The latest in MOFCOM's remedy supervision
November 26, 2015 | BY
Katherine JoO'Melveny & Myers
Nate Bush and Lining Shan [email protected] and [email protected]
Many antitrust regulators worldwide prefer to address potential anti-competitive effects from mergers among competitors with one-time “structural” fixes (such as divestitures of subsidiaries, facilities or IP), wary that “behavioral” remedies that restrict merger parties' future commercial conduct may entail ongoing administrative costs and unintended harm to consumers.
Nevertheless, China's Ministry of Commerce (MOFCOM) has adopted remedies requiring continued supervision of the parties' commercial behavior in 21 of its 25 conditional clearances issued to date under the PRC Anti-monopoly Law (AML). While MOFCOM's October 2015 approval of Nokia's acquisition of Alcatel-Lucent, which was subject to commitments involving IP licensing practices, confirms its continued readiness to impose behavioral remedies, recent actions involving the brewery and hard-drive sector demonstrate its capacity to supervise and update the remedies in force.
|AB InBev-Zhujiang Brewery
MOFCOM's first published merger decision under the AML was its November 18 2008 order conditionally clearing InBev's acquisition of Anheiser Busch. MOFCOM did not determine that the acquisition itself was likely to have any anti-competitive effects in China, but it nevertheless prohibited future transactions increasing existing stakes in Zhujiang Brewery or Tsingtao Brewery or acquiring interests in two other leading Chinese breweries without advance approval. In effect, MOFCOM asserted jurisdiction to review future deals that would not otherwise qualify as concentrations subject to mandatory merger review under the AML. At the time, commentators speculated that this anomalous remedy could reflect institutional pressures for MOFCOM to flex its new antitrust muscle in a high-profile merger (where the DOJ had already required divestitures).
MOFCOM performed its supervisory role under the 2008 order on August 20 2015 by publicly approving an increase in AB InBev's stake in Zhujiang Brewery from 25.62% to 29.99%. MOFCOM noted that AB InBev's seats on the brewery's boards of directors and supervisors would remain unchanged, and that the brewery would remain under the control of the local government. It concluded that the share increase was “insignificant” and would “not result in any material change in the control of Zhujiang Brewery.”
This implies that the share increase would not otherwise qualify as a concentration under the AML. MOFCOM maintained its ongoing supervision of AB InBev, providing that any future share increases would still require advance approval.
|Western Digital-HGST and Seagate-Samsung HDD
Among MOFCOM's most controversial remedial practices has been the imposition of “hold-separate” orders in Western Digital's acquisition of Hitachi's hard drive business (HGST), Seagate's acquisition of Samsung's hard drive business (Samsung HDD), Marubeni's acquisition of Gavilon and MediaTek's acquisition of MStar.
These orders allow buyers to proceed with the purchase of target businesses but prohibit them from integrating certain commercial functions of the targets. Such measures aim to preserve the target's role as an independent market force by requiring the buyer and target business to continue competing against each other after the deal closes.
Foreign competition regulators often require that businesses to be divested pursuant to a conventional structural remedy be held separately (often under the supervision of a trustee) until the divestiture to a suitable purchaser is completed. MOFCOM, however, converted this transitional mechanism into a final “hybrid” remedy requiring the combined entity to behave as if a structural remedy had been imposed.
Critics maintain that indefinite hold-separate orders eviscerate potential efficiency gains and synergies from mergers, while customer, supplier, and investor uncertainty undermines the competitiveness of both businesses. Others say that it is efficient to allow MOFCOM more time to monitor the actual dynamics of fluid and complicated markets like China, and that the parties retain the option of abandoning the transaction to try again in the future.
Although the orders explicitly allowed the parties to apply to MOFCOM for relief, the duration of the hold-separate orders was potentially indefinite. Until recently, MOFCOM's willingness to pare back these remedies in response to changing market conditions remained untested.
In October 2015, MOFCOM modified the hold-separate orders from both hard drive cases. In separate decisions on applications filed by Seagate and Western Digital, MOFCOM acknowledged that increased competitive pressure from solid state drives (SSDs) and excess capacity reduced the likelihood of unilateral or coordinated anti-competitive effects from the acquisitions. At the same time, MOFCOM emphasized that Western Digital, Seagate, Toshiba, HGST, and Samsung HDD remained the only five hard drive suppliers. MOFCOM found that Western Digital and HGST had “relatively greater competitive strength” with combined shares of 47% of the overall hard drive market and 50% of the portable drive segment; in contrast, it found that Seagate and Samsung HDD had “limited overlap” and Samsung HDD was “weak” and more vulnerable to competition from SSDs.
On this basis, MOFCOM rescinded the hold-separate remedies with respect to Seagate, allowing it to proceed with full integration of the Samsung HDD business. However, it retained the other remedies (including requirements for the supply of disk heads by TDK China to rivals and for sustained investment in R&D). Although MOFCOM viewed Western Digital and HGST as stronger competitors, it also acknowledged that the strict order had restrained them from “fully” competing, providing a ”full range” of products and ” integrating their products”, with “adverse impact on their customers' product procurement.” Accordingly, MOFCOM modified the order to permit integration of R&D and production capabilities, but required Western Digital and HGST to retain separate customer-facing sales forces and brands.
While MOFCOM shows no sign of retreating from behavioral remedies, the recent decisions involving AB InBev and the hard drive remedies demonstrate the possibility of modifying behavioral remedies to reflect changing market conditions.
This premium content is reserved for
China Law & Practice Subscribers.
A Premium Subscription Provides:
- A database of over 3,000 essential documents including key PRC legislation translated into English
- A choice of newsletters to alert you to changes affecting your business including sector specific updates
- Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
Already a subscriber? Log In Now