Highlights:

• Since the implementation of the Japan Fair Trade Commission’s business combination investigation procedures, two large mergers have passed anti-trust approval: SMI’s merger into NCS to form the largest steel company in Japan and second largest in the world, and the merger of the TSE Group and the OSE, Japan’s two largest financial instrument exchanges.  This article briefly outlines the new policies.
• In both cases the merger parties consulted with the JFTC prior to notification, submitted written opinions and other materials to the JFTC, and held multiple conferences with the JFTC during the business combination investigation process.
• NSC and SMI and their attorneys collaborated closely while analyzing the M&A structure and preparing for the requisite stages of investigation. TSE Group and OSE and their advisors prepared adequately in the early stage of the transaction considering the fact that the corporations submitted a written opinion stating that the acquisition does not materially restrict competition and other materials to the JFTC, and consulted several times with the JFTC as requested by the corporations in the Consultation procedure.
• We expect that the number of business combination investigations carried out by the JFTC under the New Policies will increase, and as a result, corporations and the JFTC will gain more experience and become more efficient and quick with respect to the process of business combination investigations of M&A transactions.

MAIN ARTICLE

I. Introduction

We presented previously, in this forum, an outline of the formulation of the new “Policies Concerning Procedures of Review of Business Combination” (the “New Policies”) and the partial revision of the “Guidelines to Application of the Antimonopoly Act Concerning Review of Business Combination” (the “Guidelines”) by the Japan Fair Trade Commission (the “JFTC”), and their possible influence on M&A transactions in Japan focusing on the New Policies (the “Prior Article” as of December 7, 2011).

More than one year has passed since the JFTC implemented the new business combination investigation procedures, based on the New Policies and Guidelines, on July 1, 2011.  During the past year, the JFTC conducted investigations of large cases in Japan which were closely watched overseas, including, for example (i) the merger between Nippon Steel Corporation (“NSC”) and Sumitomo Metal Industries, Ltd. (“SMI”), which was publicly announced on December 14, 2011, following the results of the investigation, and (ii) the integration of the Tokyo Stock Exchange Group, Inc. (“TSE Group”) and the Osaka Securities Exchange Co., Ltd. (“OSE”).  In the latter transaction, (i) the TSE Group acquired, through a TOB, OSE shares equivalent to over 50% of the voting rights, and after that, (ii) they will conduct an absorption-type merger (kyushu gappei) between TSE Group and OSE, whereby OSE will be the surviving company and TSE Group will be absorbed and, other foundation of new corporation by OSE and divestitures required for the integration, and finally (iii) OSE will become a holding company after the merger.  It was publicly announced on July 5, 2012 following the results of the investigation.  The M&A transaction practice in Japan has progressed as a result of the experiences of these investigations under the New Policies.

Below, we first briefly outline the New Policies once again for your understanding, and next provide a short explanation of the outline and background of the two cases mentioned above and the key points relating to the M&A transaction practice in Japan, and give you an update on the content of the Prior Article.

II. Outline of the New Policies

A brief review of the New Policies:

(i) A corporation planning to notify the JFTC can, prior to such notification, voluntarily consult with the JFTC regarding how to complete the notification form, etc. (the “Consultation”).

(ii) The corporation can submit to the JFTC materials that it believes are necessary for it to receive appropriate explanations from the JFTC during the Consultation.  The JFTC can also collect information from the corporation that it thinks are necessary in order for it to give its explanations during the Consultation.  Once the JFTC has gathered such information, the JFTC will then provide explanations to the extent it can based on the currently available information and in accordance with the Guidelines and its precedent cases (with regard to above, the New Policies 2).

