Merger control was introduced in Japan by the 1947 Japanese Antimonopoly Act (AMA) together with Japan’s first competition rules. Merger control is enforced by the Japan Fair Trade Commission (JFTC), which was established as an independent administrative office with broad enforcement powers and is composed of a chair and four commissioners. The JFTC has primary jurisdiction over the enforcement of merger control under the AMA.
i Pre-merger notification
Types of regulated mergers and thresholds
Share acquisitions (including joint ventures), mergers,2 joint share transfers, business/asset transfers and corporate splits (or demergers) are subject to prior notification under the AMA if they exceed certain thresholds. Mergers and acquisitions (M&A) transactions whose schemes involve more than one of these transactions (e.g., reverse triangular mergers that involve a merger between a target and a subsidiary of an acquirer and an acquisition by the acquirer of shares in the target) are separately analysed at each step of the transaction and may require separate filings for each of the various transactional steps.
Joint ventures are also notifiable as long as they satisfy the thresholds for share acquisitions. Unlike the regime in the EU, Japanese law does not make a distinction between full-function and non-full function joint ventures. A notification may be also required when a partnership (including a limited liability partnership) formed under Japanese law or under foreign laws acquires shares in another company through the partnership. The controlling company of such partnership should file a prior notification if the filing thresholds are otherwise satisfied.3
Generally speaking, no notification is required for transactions that amount to internal reorganisations of companies within a combined business group.4
Domestic turnover, which is defined as the total amount of the price of goods and services supplied in Japan during the latest fiscal year,5 is used as a decisive factor in the calculation of thresholds. The same thresholds will apply to both domestic and foreign companies.
According to the Merger Notification Rules,6 the domestic turnover of a company includes the sales amount accrued through direct importing into Japan regardless of whether the company has a presence in Japan.
To be precise, domestic turnover is the total amount of the following three categories of sales:7
- a sales amount derived from the sale of goods (including services) sold to domestic consumers (excluding individuals who are transacting business);
- b sales amount derived from the sale of goods (including services) supplied in Japan to business entities or individuals who are transacting business (business entities) (excluding sales of goods where it is known that such goods will be shipped outside Japan at the time of entering into the contract, without any changes made to their nature or characteristics); and
- c sales amount derived from the sale of goods (including services) supplied outside Japan to business entities where it is known that such goods will be shipped into Japan at the time of entering into the contract, without any changes made to their nature or characteristics.
In cases where the calculation of domestic turnover cannot be made in strict compliance with these rules, it is also permitted to use a different method to calculate the amount of the domestic turnover as long as it is in line with the purpose of the above-specified method and in accordance with generally accepted accounting principles.8
Notification thresholds for each type of transaction
Under the AMA, different notification thresholds apply depending on the different types of transactions, namely, share acquisitions, mergers, joint share transfers, business/asset transfers and corporate splits.
For share acquisitions (including joint ventures), the thresholds are based both on domestic turnover and the level of shareholding in the target. First, the aggregate domestic turnover of all corporations within the combined business group of the acquiring corporation must exceed ¥20 billion, and the aggregate domestic turnover of the target corporation and its subsidiaries must exceed ¥5 billion to meet the filing requirement.9 Second, such acquisition must result in the acquirer holding more than 20 or 50 per cent of the total voting rights of all the shareholders of the target (i.e., an acquisition that increases a shareholding from 19 to 21 per cent is subject to a filing, while an acquisition that increases a shareholding from 21 to 49 per cent does not require one).10 A minority ownership of over 20 per cent may be caught regardless of whether the acquirer will take control of the target company.
For mergers and joint share transfers,11 the thresholds are based on domestic turnover. The aggregate domestic turnover of the combined business group of one of the merging companies, or of one of the companies intending to conduct the joint share transfer, must exceed ¥20 billion to meet the filing requirement. Furthermore, the aggregate domestic turnover of the combined business group of one other participating company must exceed ¥5 billion.12
For business or asset transfers, the thresholds are based on domestic turnover. The aggregate domestic turnover of all companies within the combined business group of the acquiring company must exceed ¥20 billion to meet the filing requirement. For the transferring company, separate thresholds are applied depending on whether the target business or asset is the whole business or asset of the company or a substantial part of the business or asset thereof. In the former case, a threshold of ¥3 billion of domestic turnover applies to the transferring company; in the latter, the same shall apply to that attributable to the target business or asset.13
For corporate splits, there are a number of relevant thresholds depending upon the structure of the transactions, but the ¥20 billion and ¥5 billion thresholds described above (or lower thresholds) similarly apply.14
In the case of a merger, corporate split or joint share transfer, both companies intending to effect such transactions have to jointly file.15 On the other hand, in the case of a share acquisition or business transfer, only the acquiring company is responsible for the filing.
