The rising number of enforcers imposing remedies in international merger control increases the level of uncertainty around whether and in what form a complex deal can be navigated through competition authorities.
On 20 April, 2015, almost one and a half years after Applied Materials and Tokyo Electron, two manufacturers of equipment for semiconductor producers, had decided to merge, the parties announced that they abandoned their plan. The remedy package submitted to the US Department of Justice (DOJ) failed to address the authority's competition concerns, triggering the decision to shelve the deal because the parties had hoped that authorities in China, Germany, Japan and South Korea would align around the DOJ.
The Applied Materials/Tokyo Electron case illustrates the challenges and possible consequences of the remedy stage in multijurisdictional merger control. Commitments can clearly be a boon in case of a transaction raising competition concerns, as they may enable its antitrust clearance. But there is a catch. The proliferation of merger control regimes means that merging parties may face remedy requests from multiple competition authorities. The increasing likelihood of such requests may create uncertainty about the regulatory outcome of a deal and produce a chilling effect on strategic M&A deals. The willingness of business decision-makers to embark on such deals may suffer. Similarly, sellers may increasingly favor financial investors over strategic investors if the latter can no longer present reliable plans on how to overcome regulators' concerns.
The proliferation of merger control regimes means that merging parties may face remedy requests from multiple competition authorities
Remedies in an ever-changing multijurisdictional merger control landscape
In the last ten years, the international merger control landscape has changed in three notable aspects. First, the number of jurisdictions that must be considered as a matter of priority in merger review has substantially increased. Second, the threshold, above which possible concessions from the merging parties for obtaining antitrust approval may be requested, has been lowered. Finally, there is a trend away from classical structural remedies towards behavioral and rather novel remedies.
Proliferation of merger control regimes
Not that long ago, the EU, the US and Germany were the core jurisdictions where antitrust clearance was crucial to the approval of an M&A transaction.
The emergence of merger control across Latin America and Asia as well as the intensified enforcement by regulators in Japan, Korea, Mexico or South Africa have extended the list of "priority" jurisdictions and increased the risk of remedies being requested and the complexity of rules on remedies that need to be navigated.
Lower intervention threshold due to flexible substantive tests
Complex and substantial remedies were in the past most common in transactions that raised concerns about a potential dominant position of the parties post-merger. Now, remedies cannot be excluded even in transactions where the parties' combined market share is far from any dominant level. This is because the dominance test, which was purely market-related, has been replaced in the EU and within some of its member states, by a more flexible test called the "Significant Impediment to Effective Competition" (SIEC).
In addition, several newcomers in international merger control have either adopted the SIEC or similar tests. The threshold for intervention by an authority through a request for remedies has thus decreased.
This can be exemplified by the merger between global mining companies Glencore and Xstrata, which was announced in 2012 and notified to competition authorities around the world. Among them, China's MOFCOM focused its review on the markets for copper, zinc and lead concentrates. Even though the parties' combined market share in the market for copper concentrate in China was around 12 percent and there was no overlap on the segments for zinc and lead concentrates in China, MOFCOM only cleared the transaction after imposing the obligation to divest a production facility in Peru and to continue supplying Chinese customers at specific favourable terms.
Use of behavioural and novel remedies
We have seen the emergence of behavioural and unconventional remedies. One example of this are hold-separate obligations, which require companies to maintain certain operations independent post-merger. Other examples of behavioural remedies are obligations to maintain a specific commercial behavior such as the duty to maintain import levels for certain goods or the obligation to freeze prices at pre-merger levels for several years. Novel remedies also include obligations to abstain from further acquisitions or expansion of production capacity.
countries have adopted some version of merger control system
Risks for businesses from proliferation of remedies in merger control
Despite the upward trend In complex M&A deals In recent years, the fact remains that various factors related to the Increased use of remedies In International merger control render navigation of a complex deal through merger control very difficult:
Having to deal with a remedies phase In several jurisdictions can lead to protracted review procedures. Offering remedies usually stops or extends the review clock. The additional time required from the authority to assess whether the remedies allay Its concerns and to gather third-party opinions on the remedies offered extends the review procedures, which In certain jurisdictions, such as China or Mexico, are already lengthy.
Diverging outcomes and conflicting remedies
Coordination of reviewing authorities Is Important In the remedies phase, as it can help to avoid the Imposition of conflicting remedies by different authorities. In recent years, cooperation among competition authorities has increased due to the development of a set of bilateral agreements between regulators, the work done in international forums such as the International Competition Network (ICN), and the growing practice of merging parties to grant waivers that allow reviewing authorities to exchange confidential information. A recent example of such successful coordination Is General Electric's acquisition of Alstom's energy business, which was cleared simultaneously by the Commission and the DOJ subject to aligned and partially identical remedies.
Even when reviewing authorities coordinate their assessment of remedies, inconsistencies can emerge. This could be due to non-competition-related aspects In certain jurisdictions or differing lobbying opportunities for competitors and customers. Examples of the possibility of different outcomes are the acquisition by Marubeni, a Japanese trading company, of US grain trader Gavilon, which was unconditionally cleared in the EU and the US, but approved in China after the imposition of a hold-separate obligation, and the Glencore/Xstrata merger, where the DoJ and the Australian Competition & Consumer Commission did not impose any conditions, the Commission, however, imposed on Glencore the obligation to terminate relations to a zinc supplier, while MOFCOM imposed on Xstrata the obligation to divest a mine project in Peru and on Glencore the obligation to continue supplying Chinese customers at favourable conditions.
