Japan: Japan Fair Trade Commission’s New Merger Review Guidelines


On May 31, 2004, the Fair Trade Commission of Japan (the "JFTC") published new "Guidelines on the Application of the Anti Monopoly Act to Reviewing Business Combination" (Kigyo Ketsugo Shinsa ni Kansuru Dokusenkinshiho no Unyou Shishin) ("New Guidelines"). The JFTC’s previous merger guidelines provided only a vague summary of the agency’s framework for review and a list of past cases, resulting in criticism that the guidelines did not provide sufficient guidance to firms planning mergers, acquisitions and joint ventures. The New Guidelines, in contrast, provide a detailed description of the JFTC’s analytical framework, which borrows heavily from the U.S. Department of Justice and Federal Trade Commission’s Horizontal Merger Guidelines ("U.S. Merger Guidelines"). As a result, the New Guidelines provide more predictability to firms planning business combinations.

The full text of the New Guidelines is not available in English. This memorandum summarizes the New Guidelines and briefly discusses their potential impact on companies doing business in Japan.

Summary of the New Guidelines

The JFTC published its previous merger guidelines on December 21, 1998 and applied them to several cases in subsequent years. Based on its experience in these cases, the JFTC drafted the New Guidelines and submitted them for public comment in March of this year. The JFTC published the final version of the New Guidelines on May 31, 2004. For Table of Contents please see end of article

(1) Scope of Review

The antitrust laws of Japan apply to any merger, acquisition or other transaction that is likely to have an effect on Japanese commerce. The New Guidelines explain the criteria by which the JFTC determines whether it will review a particular transaction. They specify that combinations between so-called group companies, such as mergers between a parent and subsidiary or between subsidiaries, are not, in principle, subject to the JFTC’s review. For these purposes, a subsidiary is any company in which the "parent" company owns more than a 50% interest. Thus, for example, a merger between two companies in which a single "parent" owns 51% of the voting rights of each company would not normally fall within the JFTC’s review.

(2) Market Definition (Particular Field of Trade)

The New Guidelines clarify that the JFTC will determine the scope of the relevant market (both product market and geographic market) by reviewing whether the functions of products that may be included in the market are substitutable from a demand perspective. These guidelines are the first indication by the JFTC that product substitutability will be identified by examining "whether, assuming a price increase of a particular product, another product would be a factor to deter the free manipulation of price or quantity of such particular product because the purchasers of such product would be able to switch to such other product." This is substantially the same as the so-called small but significant and non-transitory increase in price ("SSNIP") test used in the U.S. Merger Guidelines. The New Guidelines indicate that, to define the product market, the JFTC will analyze factors such as use, fluctuations of price or quantity, and consumer habits. With respect to the geographic market, the JFTC will consider factors including the territory of the supplier, how far purchasers will travel to buy the product, the characteristics of the product, and methods and costs of transportation.

(3) Substantial Restraint of Competition

The New Guidelines indicate that the JFTC will take a different approach in examining whether a proposed horizontal combination (i.e., one between direct competitors) would substantially restrain competition transactions than the JFTC takes in the case of vertical (or mixed) transactions. The New Guidelines note that horizontal combinations are more likely to be harmful to competition than other types of combinations, and therefore provide a more detailed discussion of the factors the JFTC will consider in reviewing those combinations. They further note that, similar to the approach taken by the U.S. Merger Guidelines, the JFTC will consider two different types of potential harm to competition: unilateral action and coordinated interaction.

The New Guidelines enumerate the following factors that the JFTC will review in examining unilateral action and coordinated interaction:

Unilateral Action

  • Positions of the parties and their competitors in the market (market share, ranking, competition between the parties in the past, the nature and scope of joint ventures, difference in market shares from competitors, capacity for supply and substitution);
  • Imports;
  • Entry;
  • Pressure from adjacent markets;
  • Overall business capability;
  • Efficiency; and
  • Financial soundness of the parties’ corporate group.

