In a landmark ruling on 30 October 2009, the Ministry of Commerce of the People's Republic of China ("MOFCOM") granted conditional antitrust clearance to the merger between Panasonic Corporation ("Panasonic") and Sanyo Electric Co., Ltd. ("Sanyo"). Zhong Lun Law Firm's antitrust and competition team, led by senior partner Wu Peng (assisted by ten lawyers), has advised both Panasonic and Sanyo on all aspects of the MOFCOM merger control review process. In addition to assisting Panasonic and Sanyo in preparing the merger notification filing, and representing them in consultations with MOFCOM on proposed merger remedies, Zhong Lun will also assist the parties in their implementation of the remedial measures stipulated by MOFCOM.
The antitrust clearance of the proposed Panasonic-Sanyo merger (the "Merger") by MOFCOM is ground-breaking in several aspects. It is the first PRC merger review which involved all phases of merger control review stipulated by the Anti-monopoly Law of the People's Republic of China ("AML"); secondly, to date, the antitrust review involved the most complex definition and analysis of the relevant markets due to the numerous product categories concerned; and thirdly, the merger remedies stipulated by MOFCOM have so far been the most wide-ranging and sophisticated in PRC merger clearances. Below is a summary of MOFCOM's conditional merger clearance decisions on the proposed Panasonic-Sanyo merger.
I. MOFCOM Antitrust Review Process
On 21 January 2009, the Merger parties submitted the merger notification filing to MOFCOM. After receiving supplemental materials from the Merger parties, MOFCOM accepted the notification filling on 4 May 2009 and commenced the Phase I Review. Upon the completion of 30-day Phase I Review, MOFCOM decided to commence a 90 day Phase II Review, with 3 September 2009 as the ending date.
On 14 August, MOFCOM informed the applicants of the competition concerns identified during its review, and requested the applicants to propose corresponding remedial measures. On 26 August, the applicants applied to MOFCOM for an extension of the Phase II Review period, so that they can have sufficient time to prepare the specific remedial proposals. Pursuant to Article 26 of AML, MOFCOM decided to extend the Phase II Review period for 60 days, with 3 November 2009 as the ending date of the Extended Review period.
During the review process, in addition to reviewing relevant documents submitted by the applicants, MOFCOM also issued questionnaires to 39 competitors and downstream customers in respect of different products, conducted telephone interview with certain enterprises, and conducted field investigations in Shenzhen and other locations.
In order to address the competition concerns identified by MOFCOM, on 20 August, 26 August, 10 September, 24 September, and 20 October 2009, MOFCOM and the applicants held consultation sessions to discuss the proposed remedial measures. On 22 October 2009, the applicants submitted their final remedial measures proposal. Upon assessment, MOFCOM confirmed that the proposed remedial measures are sufficient to eliminate the adverse impact of the Merger on the relevant markets in China, and decided to approve the Merger with restrictive conditions imposed.
II. MOFCOM Findings on the Relevant Competition Concerns
Based on its review of the Merger, MOFCOM confirmed that the Merger will create restrictive or eliminative competitive effect on the following three product markets:
(a) Button-type Rechargeable Lithium Battery
Button-type Rechargeable Lithium Battery is the backup power source used in electrical appliances such as mobile phones and video recorders and constitutes a distinct product market; and the geographic market is defined to be the worldwide market. The Merger will create restrictive or eliminative competitive effect on such product market, due to the following reasons:
(i) Firstly, Button-type Rechargeable Lithium Battery market is highly concentrated. The applicants are the largest and the second largest manufacturer respectively on such market. After the Merger, Panasonic will have 61.6% market share, and as a result the downstream customers' right of choice will be severely restricted. Since most of the downstream customers adopt the policy of procuring products from two or more suppliers, the restrictive competitive effect resulting from the Merger will be more significant.
(ii) Secondly, after the Merger, Panasonic will have the power to raise price unilaterally. On the one hand, due to the very limited number of competitors on the market, after the Merger, any price increase by Panasonic will hardly face any effective competitive constraint; on the other hand, since Panasonic's price increase may be beneficial to other competitors, other competitors will not have the incentive to effectively compete with Panasonic.
(iii) Thirdly, any buyer countervailing power will not be sufficient to eliminate the above restrictive competitive effect. Although a portion of the large downstream customers enjoy buyer countervailing power to counterbalance the market power of the post-Merger entity, such buyer countervailing power cannot extend to other medium/small sized customers who do not have comparable bargaining power.
