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Introduction
Merger control together with Japan’s first competition rules were introduced in Japan by the 1947 Japanese Antimonopoly Act (AMA). Merger control is enforced by the Japan Fair Trade Commission (JFTC), which was established as an independent administrative office with broad enforcement powers. The JFTC is composed of a chair and four commissioners and has primary jurisdiction over the enforcement of merger control under the AMA.
Share acquisitions, mergers,2 joint share transfers, business or asset transfers, and corporate splits (or demergers) are subject to prior notification under the AMA if they exceed certain thresholds. 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 subject to the notification requirement if they satisfy the thresholds for the type of transactions used to form a joint venture, such as share acquisitions and asset acquisitions. Unlike the regime in the EU, Japanese law does not distinguish between full-function and non-full-function joint ventures. 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 partnership. The controlling company of such a 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
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
Under the AMA, different notification thresholds apply depending on the different types of transactions, namely share acquisitions, mergers, joint share transfers, business or asset transfers, and corporate splits.
For share acquisitions (including joint ventures), the thresholds are based on both 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 an acquisition must result in the acquirer holding more than 20 per cent or 50 per cent of the total voting rights of all of the shareholders of the target (i.e., an acquisition that increases a shareholding from 19 per cent to 21 per cent is subject to a filing, whereas an acquisition that increases a shareholding from 21 per cent to 49 per cent does not require one).10 A minority ownership of over 20 per cent will 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 (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 By contrast, in the case of a share acquisition or business transfer, only the acquiring company is responsible for filing.
There are no filing fees under the AMA.
In December 2019, the JFTC amended the Guidelines to Application of the Antimonopoly Act Concerning Review of Business Combination Merger Guidelines (the Merger Guidelines)16 in response to, among other things, the increased necessity of dealing with M&A transactions in the digital market. The key amendments to the Merger Guidelines are as follows.
In addition to the Merger Guidelines, the JFTC simultaneously amended the Policies Concerning Procedures of Review of Business Combination (the Policies for Merger Review).17 This amendment is significant because the JFTC, in a manner clearer than ever before, indicates its willingness to review M&A transactions that have a large value that will likely affect Japanese consumers, but that do not meet the reporting threshold based on the (aggregate) domestic turnover of the target (non-reportable transactions). Further, the amendment encourages voluntary filing for non-reportable transactions with an acquisition value exceeding ¥40 billion, if one or more of the following factors are met:
Given that the JFTC recently opened a review of the acquisition by Google LLC of Fitbit, Inc, even though that case did not meet the notification thresholds, companies engaging in non-reportable transactions for which any of the above three factors are applicable should pay close attention to the potential need to make a voluntary filing with the JFTC.
Year in review
During the 2021 fiscal year (from 1 April 2021 to 31 March 2022 (FY 2021)), the JFTC closed one Phase II case: the acquisition by Global Wafers GmbH (GW) of shares in Siltronic AG (see Section II.ii). Among the cases closed during FY 2021, the JFTC has published the review results of the integration between Salesforce.com, Inc and Slack Technologies, Inc (see Section II.i), the acquisition by GW of shares in Siltronic (see Section II.ii) and the acquisition by Google of Fitbit (see Section II.iii).
Salesforce is engaged in the customer relationship management (CRM) software business. Slack is engaged in business chat services. The parties filed notifications with the JFTC in connection with an integration by means of a share acquisition and merger.
Focusing on the CRM software market18 and the business chat services market, the JFTC characterised the transaction as a conglomerate business combination and showed the following foreclosure and exclusion concerns as potential theories of harm:
With regard to scenario (a) above, given the competitive pressures from competitors, including those active in neighbouring markets to the CRM software offered by Salesforce; the small number of users that have integrated CRM software and business chat services in practice; and the limited extent of the foreclosure effects (CRM software is used by only a few business departments within companies, and those departments that do not use CRM software will not be affected by such foreclosure), the JFTC found that the parties did not have the ability to cause market foreclosure or exclusion by engaging in the foreclosure or bundling. Furthermore, after having conducted interviews with competitors and customers, the JFTC found that the users of CRM software and business chat services recognise that one of the central values of the parties’ businesses is ‘high convenience’,19 which can be realised by enabling their services to integrate with as many third-party applications as possible (best of breed), and that if the parties engaged in the foreclosure or bundling, the foundation of the parties’ businesses would be significantly damaged. Therefore, the JFTC considered that the parties would not have any incentive to cause market foreclosure or exclusion by engaging in the foreclosure or bundling.
With regard to scenario (b) above, the JFTC found that, because the parties do not usually obtain confidential information on competitors for CRM software or for business chat services when integrating competitors’ applications, and nor do they have any incentive to do so, it is unlikely that confidential information on the competitors would be shared within the parties. The JFTC also considered that collected data from CRM software and business chat services users would not give the parties a competitive advantage in comparison with their competitors with regard to enhancement or development of new services, in view of restraining factors such as the need for user consent in the collection and use of the data, data encryption and access restrictions.
Based on the above analysis, the JFTC concluded that the notified transaction would not substantially restrain competition in any of the relevant markets.