There are no filing fees under the AMA.
ii Regulations and guidelines relating to merger control issued in the past year
Amendment of the Antimonopoly Act
In December 2013, the amendment bill of the AMA, which abolished the hearing procedure of the JFTC for administrative appeals, passed the Diet of Japan. This fundamentally revises the appeal procedure for JFTC decisions by:
- a abolishing the JFTC’s hearing procedure for administrative appeals;
- b abolishing the exclusive jurisdiction of the Tokyo High Court as the court that reviews at first instance any appeal suits pertaining to administrative hearing decisions of the JFTC;
- c introducing a system where any first instance appeals pertaining to cease-and-desist orders, etc., shall be to the Tokyo District Court only (with a panel of three or five judges); and
- d streamlining procedures for a hearing of opinions prior to issuing a cease-and-desist order and surcharge payment order to ensure increased rights to due process.
The amendment came into effect on 1 April 2015, along with the corresponding amendment of the related regulations. New rules on the procedures for hearing of opinions prior to the issuance of a cease-and-desist order and surcharge payment order, etc. (see (d) above), also came into effect on the same date, while the regulations relating to the JFTC’s hearing procedure for administrative appeals were abolished.
II YEAR IN REVIEW
During the 2015 fiscal year (from 1 April 2015 to 31 March 2016) (FY 2015), the JFTC conducted Phase II reviews in four cases: the acquisition by Osaka Steel Co., Ltd. (Osaka Steel) of shares in Tokyo Kohtetsu Co., Ltd. (Tokyo Kohtetsu); the business alliance including establishment of a joint selling company for containerboards, etc. by Nippon Paper Industries Co., Ltd. (NPI) and Tokushu Tokai Paper Co., Ltd. (TTP); the acquisition by Idemitsu Kosan Co., Ltd. (Idemitsu) of shares in Showa Shell Sekiyu K.K. (Showa Shell); and the business integration between JX Group (JX) and TonenGeneral group (TG). The JFTC cleared the Osaka Steel and Tokyo Kohtetsu case in January 2016 and the NPI and TTP business alliance case in March 2016 without conditions. As of the date of writing this chapter, the Idemitsu and Showa Shell case and the JX and TG case are still pending before the JFTC.
In addition, on 30 June 2016, the JFTC made a public statement about Canon Inc.’s acquisition of shares in Toshiba Medical Systems Corporation (Toshiba Medical) in which the JFTC noted that the scheme used by Canon deviates from the concept of the pre-notification system and would lead to an infringement of the AMA. However, no subsequent criminal action was taken by the JFTC.
i The acquisition by Osaka Steel of shares in Tokyo Kohtetsu16
Osaka Steel and Tokyo Kohtetsu are both Japan-based electric furnace steel manufacturers that are engaged in manufacturing and selling of general shaped steel. Osaka Steel, a subsidiary of Nippon Steel & Sumitomo Metal Corporation (NSSMC), which is the largest steel manufacturing group in Japan, proposed to acquire 100 per cent of the shares in Tokyo Kohtetsu, the third medium-sized/small general shaped steel (hereinafter ‘steel’) manufacturer in Japan.
Among overlapping products sold by both parties, the JFTC carried out an in-depth review for steel for which both parties maintain a relatively higher share in the Japanese market.
For this product market, the JFTC defined the relevant geographical market as ‘all regions of Japan’, finding that steel is manufactured at manufacturing bases in all regions of Japan and is sold in all regions of Japan independent of where it is manufactured.
With respect to the market for steel, the combined market share of Osaka Steel and Tokyo Kohtetsu was approximately 40 per cent, which is slightly higher than the second largest steel manufacturer (approximately 35 per cent). However, there are three steel manufacturers: Kyoei Steel Ltd. (Kyoei), Topy Industries, Ltd. (Topy) and Hokuetsu Metal Co., Ltd. (Hokuetsu) (collectively, the Three Related Companies), whose minority shares are directly or indirectly held by NSSMC17 and thus are regarded as being in a ‘joint relationship’ with NSSMC (see Section IV.iii, infra). The combined market share of the parties and the Three Related Companies (collectively, NSSMC Group) in the market for steel was approximately 60 per cent, which would become a far larger steel manufacturer and make the steel market an oligopoly market with a 95 per cent market share being held by NSSMC Group and the second largest competitor.
