Merger control under the Anti-Monopoly Act of Japan (AMA) was substantially amended in 2009. The amendments took effect on January 1 2010. This article describes the main points of the amendments to merger control, and discusses two prominent merger reviews recently undertaken by the Japan Fair Trade Commission (JFTC). The first case pertains to Panasonic's well-known acquisition of Sanyo and the second to a metal product joint venture in which the JFTC was unusually concerned about information sharing between joint venture partners through a joint venture.
Overview of amendments
The main aspects of the amendment in 2009 were (i) the introduction of prior notification of share acquisitions; (ii) a change in the filing thresholds from asset-based thresholds to sales-based thresholds; (iii) a change in the filing thresholds from an entity-based approach to a group-based approach; and (iv) a change in the definition of domestic sales. For Japanese companies, it is expected that the number of merger filings will be substantially reduced perhaps by half. As for foreign companies, it is expected that the number of cases that require a merger filing will substantially increase, mainly on account of items (iii) and (iv) above.
Under the AMA, similar but different reporting thresholds apply both before and after the amendment depending on the scheme of business combinations. Before the amendment, of all the schemes of business combinations, share acquisitions were the only scheme that solely required a post-transaction report to the JFTC. Obviously, this was an unreasonable distinction; the amendment corrected this legislative oversight.
Under the amended AMA, share acquisitions are subject to a prior notification requirement if certain applicable threshold conditions are met. Under this new prior notification regime for share acquisitions, like the prior notification regime for all other schemes of business combinations, the acquirer will have to wait until the expiration of a 30 day waiting period (which commences on the date of acceptance of the prior notification by the JFTC) before completing acquisition of the relevant shares.
Prior to the amendment only foreign companies were subject to filing thresholds based on the amount of sales; Japanese companies were subject to filing thresholds based on the level of assets. The amendment standardised the filing thresholds for all types of business combinations applicable to both foreign companies and Japanese companies. In essence, the filing thresholds for Japanese companies were changed from an asset-based approach to a sales-based approach. As the competitive impact of business combinations is more accurately measured by the amount of combined sales rather than the amount of combined assets, this change of approach seems reasonable.
Prior to the amendment the filing thresholds regarding the size of transactions and the size of the parties set forth were, in principle, based on the amount of assets of each relevant entity (the so-called entity-based approach). Since the amendment, the filing thresholds set forth are based on the amount of sales of the entire group to which the parties to business combinations belong.
A group consists of an ultimate parent company and all of its subsidiaries. A company will be considered to be a subsidiary when more than 50% of the voting rights of the company are held by another company, and also when its management is substantially controlled by the other company. The JFTC rules regarding merger filings set forth a specific definition of control, which is substantially the same as that under the Japanese Companies Act.
Foreign companies should be aware of the filing thresholds for two types of business combinations: share acquisitions and business (or asset) transfers.
For share acquisitions, a prior notification is required if the shareholding ratio after the acquisition will exceed the percentage thresholds of either 20% or 50%; it is a simplification of the three-tier thresholds of 10%, 25% and 50% prior to the amendment. Other filing thresholds for stock acquisitions will be amended together with other business combinations.
The filing thresholds for stock acquisitions under the post-amendment AMA are: (i) the aggregate domestic sales (see below for the definition of domestic sales) of all group companies of an acquirer in excess of 20 billion yen ($283 million) and (ii) the aggregate domestic sales of a target and its subsidiaries in excess of 5 billion yen.
The filing thresholds for business transfers (including asset transfers) differ in the case of (a) the transfer of the whole business of a target and (b) the transfer of both (i) a substantial part of the business of a target and (ii) the whole or a substantial part of the fixed assets used for the business.
The filing thresholds for the transfer of the whole business of a target are (i) the aggregate domestic sales of all group companies of an acquirer in excess of 20 billion yen, and (ii) the domestic sales attributable to the business in excess of 3 billion yen.
The filing thresholds for the transfer of both (i) a substantial part of the business of a target and (ii) the whole or a substantial part of the fixed assets used for the business are: (i) the aggregate domestic sales of all group companies of an acquirer in excess of 20 billion yen, and (ii) the domestic sales attributable to the transferring business in excess of 3 billion yen.
As can be seen from the above, domestic sales are used as the practical benchmark in the new thresholds. The same threshold is used regardless of the jurisdiction in which an acquirer or a target was established. The precise details of the calculation methods of domestic sales are set forth under the JFTC rules.
It is necessary to note that the concept of domestic sales after the amendment is different from that before it. Prior to the amendment, domestic sales were based on the sales amount booked in the profit-and-loss statement of a company's Japanese branch offices and its direct Japanese subsidiaries' main and branch offices in Japan. Therefore, before the amendment, no filing requirement existed in relation to business combinations as long as a foreign target did not have a subsidiary or a branch office in Japan. This substantially limited the scope of merger filing obligations of foreign companies. However, after the amendment, domestic sales include the sales amount accrued through direct importation to Japan, even without any presence of a foreign target company in Japan.