Both GW and Siltronic are engaged in the manufacturing and sales of silicon wafer products. GW notified the JFTC of its intent to acquire the shares of Siltronic thereby obtaining over 70 per cent of voting rights in Siltronic.
In respect of the relevant product markets, the JFTC defined the respective product market for each type of silicon wafers based on different manufacturing methods, different sizes (diameter) and different processing methods of single crystal silicon (which is the raw material for silicon wafers). Out of the 10 product markets in which the parties are competing, the JFTC focused its review on five product markets in which a relatively small number of competitors have a certain degree of market share.
The JFTC conducted an economic analysis (through the Cournot competition analysis model) and evaluated that, although there is a possibility that competition problems might arise in three out of the five product markets, it is difficult to conclude solely based on the results of the economic analysis, and that it is appropriate to also consider other factors when reaching a conclusion.
After having considered the presence of major competitors in each market, non-significant barriers to entry and competitive pressure from customers with bargaining power, the JFTC ultimately concluded that the notified acquisition would not substantially restrain competition in any of the relevant markets.
The Google group is active in a wide range of areas, including digital advertising, internet search engines, cloud computing, software and hardware. The Fitbit group mainly manufactures and distributes wrist-worn wearable devices. The acquisition by Google of Fitbit did not trigger mandatory filings in Japan because Fitbit’s turnover in Japan was under the ¥5 billion threshold (see Section I.i). However, because the transaction fell within the category for which a voluntary filing is recommended (see Section I.ii), the JFTC initiated an investigation.20
The JFTC indicated certain competitive concerns in terms of the following:
In particular, in regard to the first scenario in (a), the JFTC indicated its concerns that Google might foreclose its competitors in the downstream markets by, for instance, refusing access to the Android API and health-related data provided by Google. Regarding (b), the JFTC was concerned that Google’s use of Fitbit users’ health-related data for digital advertising might further strengthen its position in the digital advertising market. To address the JFTC’s concerns, the parties proposed to provide competitors with access to the Android API and health-related data free of charge for 10 years. Further, Google proposed that, for a period of 10 years, it: (1) would not use health-related data for its digital advertising; and (2) would maintain the health-related data separately from other datasets within the Google group. The JFTC cleared the transaction subject to these conditions.
According to the JFTC, the total number of merger notifications filed in FY 2021 was 337.
In the past 10 years, there have been a few cases brought into Phase II review each year, but there have been 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 are as follows.
The merger control regime
In terms of time frames, the standard 30-day waiting period will apply, which may be shortened in certain cases (see Section III.ii). 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 restarting the clock.
There is no provision in the law and there are no regulations regarding the ability to accelerate the review process. However, in practice, it might 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 Guidelines 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 expiry of the 30-calendar-day review period).
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).21 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 these limited disclosures, the JFTC usually discloses details of some major merger notification cases as part of its annual review. Such disclosure is generally subject to obtaining approval for publication from the notifying parties.
Interventions by interested parties in JFTC proceedings have not historically been common.
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: to notify the JFTC’s investigation bureau of a possible breach of the AMA22 or 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 held23 if deemed necessary, but they have been extremely rare to date. The JFTC sometimes conducts informal hearings, and market tests by way of questionnaires, with third parties, including competitors, distributors and customers, in the course of its review, as it did in the review of the integration between Salesforce and Slack (see Section II.i).
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, in advance, information about, inter alia, the outline of the contemplated order as well as the underlying facts and the list of supporting evidence to the potential recipients of such an order. The JFTC does so to give the potential recipients an opportunity to review and make copies of the evidence (to the extent possible) and to submit opinions as to the possible order.24
When the JFTC issues a cease-and-desist order, the parties to the transaction can appeal to the Tokyo District Court for annulment of the JFTC order.
The JFTC frequently holds consultations with sector-specific regulators concerning 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 considers 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.
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–Hirschman Index (HHI) for each of the above three categories (see Section III.vii). 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 notified transaction’s actual impact on competition.
Additionally, the amended Merger Guidelines suggest that if the transaction parties are both engaged in research and development in competing markets, the proposed transactions will likely reduce potential competition between the parties. The amended Policies for Merger Review, which make clear that the JFTC may request the parties to submit their internal documents concerning the proposed transaction (e.g., minutes of the board of directors and documents used for analysis and decision-making), may be utilised by the JFTC to assess, among other things, the potential effects in terms of research and development activities of the parties.
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 indicate that the geographical market may be wider than the geographical boundaries of Japan, depending upon the international nature of the relevant business. There have been several JFTC cases whereby the JFTC defined the relevant geographical market to extend beyond Japan.
In the safe harbour analysis, if any of the following conditions are satisfied, the JFTC is likely to consider that the notified transaction does not substantially restrain competition in a relevant market:
The amended Merger Guidelines indicate that even if one of the safe harbour thresholds is satisfied, the JFTC may conduct a substantive review of the proposed transaction if the market shares of the parties do not reflect their potential competitive significance (e.g., due to access to important data or intellectual property).
In addition to the safe harbour, 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.
