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Structural and Behavioral Remedies

OECD/ RCC Seminar for Competition Authorities. Structural and Behavioral Remedies. December 6, 2007. Kaoru, OKAMURA * Competition Policy Research Center Japan Fair Trade Commission ( JFTC ) Kaoru_Okamurai@jftc.go.jp. *The views expressed here are those of the speaker, not those of the JFTC.

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Structural and Behavioral Remedies

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  1. OECD/ RCC Seminar for Competition Authorities Structural and Behavioral Remedies December 6, 2007 Kaoru, OKAMURA* Competition Policy Research Center Japan Fair Trade Commission (JFTC) Kaoru_Okamurai@jftc.go.jp *The views expressed here are those of the speaker, not those of the JFTC

  2. Outline of this presentation 1.Introduction: Overview of Japanese Merger Review 2.Merger Remedy Basics: M&A Guidelines and Regulations (1)Principles and examples of merger remedies : Merger Guidelines and Revision in June, 2007. (2)How to ensure the implementation of the remedies : Party’s obligations and sanctions 3. The evaluation of past remedies 4. Conclusion

  3. Introduction Overview of Japanese Merger Review

  4. M&A Regulations • Chapter 4 of the Antimonopoly Act • To prohibit business combinations (ex. stockholdings, mergers, etc.) “having the effect that may be substantially to restrain competition” + + merger (and other business combinations) in a particular field of trade substantial restraint to competition allowed in cases where measures that will remedy the concerns from AMA is implemented concerned mergers are prohibited

  5. Types of business combinations [applicable provisions of AMA] Applicable standards (guidelines) outline of the notification/submission system [applicable provisions of AMA] stockholding [AMA Sec. 10-1] “Guidelines to Application of the Antimonopoly Act Concerning Review of Business Combination” (May 31, 2004, JFTC) Amended as of May 1. 2006 Amended as of March 28. 2007 Acquiring company of certain scale (asset of company itself larger than Y2bn or total asset of group exceeding Y10bn) is required to submit an ex post facto report within 30 days from the acquisition, when as a result the share of total stockholders’ voting rights exceeds either of the thresholds of 10%, 25%, or 50%. [AMA Sec. 10(2),(3)] interlocking directorates [AMA Sec. 13(1)] --- merger [AMA sec.15(1)] Prior notifications are required for mergers, joint establishment divisions of absorptions and acquisitions of business , etc. between companies of certain scale. For instance in the case of mergers, prior notification is required if one party with total asset exceeding JPY10bn and another party exceeding JPY1bn is involved. In principle, execution of merger is prohibited for 30 days from the day of receipt of notification. (Notification is not required for mergers between a parent company and a subsidiary, or between sister companies.) [AMA Sec. 15(2)-(4); Sec. 15-2(2)-(6); Sec.16(2)-(5)] demerger (joint establishment or absorption) [AMA Sec. 15-2(1)] acquisitions of business, etc. [AMA Sec. 16(1)] Outline of the M&A regulations

  6. flowchart of statutory procedures (mergers, etc.) Receipt of a notification on M&A, etc. When there is a concern for Antimonopoly Act When additional reports, etc. are required for the investigation within 30 days Written notification before Order Request for reports etc. necessary for the examination There is not a concern for Antimonopoly Act (documents will generally be submitted within 3 to 4 weeks) Opportunity for the parties to present views and submit evidence Receipt of reports, etc. within 90 days Order to the violator to take elimination measures Written notification before Order There is not a concern for Antimonopoly Act Opportunity for the parties to present views and submit evidence (request for hearings) Termination Order to the violator to take elimination measures Decision (Dismissal of Request) Decision (Withdrawal or Change of Order) (request for hearings) Termination Appeal for withdrawal of Decision (lawsuit)

  7. Merger Guideline Revision(1)March 28, 2007 Background • Improved environment for implementing M&A to restructure industries (The Commercial Code Revision, enacted May, 2007) and the globalization of economy made us perceive necessity to revise merger guidelines. • JFTC decided the revision to improve predictability of regulation, regulatory transparency, and quickness of merger review more in accordance with the above economic situation.