The amendment to the thresholds for merger control will have a significant impact on practice. Firstly, it is clear that the number of foreign-to-foreign stock acquisitions of which the JFTC will need to be notified will be substantially greater than before. Secondly, in order to determine whether or not a business combination reaches the thresholds, especially in determining the scope of subsidiaries (due to the group-based approach) and the amount of domestic sales, it will be necessary to assess the substance of the relationships (for example, whether a company is substantially controlled by the other company) in addition to the formal assessments (for example, whether more than 50% voting rights are held).
Panasonic / Sanyo
Panasonic Company (Panasonic), a Japanese electric appliance manufacturer, had been planning to acquire the majority of outstanding shares of Sanyo Electric Co., Ltd. (Sanyo), another Japanese electric appliance manufacturer.
While the parties had overlapping product portfolios of as many as eighty-seven products, the JFTC focused on the following three product markets as those requiring close scrutiny:
- Cylindrical-form manganese dioxide lithium batteries for residential fire alarms (MLBs).
- Lithium ion secondary (ie rechargeable) batteries (LSBs) for consumer use (such as for mobile phones and laptop computers) and for electric automobiles.
- Nickel hydride batteries (NHBs) for automobiles.
According to data submitted by the parties, the market share of Panasonic in the MLB market in 2007 was about 30% and that of Sanyo was about 70%. Therefore, the combined market share after the acquisition would be almost 100%.
Based on the recognition that (i) there was no influential competitor with a market share of 10% or more (ii) there had been little importation of relevant products (iii) the entry barriers were high because new entrants had to go through performance assessment by customers which takes substantial time, and (iv) customers could not easily change the source of the supply since there would be only two suppliers after the acquisition, the JFTC warned the parties that the acquisition would likely have an anticompetitive impact on the MLB market.
The parties then proposed as a remedy to the JFTC that Sanyo divest manufacturing facilities of MLBs in its factory in Tottori Prefecture to a third party which manufactures batteries and is a subsidiary of a major electric appliance manufacturer. Sanyo would enter into the divestiture agreement by the end of March 2010 and close the divestiture within three months after the agreement. The JFTC accepted the proposal and decided that the acquisition would not have an anticompetitive impact on the MLB market.
According to data submitted by the parties, the market share of Panasonic in the LSB market was about 5% and that of Sanyo was about 65%. Thus the combined market share after the acquisition would be about 70%. The post-acquisition HHI would be about 5,300, and HHI was about 800, which did not meet the safe harbor under the Merger Guidelines.
The JFTC decided, in spite of the relatively high market share after the acquisition, that the acquisition would not have an anticompetitive impact on the LSB market. The decision was based on the recognition that (i) there were two influential competitors with a market share of more than 10% (ii) there was substantial excess production capacity in Japan (iii) importation was expected to increase, particularly from Korea, with sufficient competitiveness regarding high quality and low price and (iv) customers such as mobile phone manufacturers and laptop computer manufacturers were sensitive to price n account of intense competition in the downstream market.
According to data submitted by the parties the market share of Panasonic in NHBs for automobiles market was about 10%; that of Panasonic EV Energy Co., Ltd., a joint venture between Toyota (60%) and Panasonic (40%), was about 90%; and that of Sanyo was between 0 and 5 %. That is to say, after the merger, the combined market share of the parties in the nickel hydride batteries for automobiles would be almost 100% if the market share of Panasonic EV Energy were included.
However, the JFTC decided that the merger would not be anticompetitive, on the basis that the technological innovation of nickel hydride batteries had come to the point where further innovation was unlikely, and research and development in lithium-ion batteries (which are more power dense and charge more efficiently than nickel hydride batteries) was under way, and it was expected that nickel hydride batteries would be replaced by lithium-ion batteries in the future.
In this case and in other cases, the JFTC often refers to the "existence of influential competitors with a market share greater than 10%." For example, in this case, with respect to the LSB market, regardless of the parties' relatively high combined market share after the merger (70%), the post-merger HHI of about 5,300, and HHI of about 800, the JFTC approved the merger without any remedial measures being taken in relation to the LSB market, most likely relying primarily on the fact that there were two competitors with market shares greater than 10% and sufficient excess capacity.
With regard to the automobile NHB market, it is interesting that the JFTC unconditionally approved the merger regardless of the fact that, assuming the JFTC's market definitions, the parties' post-merger combined market share was 100%. The main reason was that it is expected that on account of technological innovation, customers (ie auto manufacturers) will rapidly switch to LSBs for automobiles. Thus, this case indicates that the JFTC will approve mergers resulting in a very high post-merger market share if it is certain that customers will switch to replacement products in the near future.
