In recent years, the Japanese government has struggled to take steps to encourage foreign investment in Japan. The July 1 revisions of the Japan Fair Trade Commission’s (“JFTC”) merger review rules, together with recent amendments to Japanese laws encouraging industrial revitalization, are important new measures that may enhance those efforts. In addition, the impact of the March Tohoku Earthquake may result in increased efforts to address Japanese global competition issues and encourage investment, particularly in industries that were deeply affected.
Merger Review Changes
Japanese merger review has been criticized in the past for being too cumbersome, opaque and too narrowly focused on analysis of Japan as a separate market without due regard for regional and global competition. The impending merger control revisions, which went into effect on July 1, 2011, are designed to address both sets of concerns.
First, the procedural changes are designed to create a more transparent and efficient merger review process. Those changes include both the elimination of the informal and voluntary prior consultation process and the institution of measures designed to explain the JFTC’s actions and decisions in a more transparent and open manner. While the prior consultation process was designed to enable companies to secure a pre-notification assessment of their proposed transaction, it often caused delays while the JFTC requested large volumes of information and engaged in deliberate review without any clear time limitations. The new procedures, which are more in line with the U.S. and EU approach, would require notification followed by a formal review process with defined parameters and time limitations. For mergers that do not raise genuine competition concerns, the new procedures also allow the JFTC greater facility to shorten the review and clearance period. In other cases, the JFTC would be required to explain its requests for documents and information and its concerns about the proposed merger, and to publicly explain its merger review decisions. Further, the revised rules encourage the submission of any additional materials that the parties believe would be of use to the JFTC in its analysis.
Second, the impending substantive changes will both enable and encourage the JFTC to take a broader perspective in defining markets and assessing the competitive impact of proposed mergers within the context of regional and global competition as opposed to the contours of Japan’s geographic borders, to consider the potential competitive pressure from imports even where there is presently no material import activity, and to recognize that regional markets may have a disciplining effect on the merging parties’ post-merger conduct. These developments are all designed to facilitate the JFTC’s review and clearance of merger activity within the broader regional and global context in which Japanese and other merging parties actually compete.
Economic Revitalization Measures
Amendments to the Law on Special Measures for Industrial Revitalization also took effect in July. The long-debated changes are designed to promote the restructuring of Japanese companies so as to enable them to compete in global markets, and to support venture firms and others in the development of new business and the revitalization of regional small and medium-sized businesses. Specifically in the anti-monopoly area, the law establishes a process for The Ministry of Economy, Trade and Industry (“METI”) to consult with the JFTC concerning merger review when METI believes expedited review would serve the interests of promoting and revitalizing business and Japan’s economy.
Thus, as of July 1, the JFTC and METI have in place measures designed to create a more transparent and predictable merger review process and to encourage investment in, and the revitalization of, the Japanese economy.
The first major test of the new approach will involve the merger review of Nippon Steel Corp. and Sumitomo Metal Industries Ltd. — the number one and number three steelmakers in Japan — which, when combined, would become the second-largest steelmaker in the world. Although the matter was filed with the JFTC on May 31, 2011, the JFTC has confirmed that the merger review process will apply the guidelines in effect from July 1. In addition, the merging parties have announced that they will seek application of the amended Law on Special Measures for Industrial Revitalization.
Impact of the Tohoku Earthquake
The full impact of the Tohoku Earthquake on the Japanese economy and government policy will not be fully known for months to come. While the Japanese government’s immediate focus is on recovery and rebuilding, it is expected that the broad impact of the earthquake on the Japanese economy will lead to substantial consolidation and realignment of industries. Industries relating to power generation, power transmission and energy are often mentioned. The question will be how much realignment and consolidation will occur in the context of the revitalization of these and other industry sectors. In line with these expectations, the recent amendments and the revisions to the merger review guidelines are likely to have substantial regulatory impact at a crucial time for Japan.
A streamlined, transparent merger process focused on regional and global market realities is a step forward. The focus on revitalization of the Japanese economy and the earthquake crisis may result in greater long term change in Japan. Companies with operations or investments in Japan would be wise to carefully monitor the implementation of the merger guidelines, the new amendments and the post-earthquake efforts to revitalize the Japanese economy.
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This article was originally published by Bingham McCutchen LLP.