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Structural and Behavioral Structural and Behavioral RemediesRemediesDecember 6,

2007Kaoru, OKAMURA*

Competition Policy Research CenterJapan Fair Trade Commission

(JFTC)Kaoru_Okamurai@jftc.go.jp

OECD/ RCC Seminar for Competition Authorities

*The views expressed here are those of the speaker, not those of the JFTC

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Outline of this presentationOutline of this presentation

1.Introduction: Overview of Japanese Merger 1.Introduction: Overview of Japanese Merger ReviewReview

2.Merger Remedy Basics: M&A Guidelines 2.Merger Remedy Basics: M&A Guidelines and Regulationsand Regulations

(1)Principles and examples of merger remedies : (1)Principles and examples of merger remedies : Merger Guidelines and Revision in June, 2007.Merger Guidelines and Revision in June, 2007.

(2)How to ensure the implementation of the (2)How to ensure the implementation of the remedies : Party’s obligations and sanctionsremedies : Party’s obligations and sanctions

3. The evaluation of past remedies3. The evaluation of past remedies4. Conclusion4. Conclusion

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IntroductionIntroduction

Overview of Japanese Overview of Japanese Merger Review Merger Review

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M&A RegulationsM&A Regulations Chapter 4 of the Antimonopoly ActChapter 4 of the Antimonopoly Act To prohibit business combinations (ex. To prohibit business combinations (ex.

stockholdings, mergers, etc.) “having the effect stockholdings, mergers, etc.) “having the effect that may be substantially to restrain competition”that may be substantially to restrain competition”

+ +in a particular field of

trade

substantial restraint to

competition

merger (and other

business combinations)

concerned mergers are prohibited

allowed in cases where measures that will remedy the

concerns from AMA is implemented

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Outline of the M&A regulationsOutline of the M&A regulations　

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)]

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flowchart of statutory procedures flowchart of statutory procedures (mergers, etc.)(mergers, etc.)

Receipt of a notification on M&A, etc.

When there is a concern for Antimonopoly Act

Order to the violator to take elimination measures

Request for reports etc. necessary for the examination

When additional reports, etc. are required for the investigation

Receipt of reports, etc.

Written notification before Order

Decision (Dismissal of Request)Decision (Withdrawal or Change of Order)

There is not a concern for Antimonopoly Act

Appeal for withdrawal of Decision (lawsuit)

There is not a concern for Antimonopoly Act

Termination

within 30 days

within 90 days

(documents will generally be submitted within 3 to 4 weeks)

Opportunity for the parties to present views and submit evidence

Opportunity for the parties to present views and submit evidence

Written notification before Order

Order to the violator to take elimination measures

Termination(request for hearings)

(request for hearings)

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Merger Guideline Revision(1)Merger Guideline Revision(1)March 28, 2007March 28, 2007

BackgroundBackground Improved environment for implementing M&A to Improved environment for implementing M&A to

restructure industries (The Commercial Code restructure industries (The Commercial Code Revision, enacted May, 2007) and the Revision, enacted May, 2007) and the globalization of economy made us perceive globalization of economy made us perceive necessity to revise merger guidelines.necessity to revise merger guidelines.

JFTC decided the revision to improve JFTC decided the revision to improve predictability of regulation, regulatory predictability of regulation, regulatory transparency, and quickness of merger review transparency, and quickness of merger review more in accordance with the above economic more in accordance with the above economic situation.situation.

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Prior Consultation System Prior Consultation System

The Prior Consultation System is the The Prior Consultation System is the administrative service that the JFTC provides, to administrative service that the JFTC provides, to make the parties possible to know our view on the make the parties possible to know our view on the impact of the proposed M&A transaction on the impact of the proposed M&A transaction on the competition in the market, prior to the statutory competition in the market, prior to the statutory filing.filing.

It is not a statutory requirement.It is not a statutory requirement. 　　 Whether to Whether to use it is completely up to the parties’ voluntaries. use it is completely up to the parties’ voluntaries.

The JFTC will not take any action against the The JFTC will not take any action against the parties when the formal notification is made, if it parties when the formal notification is made, if it brings up no question on the proposed M&A brings up no question on the proposed M&A transaction after the examination.transaction after the examination.

