Recent Developments in the Japanese Merger Control Regime

Analysis of the Proposed Amendment to the Merger Guideline

The Japanese Fair Trade Commission initiated efforts to amend its Merger Control Guideline. This article provides an overview of how the Japanese merger control regimes will change through the amendment to guidelines and points out several respects which need careful attention by participants to the Japanese market.

Introduction
The 'Law Concerning Prohibition of Private Monopolization and Maintenance of Fair Trade' (Law No. 54 of 1947) ('JAA') is an important law which aims to promote free and fair competition in markets, thereby stimulating the creative initiative of entrepreneurs and assuring the interests of consumers in general. Although the JAA was modelled after the American Antitrust law, its merger control regimes have developed into a significantly different shape as compared to those under the Clayton Act. This is partly because most Japanese merger cases have been traditionally dealt with through informal consultation with the Japanese Fair Trade Commission ('JFTC') rather than a strict application of the law. Consequently, few guidelines have been outlined and little case law has developed to help determine whether or not the proposed mergers should be admitted from a competition law perspective. Further criticisms would include the lack of transparency, the JFTC's wide scope of discretion and it's prolonged screening process.

The recent amendment to the guideline by the JFTC concerning merger control dated 31 May 20041 (the 'Merger Guideline') purported to respond to the requests by Japanese industries to clarify the Japanese merger control regime. Moreover, the JFTC announced on 31 January 2007 that, in order to make the merger control screening process clearer and more transparent, it will revise the Merger Guideline and outline how the Merger Guideline will be changed, thereby inviting public opinion (the 'Proposal to Revision'). Although it is still unknown exactly when the Merger Guideline will be changed, according to the Proposal to Revision, there are several important revisions to be made on the Merger Guideline. It is necessary for foreign investors to Japan to pay careful attention to these revised points.

This article seeks to discuss (i) the overview of the Japanese merger control regime, and (ii) how the Merger Guideline will be altered.

Merger Regulation

Introduction
Concerning the Merger Regulation, the JAA art 10, para 1, art 15, para 1, art 15-2, para 1, and art 16, para 1 forbids an acquisition or holding of stock, mergers and acquisitions, transfer of business and the like that may be substantial to restrain competition in any particular field of trade (hereinafter referred to as 'Merger Regulation').

Under the JAA, it is always necessary to examine whether or not the proposed business combination will result in a substantial restraint of competition in any particular field of trade. Indeed, the language of the aforementioned articles is considered to be the very ground that enables the JFTC to investigate, examine, and initiate a formal hearing, even when a submission of a merger report required in the JAA, such as art 10, para 2, has not been made. In addition, in Japan, as much as the proposed transaction will affect a relevant market within Japan, the JAA applies even when one of the transaction parties locates outside the Japanese jurisdiction, whereby the JFTC can exercise its authority to block a business combination.

Merger Guideline
Overview of the Merger Guideline
First of all, the Merger Guideline defines the scope of transactions that are screened by the JFTC, and covers an acquisition or holding of stock, holding several directors office concurrently, mergers and acquisitions, splitting corporations, and transferring businesses.

Second, the guideline explains how to delineate both a geographic and a product market under the JAA.

Third, the guideline details the threshold of the substantive test for the Merger Regulation. For each of four categories mentioned below, the Merger Guideline enumerates several factors to analyse whether or not a proposed business combination may be substantial to restrain competition in any particular field of trade.

Fourth, the guideline provides several factors to be considered in deciding whether or not the substantive test shall apply. In this regard, the guideline classifies the types of transactions into four categories, ie horizontal business combinations which would cause anti-competitive effects by themselves, horizontal business combinations which would cause anti-competitive effects through collusion or conscious parallelism, vertical and conglomerate business combinations which would cause anti-competitive effects by themselves, and vertical and conglomerate Business Combination which would cause anti-competitive effects through collusion or conscious parallelism. As mentioned above, for each type of transaction mentioned above, the guideline introduces several factors for examination.

