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What do you need to do?Take steps to prepare for private actions and, if conducting an acquisition even outside China, allow time for merger clearance and to negotiate merger clearance conditions
Martyn Huckerby (贺墨亭)
Partner
Sharon Wong (王思伦)
Senior Associate
Tingting Cai (蔡婷婷)
Associate
Martyn Huckerby (贺墨亭)
Partner
T +86 21 2308 7628
Hong Kong
Hayden Flinn
(范凱敦)
Larry Kwok
(郭琳廣)
Beijing
John Shi
(史衛)
Sydney
Dave Poddar
China’s Ministry of Commerce (MOFCOM) has again imposed conditions on the merger clearance of yet another global transaction, the acquisition by Panasonic Corporation (Panasonic) of Sanyo Electric Co. Ltd. (Sanyo), while the conclusion of two private actions (one dismissed and one involving a nominal settlement) under the Anti-Monopoly Law (AML) suggests that firms still have some time to prepare before the threat of further private actions becomes a reality.
Panasonic’s acquisition of Sanyo subject to conditions
On 30 October 2009, MOFCOM announced its decision to clear Panasonic’s proposed acquisition of Sanyo. The clearance is subject to a range of conditions, including an obligation to make divestments of both Panasonic and Sanyo businesses.
Background and merger review process
Panasonic and Sanyo are both diversified Japanese-based groups with worldwide businesses. Panasonic is primarily active in the development, manufacture and sale of a wide range of audiovisual and communication products, home appliances, electronic components and devices including batteries and industrial products. Sanyo is primarily active in the development, manufacture and sale of consumer products, commercial equipment, electronic components including batteries and industrial logistics and maintenance equipment.
Panasonic’s proposed acquisition of Sanyo was first announced in November 2008. The transaction obtained clearance from the Japanese Fair Trade Commission on 10 September 2009 and the European Commission on 29 September 2009. The transaction has yet to obtain approval from the US Federal Trade Commission.
In China, Panasonic and Sanyo submitted a merger filing to MOFCOM on 21 January 2009. After the parties provided further supplementary materials, MOFCOM commenced a preliminary review on 4 May 2009. MOFCOM identified competition concerns regarding the transaction and decided to implement a second phase review to be completed by 3
September 2009. During the period of further review, MOFCOM extended the merger review period for another 60 days to 3 November 2009. On 30 October, three calendar days prior to the expiry of the extended review period, MOFCOM announced its clearance of the transaction subject to conditions.
MOFCOM’s competition concerns and conditions of clearance
MOFCOM identified competition issues in three product markets where the merged entity would have a significant market share and would thus impede competition in these markets. The relevant markets involved the following products: (1) rechargeable coin-shape lithium batteries, (2) nickel-metal hydride batteries for daily use, and (3) nickel-metal hydride batteries for vehicle use.
To address the competition concerns it had identified, MOFCOM held negotiations with the parties on six separate occasions before a final remedy plan was submitted by the parties on 22 October 2009, which was subsequently accepted. The table below outlines the various competition issues identified by MOFCOM and the relevant remedies imposed on the parties.
With respect to imposing divestment as a remedy, MOFCOM has adopted a similar approach to that employed in its previous decisions (see the Mitsubishi Rayon/Lucite and Pfizer/Wyeth decisions), including:
- Prescribed time frame - The relevant divestments for the Panasonic-Sanyo transaction should be completed within six months upon completion of the proposed merger. The parties may extend the prescribed time period for six months subject to MOFCOM’s approval. If the parties fail to complete divestiture within the extended prescribed time frame, MOFCOM may appoint an independent trustee to dispose of the relevant businesses to the resulting third party or parties.
- Subject matter of divestments - The subject matter of the above divestitures includes the relevant assets with respect to manufacturing equipment, sales, R&D and client sources. In addition, Panasonic and/or Sanyo must license the relevant IP to the buyer.
- Operational independence - Prior to the completion of all divestments, MOFCOM requires that Panasonic and Sanyo operate independently and prohibits the parties from disclosing competition related information (e.g. price, clients, etc) to each other, unless required by law.
AML private actions
Background
Under Article 50 of the AML, a company that commits a monopolistic act by entering into a monopoly agreement or abusing its market dominance is liable to third parties who suffer a loss as a result of such company’s anti-competitive behaviour.
Third parties can file lawsuits with the intermediate courts of a province, autonomous region or municipality, which have first instance jurisdiction over civil actions for monopoly cases. A number of courts have established a special panel to hear AML cases. By way of example, the Shanghai No. 2 Intermediate Court, recognising that AML cases may require a particular type of expertise to help ensure quality and consistency of judgments, has appointed an AML panel consisting of the deputy director of the intermediate court and judges from both the IP and administrative tribunals.
Once finalised, the Provisions of the Supreme People’s Court on Several Issues Concerning Monopoly-Related Civil Cases (Draft Rules), which were released on a selective basis for comment in July 2009, will provide guidance on how the courts will handle AML cases. Until that time, a handful of cases currently working their way through the courts in China are being used as a litmus test of the application of the AML.
