In the past 18 months, Japan’s regulator has tackled Big Data, introduced greater disclosure and conducted a high-profile, parallel merger review.
The pervasive influence of data has prompted the regulator in Japan to rethink its approach to merger control regimes. In June 2017, the Japan Fair Trade Commission (JFTC) and the Competition Policy Research Center (CPRC) jointly published their Report of Study Group on Data and Competition Policy. The study group began in January that year and the report discussed how Japan’s Anti-Monopoly Act (AMA) can address issues created by today’s data-driven society.
The JFTC is the sole regulatory authority that enforces merger control under the AMA, and when analysing a business combination, it starts by defining what constitutes a market in terms of size and geographic scope.
The JFTC looks at this from the perspective of a consumer’s ability to purchase a substitute product or service, and may also analyse the issues from the vantage point of supplier substitutability.
Traditionally, substitutability is determined using the SSNIP test (small but significant and nontransitory increase in price). But the proliferation of data requires a different approach. The report highlights that a digital platform comprises several layers of markets with different types of consumers or users (also referred to as a ‘multilevel market’), where ‘free’ services might be provided in one market (for example, the social media service market) but compensation is paid in another (for instance, the online advertisement market). The report argues that the SSNIP test does not necessarily apply to this type of ‘free’ market, and suggests considering the substitutability of consumers and/or suppliers using another method, such as the SSNDQ (small but significant and non-transitory decrease in quality) test, which focuses on functionality and quality rather than price.
When determining whether or not a specific business combination should be reported, the JFTC currently looks only at the parties’ Japanese turnover for the previous business year. If their turnover does not meet the thresholds, JFTC pre-notification is not required, even if their turnover may dramatically increase after the business combination is consummated (that is, if the following year’s turnovers greatly exceed the thresholds for pre-notification), and even if such a business combination then exerts a substantial influence on the relevant market(s).
The report recognises that it may take some time for data resources to be converted into increased turnover from innovation and/or sales of new products or services. In addition, the aggregated accumulated data may result in the parties being able to obtain or strengthen market power. The report therefore suggests considering a revision of the current pre-notification requirements to allow the JFTC to review certain important transactions that may be missed under the current system. It refers to a 31 March 2017 amendment to the German business combination regulations, which adds the value of an acquired company as a factor in determining whether or not pre-notification will be required. Under such a system, pre-notification could be required even in a situation where the turnover of the interested parties does not meet the thresholds.
In November 2017, the JFTC introduced quarterly disclosure for proposed business combinations including the following information: filing date; the names of the parties involved; major business category; type of business combination (for example, merger or share acquisition); clearance date; and whether the waiting period was shortened.
The cases cover both Phase I and Phase II combination reviews, subject to the exclusion of some confidential cases. The new level and frequency of disclosure by the JFTC is a welcome and positive development. We are hoping to get more information from the JFTC about this issue in the future, for example regarding analyses of market definition in real-life cases.
In 2017, the JFTC reviewed approximately 45 relevant markets when analysing two high-profile mergers
In June 2017, the JFTC published its annual business combination report looking at the biggest transactions in the fiscal year 2016. That year, two deals in Japan’s petroleum refining and wholesale industry were noteworthy—the acquisition of TonenGeneral Sekiyu K.K. by JX Holdings to create Japan’s biggest oil refiner and the purchase of Showa Shell Sekiyu K.K. by domestic rival Idemitsu Kosan Co.
The JFTC reviewed approximately 45 relevant markets, including those with high combined shares, such as the LP wholesale gas market of approximately 80–90 per cent.
The JFTC conducted reviews of both transactions in parallel. On 19 December 2016, the JFTC published a press release announcing its decision to grant clearance to both transactions, subject to the remedies proposed by the relevant parties.
These cases are significant because although the notification for the Idemitsu transaction was submitted several months before that of the JX transaction, the JFTC reviewed both transactions together, rather than applying the European Commission’s ‘first- come, firstserved’ approach.