Merger Control Overview
This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight
2007 was a year of increasing transparency, predictability and convergence among merger control systems in the Asia-Pacific region.
Australia gained a formal merger clearance process, along with stiffened penalties for violations of law, and Japan revised its own prior consultation guidelines to better reflect the practice of the Japanese Fair Trade Commission. New Zealand's merger control system was extensively reviewed, with important amendments expected for 2008 or 2009, while new or updated Merger Guidelines appeared in Japan, Korea, China and Singapore.
Korea's analysis of market concentration and Japan's analysis of market definitions moved closer to European and American antitrust practice.
Finally, two new legal structures came to life: Singapore's merger control regime became active, and Chinese legislators passed the long-awaited
2008 has already seen the publication, in draft, of Australia's updated merger guidelines, and will see China's Antimonopoly Law come into force in August. In June, New Zealand will complete a detailed government review of several aspects of merger policy, including the possibility of a new competition tribunal. The Japanese Fair Trade Commission is also expected to set before legislators later this year proposed amendments to Japan's Antimonopoly Act.
Clear trends are emerging. Competition authorities are anxious to provide comprehensive, updated and practical merger guidelines to help companies navigate their countries' antitrust laws. Clearance programmes are becoming more sophisticated and, increasingly, authorities are willing to disclose details of their frameworks for merger analysis. Most importantly, convergence among jurisdictions is increasing. In this context particularly, the work of the International Competition Network and the OECD's Competition Committee are of particular importance, promoting transparency and procedural fairness and facilitating convergence and cooperation.2
The significant developments witnessed in 2007 toward common practices in merger control are laudable, and reflect an understanding among governments and agencies that they must adapt their competition laws and policies to suit dynamic, interconnected and increasingly global markets.
The Trade Practices Act 1974 (TPA) is the central instrument of merger control legislation in Australia, and the Australian Competition and Consumer Commission (ACCC) is the body chiefly responsible for its administration. Section 50 of the Act prohibits acquisitions of shares or assets if the acquisition would have the effect, or likely effect, of substantially lessening the competition in a market in a region of Australia.3
Mergers may receive prior approval through either the clearance process (for mergers that will not substantially lessen competition) or the authorisation process (by which anti-competitive mergers are approved on public benefit grounds).
In 2007 the ACCC gained a formal merger clearance procedure to complement its existing informal programme. The penalties for non-compliance were increased significantly, and the Australian Competition Tribunal (ACT) is now the body to which applications are made for merger authorisation, rather than the ACCC. A draft set of updated merger guidelines was published in early 2008 for comment.
Formal merger control procedures
The most significant change of 2007 was Australia's introduction of a formal merger clearance process.4 Applications for merger authorisations are no longer made to the ACCC but are now made directly to the ACT.
The ACCC will clear a proposed merger or acquisition where it is satisfied that the merger will not have the effect or likely effect of substantially reducing competition in any market.5 The review period is 40 business days, extended up to a maximum of 60 business days or as otherwise agreed.
Conditional clearances may require a written undertaking from the acquirer.
Dissatisfied parties may obtain review on the merits from the ACT, or seek judicial review or a declaration from a federal court that a merger does not have the effect or likely effect of substantially lessening competition.
An application for authorisation now must be made directly to the ACT: it will succeed where the ACT is satisfied that the acquisition will or is likely to result in such a benefit to the public that the acquisition should be permitted.6 The ACT's review period is three months (extended up to a maximum of six months). The ACCC provides a report to the ACT, and may call or cross-examine witnesses. No merits review of authorisation decisions is available, although appeal to a federal court is available on questions of law.