The JFTC focused on the fact that the distribution of the parties’ market shares by region is different, but they both have more than 10 per cent market share in all regions of Japan and compete with each other. The JFTC examined the degree of actual rivalry between the parties in each region of Japan. The JFTC found from this examination that losing competition between the parties would not significantly impact the steel market because their respective market shares are extremely low in the regions that are far from their respective manufacturing bases (Osaka Steel has its manufacturing bases in western Japan while Tokyo Kohtetsu has its manufacturing base in eastern Japan). To support this finding, the JFTC also conducted econometric analyses that showed that geographical proximity between place of demand and manufacturing base could meaningfully affect cost competitiveness of steel manufacturers.
The JFTC further focused on the fact that NSSMC retained only minority shareholdings in the Three Related Companies, and examined actual rivalry between Osaka Steel and each of the Three Related Companies. The JFTC found from this examination that neither of the Three Related Companies is in a strong ‘joint relationship’ with NSSMC (ultimately Osaka Steel), and therefore that there is competitive pressure from the Three Related Companies to a certain degree. The JFTC also conducted econometric analyses to support this finding. What is noteworthy is that the JFTC published the detailed methodology used for the econometric analyses. Such analysis was conducted to find out whether and how the price-cost margin by product had varied as a result of the merger between Nippon Steel Corporation, which was in a ‘joint relationship’ with Osaka Steel and Topy, on one hand, and Sumitomo Metal Industries, Ltd. (which was in a ‘joint relationship’ with Kyoei) on the other hand.
In addition to the above findings, the JFTC found, inter alia, that one influential competitor (which in this context means competitors with a market share of 10 per cent or more) with a certain level of excess capacity will still exist even after the transaction, and that competitive pressure from users exists to a substantial degree. For the above reasons, the JFTC concluded that the transaction would not restrain competition in any of the relevant markets in Japan. However, since one of the reasons for the unconditional clearance was the finding that competitive pressure from the Three Related Companies will remain after the transaction, the JFTC expressed in its press release (but not as a formal condition to granting clearance) that it will continue to pay particular attention as to whether competition in the market for steel would be substantially restrained by the strengthening of the ‘joint relationship’ between NSSMC and the Three Related Companies (as a result of, for instance, acquisitions by NSSMC of additional shares in the Three Related Companies, increase of interlocking directors between NSSMC and the Three Related Companies’ entry into a business alliance).
ii Business alliance including establishment of joint selling company for containerboards, etc., by NPI and TTP18
NPI and TTP are both Japanese-based companies engaged in the manufacturing and selling of paper, paperboard and pulp products. The notified business alliance is expected to take two steps: TTP to spin off one of its factories and NPI to acquire minority shares in the spun-off factory, whereby the factory becomes a manufacturing joint venture between the parties (the Manufacturing JV); and NPI and TTP to spin off their sales divisions for certain products into a newly established joint venture by using joint-incorporation-type corporate split, whereby the newly established joint venture becomes a sales joint venture between the parties (the Sales JV).
There are a wide range of overlapping products sold by both parties that are relevant to the Manufacturing JV and the Sales JV. The JFTC carried out an in-depth review of the seven products for which both parties maintain a higher share in the Japanese market:
- a writing and drawing papers;
- b other specialty printing papers;
- c other converting papers;
- d unglazed shipping sack craft papers;
- e unglazed grocery papers;
- f linerboards; and
- g core base papers.
For these product markets, the JFTC defined the relevant geographical market as ‘all regions of Japan’, finding that main paper manufacturers have established sales networks all over Japan and actually supply the products at comparable prices in all regions of Japan, and that large customers, as the users of these products, purchase the products from paper manufacturers in each region of Japan.
With respect to writing and drawing papers, other specialty printing papers and other converting papers, the products manufactured at the Manufacturing JV are to be sold to TTP, and TTP and NPI will remain in competition in the sale of the products. Although there were risks of coordinated effects between the parties through the Manufacturing JV, the JFTC concluded that the impact from the transaction on competition in the markets for these products would be small because both parties proposed to create an information barrier at the Manufacturing JV level whereby competitively sensitive information, such as manufacturing costs regarding the products are not to be disclosed to NPI.
With respect to core base papers, the JFTC did not have any concerns as this comes under the safe harbour rules for horizontal business combination (for the safe harbour rules, see Section III.vii, infra).
With respect to linerboard, the JFTC found that three influential competitors with a certain level of excess capacity would still exist after the transaction, and that there is competitive pressure from relatively large customers, so the transaction would not restrain competition in the Japanese market for linerboard.
