An extract from The Public Competition Enforcement Review, Edition 13

Merger review

The number of merger filings at the JFTC has been relatively stable, with only a slight decrease compared to the immediately preceding year. From April 2019 to March 2020 (FY 2020), the JFTC accepted 310 notifications – of which 300 were cleared in Phase I (including 217 with early termination), nine were voluntarily withdrawn by the parties and one was brought into Phase II. In terms of the competitive landscape between the parties, 187 involved horizontal overlaps, 128 involved vertical relationships and 135 involved conglomerate business combinations.

Effective use of pre-notification consultation with the JFTC was key to the high Phase I clearance rate. Parties may benefit from informal discussions with the authority during the pre-notification phase, which often extends to substantive competition issues. Sometimes, the parties discuss and agree on remedies to obtain conditional clearance during Phase I.

The JFTC is also keen to employ economic analysis in complex cases. Out of 10 notable decisions published by the authority during FY 2020, two involved the use of economic analysis.

i Significant casesIntegration of Z Holdings Corporation and LINE Corporation14

In August 2020, the JFTC conditionally approved the business integration between Z Holdings Corporation (ZHD) and LINE Corporation (LINE).

ZHD is the parent of Yahoo Japan and belongs to the SoftBank group, while LINE belongs to the NAVER group, hence the transaction involved an integration between two major providers of digital platforms in Japan. Given the status of the parties as major digital platform providers, this case has particular relevance with the amended portion of the Merger Review Guidelines15 that provides key considerations for the authority's scrutiny of digital markets. The JFTC focused on the parties' horizontal overlaps in free online news distribution business, digital advertisement business and QR code payment business.

In relation to the free online news distribution business, the JFTC concluded that the parties' combined market share of 60–75 per cent would not result in substantive restriction of competition by considering various factors such as competitors in the same and neighbouring markets (including charged news distributors), ease of new entry, absence of switching costs and absence of concern that the news sources would act in a manner that forecloses the competitors.

The authority defined a number of sub-segments for the digital advertisement business, namely keyword-targeted advertisement, keyword-neutral advertisement and agency services. Despite the absence of reliable market share estimates, the JFTC concluded the absence of substantive restriction of competition on the grounds of the parties' difficulties to leverage the big data and indirect networking effect that arise from their position as digital platform providers.

The JFTC focused the multi-sided nature of the QR code payment services: one that is customer-facing and another that is merchant-facing, as well as the indirect networking effect between them. Parties' combined market share of 60–75 per cent as well as their recent growth (which may not fully appear on the value-based market shares) could not be fully mitigated by the limited competitive pressures from competitors, potential new entrants, neighbour markets such as credit cards and other cashless payment services. The JFTC could not eliminate the possibility that the parties may enjoy market power depending on their usage of data and the development of the market, hence sought for the remedies to terminate their exclusivity terms with merchants and to periodically report the parties' pricing, usage of data and the market circumstances for the next three years.

The authority's in-depth review was primarily conducted during the pre-notification consultation that lasted approximately eight months and that resulted in the conditional clearance within Phase I.

Acquisition of BASF Colours and Effects Japan Ltd by DIC Corporation16

In December 2020, the JFTC conditionally approved DIC Corporation's acquisition of BASF Colours and Effects Japan Ltd upon Phase II review.

By reference to various factors including economic analysis, the authority defined separate product markets for each colour index of organic pigments, while the relevant geographical market was considered worldwide. Particular focus was given to the three overlapping segments, where the parties have combined market share of 20–40 per cent. The oligopolistic nature of the markets as well as the high-quality requirement for automobile use increased concerns.

Remedies were structured to address the multiple merger filings, including the one with the European Commission, which included the divestment of DIC's pigment business in South Carolina, United States, as well as the appointment of a monitoring trustee.

Acquisition of Fitbit by Google17

In January 2021, the JFTC closed its own investigation against Google LLC's acquisition of Fitbit, Inc. The transaction did not meet the mandatory filing thresholds but the authority initiated the scrutiny since the transaction is valued in excess of ¥40 billion and likely affects domestic customers. This is the first published case where the JFTC applied the value-based threshold for an investigation it initiated.

The JFTC focused on the parties' vertical relationships concerning operating system for smart phones and wristwatch-type wearable devices, healthcare database, as well as the conglomerate effect that may arise from the use of healthcare database for the benefit of Google's digital ads.

In line with the commitments proposed to the European Commission, the parties undertook, for a period of 10 years, (1) non-discriminatory supply of operating system for smart phones and healthcare database; (2) segregation of the parties' healthcare database from Google's other datasets as well as restriction on the use of such database for Google's digital ads; and (3) biannual reports to the JFTC via a monitoring trustee. Subject to these remedies, the JFTC concluded that the transaction would not substantially restrain competition in the relevant markets.

ii Trends, developments and strategiesCovid-19 and merger control

As with authorities in many other jurisdictions, the JFTC has adopted partial remote working under the current situations. As related measures, the JFTC abolished the seal requirement in December 2020 and started accepting formal submission of notification by email in February 2021.

Exemption for regional banks and bus operators

With Japan's population decline and other economic circumstances as the context, M&As are considered important and effective survival options for regional players. Yet their relatively high market shares in specific regions may subject transactions to the JFTC's in-depth review.

To facilitate momentum, temporary legislation took effect in November 2020 to exempt mergers and joint operations between regional banks and bus operators from the merger control regulation, on the conditions that (1) the parties would be unable to survive without the proposed merger or joint operation; and (2) there is no concern that the parties would unreasonably increase prices or otherwise cause disadvantages to customers.

The competent regulatory authority and the JFTC will jointly review the eligibility for the exemption, and monitor the parties' behaviour following the transaction. The exemption will last for 10 years from the effective date.

iii Outlook

Similarly to other areas of enforcement, the JFTC will likely be keen to carefully monitor and review M&As that involve digital markets under the amended Merger Review Guidelines and Merger Review Procedure Policies.18