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flowchart of prior consultation proceduresflowchart of prior consultation proceduresInquiry 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

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

Initiation of the detailed examination

Submission of the documents necessary for the detailed examination

Replies that there is no concern for Antimonopoly Act

Replies that there is a concern for Antimonopoly Act

Public announcement of the contents of the prior consultations and the contents of the replies

Examination of documents = within 30 days

detailed examination = within 90 days

within 1 week

(documents will generally be

submitted within 3 to 4 weeks)

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Our Merger Remedy Our Merger Remedy BasicsBasics

M&A Guidelines and RegulationsM&A Guidelines and Regulations

1111

Principles and Examples of Principles and Examples of Merger RemediesMerger Remedies

Merger GuidelinesMerger Guidelines

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IntroductionIntroduction

I.I. Subject of the Review of Business CombinationSubject of the Review of Business CombinationII.II. A Particular Field of TradeA Particular Field of TradeIII.III. The Effect May be Substantially to Restrain CompetitionThe Effect May be Substantially to Restrain CompetitionIV.IV. The Effect of Horizontal Business combination May be The Effect of Horizontal Business combination May be

Substantially to restrain CompetitionSubstantially to restrain CompetitionV.V. The Effect of Vertical and Conglomerate Business The Effect of Vertical and Conglomerate Business

combination May be Substantially to Restrain combination May be Substantially to Restrain CompetitionCompetition

VI.VI. Measures to Remedy the Substantial Restraint of Measures to Remedy the Substantial Restraint of CompetitionCompetition

(Attachment 1)(Attachment 1) Prior ConsultationPrior Consultation(Attachment 2)(Attachment 2) Shortening of the Waiting PeriodShortening of the Waiting Period(supplement)(supplement) Flowchart of Merger ReviewFlowchart of Merger Review

Structure of the “Guidelines to Applications Structure of the “Guidelines to Applications of of

the Antimonopoly Act concerning Review of the Antimonopoly Act concerning Review of Business Combination” Business Combination” (March 28, 2007, by JFTC)(March 28, 2007, by JFTC)

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Past Efforts to Improve Accountability of Past Efforts to Improve Accountability of Japanese Merger RegulationJapanese Merger Regulation

Annual release of the outlines on the review of Annual release of the outlines on the review of some cases of business combinations (1993some cases of business combinations (1993 ～～ ))

Issue “Guidelines to Application of Act Issue “Guidelines to Application of Act concerning Review of Business Combination” concerning Review of Business Combination” (5.31. 2004) (5.31. 2004)

Issue “Policies dealing with prior consultation Issue “Policies dealing with prior consultation regarding business combination plans” (2002)regarding business combination plans” (2002)

Issue “The report of the ex post evaluation of a Issue “The report of the ex post evaluation of a review of business combination”(6.22. 2007)review of business combination”(6.22. 2007)

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Principles of RemediesPrinciples of Remedies measures taken by the parties to avoid substantial measures taken by the parties to avoid substantial

restraint on the competition in the particular field of restraint on the competition in the particular field of trade trade accepted when competitive concerns are accepted when competitive concerns are remediedremedied

The remedies should , in principle, be structural The remedies should , in principle, be structural measures like divestiture of business etc. and should measures like divestiture of business etc. and should basically be ones which recover the lost competition basically be ones which recover the lost competition after the combination in order to prevent the company after the combination in order to prevent the company group form controlling the price freely to a certain group form controlling the price freely to a certain extent.extent.

in principle, the remedies should be completed before in principle, the remedies should be completed before the implementation of the combination (if remedies the implementation of the combination (if remedies being taken after the implementation, the deadline for being taken after the implementation, the deadline for the remedies should be imposed appropriately and the remedies should be imposed appropriately and definitely)definitely)

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Types of RemediesTypes of RemediesDivestiture of Business, etc.Divestiture of Business, etc.

OthersOthers

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)

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ICN Merger Remedy Review ICN Merger Remedy Review ProjectProject

ICN Merger Working Group: ICN Merger Working Group: Analytical Framework Subgroup Analytical Framework Subgroup published the report in June, 2005.published the report in June, 2005.