(b) Civilian-use Nickel Hydrogen Battery
Civilian-use Nickel Hydrogen Battery mainly serves as the main power source for electrical appliances such as electrical tools, and constitutes a distinct product market; and the geographic market is defined to be the worldwide market. The Merger will create restrictive or eliminative competitive effect on such product market, due to the following reasons:
(i) Firstly, Civilian-use Nickel Hydrogen Battery's market is fairly highly concentrated, and has limited number of competitors. After the Merger, Panasonic will have 46.3% market share, which is much higher than any other competitor. The Merger may afford Panasonic the power to raise price unilaterally.
(ii) Secondly, the brand designation practice of downstream customers' transaction counterparties may impede market competition. During the investigation, MOFCOM found out that the transaction counterparties of some downstream customers of Civilian-use Nickel Hydrogen Battery require such customers to use battery products of Panasonic or Sanyo brand. Such brand designation practice has restrained market competition, and has foreclosing effects on battery products of other brands, and the Merger will further enhance such restrictive competitive effect.
(iii) Thirdly, Nickel Hydrogen Battery market development has slowed down and therefore it is fairly difficult to attract sufficient market entrance so as to offset the above restrictive and eliminative competitive effect.
(c) Automotive Nickel Hydrogen Battery
Automotive Nickel Hydrogen Battery is the battery used to power Hybrid Electric Vehicle or Pure Electric Vehicle. The Merger will create restrictive or eliminative competitive effect on such product market, due to the following reasons:
This product market is highly concentrated, with Panasonic EV Energy Co., Ltd. ("PEVE"), established jointly by Panasonic and Toyota, possessing 77% market share and having overwhelmingly dominant position. In addition, the remaining competitors on the market only include Panasonic and Sanyo. Therefore the Merger will lead to further reduction of the number of competitors on the market, and Panasonic may very likely use its influence over PEVE to further weaken the competition on the market.
III. MOFCOM Conditional Merger Clearance Decisions
Panasonic and Sanyo are required to implement the following remedial measures:
(a) In respect of Button-type Rechargeable Lithium Battery, fully divesting the existing Button-type Rechargeable Lithium Battery business from Sanyo, i.e. Button-type Rechargeable Lithium Battery business of Sanyo in the Tottori-ken factory at Iwami-cho, Tottori-ken, Japan shall be transferred to an independent third party.
(b) In respect of Civilian-use Nickel Hydrogen Battery, divesting Civilian-use Nickel Hydrogen Battery business from either Sanyo or Panasonic. Sanyo shall transfer its Civilian-use Nickel Hydrogen Battery business in the Takasaki factory at Takasaki City, Gunma-ken, Japan to an independent third party; or Panasonic may transfer its Civilian-use Nickel Hydrogen Battery business in its factory at Wuxi, Jiangsu Province, China to an independent third party.
(c) In respect of Automotive Nickel Hydrogen Battery,
(i) Panasonic shall transfer its HEV-use Nickel Hydrogen Battery business in its Shonan factory in Chigasaki-shi, Kanagawa-ken, Japan to an independent third party.
(ii) For Panasonic EV Energy Co., Ltd.,
(A) Panasonic's equity ratio in PEVE shall be reduced to 19.5% from current 40%;
(B) Panasonic shall waive its voting rights in PEVE's shareholders' assembly, the right to appoint directors to the board of PEVE, and its veto right in respect of Automotive Nickel Hydrogen Battery business in the Joint Venture Contract between Panasonic and Toyota (PEVE's parent company). PEVE shall change its name such that the new name will not include the word "Panasonic".
(d) The selection of the purchasers pursuant to items (a), (b) and (c)(i) above shall be conducted in accordance with the principles of being conducive to the development of the divested businesses and being conducive to market competition, and shall be subject to the approval of MOFCOM. In addition, the transferring party shall, based on the applicable purchaser's needs, transfer the relevant assets required for operation of the divested businesss, including manufacturing equipments, sales and R&D departments and customer resources. Concurrently, the transferring party shall license the purchaser to use proprietary intellectual property rights owned by it related to manufacture of the relevant products.
(e) The implementation period for divestitures pursuant to items (a), (b) and (c)(i) above shall be 6 months, with a possible extension of another 6 months subject to MOFCOM's prior approval. If the divestitures are still not completed within such extended period, MOFCOM will have the right to appoint an independent trustee to divest the aforesaid businesses to an independent third party.
(f) During the period from the date of consummation of the Merger to the completion date of the applicable divestiture, the relevant business entities of Panasonic and Sanyo shall operate independently, and shall not disclose relevant price, customer information and other competitive information to each other. However, the parties may disclose the relevant information in order to fulfill a statutory obligation.
(g) The remedial measures involving PEVE pursuant to item c(ii) above shall be completed within 6 months after the date of consummation of the Merger, and content of the remedial measures shall remain unchanged for a period of 3 years. MOFCOM's consent is required before cessation of such remedial measures.
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