Japan: Improvement to anti-monopoly rules

Author: | Published: 1 Oct 2009
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The revised Anti-Monopoly Act was passed by the Japanese Diet on June 3 2009 and is expected to come into effect as of January 1 2010. The Anti-Monopoly Act was drastically amended in 2005 in order to strengthen enforcement power. This was done by increasing the calculation rate for surcharges, introducing a leniency program and amending the hearing procedure, among other things. The supplemental provision for the 2005 amendment mandated that study be conducted on the ideal system for surcharges and other matters. The new Act is based on the discussions of the study group established under the Cabinet Office for this purpose. In addition, the new Act separately reflects discussions on aligning Japanese merger controls with those of other countries including those set down in EU regulations.

Expansion of types of conduct subject to surcharges

The new Act expands the activities that would be subject to surcharges.

Private monopolisation

The Anti-Monopoly Act prohibits two types of private monopolisation: (i) the exclusionary type; and (ii) the control type. The 2005 amendments already subject the control type to surcharges. The new Act will subject the exclusionary type to surcharges.

The surcharge rate will be 6% (2% for retail business and 1% for wholesale business), which will be multiplied by the amount of relevant sales of goods or services during the relevant period (three years maximum).

Recently, the Japan Fair Trade Commission (JFTC) has been targeting infringements of the exclusionary type much more strongly than in the past. Under the new Act, surcharges could be very large if the infringing party holds a dominant position in the market. As such, the new Act would have a significant impact on private monopolisation. An alleged infringer often has good arguments to establish justifiable reason for their exclusionary activities, and this amendment involving surcharges would further strengthen their incentive to argue. In order to increase transparency and predictability with regard to enforcement of the prohibition on private monopolisation, the JFTC published draft guidelines on the exclusionary type of private monopolisation on June 19 2009.

Unfair Trade Practices

Under the Anti-Monopoly Act in effect prior to the 2009 amendment becoming effective (the old Act), Unfair Trade Practices (UTPs) are prohibited and 16 categories of activities are specified as UTPs under the Designation of Unfair Trade Practices (JFTC Public Notice Number 15 of June 18 1982), but they are only subject to a collateralized debt obligation (CDO) and not to a surcharge.

However, because of the necessity to strengthen enforcement against UTPs, the new Act subjects five categories of UTPs to surcharges: (i) concerted refusal to trade; (ii) discriminatory pricing; (iii) unjust low price sales; (iv) resale price restriction; and (v) abuse of dominant bargaining position, the definitions of which are included in the new Act, rather than the designation.

Regarding (i) to (iv), a surcharge will be imposed if the relevant activity in the same category is repeated within a 10-year period. The surcharge rate is 3% (2% for retail business and 1% for wholesale business), which is multiplied by the amount of relevant sales of goods or services during the relevant period (three years maximum).

On the other hand, a surcharge in connection with the abuse of dominant bargaining position will be imposed even for a first-time infringement, as long as it is considered to be a continuous activity. The surcharge rate will be 1% regardless of the type of business.

In practice, it is important to note that the JFTC does not have discretion regarding whether or not to impose surcharges, but it shall impose surcharges if the requirements are met. This could have a mixed impact on enforcement because, while overall enforcement would be much stronger with surcharges, considering the significance of the result, the JFTC may need to narrowly interpret the scope, or to use 'administrative guidance', rather than taking formal action. This will be especially true in connection with the abuse of dominant bargaining position. Therefore, while the amendments may strengthen enforcement powers in relation to UTPs, they may result in a reduction in the infringement cases to be formally found by the JFTC.

Increase in surcharge rate

The new Act increases the surcharge rates by 50% if the company plays a leading role in cartels or bid rigging, among other things. More specifically, the surcharge will be increased if including but not limited to:

  • an entrepreneur has planned activity constituting an infringement and has requested another entrepreneur to participate in or continue their involvement in such activity and as a result, the other entrepreneur participated, or continued to participate in, the infringement; or
  • an entrepreneur, upon the request of another entrepreneur, continuously gave to the other entrepreneur directions concerning the price, amount of supply, amount of purchase, market share or counterparty of the transaction for the goods or services relevant to the infringement.

Under the old Act, the entrepreneur who coerced another entrepreneur to commit the violation or who blocked another entrepreneur from discontinuing the violation, which the entrepreneur also committed, is not able to obtain immunity from, or reduction of, surcharges. Together with this limitation, the new Act further strengthens the sanction on entrepreneurs who play a leading role in the infringement.

Change to the leniency program

Since the introduction of the leniency program in 2005 (effective January 2006) and up to March 2009, 264 applications have been made for leniency. Considering the significant effect of the leniency program, the new Act increases the number of leniency applicants that can obtain immunity or reduction of surcharges to a maximum of five, an increase from the old limit of three.

As a result, if an application is made before the investigation starting date (the earliest date when on-site investigation or other compulsory investigative measures have been taken), the first applicant will obtain 100% immunity from the surcharges. The second applicant will obtain a 50% reduction and the third to fifth applicants will obtain reductions of 30%. If the application is made after the investigation starting date, the reduction rate will be 30% across the board and only up to three applicants (up to five together with the applicant who applied before the investigation starting date) may obtain the reduction by filing an application after the investigation starting date.

