China Imposes Conditions on Uralkali/Silvinit Merger After Anti-Monopoly Review

3 Legal Update Antitrust & Competition Mainland China 8 June 2011 China Imposes Conditions on Uralkali/Silvinit Merger after Anti-monopoly Review On 2 June 2011, the Anti-Monopoly Bureau of In this legal update, we examine the decision more China’s Ministry of Commerce (Mofcom) announced closely and highlight the key take-outs for the its seventh conditional approval decision, clearing the business sector. proposed US$7.8 billion merger of Russian potash producers Uralkali and Silvinit subject to About the companies and proposed deal requirements relating to the merged entity’s future levels of supply and pricing for Chinese customers. Both Silvinit and Uralkali are Russian companies This marks the first published merger review decision with leading positions in the global fertiliser in China in approximately 10 months (since the industry. Silvinit’s main outputs include mineral Novartis/Alcon conditional clearance decision in fertilisers, while Uralkali is a major producer of August 2010). potash fertiliser. The positive news for the business sector is that The proposed merger of the two companies was China’s rate of unconditional clearance decisions for announced in December 2010, and prior to Mofcom’s notified transactions remains well above 95%. conditional approval decision the transaction had Additionally, this latest decision appears to be received approvals from competition authorities in further evidence of Mofcom’s willingness to negotiate Russia, Brazil, Poland and Ukraine. behavioural remedies with parties to a deal in relation to which it identifies competition concerns, Under the AML, any merger must be reported to and rather than insist on structural remedies such as pre-approved by Mofcom if certain global and/or divestment of relevant business operations. China turnover thresholds are met. Unsurprisingly given that China is one of the largest consumers of In this case, however, the true scope of the the two companies’ products (along with Brazil, India behavioural remedies remains to be seen, as they are and Malaysia), the thresholds were met by the parties broadly worded and could allow Mofcom to take a to this merger. very interventionist approach in the merged businesses’ dealings in respect of China customers Review process going forward. Some observers may also be unsettled According to Mofcom’s decision statement, by the fact that Mofcom continues to focus on deals notification of the merger was accepted by Mofcom between foreign multinationals, with the Ministry on 14 March 2011. The formal review period lasted yet to intervene in relation to a purely domestic deal 81 days. in the (almost) three year period that the Anti- Monopoly Law (AML) has been in effect. In conducting its review, Mofcom obtained views on transaction participants (or associated parties). the relevant market and the potential impact of the • The merger would create a monopoly in the supply deal from a wide range of entities, including of potash imports that enter China over land (one government departments, trade associations, of the most significant import sources, along with industry experts, and industry participants. This sea trade). type of broad consultation is now a common feature of Mofcom reviews, and is one of the main reasons Based on these findings, Mofcom determined that that review periods can be lengthy. the proposed transaction would increase the level of concentration in the relevant market, would provide Identified competition concerns the merged entity with significant market power, and would potentially increase the risk of co-ordination Mofcom determined that the relevant product between major global suppliers of potassium market in the context of the proposed merger was the chloride. market for potassium chloride. This was based on the fact that potassium chloride was the main Conditions imposed product in relation to which China-related competition concerns might be seen to arise from the Under the terms of Mofcom’s approval decision deal, and Mofcom’s view that the product was not (which are understood to have been negotiated with sufficiently substitutable with other products. the transaction participants): a. The merged entity is required to maintain its In relation to this product market, Mofcom made the established sales process and procedures when following key findings: supplying potassium chloride to customers in • Potassium chloride is a resource that is naturally China, including by maintaining direct trade found in just a few locations, and global and supply via rail or sea in a reliable and production and sales of potassium chloride are diligent manner. concentrated in the hands of a small number of b. The merged entity must continue to meet the companies. demands of China’s customers (including those • There are high barriers to market entry (and thus in agricultural, general and ‘special’ industries) no lessening of concentration in the market is for potassium chloride - both in terms of likely in the short to medium term). product volume and product range. • The merged entity would become the