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
In 2009, merger regulators in the Asia-Pacific region focused their resources on addressing the challenges of cross-border deals, promoting uniformity and responding to a worldwide financial crisis. These developments suggest that corporations will face close scrutiny in these jurisdictions as they look to move out of the recent economic doldrums and into a new era of growth. As cross-border M&A activity continues to increase, so too does the importance of understanding and complying with merger controls in these jurisdictions.
As expected, in 2009 China's Ministry of Commerce (MOFCOM) emerged as a tough merger enforcer. China's widely-discussed Huiyuan decision - in which MOFCOM blocked Coca-Cola's proposed acquisition of a major domestic juice brand - and the release of new measures, guidelines and circulars have addressed some of the issues and uncertainties that surround the application of the Anti-Monopoly Law, leaving others to be resolved in future years. Meanwhile, elsewhere in the region, merger enforcers addressed issues that would be expected during times of economic slowdown: the Japanese and Korean legislatures amended their merger-control laws in an attempt to simplify the merger-review process, while New Zealand's Competition Commission applied the 'failing firm' doctrine and, for the first time, released guidelines describing the doctrine's application. It was a quiet year in Australia, with no significant substantive or procedural change in the Australian Competition and Consumer Commission's merger-review practice, and a slight reduction in its workload of clearance applications compared with 2008. Finally, Singapore's relatively new merger-control regime continued to clear every merger it has reviewed, including one energy services industry transaction in which the merged firm was set to hold a 75 to 85 per cent share in a relevant market.
This article briefly summarises some of the key developments in merger control in these jurisdictions during 2009, with a special focus on business combinations that impacted multiple Asia-Pacific jurisdictions.
The Australian Competition and Consumer Commission (the ACCC) offers both formal and informal clearance procedures, pursuant to which a merger is assessed on the basis of its competitive effects, while the Australian Competition Tribunal (the ACT) is authorised to grant merger 'authorisations' on public interest grounds. The ACCC has not yet received an application for a formal merger clearance but enjoys a steady flow of informal applications, with 22 applications for informal clearance processed between 1 January and 26 March, 2010 alone1 and 145 applications processed throughout 2009, down from 166 in 2008.2 As the ACT has not yet considered an application for a merger authorisation, informal clearance remains the only Australian merger clearance procedure used in practice.
On 11 November 2009, the ACCC announced it would not oppose the proposed acquisition of Danks Holdings Ltd by Woolworths Ltd and its joint venture partner, Lowe's, after accepting enforceable undertakings given by the joint venture parties to the ACCC.3 Danks' principal business is the wholesale distribution of hardware products, although the company also operates some retail stores. Woolworths, a large Australian retailer operating a range of department, supermarket, electronics, liquor and petroleum retail chains, planned to develop a network of 'big box' home improvement stores in Australia in partnership with Lowe's, an American home improvement retailer. The ACCC had concerns that, following the merger, the joint venture could leverage Danks' strength in distribution, discriminating against Woolworths' competitors by providing distribution services on less advantageous terms. Accordingly, the ACCC required the merged firm to relax certain pre-existing contractual limitations on the ability of Danks' retailer trading partners to terminate their contracts with Danks, and prohibited the joint venture from providing more favourable terms to its own big box stores as compared with those provided to any competitors' stores located within a 5km radius.4
In the coming year, one company might attempt to proceed with a transaction that has been opposed by the ACCC. On 26 May 2009, Caltex Australia Limited entered into a purchase agreement to acquire 302 retail gas stations from Mobil Oil Australia Pty Ltd. In a Statement of Issues regarding the asset purchase released in September, the ACCC analysed market shares in four Australian states and determined that the proposed acquisition would cement Caltex's position as the largest wholesale competitor in each of the four markets. The ACCC considered submissions from competitors and consumers in reaching its decision, and on 2 December 2009 publicly stated that it would oppose the deal. The agency released a statement in which it expressed concerns that the transaction could reduce competition in local markets and facilitate potential price coordination among major petroleum retailers.5 The ACCC's position was confirmed in a Public Competition Assessment on 9 February 2010. Despite the ACCC's stance, Caltex has continued to publicly assert its interest in consummating the transaction.6
With China's merger regime in existence for only a few months at the beginning of 2009, observers were eagerly anticipating a case that would reveal details about MOFCOM's enforcement philosophy. On 18 March 2009, MOFCOM blocked Coca-Cola's acquisition of China Huiyuan Juice Group Ltd, prompting a great deal of analysis and comment. Also in 2009, China released several new measures, guidelines and circulars that shed further light on MOFCOM's interpretation and application of the Anti-Monopoly Law (AML). Early signs indicate that China will be an aggressive regulator of multinational business combinations that affect Chinese markets.
