FAQs on China’s Anti-monopoly Regulators Handed Down Decisions
Q: What are the decisions about?
A: On October 31, 2011, MOFCOM released its anti-monopoly review decision on an acquisition involving two foreign textile companies. MOFCOM approved the acquisition subject to a number of conditions, including a commitment from the acquiring company to spin off its holding shares of a subsidiary that is said to be the only competitor to the acquired firm.
The decision is very interesting because it discloses a lot more details than what used to be published. This change itself has shown the regulators have more confidence in their analysis and are willing to make their review process more transparent. The publication of the decision provides a unique opportunity to have an in-depth look at the regulators’ decision-making process.
Q: What are the content of the decisions?
The applicant notified MOFCOM on July 14, 2011. It took the applicant about 80 days to complete the notification procedure, including the initial filing and supplementary filings at the request of MOFCOM. On September 5, MOFCOM accepted the application.
Within 10 days from the beginning of the formal review, MOFCOM expressed its concerns about the potential anti-competitive effects of the transaction. The applicant submitted a remedy proposal very quickly. MOFCOM started the second phase on September 30 and made a final decision on October 31, saving nearly two months from the statutory deadline.
MOFCOM expressly acknowledged it had consulted with relevant agencies, industry associations, competitors and downstream enterprises in the industry. No specific names of those entities consulted by MOFCOM were given.
MOFCOM concluded that the acquisition is likely to have exclusionary and restrictive effects on competition.
MOFCOM found that the real controlling party behind the acquiring company Fondo Alpho - Alpha Private Equity Fund V- is a private equity company and controls 27.9% shares of Uster Technologies AG as its largest shareholder. The acquired company Savio is a textile manufacturing company having a fully-owned subsidiary LOEPFE.
MOFCOM found that Uster and LOEPFE are the only two manufactures in the world making electronics yarn clearer for automatic winders. Yarn clearer is specialized equipment that monitors the quality defects of yarns and makes high-speed corrections during the manufacturing process.
MOFCOM held that the electronic yarn market constitutes the relevant market.
MOFCOM acknowledged that its investigations focused on competitive status, supply and demand relationship, purchasing model and market access. MOFCOM stated in the opinion that it used third party information to verify the data provided by the applicant and consulted with industry experts.
MOFCOM stated that it had made a special review of the possibility of influence the PE company might have over Uster by reviewing the shareholder structure, voting mechanism of the shareholder meeting, attendance records of the shareholders, composition of board of directors and voting mechanism. MOFCOM found that it could not exclude the possibility of the PE Company influencing Uster’s business activities.
On the other critical issues related to competitive analysis, MOFCOM made the following key findings:
- The relevant market is highly concentrated. The companies at concern – Uster and LOEPFE, jointly share the entire market. The two companies may exclude or restrict competition after the transaction through coordination by the PE company. Meanwhile, the PE company may also engage in exclusionary or restrictive conduct through its control and influence over Uster and LOEPFE.
- MOFCOM found that patented technologies, proprietary technologies and know-know are essential to R&D and manufacturing of the electronic yarn devices. The market barriers are high for other companies because the technologies are subject to patent protection.
- MOFCOM also found that economy of scale is critical to the textile industry. The investigation reveals no successful new comers in the past three years. MOFCOM even cited evidence showing a third party’s failed efforts to enter this market in 2009-2010. MOFCOM concluded that there are substantial difficulties to enter this relevant market.
Negotiation on Conditions
MOFCOM also revealed some details about the negotiation. MOFCOM acknowledged that multiple rounds of consultations were conducted. The controlling party eventually submitted a remedy proposal, which was accepted by MOFCOM as a solution to eliminate the potential anti-competitive effects.
MOFCOM agreed to approve this transaction subject to the following conditions:
- the controlling entity of the acquiring company will sell its shares in Uster in six months.
- the acquiring company will disclose the identity, transaction volume and date regarding the entity who will purchase Uster to make sure there are no new competitive concerns.
- The acquiring company must not interfere with Uster’s business activities before selling its Uster shares.
- An independent party will be supervising the share transfer process.