Contents Contents

(1)(1) The principles of Remedial ActionThe principles of Remedial Action

(2)(2) Choice and Design of RemediesChoice and Design of Remedies

(3)(3) Implementing and Monitoring Implementing and Monitoring RemediesRemedies

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(2) Choice and Design of Remedies(2) Choice and Design of Remedies Overview of the merger remedies universeOverview of the merger remedies universe

Merger remedies UniverseMerger remedies Universe

Structural RemediesStructural Remedies

Restricting effects of vertical

relationships

Restricting effects of vertical

relationships

Changing buyers’

behavior

Changing buyers’

behavior

Modifying relationship with end-

customers

Modifying relationship with end-

customers

Behavioral RemediesBehavioral Remedies

DivestitureDivestiture IP based remediesIP based remedies

Facilitating horizontal

rivalry

Facilitating horizontal

rivalry

Controlling outcomesControlling outcomes

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How to ensure the How to ensure the implementation of the implementation of the

remediesremedies

Party’s Obligations and SanctionsParty’s Obligations and Sanctions

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Parties’ Obligations & SanctionsParties’ Obligations & Sanctions Merger Filing (with remedies included)Merger Filing (with remedies included) Prevention of violationsPrevention of violations

Extension of period for ordering elimination Extension of period for ordering elimination measures (Sec. 15(5))measures (Sec. 15(5))

SanctionsSanctions

Sec.91(Penalties against prohibited stockholdings, Sec.91(Penalties against prohibited stockholdings, etc.)etc.)

Penal servitude of not more than one year or by a Penal servitude of not more than one year or by a fine of not more than two million yen.fine of not more than two million yen.

Sec.91-2(Penalties against failure to file reports)Sec.91-2(Penalties against failure to file reports)

Fine of not more than two million yenFine of not more than two million yen

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Revised Description on RemedyRevised Description on Remedy

In revised guideline, if industrial structure In revised guideline, if industrial structure has changed to make the remedy for has changed to make the remedy for business combination unnecessary and business combination unnecessary and the parties apply to JFTC on that, the the parties apply to JFTC on that, the remedy could be changed or removed.remedy could be changed or removed.

The description of typical remedies is The description of typical remedies is added to the guideline. added to the guideline.

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The Evaluation of past remediesThe Evaluation of past remedies

““The report of the ex post evaluation of a The report of the ex post evaluation of a review of business combination”.review of business combination”.

““The report of the ex post evaluation of a The report of the ex post evaluation of a review of business combination”.review of business combination”.

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The evaluation of past remediesThe evaluation of past remedies

““The report of the ex post evaluation of a review The report of the ex post evaluation of a review of business combination”of business combination”

Published at June 22Published at June 22ndnd, 2007. , 2007. To make an review of business combination To make an review of business combination

more detailed, we assess the market more detailed, we assess the market competence conditions after the review of competence conditions after the review of business combination.business combination.

Evaluate the effectiveness of remedies which Evaluate the effectiveness of remedies which are in ex post review by the assessment that a are in ex post review by the assessment that a company have been doing their obligation.company have been doing their obligation.

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The relationship between The relationship between measures on a merger and measures on a merger and

remediesremedies For the decade(1996 -2005), we had reviewed For the decade(1996 -2005), we had reviewed

125 cases, there were 46 cases which 125 cases, there were 46 cases which substantially restrain competition in a particular substantially restrain competition in a particular field of trade, and the company had offered field of trade, and the company had offered beforehand in the plan of business combination beforehand in the plan of business combination (the entire 36.8%)(the entire 36.8%)

The 32 cases (the entire 25.6%)The 32 cases (the entire 25.6%) had been had been accepted on the premise that the remedies had accepted on the premise that the remedies had been applied.been applied.

⇒⇒A business combination are accepted by the A business combination are accepted by the remedies even though there were some remedies even though there were some problems of the competition. problems of the competition.

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Types of RemediesTypes of Remedies Follow the category of remedy in the Guideline Follow the category of remedy in the Guideline

of business combination, we can divide the 32 of business combination, we can divide the 32 cases above into the three categories. (Table1)cases above into the three categories. (Table1)

Divestiture ofBusiness etc.

Measures toPromote mport andEntry

Measures concerningActions of theCompany Group

32 14 11 16

100% 43.80% 34.45% 50.00%

Horizontial problems 24 14 9 9(ratio) 100% 58.30% 37.50% 37.50%Vertical and Mixed problems 14 3 3 11(ratio) 100% 21.40% 21.40% 78.60%

(*) Thre are some cases that the company had offerd to FTC to remedy beforehand

Numberof Cases

Execution conditions of remedies (include repetitions)

The Cases that is required toremedy(*)The ratio of CasesTypes of remedies

Table 1. Types of RemedyTable 1. Types of Remedy

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Types of RemedyTypes of Remedy （２）（２） Distinguish the 32 cases by the types of business Distinguish the 32 cases by the types of business

combination; horizontal, Vertical, and Mixed.combination; horizontal, Vertical, and Mixed. Horizontal business combinationHorizontal business combination In the horizontal business combination cases, we are In the horizontal business combination cases, we are

likely to take a divesture of business (58.3% of 24 cases) likely to take a divesture of business (58.3% of 24 cases) Vertical and Mixed business combinationVertical and Mixed business combination In the vertical and mixed business combination cases, it is In the vertical and mixed business combination cases, it is

likely to take the Measures concerning Actions of the likely to take the Measures concerning Actions of the Company Group .Company Group .

