Japan: Merger Control
The regulation of mergers in Japan is achieved through the combination of a relatively complex set of legislative and non-legislative rules. Following the amendment of Law No. 54 of 1947, as amended (the Anti-Monopoly Act, AMA), effective from January 2006, which strengthened the enforcement of competition rules in Japan, an amendment to the 'guidelines to the application of the Anti-Monopoly Act concerning review of business combination' (Merger Guidelines) was adopted on 28 March 2007. This amendment further aligns the Japanese merger control review standards with those of the EU.
The Japan Fair Trade Commission (JFTC) has proposed significant amendments to the merger control regime on 11 March 2008, through a Bill submitted to the Diet in the ordinary session, which ends in June 2008. If the Bill passes the Diet without any modifications, the following will be the key changes to the current merger control regime.
First, it is proposed that the concept of 'group of companies' be introduced in Japanese merger control. Under the current method for evaluating whether a transaction is required to be notified to the JFTC, the thresholds do not go further than considering as relevant the sales or value of assets of the party to the transaction as well as of its direct Japanese parent companies and direct Japanese subsidiaries (see below for more details). In addition, sales into Japan made from abroad by a foreign corporation are currently not counted. The proposed amendments abolish that rule and replace it with the concept of 'group companies', which is quite similar to the EU concept of group company. This will bring Japanese merger control in line with international standards and in particular with EU merger control. It will mean that the current regime whereby many mergers of large foreign companies that involve a Japanese element are not required to be notified to the JFTC, because the sales or assets of the top (usually foreign) parent companies were not taken into account, will change radically, in that many more mergers are likely to be required to be notified to the JFTC.
Second, another specificity of Japanese merger control will be abolished in the sense that a prior notification obligation will be introduced for share acquisitions. Under the current system, share acquisitions are subject to a post-notification obligation and then again only if certain pre-determined levels of shareholdings are attained (see below). Under the proposals, if a company (including the group of companies to which it may belong) acquire more than 20 per cent or 50 per cent of the voting rights of another company, such transaction will be subject to a pre-notification obligation and to a stand-still obligation during the period of review.
The combination of the above changes, if they are voted by the Diet, should therefore mean that many more transactions will become notifiable to the JFTC in the near future.
Merger control was introduced in Japan by the AMA at the same time as Japan's first competition rules. Merger control is enforced by the JFTC, which was established by the AMA as an independent administrative office and is composed of a chairman and four commissioners who possess broad enforcement powers with respect to the AMA.
h2.Merger control and the interrelation between sector-specific regulators and the JFTC
The JFTC has primary jurisdiction over the enforcement of merger control under the AMA. However, the JFTC regularly holds 'informal' consultations with relevant ministries and other sector-specific regulators and, in practice, when ruling on a given transaction, the JFTC takes into consideration relevant public and industrial policy issues. Among the various government ministries, it is generally considered that the Ministry of Economy, Trade and Industry (METI) has a strong influence over competition policy but depending on the specifics of each case, other ministries may have greater involvement.
Types of regulated mergers and thresholds
Mergers, business transfers, corporate splits (or demergers) and share acquisitions are subject to notification under the AMA. M&A transactions whose scheme involve more than one of these transactions (eg, an acquirer merges with a target after acquiring shares in the target) are separately analysed at each step of the transaction, so separate filings may need to be made for the various steps. Joint ventures are also analysed in the same way.
Depending on whether they exceed certain thresholds as described below, mergers, business transfers, and corporate splits are subject to a prior notification obligation and share acquisitions are subject to post-facto notification obligation. Generally speaking, no notification is required for transactions which amount to internal reorganisations of companies within a group. It should be noted, however, that the JFTC has a general power to review any M&A transaction for compliance with the substantive test (described below) even where the jurisdictional thresholds are not fulfilled.
For mergers, generally speaking, a monetary asset or turnover threshold of ¥10 billion and ¥1 billion is used. A prior notification is required when a company whose total assets exceed ¥10 billion and a company whose total assets exceed ¥1 billion merge. In this chapter, 'total assets' means the sum of the total amount of assets of the company, its subsidiaries in Japan (ie, any companies in Japan of which more than 50 per cent of the total voting rights of all stockholders is held by the said company), and any company in Japan which holds more than 50 per cent of the total voting rights of all stockholders of the said company. (That is to say, in this chapter, 'total assets' means the assets of the company as well as of its direct Japanese parent companies and direct Japanese subsidiaries.) For non-Japanese companies, instead of 'total assets', 'domestic sales' is used. In this chapter, 'domestic sales' is the amount of sales reported in the profit and loss statement made together with the latest balance sheet of the non-Japanese company's business offices in Japan, including its Japanese subsidiary office. (In this chapter, 'Japanese subsidiary' means the non-Japanese company's direct subsidiary in Japan only.) Such 'domestic sales' do not include sales into Japan made from abroad by a foreign corporation. In the case of a merger between two non-Japanese companies, a filing will only be required if both of the two non-Japanese companies have either a Japanese business office or Japanese subsidiary and the requirements described above are met.