(iii) After a corporation submits the notification form regarding its business combination plan to the JFTC, the JFTC will commence its review to decide whether the proposed business combination poses any problems with respect to the Antimonopoly Act (the “Act”) during the 30-day period following the date of receipt of the notification.  The review during this period is called the “Primary Review.”  If the JFTC finds that there are no such problems, the JFTC will provide a written notice stating that the JFTC will not issue an order to divest all or part of the acquired stock, an order to transfer part of the acquired business or any other measures necessary to eliminate violations of the regulations in Article 10, Paragraph 1, etc. of the Act (the “Cease and Desist Order”) (the New Policies 5 (2)).

(iv) If during the Primary Review the JFTC determines that it needs to conduct a more detailed review, it will request reports, information or other materials, such as information on products or market share (a “Request for Reports”), and will commence hearing third party opinions (the New Policies 6 (1) and (2)).  The JFTC ordinarily sends only one Request for Reports (in response to the suggestions received during public comment procedures).

(v) If after sending a Request for Reports and receiving all reports requested thereunder, the JFTC determines that the business combination plans do not pose any problems with respect to the Act, it will provide a notice that no Cease and Desist Order will be issued for 120 days after the date of receipt of the original notification from the corporation or 90 days after the date of receipt of all requested reports, whichever is later (the New Policies 6 (3)).  However, if the JFTC determines that the business combination plans are problematic from the point of view of the Act, it will notify the subject corporations that it will issue a Cease and Desist Order in advance (Article 10, Paragraph 9, etc. of the Act).  The review during this period is called the “Secondary Review.”

III. Practice under the New Policies, Outline of the two cases, and Key points relating to the M&A transaction practice

We set forth below an outline of two actual and remarkable, large-scale cases under the New Policies mentioned above.

(I) The merger of NSC and SMI

The merger of NSC and SMI is an absorption-type merger (kyushu gappei) between two corporations involved in the manufacture and sale of steel products, whereby NSC will be the surviving company and SMI will be absorbed.  With regard to hot-rolled steel sheets (which are the typical steel products), in 2011, NSC was the biggest company (approximately 30％) and SMI was the fourth biggest company (approximately 10％) in Japan (according to JFTC’s disclosed materials), and with regard to crude steel production, in 2010, NSC was the fifth biggest company (approximately 3％) and SMI was the 25th biggest company (approximately 1％) in the world (according to Metal Bulletin).  The merger was expected to close on October 1, 2012.  The JFTC conducted a review of the merger plan.

The Consultation (approximately two months), the Primary Review (30 days) and the Secondary Review (approximately five and a half months) have been completed.  The JFTC identified approximately 30 fields of trade for competitive goods and services, including steel products, titanium products and engineering business, in which competition could potentially be restrained by the merger.  Based upon its review, on December 14, 2011, the JFTC decided that the merger would not substantially restrain competition in any one of these fields of trade, taking into account the remedies proposed by the parties concerning non-oriented electrical steel sheets and the high-pressure gas pipeline engineering business and notified that JFTC will not issue the Cease and Desist Order.

Although this was a large case involving corporations in the same line of business, and the JFTC conducted a detailed review of the potential issues, in the fields of trade including non-oriented electrical steel sheets and the high-pressure gas pipeline engineering business, the review was effectively and efficiently completed in approximately six and a half months from the notification date (May 31, 2011) to the public announcement of the results of the investigation (December 14, 2011).

The merger mentioned above was effective as of October 1, 2012; as a result, Nippon Steel & Sumitomo Metal Corporation, which is the biggest company (approximately 30％) in Japan and the second biggest company (approximately 3.5％) (according to news on the web) in the world in crude steel production, has been inaugurated.