In addition, under the new Act, a joint application by companies belonging to the same corporate group will be permitted, and all the joint applicants will be assigned the same ranking regarding the order of the application.

Extension of the statute of limitation

Under the old Act, the statute of limitation for a CDO and surcharge payment orders is three years, which starts from the date of the discontinuation of the violation. However, this is relatively short compared to the one set by foreign authorities (a maximum of ten years in the EU, for example) or administrative orders under other Japanese laws (a maximum seven years for tax evasion, for example), and there have been cases where CDOs and surcharge payment orders could not be issued because of the statute of limitation. Based on this, the new Act extends the statute of limitation period to five years.

Changes to merger control

Introduction of a prior notification obligation for stock acquisitions

Under merger controls under the old Act, a stock acquisition requires, at most, a post-transaction report to be submitted to the JFTC. Stock acquisition is the only scheme of business combination that does not require prior notification.

However, under the new Act, stock acquisitions will be subject to a prior notification obligation if certain applicable threshold conditions are met. Under the new Act, the acquirer, in principle, may not acquire the stock in question until after the expiration of a 30-day waiting period. According to the draft JFTC rules published on July 29 2009, exemption from the notification would likely be limited to cases where shareholders are to acquire shares absent their proactive investment decisions.

A stock acquisition will require prior notification if the stockholding ratio after the transaction rises above 20% or 50%, which is a simplification of the three-tier thresholds of 10%, 25% and 50% under the old Act.

After the amendments, it is not be possible to avoid a pre-transaction notification by using a stock acquisition scheme.

Amendment to the filing thresholds for business combinations

Under the old Act, foreign companies are faced with filing thresholds different from those applicable to Japanese companies. Under the new Act, the filing thresholds for business combinations including stock acquisitions, mergers, corporate splits and business transfers are substantially amended as in table 1.

Table one
Current thresholds New thresholds
Acquiring company (i) The total assets of the acquiring company must exceed ¥2 billion, and,
(ii) the aggregate amount of total assets of the acquiring company, its parent company and its subsidiaries in Japan (sum of the total assets) exceeds ¥10 billion.
The aggregate amount of the domestic sales of the companies which belong to the same combined business group as the acquiring company must exceed ¥20 billion.
Target company The total assets of the target company must exceed ¥1 billion. (If the target company is a foreign company, the turnover in Japan of the target company must exceed ¥1 billion.) The aggregate amount of the domestic sales of the target company and its subsidiaries must exceed ¥5 billion.

Domestic sales

As can be seen from the table, domestic sales will be used as a decisive factor in the new threshold. The same threshold will be used, regardless of the jurisdiction in which an acquiring corporation or a target corporation was established. The precise details of the calculation methods of the domestic sales are yet to be determined by the JFTC.

It should be noted that the concept of domestic sales under the new Act is quite different from the old Act. Under the old Act, domestic sales are calculated based on the sales amount booked in the profit-and-loss statement of the target corporation's Japanese branch offices and its direct Japanese subsidiaries' main and branch offices in Japan. Therefore, under the old Act, the transaction does not require filing as long as the foreign target company does not have a direct subsidiary or a branch office in Japan. However, under the new Act, domestic sales is defined as a total amount of prices of goods or services supplied in Japan during the latest fiscal year, though the detail of the definition will be decided by the rules of the JFTC. According to the Draft Rules, domestic sales would likely include the sales amount accrued through direct importing to Japan even without any presence of a target company in Japan.

Combined business group

In addition, the domestic sales of the "combined business group" will be used under the new Act. The combined business group consists of all of the subsidiaries of the ultimate parent company. It should be noted that a corporation will be considered to be a subsidiary not only when more than 50% of the voting rights of the corporation is held by another corporation, but also if its management is "controlled" by the other corporation. The Draft Rules specifies detailed threshold for the "control", which might be found to be met even if ratio of beneficially-owned voting rights is below 40%. This concept of group companies is used in the threshold for merger control in various jurisdictions, and the introduction of this concept aligns Japanese merger control with the regulations of other countries, especially those contained in the EU regulations.

Under the old Act, only a direct parent company and direct subsidiaries (both in Japan) are jointly considered in determining whether or not a filing is required. Moreover, whether a corporation is a subsidiary or not is only determined by the ratio of voting rights. Therefore, under such a scheme, filing can be avoided by using a pre-existing grand child entity to avoid the existence of a direct relationship. The new Act deals with this problem.

In addition, under the old Act, only the stock ownership ratio of an acquiring entity was counted in determining whether the threshold regarding stock ownership ratio is met. Therefore, an acquiring corporation could avoid filing, at least arguably, by having its group corporations acquire a target corporation's stock bit by bit. Under the new Act, stock ownership of all corporations within the same combined business group is counted in determining whether the stock ownership ratio threshold is met.