The penalties for breaching section 50 of the TPA have increased. For an individual, fines may run as high as A$500,000. For a corporation, the limit is the greater of: A$10 million; three times the benefit to the corporation reasonably attributable to the breaching conduct; or, where that benefit cannot be ascertained, 10 per cent of the corporation's annual turnover.7
In 2007 the Australian government announced some minor increases in notification thresholds for foreign investors.8
Toll Holdings (Toll), a transport and logistics company, sought in 2005-2006 to acquire Patrick Corporation, a logistics company with a focus on port services and aviation, with which Toll operated a joint venture named Pacific National (Pacific). The ACCC opposed the transaction, but was persuaded in early 2006 to discontinue suit in federal court on the basis of undertakings given by Toll. These included divestiture of a 50 per cent interest in Pacific. In April 2007, the ACCC consented to vary these undertakings for the fifth time, to allow the merged entity to restructure in such a way that Pacific and Toll were managed wholly separately. Neither was to hold any interest in the other, and the entities would be managed by different boards, interacting at arm's length. After market inquiries and analysis, the ACCC reasoned that this variation would ultimately serve competition. The evolution of this settlement reflects the ACCC's flexible, sensible approach to monitoring merger control remedies.
Chinese competition law currently controls only mergers that involve foreign investors, in the Regulations on Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors (the Merger Regulations), administrated jointly by the Ministry of Commerce (MOFCOM) and the State Administration of Industry and Commerce (SAIC).
Under the Merger Regulations, MOFCOM and SAIC will investigate a merger that passes a reporting threshold9 (or a merger that is referred to them by a third party) where they believe the merger 'may lead to excessive concentration, hamper fair competition or harm the [interests of consumers].'10
Overseas mergers and acquisitions must, in certain circumstances, file for approval with MOFCOM and SAIC before announcing the plan or 'when submitting it to the competent authority in the country where it is located.'11 Exemption is available where a party can show that the transaction is pro-competitive, facilitates the reorganisation of failing firms, introduces advanced technology or qualified management personnel to improve the enterprise's international competitive stance or, unusually, may improve the environment.12
Under article 12, where a foreign investor obtains 'the actual right to control' a domestic company the transaction must be reported to MOFCOM if the transaction 'involves major industry, has or may have [an effect] on state security or caused the [transfer] of the actual right of the domestic enterprise owning [a] famous trademark or having a name of long history.'
The Guidelines to the Merger Regulations were updated in March 2007.
However, the year's most dramatic act was the passage, in August, of the Antimonopoly Law (AML), which comes into force on 1 August 2008. Modelled largely on the competition law of the European Union, the AML will replace the existing foreign merger control rules. The AML Enforcement Authority (the Authority) is yet to be chosen from existing authorities or created anew.
New Guidelines for the Merger Regulations
The new Guidelines highlight certain factors that are used to assess competition in a market (including entry barriers, number of competitors, etc) but they do not provide detailed guidance on analysis methodology for either the measurement of market concentration or the definition of relevant markets. The Guidelines also provide for informal consultation before a filing is made, and encourage the disclosure at an early stage of relevant documentation to improve the efficacy of the consultation process.
The Antimonopoly Law13
The AML prohibits concentrations of undertakings that '[have] or may have the effect of eliminating or restricting competition.' Mergers will be notifiable before consummation to the Authority at certain thresholds yet to be promulgated,14 unless the merger is between a parent and its majority-owned subsidiary or between two undertakings with a common majority-owning parent. Within 30 days the Authority will decide whether or not to initiate further review; such further review will be completed in 90 days (extendible, under certain circumstances, by a further 60 days).
A merger will be prohibited if it 'has or may have the effect of eliminating or restricting competition,' unless the parties demonstrate that the merger is procompetitive or that it is nevertheless in the public interest.15 In the event of non-compliance, the Authority may order 'necessary measures to revert to the condition of the undertakings before the concentration' and impose a fine of up to 500,000 renminbi under article 48. Article 53 provides for 'administrative review' and finally 'administrative lawsuit' in the event that parties object to the merger approval decision.
The Japanese Fair Trade Commission (JFTC) is responsible for enforcing the Antimonopoly Act (AMA), chapter IV of which includes the core merger control legislation. Mergers and acquisitions are prohibited where the effect may be substantially to restrain competition.16 Challenges to unfavourable decisions are initially heard at a JFTC hearing with a possibility of challenge thereafter in the Tokyo High Court.