With respect to unglazed shipping sack craft papers, although the combined market share of the parties was approximately 25 per cent (becoming the second largest manufacturer) and the JFTC found no entry pressure or competitive pressure from users or adjacent markets for these products, the JFTC found that there was one large competitor (Competitor A) with approximately 30 per cent market share, and three other influential competitors with a considerable level of excess capacity that would exist even after the transaction. On that basis, the JFTC concluded that the transaction would not restrain competition in the Japanese market for unglazed shipping sack craft papers in Japan. In particular, although the largest competitor had more than 20 per cent interest in the second largest competitor (Competitor B)(the former is the largest holder of voting rights in the latter), and therefore a ‘joint relationship’ is found between them, the JFTC determined that they will continue to conduct their business independently from each other because the undertaking group to which both of them belong committed to the JFTC in a past merger filing review to conduct their business as to the manufacturing and sale of the product independently from each other and not to share competitively sensitive information on the manufacturing and sale of the product.
With respect to unglazed grocery papers, although the parties would become the largest manufacturer with an approximate market share of 35 per cent, the JFTC found that there are two influential competitors whose market shares exceed 20 per cent and one competitor that has a sizable market share (nearly 10 per cent) with a certain level of excess capacity, which would exist even after the transaction, and that there exists some competitive pressure from adjacent markets. On that basis, the JFTC concluded that the transaction would not restrain competition in the Japanese market for unglazed grocery papers in Japan. Unlike unglazed shipping sack craft papers, the JFTC examined the transaction on the premise that Competitor A and Competitor B, both of which are also active in the market for unglazed grocery papers, form one group and do not compete with each other because, among other things, the group to which they belong did not make any prior commitment as to the manufacturing and sale of the product to the JFTC.
What is noteworthy from the JFTC’s review of this transaction is that, during the review, the JFTC focused on the fact that there is a pricing practice in the Japanese market for papers whereby paper manufacturers announce their respective intention to increase prices to almost the same extent at almost the same time, and then initiate negotiation as to price increase with existing customers. However, the JFTC concluded that the transaction would not substantially restrain competition in any Japanese market for the products because it cannot be found that such all-round price changes would be facilitated ‘as a result of’ the transaction.
The JFTC also published in its press release that they conducted market tests through written questionnaires and third-party hearings (involving competitors, distributors and customers).
iii The acquisition by Canon of shares in Toshiba Medical
On 30 June 2016, the JFTC approved Canon’s acquisition of shares in Toshiba Medical, Toshiba Corporation’s (Toshiba) medical equipment unit, but issued a statement warning about the way the parties carried out the deal, which could be deemed as a circumvention of the law including the prior notification obligation under the AMA. The parties structured the transaction, entered into on 17 March 2016, in such a way that Toshiba could obtain the transaction price of ¥665.5 billion prior to the end of its financial year on 31 March 2016. This meant, however, that the transaction price was paid prior to the JFTC’s clearance. The structure involved the use of a special entity (the independent third party owner) and the issuance of an equity warrant to allow Toshiba to receive cash from Canon before the JFTC’s clearance. Specifically, Canon acquired an equity warrant for which common shares in Toshiba Medical were the underlying securities, in return for which Canon paid to Toshiba an amount virtually equivalent to the consideration of common shares. Further, shares with voting rights in Toshiba Medical were acquired and held by the independent third party owner up until the time Canon exercised the equity warrant (after obtaining clearance from the JFTC). The JFTC found that the transaction structure formed part of a scheme that was aimed at Canon ultimately acquiring shares in Toshiba Medical.
The JFTC held that since there is no public precedent of its position as to such a transaction structure, it decided not to impose any sanctions in this case and approved the acquisition because it would not hurt fair competition in the medical equipment markets in Japan. This case is notable because it means that in the future, similar transaction schemes will be considered to be in violation of the AMA.
iv Statistics of the JFTC’s activity
According to the JFTC, the total number of merger notifications filed in FY 2015 was 295.
Since the thresholds for notification were amended as of January 2010, from the previous general thresholds of ¥10 billion and ¥1 billion, to the new general thresholds of ¥20 billion and ¥5 billion, the number of transactions notified to the JFTC has decreased rapidly. There are a few cases that were brought into Phase II review every year, while there were no formal prohibition decisions made by the JFTC. According to the JFTC’s statistics, the number of filings and the cases cleared after Phase II review is as follows:
No. of filings
No. of cases cleared after Phase II review
III THE MERGER CONTROL REGIME
i Waiting periods and time frames
In terms of time frames, the standard 30-day waiting period will apply, which may be shortened in certain cases (see Section III.ii, infra). If the JFTC intends to order necessary measures regarding the notified transaction, it will do so within the 30-day (or shortened) waiting period (which is extremely rare) or, if a Phase II review is opened, within the longer period of either 120 calendar days from the date of receipt of the initial notification or 90 calendar days from the date of the JFTC’s receipt of all of the additionally requested information. It should be noted that the JFTC does not have the power to ‘stop the clock’ in either the Phase I or Phase II review periods. It is, however, possible for the notifying party to ‘pull and re-file’ the notification during the Phase I period, thereby effectively re-starting the clock.