(II) Integration of the TSE Group and the OSE

In the integration transaction planned between the TSE Group and the OSE, the TSE Group will acquire OSE shares equivalent to over 50% of the voting rights of OSE through a TOB.  TSE Group is the parent company of several subsidiaries including the Tokyo Stock Exchange Inc. (“TSE”), a financial instruments exchange in Japan that has a first section, second section and Mothers section.  With regard to services related to listing stocks, the TSE’s market share, calculated based on aggregate market value as of the end of 2011 for the first section and second section, was the biggest in Japan (approximately 45%) (according to JFTC’s disclosed materials), and with regard to aggregate market value in 2011, the TSE’s market share was the third biggest in the world (approximately 6%) (according to the World Federation of Exchanges’ disclosed materials).  The OSE is a financial instruments exchange which has a first section, second section and JASDAQ.  With regard to services related to listing stocks, the OSE’s market share, calculated based on aggregate market value as of the end of 2011 for the first section and second section, was the second biggest in Japan (approximately 25％) (according to JFTC’s disclosed materials), and with regard to aggregate market value in 2011, the OSE’s market share was the 26th biggest in the world (approximately 1%) (according to the World Federation of Exchanges’ disclosed materials).  The JFTC conducted a review of the share acquisition plan.

The Consultation, the Primary Review (30 days) and the Secondary Review (approximately five months) have been completed.  The JFTC identified several relevant fields of trade for competitive services, such as services related to listing stocks, trading stocks and trading Japanese equity index futures, and on July 5, 2012, decided that the share acquisition in question would not substantially restrain competition in any particular field of trade taking into account the remedies proposed by the parties concerning services related to listing stocks, trading stocks and trading Japanese equity index futures and notified that JFTC will not issue the Cease and Desist Order.

Although this transaction was also a large case involving corporations in the same line of business, and the JFTC especially conducted a detailed review of the issues about those concerning the field of services related to listing stocks, trading stocks and trading Japanese equity index futures (the JFTC did not point out that it would materially restrict competition in field of services other than these), the review was effectively and efficiently completed in approximately six months from the notification date (January 4, 2012) to the public announcement of the result of the investigation (July 5, 2012).

(III) Key points for the M&A transaction practice resulting from the above two cases

When we analyze the above two cases from the perspective of scheduling, what they clearly have in common is that in both cases the corporations consulted with the JFTC prior to notification, submitted written opinions and other materials to the JFTC, and held multiple conferences with the JFTC during the business combination investigation process.

With regard to the merger between NSC and SMI, the corporations and their attorneys collaborated closely while analyzing the M&A structure and preparing for the requisite stages of investigation.  For example, the corporations nominated certain people to be exclusively in charge of notifications, collecting basic information and gathering data requested by attorneys.  They also held strategy conferences to coordinate explanations to be provided to the JFTC and worked together in preparing written opinions.

With regard to the acquisition by TSE Group of OSE shares equivalent to over 50% of the voting rights through the TOB, the corporations and their advisors prepared adequately in the early stage of the transaction considering the fact that the corporations submitted a written opinion stating that the acquisition does not materially restrict competition and other materials to the JFTC, and consulted several times with the JFTC as requested by the corporations in the Consultation procedure.

Although these points do not necessarily apply generally because the strategy involved for each case will depend on the type and scale of the case, they indicate that it is helpful for corporations and their attorneys to be well-prepared, to provide a full picture of the major potential issues in a well-organized manner from the perspective of strategy and to focus their attention on those issues in the early stage of the business combination investigation conducted by the JFTC, in order for the corporations to pass the investigation effectively and quickly (especially in large business combination cases which the JFTC is expected to thoroughly investigate).

We pointed out in the Prior Article that it is advisable for a corporation to address expected issues arising under the Act, and adequately prepare materials regarding products or market share, etc. and written opinions to submit to the JFTC, together with accounting, legal, and economic experts during the initial planning stages of a transaction to ensure a quick and effective business combination investigation under the New Policies, and it seems that this practice has grown (especially in large business combination cases, which the JFTC is expected to thoroughly investigate).

We expect that the number of business combination investigations carried out by the JFTC under the New Policies from now and the types of cases examined will start to grow.  As a result of the increase in these investigations, corporations and the JFTC will gain more experience and become more efficient and quick with respect to the process of business combination investigations of M&A transactions depending on the type and scale of the case in Japan.