Chapter 4 of the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Act No 54 of 1947 – the Anti-Monopoly Act or AMA) prohibits transactions that will substantially restrict competition in any relevant market.
In addition, the Japan Fair Trade Commission (JFTC), a competent Japanese authority for the AMA, prepares and publishes the Guidelines to Application of the AMA Concerning Review of Business Combination (established in May 2004 and most recently amended in December 2019) (the Merger Guidelines) to clarify details of how the JFTC analyses a proposed merger. The Merger Guidelines are also applied to cases below the filing threshold.
The JFTC has also published the Policies Concerning Review of Business Combination (established in June 2011 and most recently amended in December 2019) (the Merger Review Policies), containing detailed merger control review procedures.
The Foreign Exchange and Foreign Trade Act (FEFTA) regulates foreign transactions or inward investments as foreign direct investments or specified acquisitions – eg, the FEFTA requires the filing of a notification prior to transactions in certain areas, such as weapons, aircrafts, space, nuclear facilities, dual-use technologies (which could be used for military purposes), cybersecurity, electricity, gas, telecommunications, water supply, railways and oil.
In some industries, restrictions on inward investment under the industry-specific legislation will also apply, including under the following:
Merger control rules under the AMA are enforced by the JFTC as the sole regulatory authority in Japan. The JFTC is an external agency of the Cabinet Office, and the AMA expressly provides that the JFTC must exercise its authority independently from any other governmental bodies.
Notification is compulsory if the transaction meets a certain threshold under Chapter 4 of the AMA and relevant regulations. A transaction within the same company group is generally exempt from the obligation of notification.
Please note that the JFTC can review any merger below the notification threshold, either on its own initiative or through a voluntary consultation by the merging party (parties). Specifically, in the Merger Review Policies revised in 2019, the JFTC recommends parties whose domestic sales amounts fall under the thresholds of the notification to consult voluntarily prior to the notification process when the total consideration for the acquisition (transaction value) will exceed JPY40 billion, and the scheduled transaction is deemed to affect domestic consumers, such as by satisfying one of the following:
In practice, the targeted parties conventionally consult with the JFTC voluntarily prior to filing a notification, as described in 3.9 Pre-notification Discussions with Authorities. If they omit the voluntary consultation, the parties could be requested to provide further related information.
If a party obliged to notify fails to make/file a notification, it is subject to a criminal fine of up to JPY2 million. No such penalty has yet been imposed on any party, but in June 2016 the JFTC issued a warning on a “warehousing” case; please see 2.13 Penalties for the Implementation of a Transaction before Clearance for further details.
It should be noted that the thresholds for notification vary in accordance with the following types of transactions:
Interlocking directorship is one type of business combination that is subject to merger review by the JFTC but is not subject to mandatory notification obligation.
In more detail, the above-mentioned acquisitions of businesses or asset include:
Internal restructurings or reorganisations within the same company group are not subject to notifications in general. The AMA does not technically require notification regarding operations that do not involve the transfer of shares or assets (eg, shareholders’ agreements, changes to articles of association), although the JFTC does investigate such operations in some cases – for instance, if challenged by relevant parties as a violation of other provisions of the AMA.
The AMA does not define or use the concept of “control”. Even if they do not raise any issues of “control”, transactions are subject to notifications once they meet the thresholds described in 2.5 Jurisdictional Thresholds.
The AMA determines different notification thresholds for each type of transaction described in 2.3 Types of Transactions. Please note that the thresholds described in this section are thresholds for a mandatory notification requirement. The JFTC has the authority to review any merger case below notification thresholds.
The thresholds in a share acquisition are as follows:
The thresholds in mergers and joint share transfers are as follows:
In the case of an absorption-type company split (demerger), a transferring company transfers its business to a succeeding company. If a part of the business of the transferred company (not its entirety) is acquired by a succeeding company, a notification is required when either of the following applies.
When the entire business of the transferring company is transferred to a succeeding company, different (higher) thresholds will apply (see the JFTC website).
In the case of a joint incorporation-type company split (where two or more companies jointly establish a new company), when all the parties to the transaction transfer only a part of their business, a notification is required if:
When any of the parties to the transaction transfers its entire business to a new company, different (higher) thresholds will apply (see the JFTC website).
The thresholds in acquisitions of businesses or assets are as follows:
All sectors are subject to these jurisdictional thresholds, without any exception. Nevertheless, it is worth noting that the AMA prohibits a bank and an insurance company from acquiring or possessing more than 5% or 10%, respectively, of voting rights in another domestic company (except for an acquisition of a bank by another bank or an acquisition of an insurance company by another insurance company), in principle. The acquisition or possession will be permitted when one of the exemptions under the AMA applies, or if the party obtains prior approval from the JFTC.
The total amount of the price of goods and services supplied in Japan during the latest fiscal year is regarded as domestic turnover, from which the thresholds are calculated. In addition to direct sales within and into the country, indirect sales in Japan will be included in domestic turnover if the party recognises that the goods and services will be shipped to Japan by the direct purchaser at the time of entering into the contract without changing their nature and characteristics. The intra-group company sales amount within the same group is to be excluded from the domestic sales.