  8. Prior Consultation System • The Prior Consultation System is the administrative service that the JFTC provides, to make the parties possible to know our view on the impact of the proposed M&A transaction on the competition in the market, prior to the statutory filing. • It is not a statutory requirement.Whether to use it is completely up to the parties’ voluntaries. • The JFTC will not take any action against the parties when the formal notification is made, if it brings up no question on the proposed M&A transaction after the examination.

  9. flowchart of prior consultation procedures Inquiry prior to the initiation of prior consultations Application for prior consultations = submission of documents showing the concrete nature of the merger plan = initiation of the examination of documents Examination of documents = within 30 days Replies that there is no concern for Antimonopoly Act Notification that a detailed examination is required = Request for the submission of documents necessary for the detailed examination Public announcement that the undertaking of a detailed examination is required (documents will generally be submitted within 3 to 4 weeks) Initiation of the detailed examination Submission of the documents necessary for the detailed examination detailed examination = within 90 days Replies that there is no concern for Antimonopoly Act Replies that there is a concern for Antimonopoly Act within 1 week Public announcement of the contents of the prior consultations and the contents of the replies

  10. Our Merger Remedy Basics M&A Guidelines and Regulations

  11. Principles and Examples of Merger Remedies Merger Guidelines

  12. Structure of the “Guidelines to Applications of the Antimonopoly Act concerning Review of Business Combination”(March 28, 2007, by JFTC) Introduction • Subject of the Review of Business Combination • A Particular Field of Trade • The Effect May be Substantially to Restrain Competition • The Effect of Horizontal Business combination May be Substantially to restrain Competition • The Effect of Vertical and Conglomerate Business combination May be Substantially to Restrain Competition • Measures to Remedy the Substantial Restraint of Competition (Attachment 1) Prior Consultation (Attachment 2) Shortening of the Waiting Period (supplement) Flowchart of Merger Review

  13. Past Efforts to Improve Accountability of Japanese Merger Regulation • Annual release of the outlines on the review of some cases of business combinations (1993～) • Issue “Guidelines to Application of Act concerning Review of Business Combination” (5.31. 2004) • Issue “Policies dealing with prior consultation regarding business combination plans” (2002) • Issue “The report of the ex post evaluation of a review of business combination”(6.22. 2007)

  14. Principles of Remedies • measures taken by the parties to avoid substantial restraint on the competition in the particular field of trade  accepted when competitive concerns are remedied • The remedies should , in principle, be structural measures like divestiture of business etc. and should basically be ones which recover the lost competition after the combination in order to prevent the company group form controlling the price freely to a certain extent. • in principle, the remedies should be completed before the implementation of the combination (if remedies being taken after the implementation, the deadline for the remedies should be imposed appropriately and definitely)

  15. Types of Remedies • Divestiture of Business, etc. • Others 1. a divestiture of a part of or whole of the business of the company group 2. a dissolution of the business combination by the concerned party(ies) with another company(ies) (measures including: cancellation of the voting rights holding; reduction of the holding ratio of voting rights; or cancellation of interlocking directorates) 3. measures to promote import or market entry (including: promotion of import by making storage facilities needed to import available to the importers, granting licenses of the company group’s patents to the competitors or new entrants upon requests). 4. the measures concerning the actions of the company group (including: prohibiting discriminatory treatment of non- affiliated companies with regard to uses of essential facilities for the business)

  16. ICN Merger Remedy Review Project • ICN Merger Working Group: Analytical Framework Subgroup published the report in June, 2005. • Contents • The principles of Remedial Action • Choice and Design of Remedies • Implementing and Monitoring Remedies

  17. (2) Choice and Design of Remedies • Overview of the merger remedies universe Merger remedies Universe Structural Remedies Behavioral Remedies Divestiture IP based remedies Facilitating horizontal rivalry Controlling outcomes Modifying relationship with end-customers Restricting effects of vertical relationships Changing buyers’ behavior