Fifth, the guideline explains measures to lessen anti-competitive effects which may be caused by the proposed merger.

Major revised points of the Merger Guideline

a Safety Zone
The Merger Guideline creates a safety zone, in which the substantive test shall not apply in all four categories mentioned above, for which the Proposal to Revision offers amendment.

Currently, the Merger Guideline provides two categories for a safety zone, which shall apply to all four types of transactions. The first situation is where a market is not oligopolised and market share of combined entity is less than 25 per cent. In measuring the concentration of a market, a Herfindahl-Hirschman Index ('HHI') of concentration test is used. The HHI is calculated by summing the squares of the individual market shares of all the participants. The guideline define markets under 1,800 HHI as not highly oligoplised markets and ones under 1,000 HHI as not oligopolised. The second situation is where the market share of combined entity is less than 10 per cent. If either of the aforementioned situations should be met, the substantive test will not apply. Note that the substantive test here is to examine whether or not the condition of substantially to restrain competition in any particular field of trade has been fulfilled and thus proposed business combinations should be banned.

On the other hand, the Proposal to Revision distinguishes horizontal business combination from vertical business combination in terms of what standard of safety zone shall apply. Regarding horizontal business combination, three situations in which the substantive test shall not apply are proposed. The first situation is where HHI is less than 1,800 after business combination. The second situation is where HHI is more than 1,500 and less than 2,500 after business combination, and increment of HHI through business combination is less than 250. The third situation is where HHI is more than 2,500 after business combination and increment of HHI through business combination is less than 150. Concerning vertical business combination, the Proposal to Revision offers two situations. The first situation is where the market share of relevant parties after business combination is not more than 10 per cent. The second situation is where the market share of relevant parties after business combination is not more than 25 per cent and HHI is not more than 2,500. However, Japanese industries have requested the JFTC to accept parties that have reached market shares of no more than 50 per cent after a combination, but to no avail.

b Imported Goods and Services
Merger Guideline enumerates 'imported goods and services' as one of the factors to be analysed when examining whether or not the substantive test is fulfilled. The Proposal to Revision offers amendment to descriptions of the Merger Guideline concerning this factor.

Currently, the Merger Guideline points out that it is necessary to examine whether or not there are imported goods and services equivalent to the ones supplied by relevant parties because, given that combined firms will have to compete with imported products and services, competition in a relevant market will not likely be affected through proposed business combination. The Proposal to Revision adopts almost the same frame work of the Merger Guideline insofar as analysis of imported goods and services is concerned but offers one important change. According to the Proposal to Revision, albeit competitive pressures from imported goods and services in future can be taken into consideration, they are limited to two years from transaction.

A notable case in Japan in which whether or not expansion of imported goods was feasible at issue in a business combination case is Mitsui Sekiyu Co and Mitsuitoatsu Kagaku Co case.

In this case, the combined firm's market share was expected to be 60 per cent in the relevant market. Despite this, the JFTC admitted that the relevant parties should merge into a single firm primarily because of the availability of imported goods. Despite the expected market share, the JFTC determined that the combined firm was not likely to exercise its market power. The JFTC stressed that because its competitors had been importing the same kinds of products, even if the combined firm decreased its production level, its competitors would be able to substitute them easily. Also, the JFTC found that competitors importing goods had affected prices of those kinds of products. Although the proportion of imported goods in the relevant market just before the merger was only 1.7 per cent, the JFTC noted that the proportion of imported goods had been greater when the production level of Japanese manufactures had been small. Based upon this finding, the JFTC concluded that it would not be too difficult for competitors to expand their importation levels if prices became higher. The JFTC also determined that imported goods were not inferior to domestic goods in terms of price and quality. Based upon these examinations, the JFTC concluded that the proposed merger would not cause substantial restraint of competition.

c Financial Condition of Relevant Parties
Merger Guideline enumerates 'financial condition of relevant parties' as one of the factors to be analysed when examining whether or not the substantive test is fulfilled. The Proposal to Revision offers amendment to descriptions of the Merger Guideline concerning this factor.