Sales booked in a foreign currency should be converted into Japanese yen using the conversion rate applied for the account settlement. If such an exchange rate is not available, the average telegraphic transfer middle rate is used.
In a share acquisition, the Total Domestic Sales Amount of the acquiring company for the purpose of the notification thresholds includes the domestic sales amount of the acquiring company, its subsidiaries, and its ultimate parent company and (direct and indirect) subsidiaries thereof. The ultimate parent company must be included in the relevant entities only if it is in the form of a “company”. On the other hand, the Total Domestic Sales Amount of the target company group includes the domestic sales amount of the target company and its subsidiaries, but does NOT include the seller (ie, a parent company of the target company) and its affiliate’s sales amount.
It should be noted that not all the subsidiaries need to be in the form of a “company”, which means a partnership can be considered a subsidiary.
A company is deemed a subsidiary if another company holds the majority of the voting rights of that company. In addition, when 40–50% of the voting rights of a company are held directly or indirectly by another company, the former company can be considered a subsidiary of the latter company, by taking into account various factors such as board representation and loans provided from the latter company.
The scope of the group companies (a parent company, ultimate parent company and subsidiaries) is defined at the time of the closing of the proposed transaction. Changes in the business during the reference period have to be reflected in general. For instance, for calculation of the Total Domestic Sales Amount of an acquiring company that consummated the separate share acquisition transaction that results in obtaining more than 50% of the voting rights in another company (Company A) after the settlement of the last fiscal year, the domestic sales of Company A for the last fiscal year must be included in the calculation of the Total Domestic Sales Amount of the acquiring company group.
Foreign-to-foreign transactions are subject to pre-notification and merger control examination under the AMA, as long as the thresholds – which apply equally to foreign-to-foreign transactions and domestic transactions – are met.
There is no local effect test; a local presence does not always trigger the notification requirement. However, any transaction that meets any of the notification thresholds is considered to have a local effect.
A party without any sales exceeding the thresholds within or into Japan is not required to file a notification. Nevertheless, the JFTC may recommend that a party to the transaction makes a consultation voluntarily prior to the notification process if the amount of the transaction exceeds JPY40 billion and the attempted business combination is found to affect domestic customers. That is to say, even without sales in Japan, according to the Merger Review Policies referred to in 2.1 Notification, the business combination could affect domestic customers if the party has its business or research base in Japan, the acquired company conducts sales activities targeting domestic consumers, or the total domestic sales of the acquired company exceed JPY100 million.
The AMA does not define any market share jurisdictional thresholds.
Due to the absence of the concept of “joint control”, the JFTC does not apply any special rules to joint ventures regarding filing requirements under the AMA; joint ventures are regulated by the same principle as the jurisdictional thresholds mentioned in 2.5 Jurisdictional Thresholds.
The JFTC has the power to investigate any transaction, even when it does not meet the notification thresholds. The authority is able to ask the targets of the investigation to explain reasonably why the transaction in question would not substantially restrain competition in a relevant market, and can request further information in detail if competitors or customers of the parties raise concerns about the transaction. In fact, the JFTC is becoming more proactive in reviewing such business combinations that do not meet the thresholds.
There is no statute of limitations on the JFTC’s authority to investigate.
The completion of transactions that are subject to a notification requirement must be suspended for 30 calendar days of the statutory waiting period (corresponding to the end of the “Phase I review period”) from the date of acceptance of said notification. Nevertheless, the JFTC can shorten the waiting period in response to a paper-based request from the notifying party, if it is deemed appropriate to do so.
The related parties can theoretically implement transactions after the waiting period ends, even if the succeeding review process (the “Phase 2 review period”) has been commenced by the JFTC. In practice, however, they tend not to complete transactions before the Phase 2 review is completed. If a transaction that has a possibility of restraining competition substantially is to be closed during the Phase 2 review period, the JFTC can request the Tokyo District Court to issue an urgent injunction order to refrain the related parties from completing the transaction.
If the related parties fail to meet the waiting period requirement noted in 2.12 Requirement for Clearance before Implementation, they will risk a criminal fine of up to JPY2 million, which can be imposed both on the notifying company(ies) and on any representative(s) or employee(s) responsible for the failure.
Though the JFTC has never imposed such penalties in any case, it did issue a warning in the case of Canon Inc.’s acquisition of Toshiba Medical Systems Corporation (TMSC) in 2016, for being possibly inconsistent with the notification system. To be more specific, before filing the notification to the JFTC, Canon acquired a share warrant of TMSC, paying an amount equal to the value of the underlying common shares to Toshiba Corporation, the parent company of TMSC. In addition, a third party other than Canon and Toshiba was designated to own voting shares of TMSC until Canon exercised the share warrant. The JFTC cautioned that a company that plans to acquire shares of a target company in this way is required to file a notification with the JFTC prior to implementation.
There is no exception to the suspensive effect; it is not permitted to seek a waiver or derogate from the regulation. Meanwhile, because a notification can be filed before a definitive agreement is executed, the related company will be able to consummate a tender offer bid – for instance, by filing a notification 30 days prior to the consummation of the bidding process.
Furthermore, the JFTC can shorten the period of suspension effect in response to a paper-based request from the notifying party, when it is appropriate to do so.