world’s c. In relation to price negotiations with second largest producer and exporter of customers in China, the merged entity must potassium chloride, with a market share continue to utilise traditional negotiation exceeding one-third. Together with the procedures with such customers and take world’s largest supplier of this product, the two account of the historical and current trading companies would control approximately 70% of situation as well as the unique features of the trade. Chinese market. • China is one of the largest importers of potassium The merged company is also required to appoint a chloride, relying on imports for almost 50% of its monitoring trustee to report to Mofcom every six domestic consumption. months (or upon being requested to do so by • More than 50% of China’s imports were from the Mofcom) on fulfilment of these conditions, and 2 Mayer Brown JSM | China Imposes Conditions on Uralkali/Silvinit Merger after Anti-monopoly Review Mofcom retains the right to impose sanctions for any means to get their future deals cleared in China. failure to comply. More generally, however, there are some promising Key take-outs take-outs from the decision. These include: This is the seventh time Mofcom has issued a • The fact that the formal review period was conditional approval decision, but it is the first time approximately 12 weeks, which is at least four the conditions it has imposed on a deal may be seen weeks less than the previous average review as constraining a party’s ability to independently period for deals in relation to which Mofcom determine future pricing and supply levels. had made conditional approval or prohibition decisions. By requiring the merged entity to maintain current • Inclusion in the decision statement of a number levels of sales and supplies to customers in China, of key facts or findings that were central to and to continue utilising existing price negotiation Mofcom’s decision, which although presented procedures, Mofcom will have eased any concerns without supporting data in some cases at least these customers may have had about the potential for provides sufficient context in which to understand price rises and increased disparity in their Mofcom’s concerns (and certainly more bargaining power with suppliers of potassium explanation than some of the regulator’s previous chloride. This issue is likely to have been a conditional approval decisions). significant one in the eyes of Mofcom officials, given • The fact that the decision may be seen as further the importance of agricultural fertiliser to China’s evidence of Mofcom’s willingness to negotiate economy and food production stability. behavioural remedies with parties to a deal in relation to which it identifies competition However, the conditions are worded in a very general concerns, rather than insist on structural manner, and leave room for interpretation. The remedies such as divestment of relevant business merged entity may therefore face some risk of having operations. its customers in China complain to Mofcom about • Mofcom’s focus on addressing competition any changes to pricing and supply terms that occurs concerns in China only, which may be seen as in in the coming years, a threat that could be a source of contrast to previous decisions such as in relation continuing anxiety and pressure in negotiations with to the Panasonic/Sanyo merger in 2009, where customers. The onus will be on the merged entity to it required divestitures intended to safeguard keep Mofcom informed of sound reasons for any competition in the global market, rather than just changes to its trading terms in respect of the China in China. market. Notwithstanding the above points, the business Many international businesses who supply key raw sector may have ongoing concerns about the fact that materials and other inputs to China will watch Mofcom’s decision statements continue to evidence a closely to see how aggressive Mofcom is in tendency to rely on high existing market shares as a monitoring and enforcing compliance with these basis upon which to assume that the merged business conditions. Any indications that Mofcom is taking a operator will not be adequately constrained from particularly interventionist approach on this issue unilaterally raising prices or otherwise imposing may lead those businesses to steer clear of proposing more onerous terms on customers. Additionally, it or willingly accepting these types of conditions as a must be noted that Mofcom is still, almost three 3 Mayer Brown JSM | China Imposes Conditions on Uralkali/Silvinit Merger after Anti-monopoly Review years since the AML commenced, to hand down any adverse merger review decision in relation to a merger of Chinese enterprises or an acquisition by a Chinese enterprise. Contact Us Hannah Ha Partner T: +852 2843 4378 E: [email protected] John Hickin Partner T: +852 2843 2576 E: [email protected] Gerry O’Brien Consultant T: +852 2843 4355 E: [email protected] Mayer Brown JSM is part of a leading global legal services organisation with offices in major cities across the Americas, Asia and Europe.

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