" arising from a merger. Coordinated effects are those that arise between the merged entity and another competitor in the market place. Whilst MOFCOM did not provide a full analysis of the coordinated effects in its decision, this shows that MOFCOM is increasing the potential range of reasons for its intervention in merger cases in line with practice in European jurisdictions.

    Whilst the Novartis/Alcon decision shows encouraging signs that MOFCOM is being more sophisticated in its approach to reviewing transactions that have an impact on the Chinese market. However, the necessity of MOFCOM's intervention is questionable and a European jurisdiction may not have chosen to take such action in a case where there was less than a one per cent increment to the pre-merger market share of the market leader.

    The Novartis/Alcon decision also shows that, even though there have been improvements in the internal systems of MOFCOM, when it comes to reviewing mergers, there are still gaps in its analysis. In this decision it failed to stipulate whether it considered the relevant geographic market to be global or limited to China (it appears that MOFCOM took market share in both markets into consideration). It also failed to explain how the condition on Novartis not to sell "Infectoflam" or a similar product in China for five years from the date of the merger would assist in helping to reduce the anti-competitive effects of the acquisition on either the global or Chinese market for ophthalmic anti-inflammatory and anti-infective products.

    The Novartis/Alcon decision demonstrates that all foreign companies engaging in acquisitions that have an affect on the Chinese market, even where their market shares in China are very small, should be aware of MOFCOM's willingness to intervene in the merger and the impact that this will have on the transaction timetable. Out of the 140 merger notifications received by MOFCOM since the inception of the AML, around half have proceeded to the second phase of investigation despite the fact that many did not appear to result in any anti-competitive effects. When a merger proceeds to the second stage of investigation this can result in a delay of up to 120 days before a decision is reached.

    Two years of the AML - the story so far

    The day before it announced the conditional clearance of the Novartis/Alcon transaction, MOFCOM hosted a "stock take" briefing to mark the second anniversary of the AML. This meeting was chaired by Mr Shang Ming, Director General of the Anti-Monopoly Bureau.

    The briefing covered the life of the AML since it came into force, the main points to arise from the briefing were:

    • Since the inception of the AML, MOFCOM has accepted 140 merger review applications for review. Out of these 140 merger review applications, MOFCOM has completed review of approximately 90 per cent of the cases.
    • 95 per cent of the mergers reviewed were approved unconditionally. Only 5 mergers have been approved subject to conditions (Anheuser Bush/InBev, Mitsubishi/Lucite, General Motors/Delphi, Wyeth/Pfizer and Panasonic/Sanyo) and only one merger has been rejected (Coca-Cola's controversial proposed acquisition of Chinese fruit juice manufacturer Huiyuan).
    • Out of all the mergers reviewed, more than half of the mergers were cleared within the first stage (lasting 30 days); the remainder of the mergers were cleared within the second (lasting 30-90 days) and third stages (lasting a maximum of 60 days after the finish of the second stage).
    • Shang Ming noted that the proportion of mergers entering the second stage of review was somewhat higher than that in the US or the EU. Shang Ming admitted that sometimes mergers entered into the second stage due to a lack of time to carry out the necessary consultations and examination rather than there being any actual antitrust issues.

    Shang Ming reacted to recent media reports accusing MOFCOM of allowing preferential treatment to Chinese State Owned Enterprises (SOEs) and being more severe when examining mergers involving foreign enterprises. Shang Ming emphasised that this was not the case and insisted that all business operators, including SOEs, privately-owned companies and foreign companies are treated equally by MOFCOM.

    Shang Ming thought that the fact that there had been no published merger decisions involving local Chinese companies (i.e. decisions which had been conditionally approved or rejected) was down to the fact that the AML merger thresholds were more likely to be triggered by acquisitions involving multinational foreign companies due to their "financial strength".

    MOFCOM's merger decisions - highlights so far

    MOFCOM is only legally required to publish mergers decisions which are subject to a conditions or which rejected entirely. The decision in the Novartis/Alcon case is the sixth conditional clearance imposed by MOFCOM since the AML came into force. Below, we look at some of the other major decisions made by MOFCOM in this time.

    Inbev's US$52bn acquisition of Anheuser Busch receives conditional clearance: November 2008

    On 18 November 2008, MOFCOM published its decision to clear InBev NV/ SA's proposed US$52bn acquisition of Anheuser-Busch Companies Inc, subject to conditions. This was the first time that MOFCOM required the merging parties to agree to undertakings in order to obtain clearance under the AML.

    Even though MOFCOM stated that the transaction would not eliminate or restrict competition in China's beer market, it nevertheless added that, given the large scale of the acquisition and the strong market share and market position of the combined group, conditions would be imposed to minimise potentially adverse effects on China's beer market in the future.

    MOFCOM required that: Anheuser-Busch's existing 27 per cent stake in Tsingdao Brewery may not be increased; InBev should notify MOFCOM in a timely manner if there are any changes in its controlling shareholders, or the shareholders of such controlling shareholders; InBev should not increase its existing 28.56 per cent stake in Zhujiang Brewery; and InBev should not hold any stake in China Resources Snow Breweries or Beijing Yanjing Brewery, two other major breweries in China.

    Coca-Cola / Huiyuan deal rejected by Ministry of Commerce: March 2009

    On 18 March 2009 China's MOFCOM formally rejected Coca-Cola's proposed US$2.4 billion acquisition of China's Huiyuan Juice Group, the country's leading pure juice manufacturer.

    The planned acquisition was potentially the largest ever foreign takeover of a Chinese company and was the first major acquisition to be blocked by MOFCOM for being anti-competitive under the AML.

