CHINESE UPDATE – MOFCOM Conditionally Clears Acquisition (Requiring Disposition) by Private Equity Investor, Dispelling Notion that Private Equity Deals Are Less Subject to Anti-Trust Challenge in China

Executive Summary/Highlights: 

  • MOFCOM conditionally cleared the acquisition of Savio Macchine Tessili S.p.A ofItaly by Alpha Private Equity Fund V, a European private equity firm, subject to certain disposition conditions.
  • This is the first conditional decision relating to a private equity investor that grants conditional approval.  Historically, PE firms have believed that their transactions were very unlikely to be subject to Chinese merger control.
  • The decision illustrates that MOFCOM regards PE investors the same way it does strategic acquirors.


On October 31, 2011, the Ministry of Commerce (“MOFCOM”) published an announcement that MOFCOM conditionally cleared the merger control notification for the acquisition of Savio Macchine Tessili S.p.A. (“Savio”) by Penelope S.r.l. (“Penelope”).

Key Factors Considered by MOFCOM

According to the announcement, in reviewing this concentration of business operators, MOFCOM has considered various factors under Article 27 of the Anti-Monopoly Law of China (“AML”), including the following:

Relevant Market

MOFCOM believes that this transaction will eliminate or restrain the competition in the market of electronic yarn clearers for automatic winders. An electronic yarn clearer for automatic winders is a monitoring device assembled on an automatic winder with the function to inspect defective yarns and then to repair them automatically. The device could repair the defects in yarns within an extremely short time and no other devices have this function. The market for electronic yarn clearers for automatic winders constitutes a single product market.

Competition Issues

After investigations, MOFCOM finds that Uster Technologies Ltd. (“Uster”) and Loepfe Brothers Ltd. (“Loepfe”) are the only two manufacturers worldwide for electronic yarn clearers for automatic winders. The market shares of Uster and Loephe in 2010 were respectively 52.3% and 47.7%, and those figures forChina market were similar.

Furthermore, Alpha Private Equity Fund V ( “Alpha V”), the wholly-controlling shareholder of Penelope (the acquirer), is a private equity fund, and holds 27.9% of the shares in Uster, as its biggest shareholder; while Loepfe is a wholly-owned subsidiary of the target company, Savio.

Therefore, MOFCOM believes that, after the completion of this proposed concentration, there is a possibility that Uster and Loephe may have Alpha V coordinate their business activities and thus eliminate and restrict the competition in the market of electronic yarn clearers for automatic winders. Meanwhile, it is possible that Alpha V could also eliminate and restrict the competition through the control over and influence on Uster and Loephe.

Decisions by MOFCOM

MOFCOM decides to approve the proposed concentration with restrictive conditions, requiring Apef 5, the ultimate controlling entity of Alpha V, to transfer its shares in Uster to an independent third party within 6 months after MOFCOM’s Review Decision and it shall not participate in or have influence on the business or operational activities of Uster before completing the Uster share transfer.


  • This is the first decision that MOFCOM had made on PE acquisition cases with conditions, which reflects that MOFCOM treats PE and other industry investors equally in merger control review and does not distinguish them due to certain characteristics of PE.
  • The definition of electronic yarn clearers for automatic winder market as the single relevant market has further shown MOFCOM’s tendency to define a much smaller product segment as the relevant market in its review, and thus requires the applicants to provide the market data for such narrowly defined relevant market and considers the competition effect in a smaller product market.
  • When explaining the entry barriers of electronic yarn clearers for automatic winder market, the announcement specifically mentions that the product technology has been protected by patents and other intellectual property rights, and therefore it is difficult for new enterprises to enter into the relevant market. However, it does not illustrate whether any other substitute technologies do exist or whether any licenses of such patent technology are accessible. If the market entry difficulty is assessed only based upon the existence of patent in the relevant product, so as to determine that the business operators possessing such technology may eliminate or restrict competition in such narrow scope of product segment market, the result of such practice may frustrate the incentives or creativities of business operators to develop new products and thus would go against the purpose of competition laws, which is to promote competition, increase efficiency and protect interests of consumers.
  • Finally, the announcement mentions that MOFCOM raised its competition concerns about the transaction on September 15th, shortly after September 5th when the case was officially accepted by MOFCOM, and the applicants submitted resolution plan on September 23rd; MOFCOM and applicants had several consultations afterwards on how to eliminate competition concerns and MOFCOM made the decision with conditions on October 30th. The aforesaid details show that it is important for the applicants, who are likely to be imposed with restrictive conditions, to take part in consultations with MOFCOM on issues relating to eliminating or restricting competition as early as possible during the merger control review process.
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