By Ge Li and Qianqian Wang 

The conditioned approval late last year of a major merger in the electronics sector
by the Anti-Monopoly Bureau of China’s Ministry of Commerce (MOFCOM) may signal that Chinese antitrust regulators are becoming more confident, more sophisticated, and more aggressive in asserting a role in international commerce. On October 30, 2009, MOFCOM announced that it would approve the acquisition of Sanyo Electric Co., Ltd. (Sanyo) by Panasonic Corporation (Panasonic) subject to requirements that the combined entities divest certain overlapping business units. The vigorous review process carried out under China’s new antitrust statute and the remedial structure adopted provide important insights for future transactions involving companies that do business in China.

Background
Both Panasonic and Sanyo are Japanese companies with diversified businesses and operations worldwide, including the development, manufacture, and sale of batteries to consumers and original equipment manufacturers (OEMs). Panasonic and Sanyo entered into an agreement on December 19, 2008, under which Panasonic made a tender offer of approximately US$9 billion to acquire majority control of Sanyo, subject to regulatory approval in a number of jurisdictions. Competition concerns were raised by the European Commission, the Japanese Fair Trade Commission, MOFCOM, the U.S. Federal Trade Commission, and government authorities in seven other jurisdictions with respect to the concentration of certain products resulting from the combination.

Process
The review process carried out by Chinese regulators was unusually extended and detailed by local standards. On January 21, 2009, Panasonic and Sanyo initiated their request for regulatory approval with MOFCOM, but MOFCOM would not accept their original filing as fully complete without additional information. After Panasonic and Sanyo made certain supplementary submissions, MOFCOM officially accepted the application on May 4, 2009, which triggered a 30-day investigation period as set out in China’s Anti-Monopoly Law (adopted August 1, 2008). Following expiration of the 30-day first phase investigation period, MOFCOM initiated a second phase investigation and set September 3, 2009, as the deadline for completion. On August 26, the parties applied to extend the second phase investigation period , and MOFCOM approved an additional 60-day period. On October 30, 2009, four days before the extended final deadline, MOFCOM announced its decision to clear the transaction with conditions. This decision was made after conditional clearance by the Japanese Fair Trade Commission and the European Commission, but before the U.S. Federal Trade Commission had acted.

During the investigation, MOFCOM required the applicant parties to submit documents and data relating to the categories of products manufactured by both companies, including information with respect to their sales; product differences; pricing methodologies and strategies; distribution channels; negotiating leverage with downstream customers; production capacity and output; and any existing vertical relations with suppliers and customers. The investigation also involved feedback from 39 competitors and downstream customers (some of whom were interviewed directly by MOFCOM) as well as an on-site investigation at a facility in Shenzhen, China. According to MOFCOM’s published announcement, the final decision was reached after extensive discussions with the applicant parties.

MOFCOM’s Decision
MOFCOM explained its decision in considerable detail, providing valuable information about the review process, investigation methods, competition concerns, and remedies for the transaction. MOFCOM concluded that the concentration of business between Panasonic and Sanyo would eliminate or restrict competition in three product markets: (i) rechargeable coin-shaped lithium batteries (for mobile devices such as mobile phones and video cameras); (ii) consumer nickel-metal hydride batteries; and (iii) nickel-metal hydride batteries for automobile use. As to the geographic markets, MOFCOM concluded that the geographic markets of both rechargeable coin-shaped lithium batteries and consumer nickel-metal hydride batteries are global markets. MOFCOM identified the following competitive concerns and imposed the following remedies:

• In the rechargeable coin-shaped lithium battery market, MOFCOM expressed concern that the combined Panasonic/Sanyo would control 61.6 percent of the market and would have the power to increase product prices unilaterally, with impacts that could not be eliminated by customer power. MOFCOM therefore required that Sanyo’s rechargeable coin-shaped lithium battery business in Japan be sold to an independent third party.
  
• In the consumer nickel-metal hydride battery market, MOFCOM expressed concern that the combined entity would control 46.3 percent of the market, a share far higher than that held by other competitors. MOFCOM also expressed concern that the transaction would restrict competition, as slow development of the nickel-metal hydride battery market discourages new entry. MOFCOM therefore required that Sanyo transfer its consumer nickel-metal hydride battery business in Japan to an independent third-party buyer, and convert its factory in Suzhou to an OEM supplier that would supply certain batteries to the buyer. Alternatively, Panasonic could transfer its corresponding business in China to an independent third-party buyer.
  
• In the automotive nickel-metal hydride business, MOFCOM expressed concern that the combined Panasonic/Sanyo, together with Panasonic EV Energy Co., Ltd. (PEVE), a joint venture between Panasonic and Toyota, would control 77 percent of the market. MOFCOM therefore required that Panasonic sell its automotive nickel-metal hydride battery business to an independent third-party buyer. In addition, Panasonic was required to reduce its ownership stake in PEVE from 40 percent to 19.5 percent, waive its rights to appoint PEVE directors and vote in shareholders meetings, and drop the name “Panasonic” from the PEVE name.

Moreover, as to each required divestiture, MOFCOM required that the proposed transfer include all production facilities, sales, R&D, and customer service units as well as the intellectual property rights required for the operation of the business. Each divestiture must be approved by MOFCOM based on whether the transfer is beneficial from a competitive standpoint in China. If the transfers are not completed within six months following the completion of the acquisition (subject to an extension of another six months at MOFCOM’s discretion), MOFCOM will appoint an independent trustee to dispose of the assets. Until the fulfillment of the conditions, MOFCOM prohibited Panasonic and Sanyo from disclosing to the other any price, customer, or market-sensitive information with respect to the products at issue.

Observations
MOFCOM’s review process and its final decision suggest that MOFCOM will play an increasingly significant and effective role in monitoring offshore transactions with a China dimension. Milestone developments include:

• The MOFCOM review and remedial process was surprisingly in-depth. The Panasonic/Sanyo merger represents the first time in which MOFCOM’s merger review required an extension period beyond the second review period. During the review period, MOFCOM sought opinions from government authorities, chambers of commerce, and trade associations, and conducted investigations through questionnaires, telephone interviews, and on-site investigations. Additionally, MOFCOM held five meetings with the applicant parties to negotiate the conditions for approval.
• MOFCOM issued a public decision that was more detailed and more transparent than past decisions have been. In this decision, MOFCOM analyzed relevant markets, disclosed specific market-share figures for each relevant product, and stated the factors it considered in the review process, indicating a new level of openness regarding its review process and decision-making.
• The decision also revealed MOFCOM’s intent to exercise its authority to review international mergers between non-Chinese companies. Before Panasonic/Sanyo, MOFCOM had generally treated China as the relevant geographic market for its competitive analysis and focused only on the merging entities’ assets and interests in China in imposing conditions on the approval of offshore transactions. In this decision, MOFCOM concluded that the geographic market for two of the three product segments it addressed was worldwide in nature. Its remedies were likewise more international in nature: the requirement that the parties divest businesses located in Japan and restrict their conduct in offshore entities like PEVE represent the first time that MOFCOM has so directly addressed overseas assets.

The new decision reveals that MOFCOM, building on its new antitrust statutory regime, intends to be a major player on the global stage in competition law and international transactions. Companies doing business in China will need to account for the impact of an increasingly confident and vigorous MOFCOM when structuring transactions that impact Chinese interests, regardless of where those transactions may take place.

For more information, please contact Vinson & Elkins lawyers William R. Vigdor, Qianqian Wang, or Ge Li. Visit our website to learn more about V&E's Antitrust practice. Get a .pdf of this issue of Antitrust News & Notes, January 2010 e-newsletter here.