China Business News – MOFCOM conditionally approves Mitsubishi Rayon’s proposed acquisition of Lucite International Group

LawFuel.com - Legal Announcements Asia - China’s Ministry of Commerce ("MOFCOM") announced on Friday, April 24, 2009 that it has conditionally approved Japan's Mitsubishi Rayon Co. Ltd.’s ("Mitsubishi’s") proposed acquisition of Lucite International Group Ltd. ("Lucite"), a British chemical producer. Finding that the merged entity would have a 64% share of the market for Methylmethacrylate ("MMA"), MOFCOM has required, among other things, that as a condition for the merger: Lucite International (China) Chemical Industry Co. Ltd. ("Lucite China") must divest 50% of its annual production capacity and sell its products at cost for a period of five years (if the 50% divestment cannot be completed within six months (with the possibility of an extension of a further 6 months), MOFCOM will have the right to appoint a trustee to sell 100% of Lucite China to a third party), Lucite China must be independently managed pending completion of the divestment, and Within the next five years Mitsubishi must refrain, without prior approval, from acquiring any domestic producer of MMA and certain related products, and from constructing new factories for the production of such products. This is the first significant transaction to be approved since MOFCOM's outright rejection of the Coca Cola-Huiyuan deal last month. The international business community has followed this transaction with some concern that MOFCOM’s delay (after other major jurisdictions had already approved the transaction) further signaled a protectionist bent to its merger review process. The decision is significant in that it reflects MOFCOM’s willingness to follow international 'best practices' in allowing the deal to proceed, while attempting to devise remedies that address the specific competitive harms identified in its investigation. Assuming a correct market definition, the market shares that MOFCOM cites create a presumption of competitive harm, and the agreed remedies mirror those used in other major jurisdictions such as the EU and the U.S. It is also noteworthy that this is the first case under the new Anti-Monopoly Law ("AML") to utilize a divestiture trustee. In a troubling pattern that is similar to Coca Cola, however, MOFCOM leaves far too much to speculation. It provides only conclusory statements regarding competitive effects, and no suitable explanations or evidence to support its decision. The problem is particularly glaring with respect to its unadorned finding that Mitsubishi will have the ability to produce a blocking effect to its downstream competitors through its dominant position in the upstream MMA market. A thoughtful assessment of this conclusion, and MOFCOM’s other substantive findings regarding the product market and effects is simply impossible without more detailed information. The background and salient points of the decision are discussed in greater detail below. Background: the notification and review process MOFCOM received the parties' anti-monopoly notification for concentration of undertakings from Mitsubishi on December 22, 2008. On January 20, 2009 MOFCOM was satisfied that the materials supplied by the parties were sufficient under article 23 of the AML and commenced review of the notification. On February 20, 2009, MOFCOM decided to further review the notification and notified Mitsubishi that the further review will be completed on or before May 20, 2009. According to article 27 of the AML, MOFCOM considered the following issues: The two parties' market share and control power in the relevant markets; Market concentration in the relevant markets; Effects of the proposed acquisition on market entry and technical development; Effects of the proposed acquisition on consumers and other undertakings in the relevant markets; Effects of the proposed acquisition on national economic development; and Other factors affecting the relevant markets. MOFCOM solicited comments on the proposed acquisition through written means, seminars, meetings and consultations from trade associations, MMA manufacturers, Poly(methyl methacrylate) ("PMMA") acrylic moulding compound producers, PMMA acrylic sheet producers as well as the two parties to the proposed transaction. MOFCOM’s decision: definition of the relevant market MOFCOM asserts that the main overlap in the two companies’ businesses are in MMA manufacturing and sales. Apart from MMA, there is also minor overlapping business in some special SpMAs (Specialty Methacrylates), PMMA acrylic moulding compounds and PMMA acrylic sheets. MOFCOM defined the relevant markets as MMA, SpMAs, PMMA acrylic moulding compounds and PMMA acrylic sheets. According to the decision, the concentration has limited effects on the SpMAs, PMMA acrylic moulding compounds and PMMA acrylic sheets markets. The main effect of the proposed transaction is on the MMA market in China. The decision: competition issues After careful consideration, MOFCOM has taken the view that the proposed acquisition has the following anti-competitive effects: Horizontally, this proposed acquisition has anti-competitive effects on the MMA market. After the proposed acquisition, Mitsubishi would have a 64% market share, which is much higher that its main competitors Jilin Petrochemical Co. Ltd. and Heilongjiang Loxin Chemical Co. Ltd. Vertically, since Mitsubishi has operations in MMA as well as in its 2 downstream markets, Mitsubishi will have the power to abuse its dominant position in the MMA market after the concentration, and produce a blocking effect to its downstream competitors. The decision: remedies After the parties proposed effective remedies to mitigate the possible anti-competitive effects, MOFCOM approved the proposed acquisition with the following conditions: Lucite China will divest 50% of its annual production capacity to an independent third party for a period of 5 years. The third party will have to pay Lucite China a price calculated based on the production and management cost without profit, which will be audited by an independent auditor annually. In the event the divestment was not successfully implemented within the divestment period, the parties agreed that MOFCOM may appoint an independent trustee to sell 100% of the equity interest in Lucite China to an independent third party. The notice states that the divestment period is 6 months, from the closing of the proposed acquisition. This period may be extended by a further 6-month period at MOFCOM's discretion with reasonable justification by Lucite China. Lucite China shall be managed independently from Mitsubishi's PRC MMA monomer business operations with independent management and board of directors until the completion of the proposed divestment or sale of Lucite China if the divestment was not successful. During such period, Lucite China and Mitsubishi will continue to compete with each other in the MMA market. The parties may not share information relating to pricing, customers or other competitive information relating to the China market. Without the prior approval of MOFCOM, the parties may not acquire any domestic MMA monomer, PMMA polymer or cast sheet producer in China or build a new plant for the production of the same in China within a period of 5 years from the completion of the proposed acquisition.

China Business News – MOFCOM conditionally approves Mitsubishi Rayon’s proposed acquisition of Lucite International Group

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