Competition law developments in East Asia - January 2017

This month’s editors: Maxime Vanhollebeke, Pearl Yeung, Michael Kim, Sophie Chen, Fridoun Chee and Lydia Fung.

Below is an excerpt from our monthly Competition Report. More detailed commentary on these issues and other recent competition law developments in the Asian region is to be found in this month’s edition of our report available on a free subscription basis (see further below).

During 2016, China’s Ministry of Commerce remained one of the most active merger control authorities in the region, reviewing more than 350 M&A transactions. The procedural reforms introduced in mid-2014 are clearly bearing fruit. A vast majority of these transactions were reviewed using a simplified process, leading to unconditional clearance being granted within 30 days in more than 90 per cent of cases.

This increased efficiency allowed the Chinese merger enforcement authority to devote more resources to the review of complex transactions. During the year, the authority adopted two conditional clearance decisions and carefully reviewed other complex mergers that were ultimately cleared unconditionally after an in-depth investigation. It also monitored performance of commitments made by parties in earlier transactions, and relieved Wal-Mart of its commitments. The authority also continued enforcing the law against those parties that failed to seek pre-merger clearance or that started implementing their transaction ahead of receiving clearance.

Practitioners also witnessed a significant development in the scrutiny of notification materials during the year. The officials responsible for merger control within the Ministry announced the further development of an internal database compiling market information relating to more than 40 economic sectors. They are now particularly well-equipped to review market information provided as part of merger notifications against this database, significantly raising the bar for the parties and their advisors.

On 4 January, the Antimonopoly Bureau of the Chinese Ministry of Commerce (MOFCOM) published a decision made on 16 December in which Canon, a Japanese imaging and optical products manufacturer, was fined for implementing its acquisition of Toshiba Medical prior to receiving pre-merger clearance.

After Canon had obtained exclusive negotiation rights to purchase Toshiba Medical from Toshiba, the parties agreed to implement the transaction in two phases.

In a first phase, Toshiba Medical underwent a share restructuring to create three types of rights (20 voting shares, one non-voting share, and convertible stock options for 100 per cent of the target’s ordinary shares). Toshiba then entered into two parallel agreements, one with MS Holding (a special-purpose company set up by three individuals) and one with Canon. The decision does not explain whether MS Holding or its shareholders are affiliated with Canon.  Pursuant to the agreement with MS Holding, Toshiba sold all of the voting shares in Toshiba Medical to MS Holding. At the same time, pursuant to the agreement with Canon, Toshiba sold the non-voting share as well as the convertible stock options to Canon. The first phase was implemented immediately. While the amounts are redacted in the published version of the decision, it appears that a substantial consideration was paid by Canon upon completion of this first phase.

In a second phase, whose implementation was subject to merger control approval, Canon was to exercise its rights to acquire 100 per cent of the voting shares in Toshiba Medical. At the same time, all other shares would be repurchased by Toshiba Medical and cancelled, making Canon the sole shareholder. Canon would pay a token JPY100 ($1) consideration at that time to exercise its rights under the option.

MOFCOM considered that the two phases were closely connected and formed an indivisible part of Canon’s acquisition of Toshiba Medical. MOFCOM concluded that with the closing of the first phase, parties had started implementing their transaction, in violation of the standstill obligation under Article 20 of the Antimonopoly Law. MOFCOM decided to impose a fine of RMB300,000 ($40,000) on Canon for this infringement. The decision explains that this amount was set having regard to the fact that Canon did seek approval and that the transaction had not been fully implemented by the time clearance was sought; but that the two-phase structure was clearly designed to allow Canon to pay consideration to Toshiba early so as to assist with its financial difficulties, in full knowledge that pre-merger approval was required, showing its intent to circumvent the standstill obligation under the law.

MOFCOM otherwise approved the transaction, as it found that it does not restrict or eliminate competition.