Notice of Decision on the Approval with Conditions of Mitsubishi Rayon's Acquisition of Lucite International

China Law Update has followed the passage, implementation and enforcement of China's landmark Anti-Monopoly Law since before it was enacted by the Standing Committee of the National People's Congress in August 2007. (For a full summary, see the October 2007 issue of China Law Update. Coverage of various regulations and guiding opinions appeared in the September 2008 and February 2009 issues.)

China's Ministry of Commerce (MOFCOM) issued its first major decision about a proposed takeover under the Anti-Monopoly Law in November 2008, approving—with conditions—InBev's acquisition of Anheuser-Busch. And in our April 2009 edition, China Law Update covered MOFCOM's rejection of Coca-Cola's proposed acquisition of China's largest juice maker, China Huiyuan Juice Group Ltd.

Now comes another important decision by China's main antitrust enforcement agency: On April 24, 2009, MOFCOM released the Notice of Decision on the Approval with Conditions of Mitsubishi Rayon's Acquisition of Lucite International. Mitsubishi had proposed a total cash consideration of approximately $1.6 billion for acquiring Lucite. Both companies manufacture methyl methacrylate (MMA), a key ingredient used in the production of plastics. The acquisition was completed on May 28, 2009.

One notable element of MOFCOM's decision was that neither Mitsubishi Rayon nor Lucite is based in China, though both have major operations there. China's Anti-Monopoly Law and enacting regulations give the Chinese government authority to intervene in acquisitions where the activities in China of one or more of the companies involved reach a certain threshold. (See China Law Update's September 2008 summary of the Regulations on Notification Thresholds of a Concentration of Undertakings.) Mitsubishi Rayon's acquisition of Lucite's Chinese subsidiary, Lucite International (China) Chemical Industry Co., Ltd., was accordingly subject to MOFCOM's approval.

Mitsubishi Rayon initially filed with MOFCOM for merger control review on December 22, 2008. After a subsequent submission of several supplemental filings, MOFCOM finally accepted the case on January 20, 2009.

Adverse Effects of the Proposed Concentration

According to MOFCOM's analysis, Mitsubishi Rayon will control 64 percent of the methyl methacrylate market in China after its acquisition of Lucite. MOFCOM concluded that the proposed concentration would have an adverse impact on competition both horizontally and vertically.

• From a horizontal perspective, MOFCOM said, the concentration is likely to have a negative effect on competition in China's MMA market, since the combined company's 64 percent market share, after the concentration, will be much higher than the market share of its competitors.
• From a vertical perspective, because Mitsubishi Rayon operates businesses in two downstream markets in addition to manufacturing methyl methacrylate, the combined company will, according to MOFCOM's analysis, be capable of adopting measures to eliminate or substantially block competition, based on its dominance in the upstream MMA markets after the concentration.

Review Determination: Restrictive Conditions

Mitsubishi Rayon and Lucite negotiated with MOFCOM possible solutions to reduce the negative effects identified in MOFCOM's review. The companies provided an initial proposal for remedies and then a revised remedies proposal, which was, after assessment, finally accepted by MOFCOM.

MOFCOM approved the concentration with the following restrictive conditions:

• Divestment of Production Capacity. For five years after the merger, Lucite China must sell 50 percent of its annual MMA production capacity to one or more unaffiliated third-party purchasers. Lucite must enact this sale within six months after closing of the acquisition (or 12 months, upon application, with reasonable cause). If Lucite fails to sell this capacity within the allotted time frame, MOFCOM is entitled to appoint an independent trustee to sell 100 percent of Lucite China to a third party.
• Independent Operation. Lucite China and Mitsubishi Rayon shall be managed independently from each other within that six-month period (or 12 months, if extended). Each company shall keep its respective management personnel and board membership during that time, and the companies are prohibited from sharing information on pricing, customers and other competitive information concerning the China market. Failure to adhere to the above obligations will result in a combined penalty of between RMB 250,000 and RMB 500,000, as determined by MOFCOM based on the nature of the material violation and its impact on competition in China's MMA market.
• No Future Investment in China. As a condition of the merger, for five years after its final consummation, Mitsubishi Rayon cannot, without prior approval from MOFCOM, either (i) acquire a domestic MMA product manufacturer in China or (ii) build a new plant for MMA products in China.