MOFCOM's decision to block Coca-Cola's acquisition of Huiyuan was based on three potential anti-competitive effects: the risk that Coca-Cola's dominant position in the carbonated drink market could be leveraged to generate exclusionary anti-competitive effects on the fruit juice market through tying, bundling or other exclusive transactions; the risk that barriers to entry could be increased by the merged firm's control of two strong fruit juice brand names (Minute Maid and Huiyuan); and the risk that smaller domestic firms could face increased difficulties following the acquisition.7
In the past year, this decision has been extensively analysed as practitioners and commentators have attempted to discern future MOFCOM practice. Many have described the prohibition as a protectionist attempt to prevent a leading domestic company from coming under the control of large foreign enterprise. Some critics felt that the Huiyuan decision raised serious doubts about whether China had properly applied its own law.8 Other commentators, by contrast, have applauded China's decision as the product of a meticulous review that relied on well-developed and internationally-accepted antitrust principles.9 For example, US FTC Commissioner William Kovacic has indicated his confidence in the analysis underpinning the decision.10
Some insights into MOFCOM's enforcement approach can be discerned from this decision. For example, MOFCOM's ability to reach decisions quickly appears to suggest that MOFCOM has adequate resources and staffing to perform the work of a leading international merger control agency.11 This decision will continue to be discussed in light of future merger clearances, as China's young merger regime remains the most heavily scrutinised in the Asia-Pacific region.
MOFCOM has also played a significant role in two of the largest multinational combinations: BHP's joint venture with Rio Tinto and Panasonic's acquisition of Sanyo. MOFCOM's involvement in both of these is discussed at length in the 'Multinational merger enforcement' section below.
Measures addressing combinations of business operators
On 27 November 2009, MOFCOM's Anti-Monopoly Bureau released the Measures for the Notification of Concentrations of Business Operators12 and the Measures for the Examination of Concentrations of Business Operators.13 The new measures have been drafted in light of generally-accepted international merger review practices and offer guidance on a range of key issues, including turnover calculation. While they address a number of basic questions concerning the application of the AML, many key questions remain unanswered.
Relevant market guidelines
On 7 July 2009, the Anti-Monopoly Committee of the State Council, which supervises MOFCOM, released its final draft of the Guidelines on the Definition of Relevant Market.14 These include information on the definition of both geographic and product markets. Under the Guidelines, markets will be defined by performing a substitutability analysis that considers both demand substitutability (ie, how easily consumers can switch between products) and supply substitutability (ie, how easily a competitor can enter the market). The Guidelines also call for use of the 'hypothetical monopolist' test to supplement this analysis, which evaluates whether a hypothetical company could raise prices by a modest amount (5 to 10 per cent) and remain profitable for a sustained period of time (usually one year), notwithstanding any resulting reduction in demand.
Revised foreign investment policy
On 5 March 2009, in an apparent effort to promote foreign investment, MOFCOM issued the Circular on Further Improving the Examination and Approval of Foreign Investment.15 This Circular continues a trend of decentralised regulation of foreign enterprises doing business in China (particularly those with less than US$100 million in working capital) by delegating certain approval authority to local government bodies. Another of the many changes effected by the Circular was the relaxation of restrictions regarding oversight of foreign-owned equipment and the process for establishing branches in China.
In 2009, Japan undertook several efforts to simplify its regulation of the economy with respect to merger control, securities and foreign investment. In June, Japan amended its merger laws to conform with its peer regulators in other countries. Japan also amended its foreign investment laws to facilitate and encourage foreign direct investment. The Japan Fair Trade Commission (the JFTC) also permitted a merger between two of its securities exchanges.