    MOFCOM was roundly criticised at the time of the decision for its failure to provide any clear indication of the justification for the decision and only publishing a brief 1400 word announcement which lacked any in-depth analysis or explanation. Many commentators at the time accused MOFCOM of putting nationalistic concerns ahead of antitrust theory and thought that it had missed an opportunity to give valuable guidance on how it would handle foreign acquisitions of Chinese companies.

    Mitsubishi / Lucite deal approved conditionally: April 2009

    On 24 April 2009, MOFCOM announced that it had approved the US$1.6 billion takeover of UK acrylic manufacturer Lucite International Group by Mitsubishi Rayon, subject to several significant conditions.

    MOFCOM concluded that the deal would lead to certain "negative impacts", both horizontally and vertically, due to a combined market share of 64 per cent following the merger and would have the effect of eliminating or restricting competition unless the conditions were complied with.

    MOFCOM imposed conditions that required Lucite to sell half of its annual methyl methacryalte (MMA) monomer production capacity to a third party within 6 months for a period of five years. If the divestment is not completed within six months, then MOFCOM retained the power to unwind the transaction and arrange for the sale of 100 per cent of Lucite China to a third party. MOFCOM further required that both Mitsubishi and Lucite continue to operate their businesses separately until the divestment is complete and that, following the merger, the merged entity must not acquire any other MMA producer or establish any production plants for MMA in China.

    GM/Delphi merger approved subject to conditions: September 2009

    On 28 September 2009, MOFCOM published its decision to approve the US$1.75billion merger between General Motors (GM) and Delphi Corporation, a previously bankrupt car-parts manufacturer, subject to the companies completing several required conditions.

    Despite the deal being cleared unconditionally in the EU, MOFCOM identified four areas of concern arising out of the merger following consultations with car manufacturers. These included worries that the combined entity would be too powerful for local car manufacturers to compete and that Delphi might pass confidential information regarding other manufacturers to GM.

    The conditions imposed by MOFCOM included requirements that Delphi would continue to supply other domestic car makers without discrimination and will not increase switching costs for other manufacturers. GM was required to abstain from seeking information from Delphi regarding other domestic manufacturers and to continue to comply with multi-sourcing and non-discrimination principles when purchasing automotive parts. Both parties are required to make regular reports to MOFCOM about their compliance with the conditions.

    Pfizer/Wyeth deal approved subject to divestment conditions: September 2009

    The day after its decision on the GM / Delphi acquisition, MOFCOM announced a further conditional clearance - this time in the $68billion acquisition of drug maker Wyeth by Pfizer, Inc.

    MOFCOM determined that the merger would have an adverse effect on competition in the market for the vaccine for mycoplasmal pneumonia in swine in China, as the combined market share in this sector would be 49.4 per cent following the merger, significantly higher than the next competitor.

    MOFCOM therefore required that Pfizer should divest its Chinese swine mycoplasmal pneumonia vaccine business, including IP assets, to an approved third party within 6 months of the merger. Pfizer is also required to provide reasonable technical support to the purchaser of the business for up to three years. If Pfizer fails to find a purchaser then MOFCOM has the power to appoint a trustee to dispose of the business with no reserve price.

    MOFCOM clears Panasonic and Sanyo Merger but requires divestments outside of China: October 2009

    On 30 October 2009, MOFCOM announced that it conditionally approved the US$8.87 Billion acquisition of Sanyo Electronic Co., Ltd ("Sanyo") by Panasonic Corporation ("Panasonic"). The proposed deal triggered pre-merger filing obligations in major jurisdictions around the world and the deal had received conditional clearance from the Japanese and European competition authorities. However, compared to other jurisdictions, the conditions imposed by MOFCOM had significantly more far-reaching effects.

    MOFCOM identified that the merged entity would hold high market shares on three battery-product markets and that the merger could potentially eliminate or restrict competition. MOFCOM required that Sanyo and Panasonic sell both their button and civil battery businesses to a third party within 6 months of the acquisition and, if they were unable to find a buyer within that time frame, MOFCOM would appoint an independent trustee to transfer the business to an independent third party.

    MOFCOM also required Panasonic to transfer its vehicle battery business, located in Japan, to a third party approved by MOFCOM within 6 months of the acquisition, or an additional period of 6 months if approved by MOFCOM (otherwise MOFCOM would transfer the business to an independent third party). MOFCOM further required that Panasonic reduce its shareholding in Panasonic Energy Co., Ltd ("PEVE"), a joint enterprise company with Toyota to make vehicle batteries, from 40 per cent to 19.5 per cent following the acquisition. Panasonic was also required waive its right to appoint PEVE directors, vote in PEVE's shareholder meetings and PEVE was required to remove Panasonic from its company name.

    This decision was the first time that MOFCOM had compelled disposals outside of China which demonstrated that it is becoming increasingly sophisticated in its use of remedies for merger cases. The extra-territorial reach of some of the divestment obligations placed, whilst perhaps concerning at first glance, suggests that MOFCOM recognises that geographic markets can be defined more widely than nationally within China. This is a healthy signal for those businesses looking to engage in merger transactions in China.

    For further information or advice, please contact Peter Corne or Charlie Markillie.

    Peter Corne
    Managing Director
    Eversheds, Shanghai
    Tel: +86 21 6137 1001
    petercorne@eversheds.com

    Charlie Markillie
    Solicitor

    Eversheds, Leeds
    Tel: +44 845 498 4037
    charliemarkillie@eversheds.com

    © Eversheds LLP, 2010

     

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