Claim against Shanda dismissed
In the first case heard and decided under the AML, the Shanghai Intermediate People's Court dismissed an abuse of dominance claim against two Chinese companies. The claim had been brought by Beijing Shusheng Electronic Technology (Shusheng), an online digital book website operator, against Shanda Interactive Entertainment Limited (Shanda) and Shanghai Xuanting Entertainment Information Technology (Shanghai Xuanting). Shanda is listed on NASDAQ and specialises in online games and entertainment.
The case arose when Shanda and Shanghai Xuanting attempted to enforce their intellectual property rights by demanding that two authors stop writing a sequel to a popular online novel series originally published by the defendants. Shusheng, which had commissioned the two authors to write the sequel, alleged that the defendants' actions were an abuse of dominance in the Chinese online literature market.
The court dismissed the claim on the grounds that Shusheng failed to show evidence of the defendants' dominance in the online literature market, because:
- The adoption of market share figures published in Shanda’s promotional materials was unacceptable as the basis for calculating Shanda’s actual market share, and
- Shusheng’s online proclamation as the biggest online literature website weakened its argument that Shanda was the dominant player in the market. The Court also found that even if the plaintiff could prove that Shanda is dominant, Shanda's conduct in seeking to enforce its intellectual property rights could be regarded as legitimate conduct.
The case shows that the courts will be reluctant to accept any private claim under the AML which does not meet the necessary evidentiary standards. The case also highlights the difficulties that private litigants face in presenting empirical evidence of the state of market competition in the absence of any prior regulatory ruling.
China Mobile settles suit by customer
In the second case, China Mobile, the world's largest mobile telecom company with over 500 million subscribers, is understood to have reached an out-of-court settlement with a customer over its mobile phone fees. The case was brought by Zhou Ze, a lawyer who alleged that China Mobile had abused its dominant position through its pricing. It has been reported that China Mobile has agreed to pay RMB 1,000 (approximately US$146) to Zhou Ze. Mr Zhou had originally sued for RMB 1,200 representing two years’ worth of monthly fees that he was charged.
China Mobile has stated that it has made the payment in gratitude for the plaintiff's suggestions, and not as a settlement. It would appear that the company was reluctant to admit any wrongdoing, for concern that it might set a precedent for other potential claims. Such concern is understandable in light of the potential for a multitude of claims being brought against China Mobile by customers similarly aggrieved by its pricing practices. In addition, the Draft Rules (see previous alert - Double damages and mandatory IP licensing under the AML: Chinese competition law heats up for summer - 24 July 2009) contemplate the awarding of double damages in private claims under the AML, further exacerbating the risks involved.
Implications
With MOFCOM now having published six merger decisions under the AML, and following closely the recent conditional clearances of Pfizer/Wyeth and General Motors/Delphi, it is becoming more sophisticated and detailed in its analysis and is continuing to take an interventionist role in the exercise of its powers under the AML to approve, or withhold approval of, global deals.
MOFCOM has unconditionally approved the majority of merger notifications under the AML and could be said to be imposing conditions only in circumstances where it identifies substantive issues. However, where MOFCOM does have competition concerns in relation to a transaction, it is clear that there may be lengthy delays in obtaining clearance, and only after agreeing to a suite of remedies. As such, those involved in acquisitions within or out of China should seek pre-notification consultation well in advance and allow ample time to complete the AML merger review process.
In contrast to the disposition of merger control cases, the pace at which China implements a robust system for hearing private actions under the AML has been substantially slower, with no settled implementation rules in place and with only a handful of cases having been reported.
Further, the dismissal of the Shanda case and the nominal sum that China Mobile has agreed to pay many months after the case was initially brought, may dissuade potential litigants from bringing private actions at this stage. Indeed, the lack of private actions to date may reflect the nature of the Chinese legal system (e.g. no ready access to discovery). However, once the Draft Rules have been settled (thus making the process more transparent) there is likely to be a raft of cases brought under the AML.
In addition, once the National Development and Reform Commission or the State Administration for Industry and Commerce start concluding investigations, there is a likelihood of follow-on actions being brought (as the evidentiary burden will be lower).
In light of this emerging risk of private actions, firms operating in China should seek to reduce their exposure to litigation by conducting compliance training with employees and auditing potential compliance risks. Further, firms should take into account AML issues when preparing transaction documentation, such as ensuring that its own promotional claims do not detract from a position it may wish to take in future court cases. For those who seek to bring claims against the monopolistic wrongdoing of a company, such parties need to be well prepared when collating and presenting evidence to the court.
Disclaimer
The views set out in this publication are based on our experience as international counsel representing clients in their business activities in China. As is the case for all international law firms licensed in China, we are authorised to provide information concerning the effect of the Chinese legal environment. However we are not admitted to practice Chinese law and so are unable to issue opinions on matters of Chinese law.