  18. How to ensure the implementation of the remedies Party’s Obligations and Sanctions

  19. Parties’ Obligations & Sanctions • Merger Filing (with remedies included) • Prevention of violations Extension of period for ordering elimination measures (Sec. 15(5)) • Sanctions Sec.91(Penalties against prohibited stockholdings, etc.) Penal servitude of not more than one year or by a fine of not more than two million yen. Sec.91-2(Penalties against failure to file reports) Fine of not more than two million yen

  20. Revised Description on Remedy • In revised guideline, if industrial structure has changed to make the remedy for business combination unnecessary and the parties apply to JFTC on that, the remedy could be changed or removed. • The description of typical remedies is added to the guideline.

  21. The Evaluation of past remedies “The report of the ex post evaluation of a review of business combination”.

  22. The evaluation of past remedies • “The report of the ex post evaluation of a review of business combination” • Published at June 22nd, 2007. • To make an review of business combination more detailed, we assess the market competence conditions after the review of business combination. • Evaluate the effectiveness of remedies which are in ex post review by the assessment that a company have been doing their obligation.

  23. The relationship between measures on a merger and remedies • For the decade(1996 -2005), we had reviewed 125 cases, there were 46 cases which substantially restrain competition in a particular field of trade, and the company had offered beforehand in the plan of business combination (the entire 36.8%) • The 32 cases (the entire 25.6%) had been accepted on the premise that the remedies had been applied. ⇒A business combination are accepted by the remedies even though there were some problems of the competition.

  24. Types of Remedies • Follow the category of remedy in the Guideline of business combination, we can divide the 32 cases above into the three categories. (Table1) Table 1. Types of Remedy

  25. Types of Remedy（２） • Distinguish the 32 cases by the types of business combination; horizontal, Vertical, and Mixed. • Horizontal business combination In the horizontal business combination cases, we are likely to take a divesture of business (58.3% of 24 cases) • Vertical and Mixed business combination In the vertical and mixed business combination cases, it is likely to take the Measures concerning Actions of the Company Group . ⇒In the case of horizontal merger, it is attempt to take the structural remedies. On the other hands, in the case of vertical and mixed merger, it is likely to take the behavioral remedies.

  26. The commentaries of remedies(1) • We can divide the 32 cases into concrete remedies. • （１）Divesture of Business A. Divesture of business and a dissolution of the business combination by the concerned party(ies) with another company(ies) (measures including: cancellation of the voting rights holding; reduction of the holding ratio of voting rights; or cancellation of interlocking directorates) ・・・１０　cases of 32 B. To give the competitors a right of trading at the price equivalent to the production cost of it. (to make contract of long term supply) ・・5 Cases

  27. The commentaries of remedies(2) • （２）Measures to Promote Import and Entry When the divestitures of business could not be taken as remedies because demand is decreasing and it is expected that a company which tales over a part of or whole of the company group’s business do not appear easily, promotions of import or entry are exceptionally considered as remedial measures to solve the problem of the substantial restraint of competition in a particular of field. C. To promote the import by making facilities needed to import available to the importers・・・5 cases D. By granting the licenses of company group’s patents on appropriate conditions to the competitors or new entrants on their requests. ･･･5 cases

  28. The commentaries of remedies(3) • (3) Measures concerning Actions of the company group. In addition to the cases in Item (1) and (2) above, the measures concerning the actions of the company group could be considered as the measures to solve the problem of the substantial restraint of competition in the particular of field. E. To block the exchange of information on each other’s sales of the goods. ・・・10 cases F. Prohibiting discriminatory treatment of non-affiliated companies with regard to uses of essential facilities for the business.・・・5 cases

  29. Conclusion • In principle, the remedies should be structural measures like divestiture of business. • In the past decade, There are many cases ( almost a quarter of total reviewed cases) that can solve the problems on the competition by remedies. =This is the evidence of the importance of conduct of remedies to maintain the competition circumstance. • We have applied structural remedies mainly on the cases that are characterized by horizontal business combine. • On the other hands, in case of vertical and mixed business combine, we are likely to apply the behavioral remedies.

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