On 3 June 2009, the Japanese Diet enacted a bill (the Amendment16) to amend the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (otherwise known as the Anti-Monopoly Act or the AMA).The Amendment will become enforceable on a date to be determined by Cabinet Order before June 2010. The bill changes the Japanese merger-review process to more closely conform to the processes in the US and Europe, and reduces the number of transactions that will be subject to notification requirements. Particular changes to the AMA's merger-review provisions include:
• adjustments to Japan's pre-merger notification system - under the current AMA notification structure, corporate transactions involving the acquisition of voting securities need only be filed with the JFTC following the closing of the transaction. Under the current law, acquiring persons must notify the JFTC whenever its holding in a target exceeds any of three ownership thresholds: 10 per cent, 25 per cent, and 50 per cent. Following the amendment, the three-step threshold will be changed to a two-step threshold: 20 per cent and 50 per cent. Furthermore, once the amendment becomes applicable, Japan will require a pre-closing filing (along with a 30-day waiting period) when these thresholds are crossed; and
• revising notification thresholds - the Amendment alters the basis and size of certain other thresholds that trigger a notification obligation under the AMA. Most importantly, the Amendment changes the basis on which company size is calculated for the purposes of the notification thresholds, from total assets (under the current law) to domestic revenues in Japan for the most recent fiscal year (under the Amendment). Also, the thresholds of ¥1 billion for the target company and ¥10 billion for the acquirer will increase to ¥5 billion and ¥20 billion respectively.
On 9 June 2009, the JFTC released a report entitled 'Major Business Combinations in FY 2008'.17 Among the deals discussed in this report was the merger of 'new markets'18 by Jasdaq Securities Exchange and Osaka Securities Exchange Co Ltd, the second- and third-largest providers of new market exchanges in Japan with market shares of 35 per cent and 20 per cent respectively. The JFTC found that, while the merged firm would hold a combined market share of 55 per cent of the market for listing-related services for new securities, the combination would not substantially restrain competition. Even though the predicted post-merger market shares created a presumption of an anti-competitive business combination under the AMA, the JFTC approved the transaction without conditions on the ground that the third competitor, referred to as
'Corporation A' (presumably the Tokyo Stock Exchange) held a competitive position stronger than indicated by its market share (45 per cent). The JFTC believed that the merger would generate a stronger rival for Corporation A's currently leading securities exchange for new markets, possibly enhancing competition.
In 2009, Korea's merger regime adopted a less restrictive approach to transactions involving large companies and has improved its efforts to achieve convergence with enforcement agencies around the world. In one particularly important decision, the Korea Fair Trade Commission (the KFTC) allowed a merger between two of the largest telecommunications companies in the country.
Monopoly Regulation and Fair Trade Act (MRFTA) Amendment
An amendment to the MRFTA was passed by the Korean National Assembly on 3 March 2009.19 To induce more corporate investment the amendment removed article 10, which had limited the amount of net assets that a large company could invest in other companies.
On 28 May 2009, the KFTC entered into an agreement with the European Commission (the EC) to cooperate in a range of areas, including the review of mergers and acquisitions.20 The goal of the agreement is to increase cooperation and convergence on competition policy and enforcement. Korea's agreement with the EC provides for reciprocal notification of enforcement activity that may impact the other jurisdiction, for information sharing between the agencies, coordination of enforcement activities, the protection of confidential information furnished by the other agency, and other measures designed to facilitate a close working relationship between these authorities. This is Korea's first cooperation agreement, and in adopting such an arrangement Korea follows the examples of Australia, China and Japan, among others, contributing to an ongoing trend of coordination among competition agencies worldwide.
In early 2009, both the KFTC and the Korea Communications Commission (KCC) authorised the merger of KTF and Korea Telecom (KT).21 KT is the largest communications company in Korea, active in both wired telephony and high-speed internet. Prior to the merger, KT held a 54.3 per cent interest in KTF, the second-largest wireless phone company in Korea. The KT/KTF merger was approved unconditionally, as the KFTC concluded that there would be no anti-competitive concerns. The combination was opposed by several competing phone operators, with these firms expressing fears that KT's strength in the wired telephony market could be used to generate anti-competitive effects in the wireless phone market post-merger. SK Telecom, one competitor objecting to the merger, may have felt particularly aggrieved: it had accepted extensive remedial conditions following the KFTC's review of its own acquisition of Hanaro Telecom in 2008.22
New Zealand's merger activity in 2009 reflected, at least to some extent, the global financial crisis. Not only did New Zealand apply the failing-firm doctrine, but it also issued guidelines for further application of the doctrine. Additionally, New Zealand reformed its foreign direct investment laws to encourage further overseas investment in the country.