Amendments to the AMA
The JFTC published in October 2007 a list of 'prospective amendments' to the AMA and is currently preparing a more detailed draft bill for legislative consideration. The bill will include a revision of the notification thresholds that apply to foreign corporations and expanded exemptions from notification.
New Merger Guidelines and Prior Consultation Guidelines
In 2007 the JFTC amended both the Merger Guidelines17 and the Prior Consultation Guidelines.18 The Prior Consultation guidelines explain the prerequisites for prior consultation, the two-phase structure of the process and the document submission requirements for the process of pre-transaction consultation.
The Merger Guidelines provide for new safe harbours: for horizontal mergers, a post-merger Herfindahl-Hirschman Index (HHI) below 1,500, or a post-merger HHI between 1,500 and 2,500 with an increase of less than 250, or a post-merger HHI of above 2,500 with an increase of less than 150;19 for vertical and conglomerate mergers, a combined market share below 10 per cent or a market share below 25 per cent with a post-merger HHI below 2,500.20
For either type of merger, where the market share of the merged entity is not more than 35 per cent and the post-merger HHI is not more than 2,500, the JFTC has indicated that the possibility of a substantial restraint on competition is likely to be small.
The Merger Guidelines also contain information on how the JFTC will define markets. They adopt the SSNIP test, observe that geographic markets may extend across national boundaries, and embrace supply-side substitution analysis as part of a product market definition.21 They also provide for a failing-firm defence.22
The Merger Guidelines indicate a preference for structural remedies over behavioural ones, and a preference in principle for remedies to be implemented before consummation of the merger.23
The 1980 Monopoly Regulation and Fair Trade Act (MRFTA) is the central legislative instrument of merger control in Korea, and prohibits the substantial lessening of competition in a particular business area.24
Exemptions are available for pro-competitive mergers or those with failing firms.25 Enforcement of the MRFTA is handled by the Korea Fair Trade Commission (KFTC), with judicial review of its decisions available in the Seoul High Court.
New guidelines on the imposition of merger remedies came into effect at the very end of 2006.26 The MRFTA was also amended slightly in 2007 to relax and clarify certain filing requirements and modify the provisions relating to large business groups.
New merger review guidelines
The range of tools for horizontal merger analysis was broadened to include factors beyond market share, including the possibility of unilateral anti-competitive behaviour, the possibility of cartel formation, the level of foreign competitive pressure and the possibility of new market entry.
Presumptions that a horizontal merger would restrict competition if the market share of the merged entity (or of the top three companies post-merger) exceeded certain thresholds have now been removed.
As a tool for assessing market concentration, HHI replaced concentration ratio analysis. A safe harbour was reintroduced into Korean law. A safe harbour for horizontal mergers exists in the event of a post-merger HHI less than 1,200, or a post-merger HHI between 1,200 and 2,500 with an increase of less than 250, or a post-merger HHI of 2,500 or more and an increase of less than 150. For vertical mergers, the safe harbour applies when the HHI is less than 2,500 and the combined company's market share is less than 25 per cent, or the combined company ranks fourth or below in the market.
In 2007, the KFTC was involved in two particularly interesting enforcement actions. CJ Cable Net's acquisition of stock in Chungnam Broadcasting System and Modu Broadcasting System prompted the imposition of a detailed and rigorous remedy scheme. The acquisition integrated cable-TV providers in six cities and presented a risk of monopolisation. The KFTC imposed remedies, to be applied until the end of 2010, that included prohibitions of: direct or indirect price increases in service charges; reductions in the number of channels offered per subscription class; refusals to provide information on, or sell, the cheapest products; and any rejections of applications to convert subscriptions to the cheapest class of service.
In May, the KFTC imposed remedies on an acquisition by POSCO (a supplier of silicon electrical steel sheet) of 51 per cent of the shares in Hankook Core, Korea's largest buyer of such sheeting. The unusual aspect of the case was the compliance mechanism: a monitoring body was set up by the KFTC, composed of steel sheet suppliers and consumers, along with independent third parties, and instructed to report on a quarterly basis.