If the notified transaction does not satisfy the requirements for any of the above, the JFTC will likely conduct a more in-depth analysis of the unilateral and coordinated effects of the notified transactions.
In 2016, the JFTC approved Canon’s acquisition of shares in Toshiba Medical, Toshiba Corporation’s (Toshiba) medical equipment unit. However, the JFTC also issued a statement warning that the structure of the deal could be deemed to circumvent the law, including the prior notification obligation under the AMA, because the parties had provided that Toshiba could receive the payment of the transaction price of ¥665.5 billion 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 that equity warrant, Canon paid to Toshiba an amount virtually equivalent to the consideration for common shares. Further, shares with voting rights in Toshiba Medical were acquired and held by an independent third-party owner up until the time Canon exercised the equity warrant. 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 would not impose any sanctions in this case, but warned that similar transaction schemes will be considered to be in violation of the AMA in future.
Other strategic considerations
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 Japanese government has entered into bilateral agreements concerning cooperation on competition law with the United States, the European Union and Canada, and multinational economic partnership agreements with competition-related provisions, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Furthermore, the JFTC has entered into inter-agency bilateral cooperation memoranda with various competition authorities.27
The JFTC has a good track record of working closely with other competition authorities. It is reported that the JFTC exchanged information with various authorities, including its counterparts in the United States, the European Union, Australia and other countries, for example, in the review of the integration between Salesforce and Slack, GW’s share acquisition of Siltronic and the acquisition of Fitbit by Google in 2021.
Upon the abolition of the prior consultation procedure in 2011, the JFTC no longer provides its formal opinion at the pre-notification stage, and the review officially starts at the formal notification stage. However, neither of the Phase I or Phase II review periods can be extended even where parties submit a remedy proposal to the JFTC; nor can the JFTC stop the clock.
In practice, the JFTC is flexible about having informal discussions with potential notifying parties upon request or voluntary submission of relevant materials before the formal filings. In fact, in almost all of the recent cases that the JFTC has cleared after Phase II review, the JFTC made specific notes in its announcements that the parties had submitted supporting documents and opinions to the JFTC on a voluntary basis before officially filing the notifications. It is understood that parties to complicated mergers make use of the informal procedure to try to alleviate any potential concerns early. This is also true in multi-jurisdictional merger notifications where the management of the filing schedule is important to avoid conflicting remedies or prohibition decisions among various jurisdictions. In such pre-filing communications, coordination among Japanese and foreign attorneys is of great importance.
The Merger Guidelines recognise the ‘failing company doctrine’. They 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 financing 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 amended Merger Guidelines indicate that in a case in which a relevant market is not large enough for the parties to efficiently compete, even without a proposed transaction, such a proposed transaction would not substantially restrain competition in the relevant market in general even if only the notifying parties will remain active in the relevant market after the transaction. This principle was applied for the first time to the acquisition by Fukuoka Financial Group Ltd of The Eighteenth Bank Ltd, for which the JFTC issued a press release in 2018 stating that it found no substantial restraint of competition even though the notifying party would remain as only one bank in certain rural areas because those areas were too small for the parties to make a profit regardless of rationalisation of their operations.
Minority ownership of over 20 per cent of the voting rights in a company is a notifiable event regardless of whether the acquirer will take control of the target company (see Section I.i). In addition, under certain circumstances, even minority acquisition may be subject to a Phase II review. Moreover, 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. For example, the HHI would also be calculated based on the sales data of the integrated group as a whole. In the acquisition of a partial share of Showa Shell by Idemitsu in 2016, the JFTC, for the purpose of its review, assumed that these parties would be completely integrated as one group after the acquisition, although, at the time, Idemitsu intended to have only a minority shareholding in Showa Shell. The joint relationship is determined by taking into account various factors, even though, 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 a relationship.
Under the AMA, the JFTC can theoretically review any M&A transaction under the substantive test, regardless of whether the filing thresholds are met. The JFTC has actually investigated transactions that had not been notified in the past, including in the case of Google’s acquisition of Fitbit and certain foreign-to-foreign transactions. To mitigate the risk of an investigation, even parties to a concentration that is below the threshold level may opt to consult with the JFTC and file notification on a voluntary basis. In practice, the JFTC applies the same rules and guidelines to substantively review these voluntary notifications.
Outlook and conclusions
Although the 2019 amendments to the Merger Guidelines and the Policies for Merger Review were significant, the majority of these simply reflected the developments of practice and case law since the 2011 amendments, which is largely consistent with developments in other major jurisdictions.
The scope of disclosure, which the JFTC has made in relation to its review of Phase II cases and as part of its annual review about recent major cases, seems to have expanded in recent years. For example, in GW’s share acquisition of Siltronic, the JFTC disclosed specific details of the economic analysis it conducted, thereby giving greater transparency to its review. Although these disclosures have generally been welcomed by practitioners, when compared with 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., few decisions are published), and there are some areas where further clarification or improvements seem necessary (e.g., as to how network effects will be taken into account in a substantive review). It is hoped that the JFTC will take action, for example, through the publication of more decisions in the near future.
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