Coordinated Interaction

  • Positions of the parties and their competitors in the market (number of competitors, competition between the parties in the past, capacity for supply and the nature and scope of joint ventures);
  • Actual transactions (terms and conditions of transactions, demand trends, technological innovation trends, competition in the past);
  • Imports, entry and pressure from adjacent markets; and
  • Efficiency and financial soundness of the parties’ corporate groups.

The New Guidelines include many of the same competitive factors as the U.S. Merger Guidelines. Some of these overlapping factors include the positions of the parties and the competitors in the market, the ability of existing or potential competitors to expand, efficiencies, and the financial soundness of the parties. The New Guidelines, however, do not specify how the JFTC will weigh these factors in determining whether a proposed transaction is likely to lessen competition.

The New Guidelines provide examples of circumstances in which a merger or acquisition is unlikely to restrain competition under normal conditions (so-called "safe harbors"). The scope of these safe harbors is slightly broader than those the previous guidelines. The safe harbors in the New Guidelines include situations where (i) the combined parties control 10% or less of the market, and (ii) in the case of a non-oligopolistic market (i.e. Herfindahl Hirschmann Index ("HHI") less than 1,000), the combined parties control 25% or less of the market. The New Guidelines’ sections analyzing unilateral actions list additional limited safe harbors related to unilateral behavior.1

It should be noted that the New Guidelines use the HHI to determine the degree of concentration in a market. Calculated by summing the squares of the individual market shares of all the participants in a market, HHI is widely used in the U.S. and Europe to measure market concentration. The New Guidelines define a "non-oligopolistic market" as a market with an HHI of less than 1,000 after the combination, and a "non-highly oligopolistic market" as a market with a post-combination HHI of less than 1,800. The New Guidelines’ analytical divisions of (a) HHI less than 1,000, (b) HHI of between 1,000 and 1,800 and (c) HHI of 1,800 or more are identical to those in the U.S. Merger Guidelines.

(4) Remedies

The New Guidelines set forth the JFTC’s basic policy that remedies should be designed to replace competition lost due to anticompetitive business combinations. The New Guidelines also provide examples of possible remedies, including (1) divestiture of a business segment to create a new competitive player in the market, (2) facilitation of imports by making available storage facilities to which importers do not currently have easy access, or (3) licensing of patents under appropriate terms and conditions.

Practical Implications of the New Guidelines

(1) Impact of the New Guidelines on Merger Review

The JFTC’s method of merger review will not change significantly as a result of the adoption of the New Guidelines. While the New Guidelines provide insight into the JFTC’s methodologies and interests in reviewing various business combinations, merger analysis will continue to be highly fact-dependent. Hence, parties and their counsel will have to continue to take a case-by-case approach to analyzing business combinations, referring to the New Guidelines and published information on the cases previously examined by the JFTC for guidance.

The New Guidelines, however, will help parties and their counsel in several ways. First, they broaden the existing safe harbors, providing increased certainty for those transactions that meet the safe harbor standards. Second, they better enable parties contemplating mergers and acquisitions, even preliminarily, to design transaction structures to which the JFTC is less likely to object. Third, they enable parties who have already started merger and acquisition projects to predict better the likely outcome of JFTC review of their transactions. Finally, they clarify what kind of arguments will be effective in cases where the JFTC alleges that it believes a transaction may adversely affect competition. In short, the New Guidelines provide more user-friendly guidance that parties and their counsel can employ to design better business combinations, including guidance that will help parties assess the risk associated with selecting particular combination partners, acquiring particular products, and using particular corporate forms.

It should be emphasized that the New Guidelines provide assistance not only to the parties to a potential business combination, but also to competitors or others who may object to such combinations. Unlike the U.S. or Europe, it has been uncommon for competitors in Japan to oppose a transaction on the ground that it will have a harmful effect on competition. This likely reflects, in part, cultural differences, but it also reflects the lack of analytical guidance provided by the JFTC. Now, businesses will be able to use the New Guidelines, if they wish, to help formulate lines of attack against transactions involving their competitors. The JFTC usually solicits public comments on a transaction for a defined period of time (e.g., one month) at the beginning of the second phase of its pre-consultation process.2. Businesses wishing to comment on proposed transactions can monitor public announcements and press releases regarding their competitors, as well as the JFTC’s public announcements regarding transactions that have entered second-stage review, to ensure that comments are prepared in a timely manner.