Failing firm: enforcement activity and guidelines
On 13 February 2009, the Commerce Commission allowed Fletcher Building Ltd to purchase 100 per cent of the Whangarei masonry business assets of the Stevenson Group Ltd, and up to 100 per cent of the assets of Stevenson's Auckland masonry business.23 This decision came in the face of findings by the Commission that the acquisition could present significant competitive concerns, namely that Fletcher would have an almost 100 per cent share of the Northland masonry market and would be the dominant supplier in the Auckland masonry market. However, because Stevenson would ultimately have gone out of business absent a change in control, the Commerce Commission accepted a failing-firm argument and approved the merger.
The Commerce Commission followed this decision in October by releasing the Supplementary Guidelines on Failing Firms.24 These Guidelines were enacted to outline the type of information that should be included in an application asserting the 'failing-firm argument' and the methodology employed by the Commission for assessing such applications. In assessing failing-firm submissions, the Commission looks at cash-flow trends over sustained periods of time, the prospects of restructuring or refinancing the business, and the availability of alternative third-party purchasers. Additionally, where the failing entity is a division of a non-failing firm, the Commission will examine the ability of the parent to allocate costs, revenues and intra-company transactions between its subsidiaries, branches and divisions. To aid the Commission in this analysis, companies are asked to include supporting evidence such as budgets, forecasts, analyses, plans, minutes, data, valuation reports and any evidence of offers from other parties or other efforts to sell or improve the business.
Singapore's 30-month old merger regime has not yet blocked a merger. In that time it has cleared 15 proposed mergers, acquisitions or joint ventures.25 In one recent clearance decision, the Competition Commission of Singapore (CCS) indicated its willingness to consider other relevant factors against market share presumptions of anti-competitiveness.
On 15 September 2009, the CCS allowed National Oil Varco Pte Ltd (NOV) to purchase all the shares of South Seas Inspections (S) Pte Ltd (SSI).26 The businesses competed in the markets for the supply of inspection services for oil country tubular goods and non-destructive testing. Furthermore, as NOV also supplied oilfield systems and components - an upstream market for the inspection services - the CCS also evaluated the transaction's vertical aspects. As NOV already held a near-dominant share of the market for inspection services, the combined market share that the merged firm would hold exceeded 75 per cent, raising presumptive competitive concerns. The CCS analysed both the coordinated effects and non-coordinated effects of the proposed transaction and solicited feedback from competitors and consumers. The CCS ultimately determined that, due to low barriers to entry and strong countervailing buyer power in the relevant markets, and given the low switching costs that would be faced by potential new entrants, the merger was unlikely to lessen competition.
Multinational merger enforcement
A number of multinational mergers were reviewed by multiple authorities in the Asia-Pacific region in 2009. Two of the largest multinational mergers saw companies based in countries in the Asia-Pacific region encountering resistance under other Asia-Pacific regimes. These mergers are discussed below.
Since 2007, BHP Billiton Ltd and Rio Tinto Ltd, two Australian firms, have been exploring the possibility of combining forces in Western Australian iron-ore mining. The parties control a substantial percentage of the global aggregate production of iron ore and their efforts have been heavily scrutinised by antitrust authorities worldwide. In November of 2008, the two firms abandoned a proposed merger, citing the global economic crisis and falling commodity prices. Many commentators speculated that coordinated pressure from at least Japan and the EU might have played a more significant role than the firms were willing to admit. China also vocally opposed the merger when it was first proposed, although its anti-monopoly law was not yet in effect.
In 2009, the firms revisited a possible collaboration in the form of a joint venture. The joint venture agreement, signed on 5 June 2009, has been scrutinised by antitrust authorities around the world. Now equipped with the AML, China has scrutinised the arrangement in detail and a series of events over the summer of 2009 placed this issue at the forefront of the Asia-Pacific antitrust landscape.
First, Chinese state-owned firm Chinalco's US$19.5 billion bid for Rio Tinto collapsed on the same day that Rio Tinto signed the joint venture agreement with BHP.27 The next day, the China Iron and Steel Association called the proposed joint venture 'monopolistic,' and Chinese authorities publicly raised the question of whether the joint venture would fall under the AML.28 On 5 July 2009, an executive of Rio Tinto was arrested in China, accused of stealing state secrets and bribery.29 On 10 February 2010, prosecutors in Shanghai handed down indictments on these charges against the executive and three other employees.30 The Rio Tinto employees pleaded guilty to these charges on 22 March 2010.31
When the parties attempted to merge last year, the ACCC cleared the transaction.32 The ACCC commenced a review of the parties' joint venture on 7 December 2009. On 25 March 2010, three days after Rio Tinto employees pleaded guilty to the criminal charges in China, the ACCC called for public comment on the competitive effects of the proposed joint venture.33
On 19 December 2008, Panasonic Corporation made a tender offer of US$9 billion to purchase a majority stake in Sanyo Electric Co Ltd. Over the course of 2009, the merger of the two Japanese companies was reviewed and cleared by several antitrust authorities including MOFCOM in China and the JFTC in Japan. Japan cleared the merger in September 2009 with no objections.