⇒⇒In the case of horizontal merger, it is attempt to take the In the case of horizontal merger, it is attempt to take the structural remedies. On the other hands, in the case of structural remedies. On the other hands, in the case of vertical and mixed merger, it is likely to take the vertical and mixed merger, it is likely to take the behavioral remedies.behavioral remedies.

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The commentaries of remedies(1)The commentaries of remedies(1)

We can divide the 32 cases into concrete remedies. We can divide the 32 cases into concrete remedies. （１）（１） Divesture of Business Divesture of Business A. Divesture of business and A. Divesture of business and a dissolution of the business a dissolution of the business

combination by the concerned party(ies) with another combination by the concerned party(ies) with another company(ies) (measures including: cancellation of the company(ies) (measures including: cancellation of the voting rights holding; reduction of the holding ratio of voting rights holding; reduction of the holding ratio of voting rights; or cancellation of interlocking directorates)voting rights; or cancellation of interlocking directorates)

・・・１０　・・・１０　 cases of 32cases of 32B. To give the competitors a right of trading at the price equB. To give the competitors a right of trading at the price equ

ivalent to the production cost of it. (to make contract of loivalent to the production cost of it. (to make contract of long term supply) ng term supply) ・・・・ 5 Cases5 Cases

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The commentaries of remedies(2)The commentaries of remedies(2)

（２）（２） Measures to Promote Import and EntryMeasures to Promote Import and Entry When the divestitures of business could not be taken as When the divestitures of business could not be taken as

remedies because demand is decreasing and it is remedies because demand is decreasing and it is expected that a company which tales over a part of or expected that a company which tales over a part of or whole of the company group’s business do not appear whole of the company group’s business do not appear easily, promotions of import or entry are exceptionally easily, promotions of import or entry are exceptionally considered as remedial measures to solve the problem considered as remedial measures to solve the problem of the substantial restraint of competition in a particular of the substantial restraint of competition in a particular of field.of field.

C. To promote the import by making facilities needed to C. To promote the import by making facilities needed to import available to the importersimport available to the importers ・・・・・・ 5 cases5 cases

D. By granting the licenses of company group’s patents on D. By granting the licenses of company group’s patents on appropriate conditions to the competitors or new entrants appropriate conditions to the competitors or new entrants on their requests. on their requests. ･･････ 5 cases5 cases

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The commentaries of remedies(3)The commentaries of remedies(3)

(3) Measures concerning Actions of the company group.(3) Measures concerning Actions of the company group. In addition to the cases in Item (1) and (2) above, the In addition to the cases in Item (1) and (2) above, the

measures concerning the actions of the company group measures concerning the actions of the company group could be considered as the measures to solve the could be considered as the measures to solve the problem of the substantial restraint of competition in the problem of the substantial restraint of competition in the particular of field.particular of field.

E. To block the exchange of information on each other’s E. To block the exchange of information on each other’s sales of the goods.sales of the goods.

・・・・・・ 10 cases10 casesF. Prohibiting discriminatory treatment of non-affiliated F. Prohibiting discriminatory treatment of non-affiliated

companies with regard to uses of essential facilities for companies with regard to uses of essential facilities for the business.the business. ・・・・・・ 5 cases5 cases

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ConclusionConclusion In principle, the remedies should be structural In principle, the remedies should be structural

measures like divestiture of business. measures like divestiture of business. In the past decade, There are many cases ( almost a In the past decade, There are many cases ( almost a

quarter of total reviewed cases) that can solve the quarter of total reviewed cases) that can solve the problems on the competition by remedies.problems on the competition by remedies.

=This is the evidence of the importance of conduct of =This is the evidence of the importance of conduct of remedies to maintain the competition circumstance.remedies to maintain the competition circumstance.

We have applied structural remedies mainly on the We have applied structural remedies mainly on the cases that are characterized by horizontal business cases that are characterized by horizontal business combine. combine.

On the other hands, in case of vertical and mixed On the other hands, in case of vertical and mixed business combine, we are likely to apply the business combine, we are likely to apply the behavioral remedies.behavioral remedies.