For business transfers, the assets or turnover threshold will be met when an acquiring company (including a non-Japanese company), whose total assets exceed ¥10 billion, acquires: all the business of a Japanese company whose total amount of assets on a non-consolidated basis exceed ¥1 billion; a substantial part of a Japanese company's business, or all or a substantial part of the fixed assets of a Japanese company's business, in each case the turnover (ie, the sales in the profit and loss statement made together with the latest balance sheet) of which exceeds ¥1 billion; all the business of a non-Japanese company whose domestic sales exceed ¥1 billion; or a substantial part of a non-Japanese company's business, or all or a substantial part of the fixed assets of a non-Japanese company's business, in each case the domestic sales of which exceed ¥1 billion.
For corporate split, the threshold is based on assets and turnover.
Corporate split is similar to a business transfer insofar as the assets and liabilities are transferred, whereas it differs insofar as the assets and liabilities are comprehensively transferred as an organisational transfer and therefore no individual consent is necessary. For corporate split, the basic threshold is the same as for business transfers. There are two types of corporate split that are subject to the filing requirement. Under the first type, which consists in jointly establishing a new company by corporate split, the threshold will be met when total assets (for a Japanese company which intends to transfer a whole part of its business), turnover of the business being transferred (for a Japanese company that intends to transfer a substantial part of its business) or domestic sales (for non-Japanese companies), of one entity exceed ¥10 billion and that of another entity exceed ¥1 billion. Under the second type of corporate split, which consists in transferring a business to an existing company by corporate split, the threshold will be met when the transferring entity's total assets, turnover of the business being transferred or domestic sales as mentioned above, exceed either ¥10 billion or ¥1 billion and the total assets or domestic sales of the receiving company exceed ¥1 billion or ¥10 billion.
For share acquisitions, the threshold is based both on assets or turnover, and shareholding. First, the total amount of assets of the acquiring company (including a non-Japanese company) on a non-consolidated basis must exceed ¥2 billion and the total assets of the said acquiring company must exceed ¥10 billion, and the acquiring company either acquires (or obtains control over) shares of a Japanese company whose total amount of assets on a non-consolidated basis exceed ¥1 billion, or a non-Japanese company whose domestic sales exceed ¥1 billion. Second, such acquisition must result in the acquirer holding more than 10, 25 or 50 per cent of the total voting rights of all the stockholders of the target (so that an acquisition that increases a shareholding from 9 per cent to 11 per cent requires a filing, but an acquisition that increases a shareholding from 11 per cent to 24 per cent does not require one).
The nature of the substantive test for the assessment of mergers
The substantive test for clearance is whether the proposed merger, business transfer, corporate split, share acquisition, shareholding or interlocking directorate (in this section: M&A transaction) may result in a 'substantial restraint of competition in a particular field of trade'. As mentioned above, it is important to note that the JFTC can theoretically review any M&A transaction under the substantive test, regardless of whether or not the thresholds described above are met. On 31 May 2004, the JFTC published the Merger Guidelines, which abolish the previous guidelines that interpreted the concept of 'the effect may be substantially to restrain competition in a particular field of trade' and which are significantly more thorough and clearer than what existed before, whilst relying more heavily on economic concepts. On 28 March 2007 the JFTC adopted new Merger Guidelines, which: amend the safe harbour rules; adopt the so-called 'small but significant and non-transitory increase in price test' (SSNIP test) for the purposes of analysing demand and supply substitution when defining the markets; and provide for additional factors to be considered in the analysis of the relevant transactions.
The Merger Guidelines clarify the category of M&A transactions whose impact on competition should be reviewed. Detailed rules are provided for market definition ('particular field of trade'). Importantly, the amendments to the Merger Guidelines clarify that the geographic market may be wider than the geographic boundaries of the territory of Japan, depending upon the international nature of the relevant business. This means that it is now much more likely that consolidation within certain sectors of the Japanese economy which are faced with competition from foreign imports, for example, will be easier since the widening of the actual geographical market may dilute their national market shares. The Merger Guidelines explain the factors that will be taken into account when assessing whether a certain M&A transaction substantially restrains competition. The substantive test is analysed for each of horizontal, vertical and conglomerate M&A transactions. Another indication of the sophistication of the Merger Guidelines is that they provide that the JFTC will closely analyse market conditions both before and after the transaction with a view to establishing the actual impact on competition of the transaction, including by analysing whether it is likely that such transaction may facilitate cooperation between market players (actively or tacitly).