Although the related parties can theoretically implement transactions after the statutory 30-day waiting period, in practice they tend not to implement the transactions before the subsequent review (if any) is completed.
Even under a pressing schedule in the case of foreign-to-foreign mergers, the JFTC would not permit an implementation of the transaction before a clearance by implying a possibility of filing an urgent injunction order. It seems to be possible technically for the parties to propose a carved-out agreement; nevertheless, as far as is known, there has been no case in which the JFTC agreed to the proposal of a carved-out agreement.
There is no deadline for notification. However, taking into account the 30-day statutory waiting period, a notification must be filed with the JFTC at least 30 days prior to the completion of the transaction (see 3.11 Accelerated Procedure). The notification can be submitted even before a binding agreement between the parties is made.
No definitive agreement binding the parties is required prior to the notification. The parties can notify the JFTC on the basis of an agreement at an earlier stage, such as by a letter of intent (LOI) or memorandum of understanding (MOU). Furthermore, the JFTC regularly accepts filings with less formal agreements, but, in such cases, it requests a notifying party to submit a draft or other documents indicating that the parties have a good-faith intention to consummate the transaction. In such cases, the notifying party needs to provide the JFTC with a signed binding agreement as soon as said agreement is executed.
No filing fees are required.
In share acquisitions and business/asset transfers, the acquiring party is responsible for filing. In other types of transactions, all the parties must jointly file a notification.
To file a notification with the JFTC, a company must comply with the prescribed format, which can be downloaded from the JFTC’s website. It should be noted that different forms are set out for different types of transaction. The notification form and the required materials to be attached must be completed in Japanese, while summary translations are generally accepted regarding additional information requested from the JFTC on a voluntary basis.
The information to be included in the notification is as follows:
Certain documents must be attached depending on the type of transaction, such as a copy of the definitive agreement, financial statements and annual reports of the notifying party, a list of major shareholders, the minutes of a shareholder meeting or board meeting that approves the transaction, and powers of attorney.
In addition to the required information, the JFTC often requests – usually on a voluntary basis – additional materials to review the transactions substantially, such as definitions of the product and geographic markets, the degree of competition between the parties, competitive pressures including those from competitors, import products, new entries or customers, and efficiencies.
Furthermore, the parties’ internal documents can be requested by the JFTC, including presentation materials and the minutes of meetings such as board of directors’ meetings, materials used in analysis and decision-making processes, and emails of persons concerned, which may refer to synergies, effects or competitive concerns, typically at a later stage of the review.
Although the documents to be submitted are not required to be certified, notarised or apostilled, certifications by the company representative are required for copies of certain documents.
If the notification is deemed incomplete, the JFTC will not accept the notification, in which case it may recommend the parties to withdraw and refile the notification if amended.
Nevertheless, prior to said formal notification, parties can engage in a pre-notification consultation, in which a draft notification is submitted to the JFTC for review (a so-called draft check). This draft check process usually takes between a few days and a couple of weeks. If a submitted draft notification is deemed incomplete, the JFTC can extend this process for an amendment of the draft.
Filing inaccurate or misleading information is subject to a criminal penalty of up to JPY2 million, though no such penalty has yet been imposed, as far as is known.
In addition, the JFTC can issue a cease-and-desist order at any time if it finds significant false or misleading information in a notification, regardless of the time limit of its ability to issue an order. In other words, the JFTC can overturn its clearance decision if there is significant false or misleading information in a notification.
It should be noted that the parties concerned can consult voluntarily with the JFTC in advance through the pre-notification process. When the JFTC accepts a formal notification, the statutory waiting period will commence (Phase I review).
The JFTC has 30 calendar days from the date of a formal acceptance to review the transaction. The party/parties can request the authority to shorten the waiting period on a discretionary basis; the period is shortened in a large number of cases in practice. A request for information from the JFTC does not suspend or reset the 30-day review period.
If the JFTC comes to the conclusion that the transaction in question will not substantially restrain competition, the clearance will be granted through a written decision stating that the JFTC will not issue a cease-and-desist order (a clearance letter).
If the JFTC determines that it is necessary to conduct a more detailed review, the Phase II review will be triggered by officially requiring the filing party/parties to submit the necessary information or materials, which is called a “Request for Report etc”.
At the initiation of Phase II, the JFTC discloses the fact of its review and seeks public comments on its website. The authority must conclude the Phase II review within either 120 calendar days from the date of the JFTC’s acceptance of the notification or 90 calendar days from the date of acceptance of all the responses to the Request for Report etc, whichever is later. In practice, it is common for the JFTC to take several months or even more than a year to formally accept all the responses to the Request for Report etc.
While the suspensive effect is not applicable for the Phase II review period, in practice, the parties are recommended to refrain from completing the transaction until the clearance is granted.
If, following a Phase II review, the JFTC finds that the transaction will not substantially restrain competition, it will grant the clearance by issuing a confirmation letter which states that the JFTC will not issue a cease-and-desist order on the transaction. When finding that the transaction could substantially restrain competition, the JFTC will afford the filing party an opportunity to express their opinions (including a proposal of remedies) and submit evidence before the JFTC’s final decision on whether to issue a cease-and-desist order. In any case, the results of the review will be made public.
