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The Long March: The final hurdle is cleared in Glencore’s takeover of Xstrata as Chinese Regulators give merger the go ahead

    • Competition, EU and Trade
    • Energy and infrastructure - Mining

    17-05-2013

    On 16 April 2013 the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) conditionally approved the $30 billion takeover of Xstrata plc by Glencore International plc. MOFCOM’s conditional approval of Glencore’s purchase, which represents the largest merger in mining history, came more than a year after first being notified of the transaction.

    MOFCOM’s decision in this case is notable for two main reasons: (1) MOFCOM’s 8,000 word published decision is the most detailed competition analysis that it has ever performed and includes, for the very first time, the full text of the parties’ final commitment proposals; and (2) MOFCOM cleared the decision using a mixture of structural and behavioural remedies – a number of which have extraterritorial effect.

    MOFCOM’s decision in this case, along with its recent publication of two draft regulations relating to merger notifications, provides an insight into how MOFCOM will deal with complex mergers in the future, especially in those industries which are of strategic importance to China. The decision and draft regulations also evidence MOFCOM’s commitment to clarifying and streamlining the process for less problematic merger cases.

    Glencore/Xstrata merger - Structural and Behavioural Conditions

    The approval of the Glencore/Xstrata merger is MOFCOM’s 17th, and most high profile, conditional merger approval since the introduction of China’s Anti Monopoly Law (the “AML”) in August 2008. 1

    MOFCOM’s assessment of the transaction focused on Glencore and Xstrata’s operations in the markets for copper concentrate, zinc concentrate and lead concentrate; placing a particular emphasis on copper concentrate – a product for which China is the world’s largest consumer. Even though the merger would only increase the combined entity’s market share in the copper concentrate market to approximately 14%, MOFCOM imposed both structural and behavioural conditions after coming to the conclusion that the anticipated arrangement would be likely to have the effect of eliminating or restricting competition in the market due to vertical integration.

    Under MOFCOM’s conditional remedies for clearance, Glencore has an obligation to sell its ownership interest in the Peruvian Las Bambas copper mine (thought to have been a prized asset in Xstrata’s portfolio) to a purchaser approved by MOFCOM by 30 September 2014. If Glencore fails to find a suitable buyer for Las Bambas within the designated timeframe, then MOFCOM will require it to sell an alternative copper mining asset in Latin America or South East Asia, without a reserve price – known as a “crown jewels” requirement.

    In addition to this structural requirement, MOFCOM also imposed a number of behavioural remedies which sought to guarantee the supply of copper, zinc and lead concentrate to Chinese customers for a period of eight years.

    Glencore was also required to appoint an independent divestiture trustee to supervise and report on Glencore’s performance and commitment to the required obligations.

    The future of Chinese merger control

    MOFCOM has become known for its unpredictability and for the length of time it takes to issue a decision (MOFCOM is often the last antitrust regulator to issue its decision in multi-jurisdictional merger cases). A large number of transactions notified to MOFCOM, even those without substantive issues, progress to phase II review resulting in long delays to transaction timetables. In order to address these concerns, MOFCOM recently published two draft regulations which look to bring some much needed clarity and transparency to the merger regime under the AML.

    On 3 April 2012, MOFCOM published its Regulations on Standards for Simple Cases of Concentrations of Business Operators (“Draft Regulations on Simple Cases”). These draft regulations represent the first step towards China creating a simplified procedure for cases which are unlikely to cause substantive competition concerns. The Draft Regulations on Simple Cases set out a procedure which is very similar to the European Commission’s short form notification procedure and give details of the standards which MOFCOM will use to distinguish those cases which would qualify as a “simple case” and those which require a more detailed investigation. No procedural guidance has been published within the draft, and there is no assurance as to exactly how MOFCOM will deal with these simple cases. However, MOFCOM is expected to provide more detailed guidance on the procedure for “simple cases” later in the year.

    MOFCOM has also recently published its draft Rules Regarding Imposition of Restrictive Conditions on Concentrations of Undertakings (the “Draft Remedy Rules”). The Draft Remedy Rules set out a framework for the imposition of remedies including their determination, implementation, supervision and cancellation. The Draft Rules concentrate on structural remedies but also provide for behavioural remedies and a hybrid of both. The Draft Remedy Rules introduce two new provisions showcased in the Glencore/Xstrata merger: (1) under certain circumstances identified by MOFCOM, the regulator is able to require the divesting party to enter into a sales agreement before the merger is finalised, and in the event a suitable buyer is not found, the divesting party must agree to the sale of alternative assets; and (2) a new review mechanism has been introduced under which MOFCOM can amend or repeal its initial decision if it finds its original competition concerns have been remedied. Additionally, if a divestiture trustee (as has been appointed in the Glencore/Xstrata case) does not provide accurate information or fails to perform his duties, MOFCOM is able to seize his remuneration and disqualify him from his position acting as a divestiture trustee.

    Comment

    The decision taken by MOFCOM in the Glencore/Xstrata case will set a benchmark as its most detailed decision to date. It shows an increasing willingness on the part of MOFCOM to intervene in large offshore transactions which may impact PRC interests. The remedies imposed show that MOFCOM is confident in wielding its power to require extraterritorial divestments and to commercially renegotiate terms of supply to Chinese businesses. From a practical perspective, the case highlights the length of time needed by MOFCOM in order to decide on complex cases and therefore emphasises the importance of forward planning by parties to a transaction to consider any international competition clearances at an early stage.

    However, the extra detail provided by MOFCOM’s in its decision in the Glencore/Xstrata case and the new Draft Remedy Rules and Draft Regulations on Simple Cases show that MOFCOM is taking positive steps to progress towards a more transparent and predictable merger regime. This is encouraging news for companies engaging in mergers which require clearance by the Chinese authority. Companies will benefit from a greater ability to predict MOFCOM’s future behaviour when reviewing mergers and will be able to adapt their transaction timetables appropriately.

    1 Interestingly, it took almost twice the normal maximum statutory period (180 days) for the parties to receive the conditional clearance. The parties originally notified the merger to MOFCOM in April 2012 and then withdrew the filing at the end of the original statutory review period and re-submitted the filing – effectively resetting the clock and providing MOFCOM with extra time to review the transaction.

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