Perhaps the most interesting feature of the Merger Guidelines is the use of 'safe harbours' for each of the three categories of M&A transactions identified above (specific harbours apply to each category), as part of the substantive test analysis. These are cases where the JFTC normally considers that there is no possibility that there may be a substantial restriction of competition or that such possibility is small and accordingly, it is not necessary to conduct a detailed examination of the M&A transaction. Each case is, however, reviewed on its own merits, and the application of the harbours (see below) needs to be analysed carefully within the specific context of each transaction.
The substantive test for horizontal M&A transactions
h4. Safe harbours
First, for horizontal M&A transactions, the amendments to the Merger Guidelines identify three common safe harbours. If any of these safe harbours is met (and there are no other competitive restrictions) the JFTC is likely to consider that the M&A transaction does not substantially restrain competition, namely:
- the Herfindahl-Herschmann Index (HHI) (a commonly accepted measure of market concentration that is calculated by summing the squares of the individual market shares of all the firms in the market) after the M&A transaction is not more than 1,500;
- the HHI after the M&A transaction exceeds 1,500 but not more than 2,500, and the HHI does not increase (the so-called delta) by more than 250; or
- the HHI after the M&A transaction exceeds 2,500 and the delta is not more than 150.
If neither of the above safe harbours is met, the JFTC will proceed with the (separate) analysis of the non-coordinated (unilateral) and coordinated effects of the horizontal M&A transaction. However, the amendments to the Merger Guidelines clarify that based on the JFTC's past experience, if the HHI after the completion of the M&A transaction is not more than 2,500 and the combined market share does not exceed 35 per cent, it is generally considered that there is a low possibility that the M&A transaction will substantially restrain competition.
Analysis of unilateral effects
As to the unilateral effects of the horizontal M&A transaction, the following are the main factors that will be taken into account as part of the comprehensive examination:
- the status of the merging parties: market shares, market share ranks, pre-merger rivalries among the parties;
- the competitive pressures from non-merging firms - market shares, differences in market share between a merged firm and its competitors, excess capacity for supply, the degree of product differentiation;
- the potential and actual competitive pressures: import and entry, the presence of adjacent product and geographic markets, competitiveness in vertically related markets; and
- the efficiency and viability of merging parties.
It should be noted that the amendments to the Merger Guidelines specify that import and entry to the market over the coming two years may be considered.
Analysis of coordinated effects
As to the coordinated effects, the aim of the JFTC is to identify M&A transactions where, due to the structure of the market, the parties to an M&A transaction may find it economically rational to coordinate their behaviour and raise prices without entering into an agreement or other concerted practice that could be caught by the AMA's prohibition of unreasonable restraint of trade (ie, of cartels and other collusive behaviour among competitors). The specific factors that the JFTC will examine when undertaking its comprehensive examination of the coordinated effects of a horizontal M&A transaction are the following:
- the status of the merging parties and their competitors - the number of participants, similarity in product and cost structure, pre-merger rivalries among the merging parties, excess capacity for supply;
- the relevant market environment: transparency in business transactions, frequency and size of orders, stability and maturity in demand, the speed of technological development, pre-merger competitiveness;
- the potential and actual competitive pressures - import and entry, the presence of adjacent products or adjacent geographic markets, competitiveness in vertically related markets; and
- efficiency and viability of merging parties.
Another welcome clarification in the Merger Guidelines is the JFTC's policy as to the failing state of a firm as a defence to a horizontal M&A transaction. Again, this is not an entirely new policy; it is a clarification of the circumstances in which such a defence will be allowed.
The (cumulative) requirements for the defence to be accepted under the amendments to the Merger Guidelines are that: it is clear that one of the concerned parties is a failing firm, or one party's concerned division is a failing division (and it is highly likely that the failing firm or division will otherwise exit the market); and that there is no other alternative that is less influential on competition than the proposed transaction with the other concerned party. If the above two requirements are met, it can be expected that the failing-firm defence will operate as a type of safe harbour for the companies that wish to combine their businesses.