Parties can discuss issues on a voluntary basis with the JFTC by means of a pre-notification consultation. During the consultation, the parties can submit written explanations concerning an overview of transactions and (potential) competitive issues, and discuss substantive issues including market definition and any other competitive concerns (such as high market shares or lack of strong competitive pressure from current or potential competitors).
The period of pre-notification depends mainly on the intention of the notifying parties. For instance, if the parties ask the JFTC just to review the draft of the formal notification, it will take only a few days, while in the case of complicated transactions, it is expected to take several months or more.
The JFTC and the notifying parties regularly communicate confidentially in this process. If the parties have already publicly disclosed the transaction, JFTC may contact their competitors and customers so that it can obtain their opinions about the transaction.
The JFTC can request the parties to provide further information at any time during the review process. The amount and content of the information requested depends on the transaction.
The review process will not be suspended or restarted by requests for information. Regarding the Phase II review, the 90-day statutory review period will start to run only when the JFTC accepts all the necessary information requested in the Request for Reports etc.
The AMA does not technically provide a short-form or fast-track procedure in terms of the review process. Although the party/parties can ask to shorten the 30-day waiting period, the JFTC has sole discretion on whether to agree to such a request.
The JFTC examines whether a business combination in question is likely to result in a “substantial restriction of competition in a certain market.” Substantially restricting competition means that competition itself is significantly reduced to such an extent that a particular business operator or group of business operators can control a market by determining prices, quality, quantity and other competitive parameters at their own volition.
The Merger Guidelines mentioned in 1.1 Merger Control Legislation classify business combinations into horizontal, vertical and conglomerate business combinations, and clarify the factors to be taken into account and the framework of determining whether they may substantially restrain competition for each type of business combination.
According to the Merger Guidelines, the JFTC takes the following factors into account in assessing the (pro-/anti-) competitive effect of the transaction:
The Merger Guidelines set forth the safe harbour based on the Herfindahl-Hirschman Index (HHI). In principle, the JFTC does not conduct a substantive examination of a business combination that falls below the thresholds of the safe harbour.
The JFTC defines which markets are affected by the business combination from the perspective of the scope of the product and the geography by considering the substitutability for customers and, if necessary, suppliers.
The JFTC will use the factors described in the Merger Guidelines to define a relevant market.
The Merger Guidelines clearly state that the geographic market may extend beyond the borders of Japan, depending on the international nature of the relevant business. In fact, in some cases, the JFTC has defined the global market as the relevant market.
Another feature of the Merger Guidelines is that they establish safe harbours for three categories of business combinations: horizontal, vertical and conglomerate (each category is subject to a specific safe harbour). The JFTC believes that there is usually little or no likelihood of substantially restricting competition, and therefore no need to conduct a detailed examination of the business combination when it meets the requirements of a safe harbour. In such a case, the JFTC does not generally conduct the examination described in 4.1 Substantive Test.
The safe harbour standards for horizontal business combinations are as follows:
If a horizontal business combination exceeds the safe harbour standards, the JFTC will examine whether it would substantially restrict competition in a relevant market through the test mentioned in 4.1 Substantive Test.
In addition, the Merger Guidelines clarify that, in light of past cases, if the HHI after the business combination is 2,500 or less and the market share of the business group after the business combination is 35% or less, the risk of substantially restricting competition is generally considered to be small.
The safe harbour standards for vertical or conglomerate business combinations are as follows:
As with the horizontal business combination described above, even if a vertical or conglomerate business combination does not fall within the safe harbour standards described above, it does not immediately mean that said business combination would likely substantially restrain competition.
In addition, if the HHI after the business combination is 2,500 or less, and the market share of the parties’ group after the business combination is 35% or less, the possibility that a business combination may substantially restrain competition is generally considered to be small.
It should be noted that the latest version of the Merger Guidelines states that, even if the business combination satisfies the safe harbour standards, the JFTC will conduct further review on the matter if one of the parties has a potential strong competitive power due to its assets (including important data and intellectual property rights) or any other reason.
In a merger review, the JFTC basically defines the relevant market in accordance with its previous review cases, some of which are not disclosed to the public. However, the JFTC may take into consideration any significant changes to the premise of the definition of the relevant market, such as the innovation or development of an adjacent product market.
The JFTC basically does not depend on the decisions of competition authorities in other jurisdictions, such as the EU Commission, the US Federal Trade Commission or the US Department of Justice. Nevertheless, if the JFTC has no previous case in the field of the transaction, it may use such decisions as references to define the relevant market.
The JFTC examines any kinds of competition concerns that may cause substantial restriction on competition in the relevant market, including unilateral effects, co-ordinated effects, conglomerate or portfolio effects, vertical concerns and the elimination of potential competition.
Traditionally, unilateral and co-ordinated conduct possibly arising from horizontal business combinations has occupied a large portion of the JFTC’s concern, since a horizontal business combination would basically reduce the number of competitors in the relevant market and thus have a potentially direct negative impact on competition.