Mitsui Mining & Smelting / Sumitomo Metal Mining
Mitsui Mining & Smelting Co., Ltd. (MMS) is a Japanese general non-ferrous metal manufacturer in the Mitsui Group (a Japanese zaibatsu). Sumitomo Metal Mining Co., Ltd. (SMM) is another Japanese general nonferrous metal manufacturer in the Sumitomo Group (another Japanese zaibatsu).
MMS was going to divest its copper processing business to another operator of copper processing business named Sumitomo Metal Mining & Copper (SMC), which was a subsidiary of SMM.
By way of background, SMM manufactured electrolytic copper, and MMS owned 34% of shares in another Japanese electrolytic copper manufacturer named Pan Pacific Copper Co., Ltd. (PPC).
After the divestiture of MMS's copper processing business to SMC by way of an absorption-type corporate split, SMC would be equally owned by SMM and MMS.
In this case, the combined market shares of the parties in the processed copper products market (that is, the subject of the divestiture) were so low that they did not exceed the safe harbor thresholds in the Merger Guidelines.
Surprisingly enough however, the JFTC expressed a concern that competition in the electrolytic copper market might be substantially reduced because the parties would be able to share information regarding electrolytic copper through SMC (now a 50/50 joint venture of MMS and SMM). The basis of the JFTC's concern was that electrolytic copper was an essential raw material for processed copper products and about 40% of electrolytic copper was used for processed copper products, and as such, copper processors (such as SMC) were a very important customer for electrolytic copper manufacturers.
According to data submitted by the parties to the JFTC, the market share of PPC (effectively the market share of MMS in the eyes of the JFTC) in the electrolytic copper market in 2007 was about 35%; that of SMM was about 20%; that of Company A was about 15%; that of Company B was about 10%; that of Company C was about 10%; that of Company D was about 5%; and that of imported products was about 10%. Therefore, the combined market shares of the parties (more precisely, of PPC and SMM) after the corporate split was about 55%. The HHI after the corporate split was about 3,500, and the HHI was about 1,400.
In response to the JFTC's concern, the parties proposed the following measures to the JFTC.
- In order to prevent the sharing of information regarding electrolytic copper, MMS and SMC should implement measures of ringfencing.
- MMS and SMC should prohibit their employees from accessing non-public information regarding research, development, manufacturing, sales and marketing of electrolytic copper (confidential information), except for employees who need to access confidential information (authorized employees).
- MMS and SMM should amend their work rules so that the violation of the item immediately above shall be subject to disciplinary actions.
- MMS and SMM shall refrain from appointing PPC's officers and former officers as officers of SMC and vice versa, and from seconding or transferring PPC's authorized employees who actually accessed to confidential information to SMC and vice versa.
The JFTC accepted the proposal of the parties, and approved the corporate split.
This case is extraordinary in that the JFTC required remedies with respect to a product market that was not the direct subject of the merger review. That is, MMS was planning to divest its copper processing business into SMC by way of an absorption-type corporate split, but the JFTC was concerned, not about the market of copper processing, but about the market of electrolytic copper, which is an essential raw material of processed copper products.
Regarding the potential anticompetitive impact that may be created as a result of a joint venture, the Merger Guidelines state that if after the establishment of a joint venture, coordination through the joint venture is likely to occur between the joint venture partners, the JFTC will consider such potential coordination in its review of the joint venture and the JFTC may treat the market shares of the joint venture partners as the combined market share. However, examples under the Guidelines where such potential coordination may occur are cases in which joint venture partners divest only a part of their business functions regarding relevant products, such as production function, sales function, and research and development function.
This case obviously went beyond the typical examples set forth under the Merger Guidelines. Companies should keep in mind that the JFTC might decline approval of a merger with a small post-merger combined market share (in this case the parties' combined market share in the processed copper market did not even exceed safe harbor thresholds) because of concern about potential coordination in another related market.
||About the author
Koya Uemura is a partner in Anderson Mori & Tomotsune. His principal practice area is general corporate and mergers and acquisitions, with strong expertise in antitrust law including merger control, abuse of dominance, and international cartel investigations. He has extensive experience in the area of antitrust law in variety of industries, including telecommunication, internet, pharmaceutical, airlines, automobiles, and natural resources. He is admitted to practice in Japan and New York. He earned a Bachelor of Laws degree from Kyoto University in 1995 and a Master of Laws degree from New York University, School of Law in 2002. He is an officer of the Competition Committee of the International Bar Association (IBA), a member of the Antitrust Section of the American Bar Association (ABA) and the Inter-Pacific Bar Association (IPBA). He is a native speaker of Japanese and is fluent in English.
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