Antitrust Alert: China Approves Merger between Russian Potash Producers but Requires They Continue to Supply the Chinese Market
On June 2, 2011, the Chinese Ministry of Commerce (MOFCOM) announced conditional approval of the merger between Russian potash producers Silvinit and Uralkali. Since the PRC Anti-Monopoly Law ("AML") entered into force in 2008, MOFCOM has published only eight decisions, as it makes public only prohibition decisions and decisions imposing remedies. As of the end of 2010, MOFCOM had reviewed 189 concentrations under the AML.
This new decision confirms that, even in global markets, MOFCOM will ensure that a concentration does not adversely affect Chinese buyers, particularly where it involves products that are essential for China's economic development.
Review process
MOFCOM moved quickly in this case. It received Uralkali's initial merger filing on March 14, 2011. On April 12, MOFCOM decided to open its second phase investigation for further review. On June 2, well within the 90-day phase II investigation period, MOFCOM issued its decision.
Relevant markets
MOFCOM determined that the product market relevant to the proposed merger was the potassium chloride market. What geographic market it relied on is uncertain. MOFCOM looked at market shares at both the global and national level. While parts of the decision seem to acknowledge the global nature of the market, MOFCOM states that the merger would have anticompetitive effect in the Chinese market.
Effect on competition
In its competition analysis, MOFCOM discussed the high market concentration in the potassium chloride market. According to the decision, potassium resources are concentrated geographically and the supply of potassium chloride is concentrated in a small number of companies. The merger would then lead to further concentration. The combined company would account for over one-third of global market share and become the second largest supplier. After the merger, the combined firm together with the market leader would supply around 70% of the global market.
About half of Chinese demand for potassium chloride is met by imports. MOFCOM determined that the proposed merger would increase the likelihood that global suppliers could coordinate their activities, possibly to the detriment of market competition. Further, MOFCOM found that about one-third of China's potassium chloride imports come from border trades with the merging parties and that the merger would restrict competition in the Chinese border trade market. MOFCOM also found that the merger would affect Chinese industries, which rely significantly on imported potassium chloride.
Restrictive conditions
MOFCOM conditioned its approval of the merger on compliance with four obligations, intended to mitigate the adverse effects of restricted competition in the Chinese market.
First, after the merger, the combined entity must continue its existing sales practices, continue selling to Chinese markets by direct trading, and continue to stably, reliably, and with "utmost efforts" supply potassium chloride to the Chinese market. The requirement of doing its "utmost" (尽心尽力) to supply the Chinese market suggests a certain flexibility and subjectivity in this condition.
Second, the combined company must supply a complete array of potassium chloride products to the Chinese market, in sufficient quantities. It also must continue to supply Chinese customers so as to meet their requirements for every use. The language here is more definite than that in the first condition, and disconcertingly unqualified. It is unclear to what extent MOFCOM will imply a reasonableness inquiry into this condition, for example partially relieving the company of its compliance obligations when they would be impossible or commercially impracticable, such as during periods of unexpected increases in demand.
Third, the combined company must maintain its customary negotiation process, "fully considering the history, current circumstances, and uniqueness of the Chinese market," for both spot sales and contract sales. The full implications of the "uniqueness" (特殊性) inquiry are unclear.
Fourth, the combined company must report on its adherence to these commitments. It must appoint a trustee to supervise its performance, and MOFCOM reserves the right to inspect, monitor, and oversee the company to ensure that it meets those commitments.
Observations
1. It is unclear whether this decision is based on a finding of coordinated or unilateral effects. That is, it is not clear whether MOFCOM is more concerned with the likelihood that the remaining suppliers will tacitly coordinate output and price or that the combined Silvinit/Uralkali will have the ability unilaterally to increase price by restricting its output. The decision indeed refers to coordination by the major producers, but also notes that the merging parties would "gain a stronger market power."
2. For determining coordinated effects, under the AML there is a rebuttable presumption of collective dominance where two undertakings have 67% of the market. It appears from the decision that the mere "likelihood" that the parties will adopt a common policy would be sufficient for MOFCOM to conclude the existence of coordinated effects. This contrasts with the position in Europe, where collective dominance requires that there be (1) market transparency, so that the members of the oligopoly can detect deviation from the common policy, (2) mechanisms to deter such "cheating," and (3) the inability of competitors and consumers to disrupt the common policy. In China, it may be crucial for undertakings merging in a highly concentrated market to submit detailed economic evidence to exclude the likelihood of coordinated effects.
3. One result of this decision is that it imposes behavioral remedies on the second-largest player, but leaves the largest player free to compete without comparable marketing restrictions, although collectively they are found to be dominant. Obviously, MOFCOM did not have jurisdiction in this case to impose any remedy on the largest player, as it was not part to the concentration. One question is whether, in a merger leading to collective dominance, any remedy would be effective short of prohibition or a divestiture enabling entry by a new player capable of upsetting coordination between the largest surviving players. Similarly, if the basis of the decision is single dominance on the part of the second largest player, the paradox is that the second player would actually be hampered in its ability to compete against the largest player.
4. The behavioral remedies imposed here echo, but are less narrowly tailored than, those in GM/Delphi, where MOFCOM also imposed conditions to protect domestic trading partners. MOFCOM prohibited the combined GM/Delphi from discriminating against domestic customers, and required it to continue supplying goods of reliable quality in a timely manner, but only at market or contract prices and quantities. In contrast, the combined Uralkali/Silvinit is required to meet the demands of Chinese customers for all applications, a more stringent requirement. Further, the other conditions imposed in GM/Delphi were narrow and specific (no sabotaging other car manufacturers during the transition period, no sharing trade secrets of domestic companies, no discriminating against unaffiliated suppliers). Here, the requirements that the combined company continue doing its utmost to supply potassium chloride and consider the uniqueness of the Chinese market are broader and highly subject to interpretation.
5. The main lesson from this decision is that, more than any other major jurisdiction, MOFCOM will pay close attention to the effect of a global merger on domestic buyers, especially for products viewed as essential for economic development. This is made clear in the AML itself, which requires MOFCOM consider "the effect of the concentration on national economic development." Similarly, the recently adopted national security review procedure permits the PRC to block the acquisitions of Chinese assets when they would affect national security, including the stability of the national economy (see our February 2011 Alert, "China's New National Security Review Will Examine Foreign Investment in Chinese Companies").
For the original text in Chinese, please visit the MOFCOM web site. An English translation is attached here.
Lawyer Contacts
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Peter J. Wang
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+86.21.2201.8040 / +86.10.5866.1111
pjwang@jonesday.com
Sébastien J. Evrard
Beijing
+86.10.5866.1112
sjevrard@jonesday.com
Yizhe Zhang
Beijing
+86.10.5866.1111
yzhang@jonesday.com
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