However, this does not mean that the JFTC only has competition concerns in horizontal business combinations. It has also conducted numerous investigations on other competition concern matters, and there are some cases in which it has conditionally approved vertical business combinations as long as the parties undertook remedies. Furthermore, in some cases, the JFTC has assessed conglomerate or portfolio effects and any other kind of anti-competitive effects.
In examining competition concerns, the JFTC takes into consideration economic efficiencies as one factor. However, as the Merger Guidelines state, the JFTC considers that the improvement of efficiency is merely an inherent outcome of the business combination, and must be passed on to consumers through lower product prices, improved quality, and so on. Therefore, the JFTC tends to consider that the improvement of efficiency alone is not likely to justify the transaction.
In principle, the JFTC considers only competition issues in the process of examination. Although the JFTC may consider non-competition issues in some cases, such as industrial policy and other issues of public interest, it is not bound by these kinds of concerns.
Generally speaking, there is no special consideration for joint ventures under the AMA and the Merger Guidelines. That said, the Merger Guidelines state that when joint venture partners establish a joint venture to integrate only a part of their business, the JFTC will analyse the co-ordinated effects between the remaining businesses of joint venture partners (“spill-over effect”).
With respect to a notification requirement, if the transaction involves multiple kinds of business combinations, each stage of the business combination may constitute a separate business combination subject to a pre-notification. For instance, in a triangular merger case, the parties would likely have to file notifications for a share acquisition and for a merger separately. Likewise, if a joint venture transaction comprises multiple business combinations subject to pre-notifications, parties have to file notifications separately on the basis of each business combination.
Under the AMA, the JFTC can file a motion for an urgent injunction order (an injunction against the consummation of a transaction prior to the completion of examination) and issue a cease-and-desist order (a prohibition against the consummation of a transaction after the completion of examination).
Regarding an urgent injunction order, the JFTC must show that the business combination would likely substantially restrain competition, and that the consummation of a business combination would cause irreversible damage to competition. The JFTC must file a petition for an urgent injunction order with the Tokyo District Court and prove the existence of a suspected violation of the AMA and the urgent need for such an order. The hearing will be held privately and expeditiously; if the court approves the JFTC's request, it will issue the order.
A cease-and-desist order is an administrative action to prohibit a business combination transaction or to order a party to take measures to eliminate the likelihood of the transaction substantially restricting competition after the JFTC completes its review. The order includes business divestitures, stock transfers and business transfers to eliminate substantial restraints on competition. The JFTC can issue a cease-and-desist order on its own (without any prior review or approval by a court), and it can be either before or after the consummation of a planned business combination.
The recipient of a cease-and-desist order issued by the JFTC can file an action seeking a cancellation thereof with the Tokyo District Court within six months of receiving the order.
In fact, the JFTC has not issued a cease-and-desist order for more than 40 years. In practice, if the JFTC informally indicates its competition concern to parties, the parties often propose a remedy, seeking the JFTC’s clearance, or voluntarily withdraw their notifications. Therefore, the JFTC has not faced the need to issue a cease-and-desist order on business combinations.
The parties in question may discuss remedies with the JFTC at any stage, including pre-notification, the Phase 1 review process and the Phase 2 review process. If the parties propose a remedy, the JFTC will review the business combination on the premise that the proposed remedy will be implemented.
During the pre-notification stage, the JFTC and the parties basically discuss the form and content of notification and the competition issues of the proposed transaction, but there are a few cases in which the parties and the JFTC negotiate a remedy in response to the JFTC’s competition concern.
The legal standard for a prohibition (ie, cease-and-desist order) is whether a planned business combination is likely to substantially restrict competition in a relevant market. Therefore, any remedy should alleviate a competition concern to the extent that substantial restraint of competition is eliminated so that the transaction can be approved by the JFTC. The Merger Guidelines supplement this point.
The Merger Guidelines also state that the JFTC considers and examines what measures are appropriate for solving the likelihood of substantially restraining competition on a case-by-case basis for each business combination. Furthermore, the Merger Guidelines clearly state that a structural remedy is the most effective remedy and thus should be taken in principle, such as business transfers. However, in practice, a behavioural remedy could be acceptable in many cases, if it is appropriate to resolve the JFTC’s competition concern.
The Merger Guidelines state that structural remedies are the most effective remedies, but behavioural remedies can also be accepted.
Structural remedies include the transfer of all or part of the business units of either party, the withdrawal of a certain relationship with a company belonging to the parties’ group (for example, suspension of the holding of voting rights, reduction of the ratio of voting rights, or suspension of the concurrent holding of executive positions), and the withdrawal of the business alliance with a third party.
On the other hand, behavioural remedies include the elimination of discriminative terms and conditions or the refusal of supply, cost-base trading, a Chinese wall on the exchange of secret information, and so on.
The parties may discuss with the JFTC what remedies are appropriate to eliminate the JFTC's concerns. Upon the request of the party/parties after the consummation of the transaction, the JFTC may approve a change of content of the remedies or even a termination of the remedies as a result of assessing the necessity of continuing the remedies in light of changes in competitive conditions after the business combination.
Please see 5.2 Parties' Ability to Negotiate Remedies.
The Merger Guidelines state that remedies should, in principle, be fully carried out prior to the implementation of the business combination. However, as an exception, remedies can be carried out after the clearance if the proposed remedy properly and clearly defines the deadline and the JFTC approves it.
