December 8, 2017
The Chinese Ministry of Commerce (“MOFCOM“) recently conditionally approved Advanced Semiconductor Engineering’s proposed acquisition of Siliconware Precision Industries under China’s Anti-Monopoly Law. Despite the parties’ market shares in China not exceeding 30%, the decision[1] imposes a two-year “hold-separate” condition, under which the two companies must remain as two independent competitors, with unchanged business models and market practices.
The AML has a compulsory pre-closing merger control review with low financial thresholds, catching many global transactions even if they do not have any nexus with China. MOFCOM has been particularly concerned by transactions that may affect Chinese competitors or customers, consistent with its mandate under the AML. Between 2011 and 2013, MOFCOM imposed hold-separate remedies in 4 transactions. Most observers believed that MOFCOM has stayed away from such remedies in the recent years because of the difficulty to monitor hold-separate arrangements.
MOFCOM’s recent decision confirms that hold-separate arrangements are still part of MOFCOM’s toolbox. Given the importance of the high tech sector for the Chinese government, we can expect more of these remedies in future high tech transactions.
Advanced Semiconductor Engineering, Inc. (“ASE“) and Siliconware Precision Industries Co., Ltd (“Siliconware“) (together, the “Parties“) are Taiwanese integrated-circuit semiconductor packaging and testing companies.
On 30 June 2016, they signed a merger agreement (the “Transaction“), according to which the Parties would establish Advanced Semiconductor Investment Holding Co., Ltd (the “Holding Company“), which would fully own and acquire sole control of both ASE and Siliconware.
The Transaction triggered merger filings in Taiwan, the US and China. The Taiwanese Trade Commission and the US Federal Trade Commission issued their unconditional clearance decisions in November 2016 and May 2017, respectively.
The Parties first filed their notification to MOFCOM on 25 August 2016. At the end of Phase 3 (which was supposed to end on 11 June 2017), the Parties withdrew their filing and submitted a fresh filing on 6 June 2017. On 6 July 2016, MOFCOM commenced its Phase 2 review of the second filing, thus extending the final review deadline to 29 November 2017. The deal was cleared on 24 November 2017, 15 months after the first filing.
MOFCOM’s review focused on a narrow product market of semiconductor packaging and testing (“P&T“) outsourcing service.
Upon examination of the market, MOFCOM found that there is a distinction between P&T services provided by integrated design and manufacturing (“IDM“) companies, such as Samsung, and those provided by professional outsourcing companies, such as the Parties. MOFCOM noted that P&T providers in the former category have their own semiconductor brand and cover all elements of production, including design, manufacturing, P&T and sales, with some players even selling electronic products for end use. MOFCOM commented that IDM companies have been “gradually stripping off” lower end production services, such as P&T, and outsourcing them to companies such as the Parties.
ASE and Siliconware are ranked first and third in the global market and fifth and first in the Chinese market for semiconductor P&T outsourcing services, respectively. Post-merger, MOFCOM noted that ASE would rank first in both the global and Chinese markets, with a combined market share of approximately 25 to 30% in both markets. In contrast, the global market share of the next three competitors would be approximately 10 to 15% each, with the rest of the competitors being fragmented with a market share of less than 4%.
MOFCOM’s market investigation revealed that customers are relatively “sticky” in this sphere due to the risks, costs and length of time (approximately six months to two years) involved in switching providers. In addition, MOFCOM noted that ASE and Siliconware are close competitors and the most important providers of P&T outsourcing services for many customers in China.
Given the Parties’ strength in the market, MOFCOM found that post-merger, the merged entity would have the ability and motive to raise prices and to carry out other harmful practices, such as a price discrimination strategy maximizing profits to the detriment of Chinese customers with weak bargaining power. However, the anti-competitive effects of the Transaction would be offset to an extent by the rapid development of the industry and P&T service providers’ dependence on their clients.
In order to address MOFCOM’s concerns, the Parties offered commitments, pursuant to which the two companies will remain independent of each other for 24 months, by keeping their financial, HR, pricing, sales, production capacity and procurement matters separate. The Holding Company will exercise limited shareholders’ rights during this period. In addition, the Parties will provide P&T services to clients in a non-discriminatory way and set the prices and transaction conditions in a reasonable manner. Both Parties also undertake not to restrict customers’ selection of, or transition to, other providers.
A hold-separate remedy generally requires merging parties to keep all or a portion of their businesses independent post-merger, until the condition is removed with MOFCOM’s express approval. Critics of the hold-separate remedy argue that this is an inappropriate intervention into the economic operations of undertakings and constitutes an overstepping of MOFCOM’s regulatory powers. In addition, hold-separate remedies are difficult and time-consuming to monitor for compliance.
Prior to ASE/Siliconware, MOFCOM used the hold-separate remedy on four occasions. MOFCOM’s first two uses of this remedy were both in the hard-disk sector: a 12-month hold-separate condition in Seagate’s acquisition of Samsung’s hard-disk business in 2011; and a 24-month hold-separate condition in Western Digital and Hitachi’s merger in 2012. In Seagate/Samsung, MOFCOM lifted the condition in 2015, only after a detailed review of the parties’ fulfilment of their hold-separate obligations. In Western Digital/Hitachi, MOFCOM carried out an investigation into the parties’ alleged failure to observe the hold-separate obligation, which resulted in a delayed and only partial removal of the condition in October 2015 and a fine of 600,000 yuan (c. USD 90,000) for two violations.
MOFCOM also imposed a 24-month hold-separate obligation in agricultural trader Marubeni’s buyout of Gavilon in April 2013. Most recently, MOFCOM imposed the longest hold-separate obligation to date in the MediaTek/Mstar merger in August 2013. There, MOFCOM required Mstar’s LCD chip business to be independently operated for 36 months.
In contrast to the four hold-separate conditions previously imposed by MOFCOM, the condition in ASE/Siliconware automatically expires after a fixed period. This is a significant advantage for the Parties, as MOFCOM’s approval process for removing a hold-separate condition can be lengthy and complicated.
Finally, this shows that MOFCOM will pay close attention to the impact of a merger on Chinese market players, even if the merging parties’ market shares are low. This is in line with MOFCOM’s mandate under Article 24 of the Anti-Monopoly Law, which is to assess the impact of a merger on the development of the national economy. Considering that the development of the high tech sector is a priority for the Chinese government, we may see more hold-separate conditions in the future.
[1] Dated 24 November 2017. English version available at http://english.mofcom.gov.cn/article/policyrelease/buwei/201711/20171102677556.shtml.
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