ii Parties’ ability to accelerate the review procedure
There is no provision in the law and are no regulations regarding the ability to accelerate the review process, but in practice it may be possible to put pressure on the JFTC by submitting a written request to the JFTC in cases where a filing is made less than 30 calendar days before the planned closing date. The Merger Guidelines19 state that the JFTC may shorten the waiting period when it is evident that the notified merger may not substantially restrain competition in any relevant market (which means when the JFTC closes its review prior to the expiration of the 30-calendar-day review period).
iii Third-party access to the file and rights to challenge mergers
Access to the file
Generally speaking, no third party has access to the merger notification files. Further, the JFTC does not even disclose the fact of the filing of a merger notification or clearance thereof, except for cases in which a Phase II review is commenced (in which case the JFTC discloses the identity of the companies involved in the notified transactions).20 This means that third parties cannot even confirm whether a merger has actually been notified, unless the case has moved on to Phase II. Apart from the above limited disclosure, although not timely, the JFTC usually discloses details of some major merger notification cases as part of its annual review, subject to obtaining approval for such publication from the notifying parties.
Rights to challenge mergers
Interventions by interested parties in JFTC proceedings have not historically been common; however, there was one case in which interventions were made by Japanese steel manufacturers before the JFTC in relation to the proposed hostile takeover attempt by BHP Billiton of Rio Tinto, first announced in 2007.
Although third parties may file a lawsuit to ask the court to order the JFTC to issue a cease-and-desist order, the legal path to successfully do so is extremely narrow and does not merit a detailed explanation here. There are two ways for third parties to submit complaints to the JFTC in the course of a merger review: one way is to notify the investigation bureau of the JFTC of a possible breach of the AMA;21 and the other is to submit complaints to the mergers and acquisitions division of the JFTC.
In addition, as stated in the Policies for Merger Review, in the event that a merger review moves on to Phase II, the JFTC will publicly invite opinions and comments from third parties. Public hearings can be held22 if deemed necessary, but they have been extremely rare to date. The JFTC sometimes conducts informal hearings with third parties, including competitors, distributors and customers, in the course of its review, as it did in the review of the Osaka Steel and Tokyo Kohtetsu case and the NPI and TTP case (see Section II.i, supra). Moreover, it is rare but the JFTC may conduct market tests by way of questionnaires in writing with third parties in the course of its review, as it did during the review of the NPI and TTP business alliance.
iv Resolution of authorities’ competition concerns, appeals and judicial review
The JFTC can issue a cease-and-desist order when it believes that a proposed transaction has the effect of substantially restraining competition in a particular field of trade (i.e., a relevant market). Prior to issuing a cease-and-desist order, the JFTC will provide information about, inter alia, the outlines of the contemplated order as well as the underlying facts and the list of supporting evidence to the potential recipients of such order in advance to give them an opportunity to review and make copies of the evidence (to the extent possible) and to submit opinions as to the possible order.23
When the JFTC issues a cease-and-desist order, as explained in Section I.ii, supra, the parties to the transaction can now appeal to the Tokyo District Court (instead of resorting to the JFTC administrative hearing procedure, as was the case in the past) for annulment of the JFTC order.
v Effect of regulatory review
The JFTC frequently holds consultations with sector-specific regulators with regard to general issues as to the relationship between the JFTC’s competition policy and sector-specific public and industrial policies. In this regard, it is generally understood that the JFTC takes into consideration relevant public and industrial policy issues when ruling on a given transaction, without prejudice to the independence of its competition policy review and merger review. Among the various government ministries, the Ministry of Economy, Trade and Industry has been active in advocating competition policy, but depending on the specifics of each case, other ministries may also be involved.
vi Substantive review
The Merger Guidelines set out the various factors that may be taken into account by the JFTC when assessing the impact of notified transactions on the competitive situation. Specifically, the Merger Guidelines provide an analysis of the substantive test for each type of transaction (e.g., horizontal, vertical and conglomerate M&A transactions). One of the important parts of the substantive test analysis is the use of ‘safe harbours’ measured by the Herfindahl-Herschman Index (HHI) for each of the above three categories (see Section III.vii, infra). It is also suggested in the Merger Guidelines that, both before and after the transaction, the JFTC will closely analyse market conditions from various viewpoints, including whether the transaction may facilitate concentration between market players, to ultimately determine the actual impact on competition of the notified transaction.