If the parties fail to carry out the remedies, the JFTC may issue cease-and-desist orders to prohibit the parties from implementing the business combination, or may take measures to eliminate the substantial restraint of competition caused by the business combination.
When the JFTC concludes that the business combination will not substantially restrict competition, it will issue a notice to the parties that it will not issue a cease-and-desist order. This notice itself is not available to the public.
Regarding confidentiality, please see 7.3 Confidentiality.
The JFTC may issue a clearance subject to remedies for foreign-to-foreign transactions. To date, it has issued conditional clearance for the following foreign-to-foreign transactions:
Neither the AMA nor the Merger Guidelines give express guidance regarding ancillary restraints or related arrangements. However, the JFTC may carry out in-depth assessment regarding ancillary restraints in its substantive review.
If, in the course of the review process, the party reports ancillary restraints and the JFTC still issues clearance without raising any competitive issue, it would be unlikely that the JFTC would challenge the transaction after the issuance of clearance in a practical sense. However, ancillary restraints are still subject to challenges by the JFTC in theory, even after the clearance.
As a general rule, the AMA provides that any person who believes there is an act in violation of the AMA may make a report to the JFTC and ask for appropriate measures to be taken. In addition, while there is no formal or statutory procedure, any third party may informally submit any report or complaint to the JFTC at any time, including customers and competitors.
As a part of the formal procedure of a merger review, the Merger Review Policies provide that, at the beginning of a Phase II review, the JFTC invites the public to offer their written comments on the contemplated transaction within 30 days of the announcement on the JFTC’s website.
The JFTC is not obliged to respond to a third party’s comment, but will normally take information provided by a third party into account in the substantive review. Furthermore, if the report made by any person under the AMA meets the requirements and qualifies as notice as provided in the AMA and the Rules on Investigations by the Fair Trade Commission (established in October 2005, and most recently amended in September 2020 – the JFTC Investigations Rules), the JFTC shall notify such a person about its decision as to whether it will take appropriate measures for the case reported in accordance with the AMA.
The JFTC typically contacts third parties such as competitors or customers by sending written questionnaires or requesting oral interviews as a part of its review process if the planned transaction is publicly announced or the investigation proceeds to the Phase II review. Also, as stated in 7.1 Third-Party Rights, a third party will be invited to submit comments in writing at the beginning of a Phase II review. The JFTC tends to make these inquiries proactively when it sees issues in the substantive review. In addition, the JFTC sometimes conducts a kind of "market test", in which it asks for the opinions of third parties for the purpose of assessing the feasibility of proposed remedies.
During the Period of the JFTC’s Review
The JFTC does not make the information available to the public until the initiation of the Phase II review. Therefore, in the course of a merger review, the existence of a fact of filing, and any confidential information or business secrets that consist of filing documents, supporting documents or oral guidance to the JFTC will not be publicly disclosed if the case is cleared before going to a Phase II review. If the case is subject to a Phase II review, the JFTC invites the public to offer their written comments on the contemplated transaction, at the beginning of Phase II (see 7.1 Third-Party Rights). The description of the transaction will be made public in such case.
Disclosure for Statistical Purposes or as a Precedent Case
Aside from the slight chance of the JFTC issuing a cease-and-desist order, which will fully disclose the transaction, the JFTC announces the outcome of its review on cases subject to the Phase II review.
In addition, the JFTC annually publishes a report of the major business combination cases on its website around June (the 2020 edition was published in July), which provides a summary of merger review cases that serves as a useful reference. These cases are selected from those cleared in Phase I as well as Phase II, and the parties will be contacted by the JFTC before the publication, to confirm whether the publication contains any confidential information.
Since 2017, the JFTC also announces quarterly the list of cases it has cleared. The list shows each filing date, the parties’ name, the date of clearance and whether it was short-track (ie, whether the statutory waiting period was shortened).
The JFTC has entered into agreements for co-operation with various overseas authorities, including the European Commission and the DOJ and the FTC in the United States. Article 43-2 of the AMA expressly provides that the JFTC may exchange information with authorities in other jurisdictions for specific transactions, if doing so is not against the national interest, and if the authority of other jurisdictions can maintain the confidentiality of information.
In practice, if the JFTC wishes to disclose the information of a specific transaction to any foreign authority, it obtains the parties’ written waiver in advance.
While the JFTC believes that co-operation with other jurisdictions will be beneficial in multi-jurisdiction filing cases, as a practical matter, whether the JFTC works closely with other jurisdictions depends on the specific case and regulators.
Pursuant to the provisions of the AMA, if a party is unsatisfied with the cease-and-desist order, it may bring an action seeking cancellation of such order against the JFTC before the Tokyo District Court. That said, practically speaking, it is unlikely that a cease-and-desist order will be issued in merger cases, which results in the unavailability of judicial review in merger review cases.
An action seeking cancellation of a cease-and-desist order must be filed with the Tokyo District Court within six months.
Since there is no precedent of appeal against a cease-and-desist order on a business combination after the amendment of the AMA that provides the current system, the timeline is difficult to predict. However, it could take several years if the non-prevailing party appeals the cease-and-desist order from the first instance until a court judgment is finalised. Considering this, if the party plans to bring an action, the party needs to consider petitioning for a stay of execution of the order in accordance with the Administrative Case Litigation Act.
