In its press release on March 17, 2014, the Korea Fair Trade Commission (the “KFTC”) blocked the  proposed acquisition of 50% shares by Essilor Amera Investment Pte. Ltd. (a subsidiary of Essilor  International S.A., the largest optical lens maker in the world) in Daemyung Optical Co., Ltd. (the  second largest optical lens maker in Korea) citing inter alia the likely lessening effect on price  competition and the probable future abuses of the enhanced market power. On top of the expressed  competitive concerns, the KFTC observed that allowing foreign firms to acquire local firms and turn  them into their local sub-contractors worsens the competitive market structure of the domestic  optical lens industry.

This was the first case in which the KFTC blocked a proposed combination since 2007 (when the KFTC  blocked the business transfer deal between Owens Corning and Saint-Gobain Vetrotex for the latter’s  business of the glass fibre reinforcements and composite fabrics) and also the very first case in  which an acquisition of a Korean firm by a non-Korean firm was blocked in Korea.

Factual Backdrop of the Proposed Combination

The filing of the proposed combination was preceded by a share acquisition agreement dated January  4, 2013 by and between Essilor Amera Investment Pte. Ltd. (a subsidiary acting as the acquiring  party on behalf of Essilor International S.A.) and Daemyung Optical Co., Ltd. In 2002, Essilor  International S.A. entered Korea by acquiring Chemiglas Corp., the largest optical lens maker in Korea at the  time. As the largest maker of optical lens in Korea and the world, this proposed combination was  Essilor’s second attempt at acquiring a major local firm in the Korean optical lens industry.

The KFTC Blocks the Proposed Combination

After taking more than one year in its review, the KFTC announced its decision to block the  proposed combination. The proposed combination itself seemed to gravely worsen the concentration  ratio in the optical lens industry, on top of probable anti-competitive consequences the KFTC  perceived as not only likely but irreversible once they occur. The relevant product markets were  two: the one for short-focus lens and the other for multi-focal lens. Both product markets were  then confined to the geographic perimeter of Korea.

In Korea, a proposed combination between the firms whose collective market share will surpass the  statutory threshold will trigger a rebuttable presumption of likely competitive harm. More  specifically, the requirements triggering such a presumption are: (i) the combining firms  collectively claim a market share of 50% or higher (or the top three firms, including the combining  firms, claim a market share of 75% or higher); (ii) the collective market share of the combining  firms is the largest in the relevant market; and (iii) there is a difference of 25% or more between  the collective market share of the combining firms and that of the firm holding the next largest  market share.

The KFTC concluded that the post-combination concentration ratio justified the presumption of  competitive harm. More specifically, the proposed combination would have given the combining firms  a collective market share of 66.3% in the market for short-focus lens and 46.2% in the market for  multi-focal lens. In both of these markets, the collective market share of the combining firms  would have far surpassed those of other competitors, most notably surpassing (by over 50%) the  market share of 11.1% held by Hanmi Swiss Optical Co., Ltd. as the second largest firm in the  short-focus lens market in Korea. The triggering of the statutory presumption of competitive harm  seemed well justified.

On top of the statutory presumption, the KFTC also found the likelihood of competitive harms in the  markets for short-focus lens and for multi-focal lens in Korea. More specifically, the KFTC  concluded that: (i) Daemyung Optical has been acting as the price leader for the last ten years,  and the proposed combination will wipe out price competition between Daemyung Optical and Essilor; (ii) the combined firm will be the only firm offering the full-line of optical lens and may  leverage the enhanced market power to coerce tie-in sales or to impose other unreasonable terms of  trade; and (iii) the disappearance of a maverick firm like Daemyung Optical will likely create oligopoly  effects by making easier a market-wide practice of information sharing and consciously parallel  behaviors. Furthermore, the in-flow of foreign competition from China seemed unlikely, given the  quality difference etc.

The foregoing consideration seemed to show that the proposed combination will likely worsen the  competitive structure in the optical lens industry for which an imposition of behavioral remedies  (e.g., no price increase for a stipulated time period) will be inadequate.  Therefore, the KFTC decided to block the proposed combination.

Remarks on the KFTC Decision

This decision made it clear once again that a combination posing probable competitive harms that  are difficult to cure will be blocked by the agency. Under the Standards for Imposing Remedial  Orders on Business Combinations issued in 2011 (the “Guidelines”), structural remedies are to be  given consideration in priority over behavioral remedies. More specifically, the Guidelines  authorize the KFTC to block or unwind any proposed combination if it poses probable competitive  harms for which there is no other remedy. This was the first case of a blocked combination since  the issuance of the Guidelines.

This decision also shows the KFTC’s stern inclination to confine the geographical scope of relevant  markets to the national boundary of Korea unless such a finding of geographic market is clearly  refuted by facts. A broader definition of the geographic market may have helped Essilor on the  effects of the probable competitive harms. However, citing the perceptions shared among the buyers  and the sellers, the improbability of Chinese firms penetrating the Korean market, along with  economic analyses, the KFTC defined the geographic scope of the markets as Korea.

The decision also appeared to have been motivated by the desire to protect the domestic market  structure, specifically domestic lens makers that are small-to-medium-sized. The press release  stated the KFTC’s perceived need to “keep solid domestic firms from being acquired by foreign firms  only to be relegated to the position of being their sub-contractors” and thereby “maintain the  existing competitive structure”. This may suggest the possibility that future attempts by foreign  firms to acquire local small-to-medium-sized firms in Korea (if the culmination of which gives them  much more enhanced market share and power) likely will face difficulties in obtaining clearance  from the KFTC.

Since the adoption of “commitment decision” system in 2011, firms whose cases are under review or  investigation by the KFTC may propose their own solutions to settle their cases with the KFTC  without a finding of wrongdoing. Although there has not been any precedent to this date where a  commitment decision was used on a business combination, this system may be used for business  combination cases, especially if obtaining clearance is expected to be difficult.

In the case of Essilor, it may have helped Essilor to propose a combination of post-combination  remedies (both behavioral and structural) to avail itself of the commitment decision system. As for  the behavioral remedies, it may have helped Essilor to propose to commit for a certain  post-combination period to not raise its prices and to also apply fair terms of trade to its  dealers, as these are some of the typical concerns expressed by the KFTC in reviewing a prospect of  enhanced market power.  While  these remedies alone would not have sufficed, they certainly could have been buttressed by  proposing some structural remedies – i.e., implementing a separation of the management between  Daemyung and Chemiglas to enable price competition between the two or, if necessary, proposing a  partial sell- off of the short-focus lens business of Daemyung. On top of proposing these remedies,  it may also have been a worthwhile idea to consider highlighting competitive pressure from adjacent  markets, specifically due to the substitutability between the lens for eyeglasses and a variety of  other “vision- correcting” solutions ranging from contact lens to surgical methods. Highlighting  such competitive pressure may have helped Essilor to suggest the propriety of a commitment decision  for its proposed combination.