Merger control in New Zealand is the concern of the Commerce Commission (the Commission). Part III of the Commerce Act prohibits mergers and acquisitions that substantially lessen competition, while empowering the Commission to grant both clearances (on the basis that a proposed merger will not substantially lessen competition) and authorisations (approving an anti-competitive merger on public interest grounds). Decisions of the Commerce Commission may be appealed to the High Court.
The New Zealand government is currently reviewing its merger rules, and the Ministry of Economic Development published in May 2007 a comprehensive discussion document (the MED document).27 The government plans to implement some of its less contentious proposals but has deferred final policy proposals concerning the remainder until June 2008. The year 2007 also saw an independent review (the Lear review) at the instance of the Commerce Commission, which compared New Zealand clearance practices with international best practices.28
Clearance review period
The MED document proposed that the statutory review period be increased from 10 to 30 working days; the Lear review suggested that the Commission seek an extension to 40 days. The Lear review noted this would harmonise with the time frame for Australian merger review.
The Lear review recommended that the Commission introduce for the first time a set of guidelines to bring additional consistency, structure and efficiency to the merger review process.
The Commission currently has no authority to directly enforce undertakings given to them by parties during the clearance process. The MED document proposes giving the Commission the power to seek appropriate court orders to ensure compliance, and the power to approve minor variations in such undertakings. In a recent Cabinet paper the government signalled its intention to implement these proposals.
A new competition tribunal
The MED document raised the possibility of introducing a specialised competition tribunal to replace the High Court as the forum for appeals from Commission decisions.
The Competition Act 2004 (the Act) is the central merger control law in Singapore, and is enforced by the Competition Commission of Singapore (CCS).29 Section 54 of the Act prohibits mergers that have resulted, or that are likely to result, in a substantial lessening of competition within any market in Singapore. A right of appeal to the Competition Appeal Board lies from all merger decisions of the CCS, except a decision to refuse to accept an offered commitment.
Singapore is in the process of building a developed system of competition law, and the gradual introduction into force of the Competition Act is the central component of this process. In June 2007, the CCS published guidelines on both merger review procedures30 and substantive assessment of merger transactions,31 and July saw the Act's M&A provisions come into force.
Guidelines on Merger Procedures
The CCS discourages applications in respect of mergers 'that do not raise any real concerns of infringement.' The CCS is unlikely to intervene unless the merged entity will have a market share of 40 per cent or more, or the merged entity will have a market share of 20-40 per cent and the post-merger combined market share of the three largest firms is 70 per cent or more.32
Full review of a formal application is in two stages: a 30-day quick review and a 120-day detailed examination. After a final decision, dissatisfied parties may apply within 14 days to the minister of trade and industry for an exemption on public interest grounds.
Under section 60A of the Act, the CCS may accept commitments from merging parties. Upon registration with the District Court, a commitment gains the status of a court order; violation is accordingly treated as contempt of court. Other remedies include directions issued by the CCS and fines (up to 10 per cent of the party's turnover in Singapore for each year of infringement up to a maximum of three years). The CCS has a general preference for structural remedies above all, and for behavioural remedies over financial penalties.
Guidelines on the Substantive Assessment of Mergers
Whether a transaction is considered a merger is based on qualitative criteria, but control is generally deemed to be acquired when an entity holds more than 50 per cent of voting rights in another, and is rebuttably presumed when it holds between 30 per cent and 50 per cent of those rights.33
Market definitions include both demand and supply-side substitution, and market concentration and structure are examined using market shares and concentration ratios (particularly 'CR3': the sum of the market shares of the three largest firms in the relevant market).
Mergers with sufficient net economic efficiencies are excluded from the merger control provisions. The CCS will consider efficiencies that arise in Singapore, are shown by clear and compelling evidence and will materialise within a reasonable time. A narrow failing-firm or failing-division defence is also available.