There is no precedent in which a third party has successfully appealed against a clearance decision or a cease-and-desist order. However, any third party may bring an action against a cease-and-desist order as long as it has standing to sue.
In December 2019, the JFTC revised the Merger Guidelines and the Merger Review Policies. This revision focuses on business combinations in digital markets, which can be outlined as follows.
According to the JFTC's announcement in July 2020, the total number of notifications for merger control filed in the most recent fiscal year of the JFTC (ie, from April 2019 to March 2020 – FY2019) was 310 cases, one of which went to Phase II review. There has been no case in which the JFTC imposed a fine (for failing to file). Four cases were cleared with conditions, and 39 transactions between foreign businesses were notified with the JFTC in FY2019.
In cases where a major company purchases a prospective start-up, such a transaction may not meet the filing thresholds as a start-up does not yet have large sales. As seen in 9.1 Recent Changes or Impending Legislation, the revised Merger Guidelines encourage voluntary consultation in such a situation.
In addition, in the recent case of M3, Inc. and Nihon Ultmarc Inc. (the JFTC announcement on 24 October 2019), the JFTC initiated a merger review even though the transaction did not cross the filing requirement threshold and was already consummated.
See the Japan Trends & Developments chapter in this guide for more details.
In Japan, the Antimonopoly Act (AMA) governs merger control matters, including the merger review process conducted by the Japan Fair Trade Commission (JFTC), which is the competition authority in Japan. In addition, the JFTC publicises the Guidelines to Application of the Antimonopoly Act Concerning Review of Business Combination (Merger Guidelines) and the Policies Concerning Review of Business Combination (Merger Review Policies), amended on 17 December 2019.
To grasp the recent trends and developments of the merger review process conducted by the JFTC, it is important to understand the latest versions of the Merger Guidelines and the Merger Review Polices, which reflect the JFTC’s recent attitude regarding merger review. It is worth noting that the revised Merger Review Policies explicitly recommend a party to a merger to make a voluntary consultation with the JFTC, even if the proposed merger transaction does not meet the thresholds set out under the AMA, in cases where the total consideration for an acquisition exceeds a certain amount and would likely affect domestic consumers in Japan (please see Google/Fitbit: Merger review process, below). This revision indicates that the JFTC would likely examine a merger transaction that does not meet the jurisdictional threshold, and the JFTC actually conducted merger reviews on at least two cases in 2019 and 2020 (please see Google/Fitbit and M3/Nihon Ultmarc, below).
On the other hand, the revised Merger Guidelines explicitly include new factors to be taken into account when the JFTC examines whether a merger would likely substantially restrain competition on a certain “digital platform” market (such as network effect), and indicates the JFTC’s intention to actively examine mergers on digital platform markets. In fact, the JFTC has intensively reviewed mergers involving a big tech company on digital platform markets, such as Google and Fitbit, and Z Holdings and Line (please see Google/Fitbit and Z Holdings/Line, below).
Also, it should be pointed out that the JFTC focuses not only on horizontal business combinations but also on vertical and conglomerate effects. In addition, it is fair to say that the JFTC tends to issue a clearance subject to a behavioural remedy for a vertical and/or conglomerate effect. Moreover, it has issued an unconditional clearance to a horizontal business combination despite significantly high aggregate market shares in some recent cases.
Furthermore, in understanding the framework of merger review in Japan, it is important to understand the merger review flow in a practical sense, rather than the formal process stipulated under the law. Although the AMA literally stipulates a merger review process comprising two review steps (Phase I and Phase II), the JFTC has rarely initiated the Phase II review process. According to the JFTC’s publication in July 2020, just four cases proceeded to Phase II review from 2017 to 2019 (fiscal year), while the JFTC received 937 notifications from parties during the same period (please see the official website of the JFTC for details: www.jftc.go.jp/houdou/pressrelease/2020, available in Japanese only).
There are two reasons why so few cases have proceeded to the Phase II process. First, a party to a merger has a right to withdraw a notification at its discretion, and thus can withdraw the notification and refile a notification later if it hopes not to proceed to the Phase II process. The second reason is that, in almost all cases, the parties and the JFTC discuss potential competitive concerns regarding the proposed transaction during the pre-notification consultation, and the parties file notifications as a mere formality after they resolve the JFTC’s competitive concerns. In some cases, the parties and the JFTC substantially discuss potential remedies proposed by the parties even during the pre-notification consultation period (please see Z Holdings/Line, below).
The JFTC publicised the following facts on its official website:
Merger review process
Under the revised Merger Review Policies, a party to a merger that does not meet the relevant jurisdictional threshold under the AMA is “recommended” to have a voluntary consultation with the JFTC if the merger meets the following requirements:
In this transaction, based on the information publicised by the JFTC, it is likely that the total consideration for the acquisition of Fitbit exceeds the threshold of JPY40 billion. However, according to the JFTC’s announcement, it is not clear as to whether Google and/or Fitbit voluntarily contacted the JFTC prior to their announcement of this transaction.
