On Oct. 30, China's Ministry of Commerce, or MOFCOM, announced its approval of Panasonic Corp.'s long-delayed $8.94 billion tender offer for a majority stake in Sanyo Electric Co. Ltd., subject to certain post-completion divestitures. This is the first time the Chinese competition authorities have compelled disposals outside of the country in a transaction involving two non-Chinese businesses. The decision follows MOFCOM's approval of the $68 billion Pfizer Inc.-Wyeth transaction issued on Sept. 29 that was conditioned on the divestiture of Pfizer's swine mycoplasmal pneumonia vaccine business in China.

On Dec. 19, 2008, Japan's Panasonic and Sanyo entered into a Capital and Business Alliance Agreement, which provided for Panasonic to acquire at least a majority of the voting rights of Sanyo by means of a tender offer for all of the outstanding shares of Sanyo. The transaction was subject to regulatory approval in a number of jurisdictions, and competition concerns were raised by the U.S. Federal Trade Commission, the Japanese Fair Trade Commission, the European Commission and MOFCOM with respect to the concentration of certain products in their respective markets resulting from the combination.

MOFCOM issued its conditional approval after conditional clearance by the Japanese Fair Trade Commission and European Commission but before the U.S. Federal Trade Commission. The conditions set by MOFCOM relate to three categories of battery products: rechargeable portable nickel metal-hydride batteries; coin-shaped rechargeable lithium batteries; and rechargeable nickel metal-hydride batteries for automotive use.

MOFCOM concluded that the acquisition of Sanyo by Panasonic would result in market share concentration in China of 46.3% for rechargeable portable nickel metal-hydride batteries and 61.6% for coin-shaped rechargeable lithium batteries. With respect to nickel metal-hydride batteries for automotive use, MOFCOM found that 77% of the market share was controlled by Panasonic EV Energy Co. Ltd., or PEVE, a joint venture between Panasonic and Toyota Motor Corp., with the remainder shared by Panasonic and Sanyo. MOFCOM concluded that the post-acquisition concentration would adversely affect competition in these markets and conditioned its approval of the transaction on certain post-completion divestitures. The divestitures of some of these businesses were also required by the Japanese and European regulators.

In order to obtain MOFCOM's approval for the transaction, Panasonic and Sanyo agreed to the following divestitures and conditions, which, as is commonly the case with the Japanese, U.S. and European regulators, were finalized following discussions with the regulators:

Rechargeable portable nickel metal-hydride batteries. Either (i) transfer Sanyo's nickel metal-hydride battery business in Japan to an independent third party and convert Sanyo's business in Jiangsu Province in China into an original equipment manufacturer factory; or (ii) transfer Panasonic's nickel metal-hydride battery business in China to an independent third party.

Coin-shaped rechargeable lithium batteries. Transfer Sanyo's coin-shaped rechargeable lithium battery business in Japan to an independent third party.

Rechargeable nickel metal-hydride batteries for automotive use. Transfer Panasonic's rechargeable nickel metal-hydride vehicle battery business in Japan to an independent third party.

In each case, the transfer would 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. The divestitures must be completed within a specified time period and is subject to MOFCOM approval 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 would appoint an independent trustee to dispose of the assets. Until the fulfillment of these conditions, Panasonic and Sanyo are prohibited from disclosing to the other any price-, customer- or market-sensitive information with respect to the products.

In addition, MOFCOM required that for the PEVE joint venture, Panasonic must, within six months after completion of the acquisition, (i) reduce its equity stake in PEVE to 19.5% from 40%; (ii) effectively make its equity interest nonvoting; (iii) terminate its rights to appoint directors to the PEVE board; (iv) give up its veto rights under the joint venture contract with Toyota (PEVE's other shareholder); and (v) remove "Panasonic" from the PEVE name. These requirements would remain in place for at least three years and may be revoked only with MOFCOM's prior approval.

The application for the proposed Sanyo acquisition was made on Jan. 21. After certain supplementary submissions were made, the application was officially accepted on May 4, which triggered the commencement of MOFCOM's investigation period. The initial investigation period was extended, and the final decision was announced right before the Nov. 3 deadline of the extended investigation period.

During the investigation, MOFCOM required the parties to submit documents and data relating to the same categories of products manufactured by both companies, including information with respect to their sales, product differences, pricing methodologies, as well as 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 which were interviewed, and 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 parties.

Since China's new Anti-Monopoly Law, or AML, became effective in August 2008, MOFCOM has issued six published decisions: InBev SA-Anheuser-Busch Cos., Coca-Cola Co.-China Huiyuan Juice Group Ltd., Mitsubishi Rayon Co. Ltd.-Lucite International Ltd., General Motors Co.-Delphi Corp., Pfizer-Wyeth and Panasonic-Sanyo. The Panasonic-Sanyo decision is the latest ruling issued by MOFCOM and reflects the increasing confidence with which MOFCOM intends to exercise its authority to review international mergers and enforce the AML to an offshore combination between two non-Chinese businesses. Apart from the Coca-Cola-Huiyuan decision, which involved the acquisition of a Chinese company by Coca-Cola, the other cases were all offshore combinations between non-Chinese parties. Before the Panasonic-Sanyo decision, MOFCOM's conditions for approval of international deals included divestitures of businesses in China, restrictions on an increase of equity stake in Chinese businesses and restrictions on change of control of the acquiring party. In the Panasonic-Sanyo decision, MOFCOM's conditions included the following requirements not found in its prior decisions: divestiture of businesses located outside of China; reduction of the equity stake in an offshore joint venture between two non-Chinese businesses, forfeiture of voting power and veto rights at both shareholder and board levels of the joint venture and the change of name of the joint venture entity; and the satisfaction of the conditions within a specific time frame, failing which the government will appoint an independent trustee to complete the divestitures of the businesses, which are located outside of China (although it is unclear how this would actually be implemented).

The Panasonic-Sanyo decision is significant in that it gives insight into how MOFCOM views international deals done entirely offshore, which, in its view, would have an anticompetitive impact on the Chinese market, and into the market analysis the regulator undertook to support the decision.

Weil, Gotshal & Manges LLP's Akiko Mikumo, managing partner for Asia based in Hong Kong, and Jasson Han, senior consultant based in Beijing, focus on corporate/M&A transactions.