The steps taken toward transparency and harmonisation by merger control regimes in the Asia-Pacific region last year provided increased clarity and efficiency to the merger process faced by multinational companies subject to these jurisdictions. These developments indicate a willingness to adopt best practices from other jurisdictions when those practices have been demonstrated to promote competition as key components of effective merger enforcement efforts. Such developments are especially important as the number of enforcement regimes - and therefore the potential for conflicting rules and excessive compliance burdens - has never been higher.
- The author gratefully acknowledges the assistance of his colleague Daniel Francis in the preparation of this article.
- See also the ICN's eight Guiding Principles For Merger Notification and Review (the full document is available from the ICN's website, along with the ICN's Recommended Practices for Merger Notification Procedures, at www.internationalcompetitionnetwork.org/index.php/en/publication/294). Another important document is the OECD's 2005 Council Recommendation on Merger Review (available at http://webdomino1.oecd.org/horizontal/oecdacts.nsf/linkto/c(2005)34).
- Mergers involving foreign investors and foreign persons are subject to the Foreign Acquisitions and Takeovers Act 1975. Overseas acquisitions that have the actual or likely effect of substantially lessening competition in a region of Australia may be challenged before the Australian Competition Tribunal within a year under TPA, section 50A.
- The Formal Merger Review Process Guidelines, which address both the clearance and authorisation processes, are available at www.accc.gov.au/content/index.phtml/itemId/776055/fromItemId/3737.
- The formal clearance process is in TPA, sections 95AC to 95AS.
- The authorisation process is enacted in TPA, sections 95AT to 95AZM.
- TPA, sections 76(1A) and 76(1B).
- The most recent statement, at the time of writing, of the Australian government's policy on foreign investment (dated January 2007) is available at www.firb.gov.au/content/Publications/AnnualReports/2005-2006/AppendixA.asp.
- The thresholds are listed in Merger Regulations, article 51.
- Merger Regulations, article 52.
- Merger Regulations, article 53.
- Merger Regulations, article 54.
- An official translation from MOFCOM is available online at http://english.mofcom.gov.cn/aarticle/policyrelease/announcement/200712/20071205277972.html.
- AML, article 21 provides that the State Council shall promulgate notification thresholds.
- AML, article 28.
- Notification thresholds are found in articles 10 (acquisitions of stock), 15 (mergers) and 16 (acquisitions of business or assets) of the AMA.
- 'Guidelines to Application of the Antimonopoly Act Concerning Review of Business Combination' (Tentative Translation), amended 28 March 2007.
- 'Policies Dealing with Prior Consultation Regarding Business Combination Plans', amended 28 March 2007.
- Prior Consultation Guidelines, part IV, section 1(3).
- Prior Consultation Guidelines, part V, section 1(3).
- Merger Guidelines, part II, sections 1-4.
- Merger Guidelines, part IV, section 2(8).
- Merger Guidelines, part VI, section 1.
- MRFTA, article 7(1).
- MRFTA, article 7(2).
- A summary in English of the revised criteria is available online at http://ftc.go.kr/data/hwp/20080104_103460.pdf.
- 'Review of the Clearance and Authorisation Provisions under the Commerce Act 1986: Discussion Document', Ministry of Economic Development, May 2007, available at www.med.govt.nz/templates/MultipageDocumentTOC____27162.aspx.
- 'Best Practice Review of the New Zealand Merger Clearance Regime: A Report to the Commerce Commission', Alan Lear, August 2007, available at www.comcom.govt.nz/BusinessCompetition/Publications/abestpracticereviewofthenewzealand.aspx.
- Mergers involving telecommunications, newspapers and publications, banking and certain financial institutions, or holders of public licences to provide port or marine services come within the purview of other authorities and legislation; they are not governed by either the Competition Act or the CCS. A number of specified activities in paragraph 6(2) of the third schedule to the Act are also exempted from the Act's merger control rules.
- CCS Guidelines on Merger Procedures.
- CCS Guidelines on the Substantive Assessment of Mergers.
- CCS Guidelines on Merger Procedures, section 3.4.
- CCS Guidelines on Merger Procedures, section 3.10.