One of the takeaways from this case is that a merger transaction that is not subject to notification thresholds would still likely be subject to a merger review by the JFTC, which could have an impact on the schedule of a global filing project. Therefore, it should be noted that a party to a merger needs to analyse whether its proposed transaction will meet the threshold for a recommended voluntary consultation in addition to the threshold for a formal notification.
Vertical relationship and conglomerate effect
As Google and Fitbit had no significant competitive issues in their horizontal relationship, the JFTC focused its examination on three types of vertical relationships, such as the relationship between the operation system for a smartphone provider (as an upstream service) and the watch-type wearable device manufacturer (as a downstream product). Also, the JFTC raised the issue of whether a health-related database to be possessed by the parties would substantially diminish competition in the digital advertising market as a conglomerate effect.
Finally, Google and Fitbit proposed behavioural remedies to address the JFTC’s concerns regarding both the vertical and conglomerate effects. As for the vertical relationships, for instance, the parties promised not to refuse to provide an operation system for smartphones to watch-type wearable device manufacturers other than Fitbit for at least ten years. Furthermore, concerning the conglomerate effect, the parties promised not to use the health-related database for digital advertising services for at least ten years.
This is the first public case in which the JFTC investigated a merger on a concentration that fell below the notification thresholds since the Merger Review Policies were amended in 2019. It would be sensible to assume that the JFTC will investigate future merger cases involving a big tech company regardless of whether the transaction meets the notification thresholds. This case is a good example of how active the JFTC is in vertical and conglomerate mergers.
The JFTC publicised the following facts on its official website:
Merger review process
Despite the fact that this transaction did not meet the jurisdictional threshold and was not subject to a notification requirement, and that the parties had already consummated the transaction, the JFTC still started a merger review on whether it would likely substantially restrain competition in certain relevant markets.
The AMA does not literally prohibit the JFTC from conducting a merger review on a transaction that does not meet the threshold under the AMA but, in practice, there was no precedent in which the JFTC examined such a transaction before this case. In this context, this case would be considered the leading case ruling on the JFTC’s power or authority (Google/Fitbit is considered to be consistent with this precedent). It is also worth noting that the JFTC started a merger review and imposed the behavioural remedy proposed by the parties even though the parties had already consummated the transaction several months previously.
In this case, the JFTC intensively examined whether the vertical relationship between the business conducted by M3 (as an upstream service) and the business conducted by Nihon Ultmarc (as a downstream service) might cause a substantial limitation on competition. Since M3 had the high share of 75% in the upstream market as of 2019, the JFTC determined that M3 had sufficient capacity to implement input foreclosure against Nihon Ultmarc’s competitors, and thus this transaction would likely harm competition in the downstream market. Meanwhile, the JFTC also examined the conglomerate effect from the bundling supply of the parties’ services (please see the JFTC’s official website for details: www.jftc.go.jp/en/pressreleases/yearly-2019/October).
To resolve these concerns, the parties proposed a behavioural remedy that included but was not limited to the following:
This was the first case in which the JFTC made it public that it challenged a consummated merger. It is worth noting that the JFTC opened an investigation for a consummated transaction just to investigate vertical and conglomerate concerns. In addition, this case shows the JFTC’s interest in platform and data business even aside from GAFAM companies. It is also important to note that the proposed remedies are supposed to remain in place for an indefinite period of time. The lasting period of behavioural remedies will be an important issue on remedy discussion in future cases as well, because the JFTC cannot extend the remedy period after the clearance decision.
The JFTC publicised the following facts on its official website:
ZHD and Line consulted with the JFTC between 18 November 2019 and 14 July 2020 for the purpose of resolving the JFTC’s competition concerns. While the parties spent eight months in pre-notification consultation with the JFTC, the JFTC had just 21 calendar days (12 business days in Japan) to review the transaction in the Phase I process. Based on these facts, it is reasonable to state that the JFTC investigated the case substantially, including an evaluation of the proposed remedy, during the pre-notification phase. It would be fair to assume that the parties filed the notification with the reasonable forecast that the remaining procedure would be completed within 30 days.
In almost all cases, the JFTC addresses and resolves its competitive concerns during the pre-notification consultation process, and therefore rarely opens a Phase II process.
Digital platform market
The JFTC’s examination focused on news distribution services, advertisement-related businesses and code-based payment businesses due to the competitive pressure of competitors, customers or new entries, while there are many other markets in which the parties have overlaps or vertical relationships.
It is worth noting that the JFTC evaluated the magnitude of competitive pressure from competitors in the code-based payment business by taking the “indirect network effect” into consideration, since said business was considered one of the multiple digital platform businesses in which the parties and competitors operated.
Although the aggregate market shares of the parties in the code-based payment business was approximately 60%, the JFTC concluded that this transaction would not substantially restrain competition in the code-based payment business, based on the following behavioural remedy proposed by the parties:
This case is an excellent example of a horizontal merger with a significant combined market share that was cleared by the JFTC without any condition (for free news supply business) or with relatively lenient behavioural remedies (for code-based payment business). Even though the parties’ consumers are general smartphone users, the JFTC did not have an opportunity to collect comments from the general public as the parties successfully kept away from the Phase II review.