Merger Controls First Edition - J Sagar Associates

Anderson, Mōri & Tomotsune Japan
On June 18, 2010, the Cabinet adopted a comprehensive economic report named “the New Growth Strategies 2010”, and
pointed out the necessity for the JFTC to take into account competition in global markets in its merger review.
Against this background, the Revised Merger Guidelines explicitly refer to an example of a geographic market definition
in East Asia: “if a major domestic and overseas supplier is selling at a materially equivalent price in the sales areas
worldwide (or in East Asia), and if the user is selecting their major supply source from suppliers around the world (or in
East Asia), then a world (or East Asia) market will be determined.”
The JFTC might comment that the reference to geographic markets across the border simply confirms its current practice
and is not intended to change it. However, it appears that this specific reference to the East Asia market is intended to
address the public criticism mentioned above. It is therefore expected that the JFTC will define geographic markets across
the border in more merger cases.
(2) Potential Imports
The Revised Merger Guidelines explicitly stipulate that, “regardless of whether imports are currently being conducted
or not”, the competitive pressure by imports may be considered sufficient to constrain the exercise of market power by
the merged company. In other words, potential imports can be considered as sufficient competitive restraint, just as
actual imports are. The interesting point about the Revised Merger Guidelines regarding potential imports is that they
do not make any distinction between actual imports and potential imports and treat both under the same criteria in
determining, in response to the price increase after the merger, whether or not imports of the relevant products would
increase within a certain period (generally two years) and thus function as a competitive constraint on the market power
that may be exercised by the merged entity.
Some may argue that, even if the same criteria is applied to both actual and potential imports, in reality, potential imports
will be far less likely to be an effective constraint than actual imports. They may be right, but since the JFTC generally
has a tendency to apply its guidelines relatively strictly, the potential consequence of the explicit recognition of potential
imports as a competitive constraint should not be undervalued in practice. Also, this revision is probably intended by the
JFTC to address the public criticism that the JFTC has not paid as much attention to the reality of international competition
as it should have.
(3) Failing Company Defence
The old Merger Guidelines recognised the failing company defence only in very limited cases, such as when a target
(either the entire target company or a targeted business to be acquired) was in net capital deficiency. The Revised Merger
Guidelines have slightly extended the defence to cover cases where the target has been “continuously” suffering
“significant” operating losses. According to the JFTC’s response to the public comments on the draft Revised Merger
Guidelines, when the target is considered to have been “continuously” suffering “significant” operating losses shall be
determined from the viewpoint of whether the target is highly likely to exit the market.
This revision is mainly intended to address criticism from Japanese industries of the old Guidelines that, if an acquirer had to
wait until the target became in net capital deficiency, it was often too late to rescue the ailing target. In reality, however, the
JFTC has been recognising the failing company defence relatively loosely in the last couple of years than the old Guidelines
seemingly indicated (please refer to Xing’s acquisition of BMB in 2009). The Revised Merger Guidelines may strengthen the
tendency for the JFTC to relatively loosely recognise the failing company defence even further.
(4) Shrinking Demand
The Revised Merger Guidelines stipulate that, if demand of a product has been “continuously and structurally” falling
well under the supply of the product as a result of a decrease in demand for the product, the JFTC may recognise that fact
as a competitive constraint on the exercise of market power by the merged company. Because many areas of Japanese
industries have been shrinking, there have been a lot of merger cases in which the combined market share was substantially
high but the mergers were still cleared by the JFTC because the exercise of market power by the combined company was
highly unlikely. This revision of “shrinking demand” was not included in the original public draft of the Revised Merger
Guidelines, and was added in response to public comment. Such incorporation into the JFTC’s Guidelines of public
comment was not common in the past, but is in line with the JFTC’s tendency in the last couple of years to listen to the
public voice more carefully than before.
What “continuously and structurally” exactly means is not explained under the Guidelines, but in light of the JFTC’s past
practice, this would typically be intended to be applied to cases of product markets where demand has been declining over
the years due to a change in market structure but production capacities have not been easily curtailed because large upfront
capital investments were required and a large part of the investment costs were sunk (for example, in the case of certain
chemical products). It is theoretically sound and consistent with the JFTC’s past precedents to recognise shrinking demand
and accompanying excess capacity as a factor to constraint on market power.
(5) Neighbouring Markets
The Revised Merger Guidelines added another example of competitive constraint from neighbouring markets. They state
that, if competing products in neighbouring product markets (i.e., products that are not, in a strict sense, within the properly
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