Competition law developments in East Asia - September 2016

This month’s editors: Maxime Vanhollebeke, Emir Pohan, Pearl Yeung, Michael Kim, Sophie Chen, Yui Ota, Lydia Fung and Ada Lam.

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).

This month the Hong Kong Competition Commission initiated a public consultation on a block exemption order it proposes to adopt regarding liner shipping activities. The proposal provides insight into the authority’s enforcement policy and is the first substantive decision released by the Commission since the entry into force of the Competition Ordinance in December of last year.

The proposed order, if adopted, would confirm that the coordination by shipping lines of their respective capacities and sailing schedules leads to sufficient economic efficiencies that outweigh their potential harm to competition, at least where parties do not collectively account for a significant market share. The Commission does not however propose to include coordination on pricing and commercial terms within the scope of the proposed order, as none of the efficiencies arising from these practices would be sufficient to compensate for the significant competition concerns to which they give rise.

The Commission’s proposed order stands broadly in line with similar exemptions applicable in the shipping industry in other jurisdictions, particularly the EU and Malaysia. Its approach is however different from that adopted in Singapore and in some other countries where price coordination among shipping lines is tolerated. While recognising that foreign legal regimes would sometimes permit price coordination, a detailed analysis of the claimed efficiencies under the Competition Ordinance justified the Commission’s rejection of this practice. It also took note of a growing inclination in neighbouring jurisdictions to reconsider existing exemptions having regard to sound competitive analyses. The Commission’s detailed analysis in this case shows that while it will take into account the international regulatory environment in making a decision, it will ultimately set its own course in applying the statutory provisions of the Ordinance in the context of the Hong Kong economy.

The Philippine Competition Act took effect in August 2015. This month, the Philippine Competition Commission (PCC) adopted several measures regarding its merger control regime.

Refined merger review procedures

On procedural aspects, the PCC released a revised merger notification form, which must be used when reporting transactions after 1 September. Compared to the notification form that was first released in July, the revised form now requires substantially more disclosures on the group entities participating in the transaction, as well as the transaction itself. As regards the competitive analysis, vertical relationships must now be considered in addition to horizontal overlaps among the transacting parties. The acquirer must also now include a brief description of the transaction, which the PCC will publish upon adoption of its decision at the end of the first phase of its review.

The PCC also adopted clarification notes on two topics. The first note explains that parties can seek clearance on the basis of a binding term sheet or letter of intent. Irrespective of whether such a preliminary document exists, parties must seek clearance prior to the execution of a definitive agreement among the transaction parties. This somewhat unusual requirement was introduced when the Implementing Rules and Regulations came into effect in June. The Clarificatory note No 16-001 on Definitive agreements and binding preliminary agreements in mergers and acquisitions now explains that in global transactions subject to merger control clearance in at least three foreign jurisdictions, parties should file prior to the execution of those agreements “involving the Philippine aspect” of the transaction. In a second note, the PCC confirms that internal group restructurings that do not lead to a change of control do not require notification. Both notes were released on 16 September.

Consultation issued on merger control guidelines

Further to the release of its Implementing Rules and Regulations in June of this year, the PCC issued initial merger guidelines for public consultation on 19 September. Interested parties have until 30 September 2016 to submit their views.

Section 20 of the Philippine Competition Act prohibits merger or acquisition agreements that substantially prevent, restrict or lessen competition in a relevant market. The Act also provides for the mandatory notification of such agreements whose value exceeds P1 billion ($21 million). hile the Implementing Rules and Regulations already stipulate the share, asset and turnover thresholds relevant to this assessment, as well as considerations that would affect its competitive analysis, the guidelines supplement additional details on how the PCC intends to conduct its substantive merger analysis. Their substance reflects what would commonly be seen in other jurisdictions.

The guidelines first discuss market definition in some depth. This discussion is followed by guidance on the significance of market shares and market concentration, (relying on the Herfindahl-Hirshman market concentration index (HHI)) as an indication of whether competition concerns can be expected to result from a transaction. In this regard, the PCC recognises three categories of markets: unconcentrated markets, where the HHI is below 1,500; moderately concentrated markets, where the HHI lies between 1,500 and 2,500 points; and highly concentrated markets, where HHI is above 2,500 points. In general, any increase in HHI of less than 100 points will not likely result in anticompetitive effects. However, where the increase in HHI exceeds 100 points in a moderately concentrated market or the increase in HHI in a highly concentrated market is between 100 and 200 points, potentially significant competition concerns will prompt scrutiny by the PCC. Finally, a rebuttable presumption of market power arises where the increase in HHI in a highly concentrated market exceeds 200 points.

Beyond the consideration of concentration ratios, reviews by the PCC will also be conducted having regard to potential unilateral effects, coordinated effects and the existence of competitive constraints in the market, as compared to the counterfactual. Finally, the guidelines provide for the opportunity to justify a merger based on outweighing efficiencies and to rely on the “failing firm defence”.