By Hung Ou Yang, Chan-Chi Chang, and Wan-Chen Juan
Mergers of enterprises may enhance the market power of the merging enterprises and lead to reduction of competition. However, mergers of enterprises may also increase the scale of production and reduce production costs of the merging enterprises, which may strengthen the overall competitiveness of the industries. The Fair Trade Commission of Taiwan (“TFTC”) does not control and scrutinize every mergers or business combinations of enterprises. Here, Article 10 of the Fair Trade Act of Taiwan (“FTA)” defines the types of business combinations of enterprises, including mergers and acquisitions, which may be subject to further control of the TFTC. That being said, when a business combination falls under the definition set out in Article 10 of the FTA and meets the thresholds under Article 11 of the FTA, the enterprises shall file a notification with the TFTC before the transaction is closed. With such notication being filed, a no-close waiting period of 30 business days will apply, prohibiting the enterprises from any further mergers. The no-close waiting period would commence from the date of filing with complete filing materials. The no-close waiting period can be extended to no more than 60 business days at the TFTC’s discretion. If the TFTC does not take any action in regard to the filing of notification during such waiting period, the enterprises may proceed to business merger/combination.
In general, the TFTC will review whether a business combination should be prohibited according to the following steps: defining the relevant market → calculating market shares → measuring the level of market concentration → assessing the effects of restricting competition → evaluating the overall economic benefits yielded by the business combination → decision making. Particularly, market definition and calculation of market shares are the core issues in analyzing market power and the anti-competitive impacts on the market.
Further, we will introduce some cases and the decisions of the TFTC for providing the readers with a general idea of how the TFTC determines the relevant markets and market shares.
1. Market Definition
The TFTC delineates a relevant market from two aspects: product markets and geographic markets. According to the Principles for Deciding the Scope of the Relevant Market (“Principles”) released by the TFTC, a relevant product market is composed of all those products (or services) which are considered to be highly demand-side substitutable or highly supply-side substitutable by the consumers by reason of the functions, characteristics, intended use or prices of the products. Secondly, a relevant geographic market comprises the areas in which consumers are able to easily select or switch to other suppliers that provide the specific products or services.
In practice, the TFTC first determines the scope of the relevant product market, and then determines the scope of the relevant geographic market. The TFTC mainly asks whether there is reasonable substitutability on the demand side or the supply side for the product at issue when determining a relevant product market. Also, the TFTC would estimate whether there is reasonable substitutability between the sources of supply located at different areas. Thus, determining the degree of substitution between the products is a crucial issue when the TFTC defines a relevant market.
According to the Principles, the first prong, demand-side substitutability, looks at whether consumers of the focal products/services would be able to or willing to switch to alternative products/services when price increase in the focal products/services occurs. The second prong, supply-side substitutability, according to the Principles, examines whether competitors or potential competitors are able to provide consumers with alternative products/services and replace the products/services in question when the price of the products/services in question increases. A similar approach estimating demand-side substitutability and supply-side substitutability would also apply in determining the scope of the relevant geographic market.
In practice, the TFTC focuses more on the responses of the customers after the price of the focal products/services goes up, that is, demand-side substitutability. The next question is, how to determine the degree of substitutability between several kinds of products? The TFTC would focus on cross-price elasticity of demand between the focal product itself and its substitutes. For example, when Uni-President Enterprise Corporation (“Uni-President”) contemplated to acquire one third of the shares of Weilih Food Industrial Co. Ltd. (“Weilih”) in 2010, the TFTC concluded that the competition regarding the products at issue, instant noodles, between Uni-President and Weilih, will be eliminated after the merger because Uni-Persident will dominate the local market and eventually manipulate the prices of instant noodles in the local market. The merger was prohibited by the TFTC. Here, Uni-President argued that up to five kinds of ready-to-eat foods should be regarded as substitutes for instant noodles. The five kinds of ready-to-eat foods are as follows: (1) cookies and snacks, (2) fresh foods, (3) staple foods and starches, (4) can sauce, and (5) frozen foods. Uni-President further argued that the value of the cross-price elasticity of demand between instant noodles and the above five kinds of ready-to-eat-foods is a positive number, representing that these products are interchangeable. In short, Uni-President argued that the five kinds of ready-to-eat foods and instant noodles constitute only one product market. See 99 TFTC Merger Decision, No. 099003 (2010).
However, the TFTC rejected to adopt Uni-President’s definition of the relevant product market. The TFTC chose the top three most sold products in the five kinds of ready-to-eat foods at the price range from NTD 20 to NTD 50 as the potential substitutes for instant noodles. According to the TFTC’s calculation, the values of the cross-price elasticity of demand between instant noodles, cookies and snacks, staples and starches, and can sauces are negative. The values of the cross-price elasticity of demand between instant noodles, fresh foods and frozen foods are positive, but low. Therefore, the TFTC concluded the five kinds of ready-to-eat foods and instant noodles are not replaceable so they are not in one relevant product market. Instead, instant noodles should be defined as a single market.