(2) Weighing the Factors to Be Considered Under the New Guidelines

Although some commentators have complained that the New Guidelines do not indicate the relative weight the JFTC will give to various factors in reviewing a transaction, it seems likely that the JFTC has listed the factors in order of importance. It should be emphasized, however, that the JFTC considers and balances all of the factors in making its determinations. Likewise, the JFTC will review both the potential unilateral action and coordinated interaction that may result from a transaction. If there are potential adverse unilateral effects, the business combination will not be approved even if there is no potential coordinated interaction problem (or vice versa). For example, an argument that an alliance will not create a dominant firm in the relevant market will not be persuasive in a market where there is substantial danger of coordinated interaction based on the number of participants, the transparency of the information affecting competitive decisions and other factors.

(3) Importance of Market Definition

Under the New Guidelines, the decision whether a transaction is likely to restrain competition substantially will depend significantly on how the market is defined. Now that the JFTC has expressly adopted the SSNIP test in the New Guidelines, defining the market means determining whether purchasers would shift to substitute products in the event of a price increase. In order for products to be suitable substitutes for each other, it is of course important that the products in question are interchangeable in function. In making presentations to the JFTC, however, parties often fail to present information regarding factors beyond their own products or businesses, such as consumer perceptions, the supply capacity of competitors (e.g., the capacity of competitors’ facilities and their operating rates), and switching costs. While this type of information is often difficult for merging parties to collect, some examples of the information that parties may be able to collect includes information on past price fluctuations and the corresponding responses of purchasers at the time. The acquisition and use of the types of information discussed above will likely become more common, both for businesses trying to prepare thoroughly for antitrust inquiries related to business combinations and for those opposing such combinations.



Chapter 1 Scope of Review

1. Equity Holdings

2. Dual Assumption of Directors & Officers

3. Mergers

4. Splits

5. Purchase of Business, etc.

Chapter 2 Particular Field of Trade

1. Basic Theory in Defining a Particular Field of Trade

2. Scope of Product

3. Scope of Geographic Area

Chapter 3 Substantial Restraint of Competition

1. Interpretation of "Substantial Restraint of Competition"

2. Types of Business Combinations and Substantial Restraint of Competition

Chapter 4 Substantial Restraint of Competition by Horizontal Business Combinations

1. Basic Theory

2. Factors to be Considered with Regard to Substantial Restraint of the Competition by Unilateral Action

3. Factors to Be Considered with Regard to Substantial Restraint of the Competition by Coordinated Interaction

Chapter 5 Substantial Restraint of Competition by Vertical Business Combinations and Mixed Types of Business Combinations

1. Basic Theory

2. Factors to Be Considered with Regard to Substantial Restraint of Competition by Vertical Business Combinations and Mixed Types of Business Combinations

Chapter 6 Remedies to Rectify Substantial Restraint of Competition

1. Basic Theory

2. Categories of Remedies


1: For example, a unilateral action safe harbor exists where the market is not highly oligopolistic (i.e., HHI less than 1,800), the combined parties will have 35% or less of the market share after their after combination, and there are two other competitors with a market share of 10% or more in the same market. This safe harbor for unilateral action may not apply, however, to cases in which there is an issue with respect to the competitive behavior of the parties in the past, the capacity of supply and/or the interchangeability of products.

2: Although not statutorily required, the JFTC has a system of "pre-consultation" for firms planning business combinations. This pre-consultation process is commonly used by the firms to obtain a sort of "no action" letter from the JFTC, although there is no penalty if firms do not use this system before making their statutory filing. The pre-consultation process requires the applicant company to agree to publicly announce its planned business combination if the JFTC determines it is necessary to pursue a detailed review (second phase) after the initial review (first phase), so that the JFTC may contact customers and competitors of the applicant company to obtain information, and solicit comments from the public.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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