The detailed method to define the ‘particular field of trade’ (i.e., relevant market) is also provided in the Merger Guidelines. Importantly, the Merger Guidelines were amended in 2007 to clarify that the geographic market may be wider than the geographical boundaries of Japan, depending upon the international nature of the relevant business. Following the 2007 amendment, there have been several JFTC cases where the JFTC defined the relevant geographical market to extend beyond Japan. One involved TDK Corporation’s acquisition of Alps Electric Co, Ltd’s magnetic heads business in 2007, in which the JFTC found that the relevant geographical market consisted of the worldwide market for magnetic heads since magnetic head manufacturers sell their products at the same price regardless of the customers’ geographical locations. The JFTC reached a similar conclusion in many subsequent cases, including the merger of NEC Electronics and Renesas Technology in 2009, two HDD cases (Western Digital and Seagate Technology) in 2012, and the ASML and Cymer case in 2013. It is likely that the JFTC will continue to define geographical markets that extend beyond Japan when assessing notified transactions, depending on the actual conditions of competition.
vii Safe harbours
In the safe harbour analysis, if any of the following conditions is satisfied, the JFTC is likely to consider that the notified transaction does not substantially restrain competition in a relevant market:24
- a horizontal transactions:
- • the HHI after the notified transaction is not more than 1,500;
- • the HHI after the notified transaction exceeds 1,500 but is not more than 2,500, and the increased HHI (delta) is not more than 250; or
- • the HHI after the notified transaction exceeds 2,500 and the delta is not more than 150; and
- b vertical and conglomerate transactions:
- • the merging parties’ market share after the notified transaction is not more than 10 per cent; or
- • the merging parties’ market share after the notified transaction is not more than 25 per cent and the HHI after the notified transaction is not more than 2,500.
In addition to the safe harbour above, the JFTC is highly unlikely to conclude that transactions falling within the following threshold would substantially restrain competition in any particular market: the HHI after the notified transaction is not more than 2,500, and the merging parties’ market share is not more than 35 per cent. 25
If the notified transaction does not satisfy the requirements for any of the above, the JFTC will likely conduct more in-depth analysis of the non-coordinated (or unilateral) and coordinated effects of the notified transactions.
IV OTHER STRATEGIC CONSIDERATIONS
i Coordination with other jurisdictions
Cooperation between the JFTC and foreign competition authorities
In principle, the JFTC is entitled to exchange information with competition authorities of other jurisdictions based on the conditions set out in the AMA.26 In addition, the JFTC has entered into bilateral cooperation agreements with the competition authorities of the United States, the European Union, Canada, the Philippines, Vietnam, Brazil, Korea, Australia and China.27 Furthermore, the JFTC propounded the establishment of an international cooperative framework for merger review at the 11th ICN Annual Conference held in April 2012, which was approved at that Conference. Under these agreements and frameworks, it is expected that various levels of information exchanges and discussions will be carried out between the participating authorities.
The JFTC has a good track record of closely working with other competition authorities. In the review of the acquisition of Sanyo Electric by Panasonic in 2009, the JFTC reported that 10 competition authorities reviewed the transaction, and that the JFTC worked with its counterparts in the US and the EU, in particular. Likewise, the JFTC exchanged information with various authorities in the two HDD cases in 2012, in the business combination of ASML and Cymer and the Thermo Fisher and Life Technologies case in 2013 and in the Zimmer and Biomet case in 2015.
Coordination among attorneys from various jurisdictions
As explained in Section IV.ii, infra, the JFTC abolished the voluntary consultation procedure (prior consultation procedure) as of 1 July 2011, which means that the substantive review of a proposed transaction would only start at the formal notification stage. In addition, as explained in Section III.i, supra, each of the Phase I and Phase II review periods cannot be extended even in cases where parties submit a remedy proposal to the JFTC; nor can the JFTC stop the clock. This might cause difficulties, especially in global merger notifications where the management of the filing schedule is important to avoid conflicting remedies or prohibition decisions at the end of the merger review procedure in various jurisdictions. Thus, coordination among Japanese and foreign attorneys is of even greater importance following the abolition of the prior consultation procedure.
ii Pre-filing consultation with the JFTC
Upon the abolition of the prior consultation procedure in July 2011, the JFTC no longer provides its formal opinion at the pre-notification stage, and the review officially starts at the formal notification stage.