As a guideline, the court held that if the value of the cross-price elasticity of demand is over 0.5, the two products can be regarded as substitutes for each other and constitute a single product market. See 99 TFTC Merger Decision, No. 099003 (2010); 100 Taipei High Administrative Court, No. 1226 (2011).
When defining a relevant geographic market, the TFTC focuses on whether consumers are able to easily switch to suppliers at different areas. One example is the merger of Cashbox Partyworld and Holiday Entertainment in the KTV entertainment industry. In 2003, Cashbox Partyworld Co., Ltd. (“Cashbox”) attempted to acquire Holiday Entertainment Co., Ltd. (“Holiday”) for the first time. The TFTC concluded that the relevant geographic market covers entire Taiwan and both KTV operators accounted for about 20% market share each. Thus, the TFTC issued a conditional approval to Cashbox and Holiday. See 92 TFTC Merger Decision, No. 092003 (2003).
However, the TFTC changed its market definition in Cashbox’s second acquisition of Holiday and analyzed the relevant geographic market from a national market and from each local market. The TFTC stated that the two KTV operators accounted for nearly 50% market share in the national market and accounted for nearly 90% shares in the regional market comprised of New Taipei City and Taipei City. From this perspective, Cashbox and Holiday will possess monopoly power through the merger. Therefore, the business combination of Cashbox and Holiday was again prohibited. See 96 TFTC Merger Decision, No. 096002 (2007); 97 TFTC Merger Decision, No. 097002 (2008); 98 TFTC Merger Decision, No. 098002 (2009).
The TFTC concluded that considering consumers have to spend time and money to go to a KTV operator in addition to the fees for the audiovisual and singing services, consumers are unlikely to pay excessively high transportation costs and long traveling time to obtain audiovisual and singing services at distant areas. Therefore, there is limited or no substitutability between audiovisual and singing service providers at different cities and counties. Furthermore, the TFTC defined regional markets under the national market. According to the TFTC's method, individual cities/counties and adjacent cities/counties connected by short transportation networks would constitute one regional market. For example, Taipei City and New Taipei City are connected by an intensive bus and metro network so the two cities are in one geographic market. The remaining cities and counties respectively constitute single geographic markets. See Id.
Notably, market definitions of the TFTC vary from case to case and depend on the prevailing market condition when the enterprises conduct business combination. For example, in the TFTC’s action to fine the co-operation of Cashbox and Holiday in 2014, the TFTC defined that the relevant geographic market is the national market and did not identify any regional market. See 103 TFTC Merger Decision, No. 103051 (2014).
Because Taiwan’s economy relies heavily on international trade, it is important to check whether a relevant geographic market is actually global from the TFTC's perspective. Is it a global market or a domestic market? The Elzinga-Hogarty Test (“E-H Test”) will be employed by the TFTC to define the scope of a relevant geographic market. For example, the merger of Advanced Semiconductor Engineering Inc. and Siliconware Precision Industries Co., Ltd., and the merger of Tang Eng Iron Works Co., Ltd. and Yieh United Steel Corp used the E-H Test, calculating the values of LIFO (Imports/Consumption) and LOFI (Exports/Production). If both the values of LIFO and LOFI do not exceed 25%, it means that the domestic demand for the focal product is mostly satisfied by domestic manufacturers and that there are very few products from foreign countries in the domestic market. When foreign manufactures have difficulties in entering the domestic market, they should not be calculated into the suppliers of the domestic market. Here, domestic production and consumption does not need to rely on imports and exports of foreign products. Thus, the relevant geographic market should be limited to the territory of Taiwan.
In addition, the Supreme Administrative Court pointed out that the concept of multinational regional markets may play a role in its decision. For example, Northeast Asian market includes Taiwan, Japan, Korea and Mainland China. If both the values of LIFO and LOFI are higher than 25%, it is not appropriate to conclude directly that the geographic market is the global market. Here, the court would examine and define the scope of multinational regional markets. See 108 Supreme Administrative Court No. 400 (2019).
2. Calculation of Market Share
According to Article 11 of the FTA, a notification must be filed with the TFTC before the closing of the transaction if (1) as a result of business combination, the enterprises will have one third of the market share; or (2) any of the enterprises participating in the business combination has one forth of the market share before the business combination; or (3) the aggregate global turnover of the enterprises participating in the business combination exceeds NTD 40 billion in the preceding fiscal year, and at least two enterprises have each domestic turnover over NTD 2 billion in the preceding fiscal year; or (4) the preceding fiscal year’s domestic turnover of one enterprise exceeds NTD 15 billion, or NTD 30 billion if the enterprises are financial institutions, and the preceding fiscal year’s domestic turnover of another enterprise exceeds NTD 2 billion.