Exemption from filings

Under the old Act, only limited cases of intra-group business combinations are exempted from filing. For example, mergers between a grandparent company and its grandchild company or mergers between an uncle company and its nephew company are reportable.

The new Act expands the exemption from filing of intra-group business combinations further. For example, under the new Act, any merger between companies within the same combined business group, such as a merger between an uncle company and a nephew company, is not reportable.

Stock acquisitions by partnerships

Under the old Act, only stock acquisitions by corporations are subject to a merger filing, and stock acquisitions by individuals or partnerships are not subject to a merger filing. However, under the new Act, when a partnership (including limited liability partnerships), formed either under Japanese law or under foreign law, that is 'controlled' by a corporation acquire stock of another corporation, such a controlling corporation should file a prior notification if the filing thresholds are met.

In determining whether the thresholds are met, such a controlling corporation is deemed to acquire the stock. Therefore, when the aggregate domestic sales of all corporations within the same combined business group as such a controlling corporation exceed ¥20 billion, the filing threshold regarding an acquiring corporation is deemed to be met, and then whether the other thresholds are met needs to be determined.

Impact on practice of amendments to merger control thresholds

The amendments to the thresholds for merger control will have a significant impact on practice. First, it is certain that a substantially larger number of foreign-to-foreign stock acquisitions would need to be notified to the JFTC than the number under the current threshold. Second, in order to determine whether or not the transaction satisfies the threshold, especially in determining the scope of subsidiaries and the amount of domestic sales, it will be necessary to check in substance (whether a corporation is 'controlled' by the other corporation, for example), in addition to the formal check (whether more than 50% voting rights are held, for example).

Although these amendments do not change the substantial thresholds of merger review, it is undoubted that foreign companies will have to pay much closer attention to merger control under the new Act than under the old Act.

Others

Exchange of information with foreign competition authorities

The new Act includes provisions regarding information exchange with foreign competition authorities. Information would be provided by the JFTC to a foreign competition authority if a provision is beneficial to the performance of the duties of the foreign competition authority, if it is considered that the provision of information would not have an adverse impact on appropriate enforcement of the Anti-Monopoly Act or otherwise infringe the interests of Japan and if the JFTC can confirm the reciprocity, confidentiality and purpose of use by the foreign competition authority.

In addition, appropriate measures shall be taken so that the information provided by the JFTC will not be used in any criminal procedures in foreign countries.

Restriction on access to case records

Under the old Act, persons who have an interest in the official hearing proceedings of the JFTC, in which the addressees of a JFTC's CDO challenge such an order, are entitled to access the case records and may request copies of such records. The new Act places a limit on access to case records so that access and requests for copies may be rejected by the JFTC if the JFTC considers that it would be detrimental to the interests of third parties or if there are other reasons for rejection. In addition, the JFTC may limit the purpose of using copies of the case records and may place other appropriate conditions on such use.

The new Act states that courts may issue a document production order in litigation seeking the suspension or prevention of infringements of UTPs, unless there is a justifiable reason against such an order. In order to determine whether there is a justifiable reason, such as protection of business secrets, the court may request disclosure only to the court (in-camera procedure).

About the author

Yusuke Nakano is a partner at Anderson Mÿri & Tomotsune. His main areas of practice are antitrust, M&A and business dispute resolutions. Yusuke is admitted to practice in Japan and New York. He has a law degree from the University of Tokyo and a masters degree from Harvard Law School. Yusuke trained with the New York office of Skadden Arps Slate Meagher & Flom. He speaks Japanese and English.
Contact information

Yusuke Nakano
Anderson Mori & Tomotsune 

 Izumi Garden Tower, 6-1, Roppongi 1-chome,
Minato-ku, Tokyo 106-6036,
Japan
Tel: +81 3 6888 1000  
E-mail: inquiry@amt-law.com
Web: www.amt-law.com

About the author

Koya Uemura is a partner at Anderson Mÿri & Tomotsune. His principal area of practice is antitrust. He is admitted to practice in Japan and New York and has a law degree from Kyoto University and a masters degree from New York University, School of Law. He is a native speaker of Japanese and is fluent in English.
Contact information

Koya Uemura
Anderson Mori & Tomotsune 

Izumi Garden Tower, 6-1, Roppongi 1-chome,
Minato-ku, Tokyo 106-6036,
Japan
Tel: +81 3 6888 1000  
E-mail: inquiry@amt-law.com
Web: www.amt-law.com

About the author

Etsuko Hara is an associate at Anderson Mÿri & Tomotsune with broad experience in the area of corporate transactions, M&A, financial transactions and general corporate work. Her scope of experience also includes antitrust. She is a graduate of Columbia Law School (masters degree) and the University of Tokyo (law degree). She was admitted as a lawyer in Japan in 2001 and in New York in 2007.
Contact information

Etsuko Hara
Anderson Mori & Tomotsune

Izumi Garden Tower, 6-1, Roppongi 1-chome,
Minato-ku, Tokyo 106-6036,
Japan
Tel: +81 3 6888 1000  
E-mail: inquiry@amt-law.com
Web: www.amt-law.com