On 30 October 2009, MOFCOM conditionally approved the merger subject to certain divestitures.34 First, in the rechargeable coin-shaped lithium battery market, MOFCOM required that Sanyo's rechargeable coin-shaped lithium battery business in Japan be sold to a third party, expressing concern that the merged entity would otherwise control 61.6 per cent of the market. Second, among other considerations, MOFCOM required that at least one party divest its consumer nickel-metal hydride battery business, expressing concern that the combined entity would control 46.3 per cent of a market characterised by high barriers to entry. Finally, Panasonic was required to divest its automotive nickel-metal hydride battery business and reduce its presence in a joint venture with Toyota regarding the same market. For each of these divestitures, the proposed transfers were required to occur within six months following the completion of the acquisition and included all production facilities, sales, R&D, customer service units, and intellectual property. MOFCOM prohibited Panasonic and Sanyo from disclosing to one another any price, customer, or market-sensitive information with respect to the markets of concern until after the transfers occurred. The parties agreed to these terms and consummated the merger accordingly.
Merger enforcers in the Asia-Pacific region played a key role in reviewing some of the most significant international transactions in 2009. These agencies also continued to pursue a program of domestic enforcement while developing and clarifying the merger-control rules in their respective jurisdictions, promoting the increased transparency and predictability that are of particular importance in a time of economic uncertainty. Combined with new policy guidelines and legislation, recent enforcement actions in the Asia-Pacific region demonstrate a pattern of increased harmonisation with other regimes, and suggest that companies and counsel can expect continued vigorous enforcement from these agencies in the foreseeable future.
* The author gratefully acknowledges the assistance of his colleagues Daniel Francis and Joseph Tipograph in the preparation of this article.
7. www.mofcom.gov.cn/aarticle/ae/ai/200903/20090306108388.html?2376700066 =3129426587 (translation available at http://blogs.wsj.com/chinarealtime/2009/03/18/china%E2 per cent80%99s-statement-blocking-coca-cola-huiyuan-deal/tab/article/).
8. www.nytimes.com/2009/03/26/business/worldbusiness/26coke.html?_r=1&scp= 3&sq=huiyuan&st=cse.
9. Xinzhu Zhang & Vanessa Y Zhang, 'Chinese Merger Control: Patterns and Implications', J Comp L & Econ (forthcoming 2010), available at
11. Xinzhu Zhang & Vanessa Y Zhang, 'Chinese Merger Control: Patterns and Implications', J Comp L & Econ (forthcoming 2010), available at
12. http://fldj.mofcom.gov.cn/aarticle/c/200911/20091106639149.html?2371591842= 3129426587l.
13. http://fldj.mofcom.gov.cn/aarticle/c/200911/20091106639145.html?4284194466= 3129426587.
14. http://english.mofcom.gov.cn/column/print.shtml?/newsrelease/commonnews/200907/ 20090706389449.html.
15. http://english.mofcom.gov.cn/aarticle/counselorsreport/asiareport/200903/ 20090306126607.html.
18. 'New market' refers to a market opened for new businesses to raise funding for growth.
20. http://eur-lex.europa.eu/Notice.do?val=499383 per cent3Acs&lang=en&list=499383%.
22. KFTC Newsletter, issue 6.
23. www.comcom.govt.nz/BusinessCompetition/MergersAcquisitions/ reasonspublishedforclearancegrante.aspx.
24. www.comcom.govt.nz/BusinessCompetition/MergersAcquisitions/ supplementaryguidelinesonfailingfi.aspx.
26. www.ccs.gov.sg/PublicRegister/National+Oilwell+Varco+and+South+Seas+ Inspection.htm.
34. 'MOFCOM Approved Panasonic's Acquisition of Sanyo with Conditions' - an announcement of the Ministry Of Commerce of the PRC (No. 82 of 2009).