The threshold amount of the turnover shall include the turnover of an enterprise that is controlled by, controlling, or affiliated with the enterprises participating in the business combination, and of an enterprise where itself and the enterprise participating in the business combination are controlled by the same enterprises.
A merger notification may be exempted if one of the following circumstances is met:
(1) Where an enterprise or its 100% held subsidiary combines with another enterprise in which it already holds 50% or more of the voting shares or capital contribution; or
(2) Where enterprises of which 50% or more of the voting shares or capital contribution are held by the same enterprise, combine; or
(3) Where an enterprise assigns all or a principal part of its business or assets, or all or part of its business that could be separately operated, to another enterprise newly established by the former enterprise solely; or
(4) Where an enterprise redeems its shares held by certain shareholder(s) in accordance with the proviso in Paragraph 1, Article 167 of the Company Act or with Article 28-2 of the Securities and Exchange Act, resulting in any of its remaining shareholder(s) hold one third or more of the voting shares or capital contribution of the enterprise; or
(5) Where a single enterprise reinvests to establish a subsidiary and holds 100% shares or capital contribution of such a subsidiary; or
(6) Any other type of business combination designated by the TFTC.
The next question is, how to calculate market share and which factors should be considered in calculations?
In the latest merger of Cashbox and Holiday, the TFTC adopted the aggregate annual turnover as the basis for calculating market share. The numerator is the total annual turnover of Cashbox and Holiday in 2018 and the denominator is the total annual turnover of the national audiovisual and singing services market in 2018. Here, Cashbox and Holiday, including their controlling entities and subsidiaries, will account for 45.35% share in the national market after the merger. Moreover, they will account for 57% market share in Taipei-New Taipei Cities, 65 % market share in Taoyuan City; 73% market share in Hsinchu City; 27% market share in Taichung City, 25% share in Tainan City, and 14% market share in Kaohsiung City after the merger.
However, they argued that market shares should be calculated based on the number of karaoke venues licensed by the upstream karaoke products. Accordingly, Cashbox and Holiday respectively account for 5% market share and 6% market share only so that the merger does not meet the notification threshold. However, the TFTC rejected such approach, stating that karaoke venues and other equipment are purchased according to the estimation of consumers’ demands and costs. Therefore, the number of karaoke venues is unable to represent the numbers of consumers and transaction amount. See 108 TFTC Merger Decision, No. 108001 (2019).
In this case, the TFTC adopted the Herfindahl-Hirschman Index (“HHI”) to measure its market concentration and determine market competitiveness. The ability to raise prices after a business combination is so called unilateral effect. Enterprises tend to raise prices after business combination due to the elimination of competition. The HHI is calculated by squaring the market share of each enterprise in the market, and summing the resulting numbers. The higher a HHI a market has, the higher market concentration is.
Here, the TFTC focuses more on the changes in market concentration before the business combination and after the business combination, which is △HHI. The TFTC has not revealed which extent of change would be considered to have effects of limiting competition significantly. It sometimes takes references to the Horizontal Merger Guidelines of the USA.
In the merger case of Cashbox and Holiday in 2018, the TFTC first defined the relevant product market comprises the enterprises whose main service is to provide audiovisual and singing equipment and venues. According to the TFTC’s calculation, the HHI is 1,124 in the national market before the merger. Therefore, it is a lowly concentrated market. However, the merger will increase the HHI by 956 and reach 2,129 in the national market. Thus, it will become a moderately concentrated market and need further examination on the effect of restricting competition. The HHI is even as high as 3,315 in Taipei-New Taipei Cities, 4,366 in Taoyuan City, and 5,423 in Hsinchu City after the merger. The transaction will increase the HHI by over 200 in the above regional markets. It is very likely that the two KTV operators will exercise their market power after the merger and significantly lessen competition. As for regional markets like Taichung City, Tainan City and Kaohsiung City, they are still lowly concentrated markets after the merger so that the merger is not likely to reduce competition in these regional markets. See Id.
3. Takeaways
We aim to clarify the review steps and important considerations of the TFTC for foreign enterprises who are anticipating a merger with regard to a Taiwanese company. Here are the takeaways: The method used to define a relevant market will affect the calculation of market share. The market share of the enterprises participating in a business combination will affect the level of market concentration after the transaction. Market definition and market shares are important elements in assessing antitrust cases. The issues involve not only legal analysis but also economic analysis and the industry of the enterprises participating in a business combination. The enterprises should consult Taiwanese lawyers and conduct a comprehensive assessment to make the most favorable plans and statements during the notification process or litigation process.
AUTHOR: Hung Ou Yang
Managing Partner
Taipei
+886-2-2707-9976
[email protected]
AUTHOR: Chan-Chi Chang
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Taipei
+886-2-2707-9976
[email protected]
Author: Wan-Chen Juan
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Taipei
+886-2-2707-9976
[email protected]
Copyright Brain Trust International Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
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