The substantive test for vertical and conglomerate M&A transactions
As to vertical and conglomerate M&A transactions, the Merger Guidelines' approach is to consider that such M&A transactions have less of an impact on competition than horizontal M&A transactions, since the number of competitors in the relevant market is not reduced as a result. Provided such vertical or conglomerate M&A transaction does not result in vertical or horizontal market foreclosure, does not facilitate coordinated effects, and does not eliminate potential competition, it can be expected that such M&A transaction will not pose any significant competition issues.
The amendments to the Merger Guidelines identify two safe harbours for vertical and conglomerate M&A transactions. If any of these safe harbours is met (and there are no other competitive restrictions) the JFTC is likely to consider that the M&A transaction does not substantially restrain competition:
- the merging parties' market share after the M&A transaction is not more than 10 per cent; or,
- the merging parties' market share after the M&A transaction is not more than 25 per cent and the HHI after the M&A transaction is not more than 2,500.
If none of the above safe harbours is met, the JFTC will proceed with the (separate) analysis of the non-coordinated (unilateral) and coordinated effects of a vertical or conglomerate M&A transaction in the same way as for horizontal M&A transactions. However, the Merger Guidelines clarify that, if HHI after the M&A transaction is not more than 2,500 and the merging parties' market share after the M&A transaction is not more than 35 per cent, it is generally considered that the possibility of the M&A transaction resulting in substantially restraining competition is low.
A chart illustrating the substantive analysis undertaken by the JFTC for the assessment of (horizontal) M&A transactions is provided at the end of the chapter.
The informal prior consultation procedure
M&A transactions are usually submitted to the JFTC under the voluntary informal consultation procedure prior to the formal statutory filing of a proposed transaction under the AMA. Using the informal prior consultation procedure presents the advantage that, as a general rule, the JFTC will make up its mind about a particular case at this early stage and will almost always keep to that opinion in the formal notification procedure. Amendments to the informal consultation procedure (Informal Consultation Guidelines) were published together with the amendments to the Merger Guidelines.
Following the amendments to the Informal Consultation Guidelines, the JFTC will start its phase 1 examination within 20 days from the initiation of the informal consultation procedure, or upon receiving all the requested information, in case the JFTC requests such additional information. The amended Informal Consultation Guidelines provide detailed examples of documents that will be considered for the JFTC's competitive analysis.
Within 30 days from the start of the phase 1 examination, the JFTC will indicate either that the proposed transaction does not raise AMA issues or that a phase 2 examination is necessary. In the latter case, the JFTC will explain to the notifying party its issues of concern on the basis of specific product or services markets, as well as in terms of geographic markets. If the notifying company decides to proceed (rather than withdraw its application), its application will be made public and the JFTC will commence its phase 2 examination, which includes inquiries to competitors, retailers and end-users. The JFTC will also receive opinions from the public for a period of 30 days after disclosure of the proposed transaction. At this stage of the procedure, the notifying party has an opportunity to make amendments to the proposal in order to address the JFTC's issues of concern.
The JFTC will then issue its informal decision within 90 days of receiving the necessary documents and information, and will inform the notifying party of the result of its examination, including the reasoning behind its decision.
If the JFTC indicates to the notifying company that informal approval of its proposed transaction is unlikely to be given, the notifying company may decide to withdraw the submission if it believes that the possibility of ultimately securing approval under the statutory procedure is small. If the JFTC concludes that the proposed transaction poses competition problems, and the applicant has offered some remedies to resolve the problem, the JFTC will provide its answer, taking into account the notifying parties' offer.
If the JFTC states that there are no competition issues, either at the end of the 30-day phase 1 examination or at the end of the phase 2 examination, the parties can file the official statutory notification on the basis that an unconditional approval will be obtained, provided that there is no material change of circumstance.
Finally, for merger investigations in corporate and industrial revitalisation cases, in certain situations not likely to restrain competition (similar to the safe harbour cases mentioned above), the JFTC has announced that it will review such cases, at the informal consultation stage, within an accelerated timetable of 15 days after the start of the phase 1 examination.
Formal notification procedure: filing and timing issues
In the case of a merger (or corporate split), both companies intending to effect a merger (or corporate split) are jointly responsible for the filing. In the case of a business transfer, the receiving company is responsible for the filing. In the case of a share acquisition, the acquiring party is responsible for making the post facto filing. There are no filing fees.
In terms of timing, where a prior notification is needed (see above) the standard 30-day waiting period will apply, during which the JFTC may request additional information in the form of reports, data, etc. In certain cases the JFTC may shorten the 30-day waiting period (for example, because at the informal consultation stage it indicated that the case raises no competition concerns). If the JFTC intends to order necessary measures regarding the M&A transaction, it will notify the parties within the 30-day waiting period (or if such period is shortened, within the shortened period), or in case that the JFTC has requested additional information, within the longer period of either 120 days from the date of receipt of the initial notification, or 90 days from the date of the receipt of all of the additional information. Where a post facto notification is needed, the acquiring party is required to make the filing within 30 days after the relevant share acquisition.