Currently, the Merger Guideline says that a business combination is not likely to create or enhance market power or to facilitate its exercise if one of the combining firms faces imminent failure causing it to exit the relevant market without combination. Based upon this recognition, the guideline creates a safety zone, in which the substantive test shall not apply. The first situation is where the market share of a combined firm is not more than 50 per cent, one of the relevant parties would be unable to meet its financial obligation in near future absent a combination, would therefore exit relevant market, and it is less likely for other measures which influence less to competition to be available. The second situation is where the market share of combined parties is not more than 50 per cent, a part of business of a relevant party is failing, absent a combination, failing business would exit relevant market, and it is less likely for other measures which influence less to competition to be available.

On the other hand, the Proposal to Revision eradicates the upper limit of the 50 per cent market share for a safety zone. In the first situation, the safety zone does not permit the relevant parties to meet their financial obligations in the near future without a combination, causing them to withdraw from the relevant market. At this point, other measures that have smaller influences on the market would barely be available. In the second situation, where a part of the business is failing, and is without combination, this business too would have to withdraw from the relevant market. Other measures that have smaller influences on the market would barely be available in this situation as well.

d Measures to Lessen Anti-competitive Effects
The guideline states that it could be useful for relevant parties to transfer a part of its business to a third party so that competition in a market is increased. The guideline also suggests that competition could also be effectively maintained if relevant parties facilitate new entry or import of goods so that a combined firm would not acquire excessive market power. In fact, the JFTC has, on a case-by-case basis, granted conditional clearance to a proposed transaction if, for example, one or both parties undertake to make certain divestments or take other measures to promote competition in relevant markets. In this connection, the Proposal to Revision offers structural remedies such as transferring a part of business to third parties as one of the principle measures taken to lessen anti-competitive effects.

Procedural aspects of Merger Regulation
Qualifying 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 JAA. 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 that opinion in the formal consultation procedure.

Within 30 days of the notification for informal consultation, the JFTC will indicate either that a proposed transaction does not raise the JAA's issues or that further detailed examination is necessary. In the latter case, the JFTC will explain to notifying parties the issues of concern on the basis of specific products or services markets as well as geographic markets. If a notifying company decides to proceed (rather than withdraw its application), its application will be made public and the JFTC will commence its detailed investigation of the matter, including through contacts with 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 a notifying party has an opportunity to make amendments to a proposal in order to address the JFTC's issues of concern.

The JFTC will then issue its informal decision within 90 days after receipt of necessary documents and information and will inform notifying parties of the result of its examination, including the reasons behind its decision.
If the JFTC indicates to notifying companies that informal approval of its proposed transaction is unlikely to be given, notifying companies may decide to withdraw the submission if they believe that the possibility of ultimately securing approval under the statutory procedure is small. If the JFTC concludes that a proposed transaction poses competition problems, and an 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 days documentary examination or at the end of the detailed examination, relevant 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.

Conclusion
As three years have passed since the introduction of the new JFTC's merger guideline, strict approaches have begun to be taken to take care of each business combination case. This trend indicates that it requires more elaborate analysis to anticipate whether or not certain business transactions will be cleared by the JFTC. Also, some of the revised points of the Proposal to Revision need elaborate attention, as the JFTC's merger screening process will surely be changed after the amendment to the Merger Guideline. In this sense, it is indispensable for foreign investors in the Japanese market to be familiar with the big picture of the Japanese Merger Control Regime and its recent movements.

Akira Inoue
Anderson Mori & Tomotsune
E-mail: akira.inoue@amt-law.com

Notes

1 The Japanese Fair Trade Commission, Dokusenkinshihoujouno Kigyoketugosinsa Nikansuru Unyohshisin [The Guideline Concerning the Examination on Merger and Acquisition under the Antimonopoly Law in Japan], (2004), available at http://www2.jftc.go.jp/pressrelease/04.may/04053101.pdf (last visited 28 February 2005).