At first, many practitioners considered that such rigid practice might cause difficulties, especially in global merger notifications. However, in practice, the JFTC is flexible about having informal discussions with potential notifying parties upon request or voluntary submission of relevant materials prior to formal filings. Interestingly, in almost all cases that the JFTC cleared recently after Phase II review, including the Osaka Steel and Tokyo Kohtetsu case and the NPI and TTP business alliance case (see Section II.i and ii, supra), the JFTC made specific notes in its announcements that the parties had submitted supporting documents and opinions to the JFTC on a voluntary basis prior to officially filing the notifications. It is understood that parties to complicated mergers make use of that informal procedure to try and alleviate any potential concerns early. So far, the JFTC seems to be receptive to such informal prior communications.
iii Special situations
Failing company doctrine
The Merger Guidelines recognise the ‘failing company doctrine’, and state that the effect of a horizontal merger would not be substantial if a party to the merger has recorded continuous and significant ordinary losses, has excess debt or is unable to obtain finance for working capital, and it is obvious that the party would be highly likely to go bankrupt and exit the market in the near future without the merger, and so it is difficult to find any business operator that could rescue the party with a merger that would have less impact on competition than the business operator that is the other party to the merger.
The precedents in which the failing company doctrine was applied were the acquisition of Showa Aluminum Powder KK by Toyo Aluminium KK and the acquisition of Kishimoto Medical Science Laboratory by BML Inc in 2010. The JFTC cleared both transactions by taking into account, inter alia, the failing firm doctrine. More specifically, with respect to the Showa and Toyo case, the JFTC cleared the acquisition on the grounds, inter alia, that Showa had excessive levels of debt and was unable to get finance for working capital, as well as because it was highly likely that Showa would withdraw from the relevant markets in the near future. The JFTC also mentioned that it would have been very difficult for Showa to enter into a merger with another candidate that would have a lesser impact on competition compared with the merger with Toyo.
Minority ownership interests
It should be noted that minority ownership of over 20 per cent of the voting rights in a company is notifiable regardless of whether the acquirer will take control of the target company (see Section I.i, supra). In addition, in the JFTC’s substantive review, any companies that are in a ‘close relationship’ with an acquirer or a target may be deemed to be in a ‘joint relationship’. Accordingly, these companies could be treated as an integrated group for the purpose of the substantive analysis and, for example, the HHI will also be calculated based on the sales data of the integrated group as a whole. The joint relationship will be determined by taking into account various factors although, according to the Merger Guidelines, a minority holding of voting rights of over 20 per cent and the absence of holders of voting rights with the same or higher holding ratios of voting rights would suffice to find such relationship.
iv Foreign-to-foreign mergers
The amendment to the AMA effective as of January 2010 has made foreign-to-foreign mergers between undertakings that have no Japanese subsidiary or branch office in Japan, but that have substantial domestic turnover in Japan, notifiable (see Section I.i, supra). As in BHP Billiton’s attempt to take over Rio Tinto through a hostile bid, the JFTC will not hesitate to fully investigate foreign-to-foreign mergers that may have a substantial impact on competition in Japan by cooperating and exchanging information with foreign competition authorities as necessary (see Section IV.i, supra).
v Transactions below the notification thresholds
It is important to note that, under the AMA, the JFTC can theoretically review any M&A transactions under the substantive test, regardless of whether the filing thresholds described above are met. The JFTC has actually investigated transactions that had not been notified to it, including foreign-to-foreign transactions such as the above-mentioned attempt by BHP Billiton to take over Rio Tinto through a hostile bid.28
V OUTLOOK AND CONCLUSIONS
i Amendment of the AMA
As mentioned in Section I.ii, supra, the amendment of the AMA finally came into force on 1 April 2015, which abolished the hearing procedure of the JFTC for administrative appeals. Going forward, all appeals against JFTC cease-and-desist orders, etc., will be dealt with by the Tokyo District Court instead of through the JFTC’s administrative hearing procedure. This means that addressees of JFTC orders will be able to appeal to the Tokyo District Court, then to the Tokyo High Court and finally to the Supreme Court, thereby having potential access to three levels of judicial review.