Merger remedies: policies and practices
The JFTC will, on a case-by-case basis, grant conditional clearance to a proposed transaction if, for example, one or both of the parties undertake to make certain divestments or take other measures to promote competition in the relevant market. The Merger Guidelines clarified the JFTC's policy regarding remedies by listing a number of remedies that can be offered by the parties to a transaction in order to solve competition concerns.
Broadly speaking, the Merger Guidelines although less analytical and detailed in their content, are in line with the European Commission's Notice on remedies (2001/C 68/03, OJC68, 2 March 2001) and in particular the general objective to ensure competitive market structures through appropriate remedies to particular competition issues.
The Merger Guidelines list the following types of remedies:
- remedies to restore or minimise a change in market structure: divestiture of a part of business, reduction in the shareholding ratio, dissolution of joint ventures et cetera;
- remedies to enhance competition: requiring access to essential inputs for import or entry, licensing know-how or intellectual property rights, et cetera; and
- remedies to exclude or limit actions by the merged entity aimed at taking advantage of its increased market power: a commitment to non-discriminatory behaviour, obligation to refrain from information exchange (which may lead to collusion among firms), et cetera.
A good example of the JFTC's policy regarding remedies can be found in its March 2002 decision in the Japan Airlines Co/Japan Air Systems Co consolidation. The JFTC considered that such consolidation could potentially create a substantial restraint of competition in the market for domestic air transport for passengers. As a condition of clearance, and in order to alleviate competition concerns, the JFTC asked the parties to divest nine take-off and landing slots at Tokyo's Haneda airport and take measures such as an agreement to reduce certain air fares. A more recent example is the JFTC's approval of Johnson & Johnson's proposed acquisition of Guidant in 2005, where the JFTC, in cooperation with the US FTC and the EC, approved the Japan portion of the global transaction despite identifying a substantive restraint of competition in a certain market, on the (structural) condition that Johnson & Johnson divested a specific business (the transaction has not closed).
The role of competitors in the merger control process
Compared to the EU and even more so the US, there is less of a 'culture' of using private actions in Japan to block M&A transactions. It can be safely said that such cases are the exception rather than the rule in Japan. Theoretically, any person may undertake a private action, or report what they believe to be a violation of the AMA to the JFTC. The JFTC is obliged to investigate the matter, but has full discretion as to whether to take any formal enforcement action or not.
The growing importance of economic analysis in merger cases
The JFTC is making increasing use of economists and economic analysis in its assessment of merger cases. First, the JFTC is holding joint staff meetings with the US and EU competition authorities to learn and absorb economic know-how in the area of merger cases. Second, the JFTC is hiring researchers and academics specialised in economic analysis in order to bolster the agency's economic analysis capacities. Third, the JFTC set up a new body in 2003, the Competition Policy Research Centre, which, among other tasks, has the function of promoting the use of economics in the JFTC's decision-making. Finally, there is a clear focus on increased economic analysis in the amendments to the Merger Guidelines which introduce the SSNIP test, use the HHI as the sole measure of market concentration, and also use the notion of the delta as an additional economic requirement to meet the safe harbour.
Does the Japanese business community accept the policy and system? Are there movements for reform?
Comparatively, it took a longer time for the Japanese business community to accept merger control rules than in other jurisdictions such as the EU or US, mainly due to the circumstances that led to the introduction of the AMA. It is the case, however, that since the late 1980s, merger control rules have been increasingly accepted and more strictly enforced by the JFTC.
Interface with other merger control regimes within the Asia-Pacific region and technical assistance offered by the JFTC
The JFTC has been providing competition law-related training courses for some specific Asia-Pacific countries (such as China, Thailand and, recently, Indonesia) and has entered into a specific economic partnership agreement with Singapore, which includes cooperation on anti-competitive activities. In addition, there is a growing trend towards cooperation between the JFTC and other competition authorities of the Asia-Pacific region through multilateral agreements - mainly APEC, OECD and the East Asia Competition Policy Forum (as well as global forums such as the WTO and ICN).
JFTC’s approach to the assessment of M&A transactions
The diagram below is based on that published by the JFTC in its press announcement of 31 January 2007 on the amendments to the Merger Guidelines.
Formerly of Anderson Mori & Tomotsune, Tokyo, now with Gibson Dunn & Crutcher LLP, Brussels.