Remedies addressing not only competitive harm
Remedy-related uncertainty is further aggravated by the fact that some enforcers also consider non-competition aspects when designing remedy packages, particularly in some of the newer competition regimes. When MOFCOM cleared Marubeni's acquisition of Gavilon on the condition that Marubeni undertook to hold its own and Gavilon's soybean businesses separate, MOFCOM imposed this remedy despite the fact that the parties' combined market share on the market for import of soybeans to China was less than 20 percent and there were several other strong competitors. It seemed that the hold-separate obligation was motivated by industrial policy considerations related to the import of soybeans.
Meanwhile, employment policy Issues seemed to be the background of the remedies imposed by the South-African Competition Appeal Court on US retailer Wal-Mart in its acquisition of South African wholesaler and retailer Massmart. Notwithstanding Wal-Mart's lack of presence in South Africa and the Competition Commission suggesting unconditional approval of the deal, the Competition Tribunal cleared the deal subject to conditions, which included a prohibition of dismissals for two years post-merger.
Use of remedies stage by third parties
Offered remedies have to be market-tested as to their suitability to allay the competition concerns voiced by the authorities. The remedies stage offers thereby to competitors, customers or other third parties an opportunity either to undermine the deal by declaring the offered remedies inadequate or to influence the remedies package In a way that best serves their Interests.
Mitigation of uncertainty from remedies in multijurisdictional merger control
Parties to a strategic M&A transaction should take all available steps, in order to prevent or prepare for diverging remedies in multijurisdictional merger control. This starts with the allocation of merger control risk among the merging parties in transaction agreements.
Merging parties should also consider facilitating cooperation between reviewing authorities, so as to increase the chances of a consistent remedies approach. In this regard, it will often be advisable to grant the reviewing authorities a waiver for the exchange of confidential information. Notifying parties should, of course, also take a consistent approach regarding the information they submit and the remedies they offer.
Finally, merging parties may also consider putting the EU or/and the US review from a timing perspective ahead of review in other, less sophisticated jurisdictions, so that the latter have more incentives to follow suit regarding the remedies.
However, the main uncertainty— mitigating action—is required from competition authorities and policy makers. Enforcers should intensify harmonisation of procedural and substantive aspects of remedies through best practices or guidelines. The ICN and other international organisations provide a platform for such efforts. On top of such "soft" harmonisation, legislators should take steps towards a further convergence of merger control regimes. Such approximation could become part of the negotiation agenda for bilateral or multilateral trade agreements and aim to remove considerations that are unrelated to competition from remedies in merger control and to harmonise the remedy tool box and procedure.
Merger clearance in Japan: Getting your timing right
Although the business combination review process in Japan bears many similarities with other jurisdictions, there are also some important but subtle distinctions that bear examination. One such distinction relates to time management when seeking clearance before the Japan Fair Trade Commission (JFTC). Exercising control over the timing can help to reduce the burden on the filing parties, make the process smoother and more predictable, and secure a better outcome.
First, some background: the review period for the first phase of a business combination filing in Japan ("Phase I“) is 30 calendar days. Although Phase II begins immediately after Phase I, the Phase II "review period“ does not start until the JFTC is satisfied that it has the necessary information. The Phase II review period is 90 calendar days.
The important point to understand is that, unlike in some other jurisdictions, the JFTC does not have the authority to "stop the clock“ or extend the time for either the Phase I or the Phase II review periods. If time runs out before the JFTC is ready to make a decision, therefore, the agency's incentive is to allow the matter to proceed to Phase II (as in the case when the Phase I period expires) or to ban the combination from proceeding (as when the Phase II period expires). For this reason, an earlier filing is not necessarily better and indeed, it may be ill-advised.
Getting the ball rolling
Effective clock control starts before the business combination filing is even made with the JFTC. Although Japan no longer has an official pre-merger consultation period, parties are still well-advised to begin consulting with the JFTC in advance of their filing. Because the notification form itself requires so little information (unlike, for example, the European Form CO), it is often advisable at this stage to submit a briefing paper fleshing out the background and key issues. The more complex and difficult the business combination is likely to be, the more important it is to start the process early. In the 2011 Nippon Steel/Sumitomo Metal merger, for example, the parties reached out the JFTC more than three months before their official filing and began preparing materials for the agency even before that.
Communicate and educate
Beginning in this pre-filing period and throughout the process, the parties should be regularly communicating with and educating the JFTC. Communications should not only be embodied in formal documents, such as the briefing papers and company documents submitted in other jurisdictions, but should also take the form of regular, even daily, conversations with the JFTC. The agency has shown itself to value a near-constant dialogue that can sometimes appear unusual from the perspective of practice in other jurisdictions. There is no substitute for these conversations when it comes to understanding the JFTC's thinking or to establishing credibility with the agency. The best way to build the rapport necessary to have these conversations is to start them as early as possible.
Withdraw and refile
In the event that the parties find themselves coming up to the impending end of Phase I, in some cases there may be the option of withdrawing and refiling their application. This would restart the Phase I 30-day period. This may be necessary in certain cases but can also sometimes be obviated by starting the consultation process early. Delaying the start of Phase II, even if it is inevitable or very likely, has the added benefit of delaying the publicisation of the case that would happen when Phase II starts.
Managing Phase II
Finally, filing parties may not always want to start the 90-day Phase II review period as soon as possible because they may wish to avoid placing time pressure on the JFTC to review the deal within that limited time frame. In addition to starting a ticking clock that may actually harm the parties, this can also build goodwill with the JFTC. Delaying the start of the Phase II review period does not necessarily prejudice the parties, because the JFTC will start reviewing materials from the parties even before the Phase II review period has commenced. In addition, the parties can usually negotiate with the JFTC to reduce the 90-day period and secure clearance faster.
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