ii Developments following the introduction of the new Merger Review Rules and Policies for Merger Review
Five years have passed since the amendments to the Merger Review Rules and the Policies for Merger Review were introduced in June 2011. These amendments primarily concern the procedural aspects of merger reviews by the JFTC, while some clarifications were also made to the substance of the JFTC’s review policies. Since these amendments, the JFTC has already cleared 16 cases following Phase II reviews, and has made some disclosures as part of its annual review about recent major cases it has handled. These disclosures have been welcomed by practitioners, as they have made the new merger filing procedures clearer and more predictable. Recently, the scope of disclosure that the JFTC has made in relation to its review of Phase II cases seems to have expanded. In particular, as to the Osaka Steel and Tokyo Kohtetsu case and the NPI and TTP business alliance case (see Sections II.i and II.ii, supra), the JFTC disclosed specific details of the economic analysis it conducted, thereby giving greater transparency as to its review. However, when compared to the practice of other leading competition authorities there is still a relative lack of available information as to the JFTC’s decisional practice (e.g., very few decisions are published), and some areas where further clarification or improvements seem necessary (e.g., as to market definition). It is hoped that the JFTC will take action, for example, through the publication of more decisions and of new or updated guidelines in the near future.
1 Yusuke Nakano is a partner, Vassili Moussis is a senior foreign counsel, and Takeshi Suzuki and Kiyoko Yagami are senior associates at Anderson Mōri & Tomotsune.
2 The JFTC uses the term ‘merger’ in its English translation of the AMA to describe what is called ‘amalgamation’ in many other jurisdictions.
3 Article 10, paragraph 5 of the AMA.
4 A combined business group consists of all of the subsidiaries of the ultimate parent company. A company will generally be considered to be part of a combined business group not only when more than 50 per cent of the voting rights of a company are held by another company, but also if its financial and business policies are ‘controlled’ by another company. The Merger Notification Rules specify detailed thresholds for ‘control’ to exist, which might be found even in cases where the ratio of beneficially owned voting rights is even slightly higher than, 40 per cent. The concept of ‘control’ to decide which companies are to be included in the combined business group is in line with the concept of ‘control’ used to define group companies under the Ordinance for the Enforcement of Companies Act. This concept of ‘control’ generally (there are still some remaining differences) aligns Japanese merger control with the merger rules of other jurisdictions, especially the EU rules as to the identification of the undertaking concerned.
5 Article 10, paragraph 2 of the AMA.
6 The Rules on Applications for Approval, Reporting, Notification, etc., pursuant to Articles 9 to 16 of the AMA (as amended in 2015).
7 Article 2, paragraph 1 of the Merger Notification Rules.
8 Article 2, paragraph 2 of the Merger Notification Rules.
9 Article 10, paragraph 2 of the AMA.
10 Article 16, paragraph 3 of the Implementation Rules of the AMA.
11 Under Japanese law, ‘joint share transfer’ refers to a specific structure stipulated by the Companies Act of Japan that involves two or more companies transferring their shares into a new holding company in exchange for shares from that holding company.
12 Article 15, paragraph 2 and Article 15-3, paragraph 2 of the AMA.
13 Article 16, paragraph 2 of the AMA.
14 Article 15-2, paragraphs 2 and 3 of the AMA.
15 Article 5, paragraph 2; Article 5-2, paragraph 3; and Article 5-3, paragraph 2 of the Merger Notification Rules.
16 JFTC press release of 28 January 2016. As of the date of writing this chapter, a full text in English is not available.
17 NSSMC holds 26.7 per cent of shares in Kyoei as the largest shareholder, and 20.5 per cent of shares in Topy as the largest shareholder, and Topy holds 36 per cent of shares in Hokuetsu as the largest shareholder.
18 JFTC press release of 18 March 2016. As of writing, a full text in English is not available.
19 The Guidelines to Application of the Antimonopoly Act Concerning Review of Business Combination (31 May 2004 (as amended)).
20 Policies Concerning Procedures of Review of Business Combination (14 June 2011; Policies for Merger Review, as amended in 2015).
21 Article 45, paragraph 1 of the AMA.
22 Article 42 of the AMA.
23 Article 9 of the Rules on the Procedures of Hearing of Opinions.
24 Part IV, 1(3) and part V, 1(3) of the Merger Guidelines.
25 In practice, if a transaction satisfies the safe harbour conditions at (a) and (b) (Section III.vii, supra), the JFTC does not conduct any further substantive review of the transaction.
26 Article 43-2 of the AMA.
27 Recently, the JFTC concluded bilateral cooperation arrangements with the Administrative Council for Economic Defense of the Federative Republic of Brazil on 24 April 2014, with the Fair Trade Commission of the Republic of Korea on 25 July 2014, with the Australian Competition and Consumer Commission on 29 April 2015, and with the Ministry of Commerce of the People’s Republic of China on 11 April 2016, respectively.
28 At the time, qualifying share acquisitions were subject to ex post facto reporting requirements.