the rising tide of competition regulation in asia pacific

1Allens is an independent partnership operating in alliance with Linklaters LLP.

The Rising Tide of Competition Regulationin Asia Pacific and Vietnam

Ho Chi Minh City

28 May 2015

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Vietnam 1994 – News headline

‘We are here to dominate the market and eliminate the competition’

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Agenda

• Merger control

• Anti-competitive agreements

• Abuse of dominant market position

• Competition compliance

• Q&A


Merger Control

Regional update

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When a merger filing required?

ConcentrationConcentrationMarket shareor turnover thresholds

Market shareor turnover thresholds

A notifiable transactionA notifiable transaction

Merger filing can affect deal valuation, timing and certainty of closing of a transaction.

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Acquiring a business in Asia

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Recent merger control activities

• China – Marubeni’s acquisition of Gavilon – soybeans – required ring-fencing to keep operations separate and appointment of supervising trustee.

• China – Glencore’s acquisition of Xtrata – copper concentrate –required sale of copper mine in South Africa, guaranteed supply to China on annual contract basis and supervising trustee.

• India – Sun Pharmaceuticals’ acquisition of Ranbaxy Labs – had to sell a number of brands where high market share.

• Singapore – Manitowoc’s acquisition of Enodis – refrigeration manufacturers – required sales of brands and manufacturing facility.


Merger Control

Vietnam update

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What is captured?

ConsolidationsConsolidationsMergersMergers

Concentration AcquisitionsAcquisitions

Joint venturesJoint venturesOther forms Other forms

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Merger control regime in Vietnam

Combined market shareof the parties

Combined market shareof the parties

Less than 30% 30-50% More than 50%

No notification is required

Compulsory notification before

closing(unless resulting in an

SME)

Prohibited(unless an

exemption is granted)

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7 working days 45 days

Submit notification to VCA

VCA to confirm completeness of the dossier

30 days

VCA to review and issue decision or extend the review period

30 days

VCA to issue decision or extend the review period

VCA to issue decision

Total timing: 105 days after submission of a complete notification dossier

Fine: Up to 10% of the total revenue in the preceding financial year

Total timing: 105 days after submission of a complete notification dossier

Fine: Up to 10% of the total revenue in the preceding financial year

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Notification documents

• Standard notification form;

• Copy of the certificate of business registration of the participating enterprises;

• Audited financial statements for the last two consecutive years of the participating enterprises;

• List of subsidiaries of the participating enterprises;

• List of all types of goods and services in which the participating enterprises and their subsidiaries are currently conducting business;

• Report on market share in the relevant market of the participating enterprises for the last two consecutive years.

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VCA merger control activities in 2014

• 9 formal merger filings in 2014, including onshore and offshore deals

• First ever exemption issued for Banknet and Smartlink merger with 100% combined market share

• Increased number of cases referred from local licensing authorities (DPIs, industrial zone authorities and State Securities Commission) to the VCA for opinion – indicates more coordination between the VCA and the corporate licensing authorities.

• 5 out 9 formal filings were made in respect of merger of companies within the same group – e.g. Lotte, NSG or Lixil. Companies to beware of merger control requirements in respect of its corporate restructuring in Vietnam.

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Merger control cases in 2014

No Time SectorForm of economic concentration

Participants in the economic concentration

1 March 2014

Yarn production, weaving and trading of silk, yarn, textile fibers, production of all kinds of towels

MergerPhong Phu Joint Stock Corporation (Merged company)Phong Phu Fabric Joint Stock CompanyPhong Phu Home Textile Joint Stock Company

2 April 2014Market plastic and PVC plasticresins

Takeover

Petronas Chemicals Group (Seller)Phu My Plastics and Chemicals Co. Ltd (Target)Asahi Glass Company Limited (Buyer)Mitsubishi Corporation (Buyer)

3 May 2014 Transportation and warehouse Joint ventureA.P Moller – Maersk A/SCMA CGM S.AMSC Mediterranean Shipping Company SA

4 July 2014Wholesale and retail trading of pharmaceutical products

TakeoverAbbott Investments (Buyer)Positron Limited (Seller)CFR Pharmaceuticals S.A (Target)

5September2014

Logistics MergerSchenker Vietnam Co.Ltd (Merged company)Schenker Gemadept Logistics Vietnam Co. Ltd

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Merger control cases in 2014

No Time SectorForm of economic concentration

Participants in the economic concentration

6 October 2014Manufacturing and trading of sanitary ceramics, sanitary wares, bathroom accessories

MergerLixil Inax Vietnam Corporation (Merged company)Lixil Inax Saigon Manufacturing Co. LtdLixil Inax Danang Manufacturing Co. Ltd

7 October 2014

Production, sales and export of cement and clinker, exploitation, production and trading of construction stone

MergerVICEM Hai Van Cement Joint Stock Company (Merged company)Hoa Phat Construction Stone Joint Stock Company

8 November 2014

Wholesale and retail trading, manufacturing of confectionery, processed foods and meat products

MergerLotte Vietnam Shopping Co. Ltd (Merged company)Lotte Mart Danang Co.,Ltd

9 December 2014Manufacturing and trading of glass and products from glass

MergerNSG Vietnam Glass Industries Ltd (Merged company)NSG Vietnam Special Glass Ltd


Merger Control

Panel discussion

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Scope of application to foreign companies • The Vietnam Competition Law is stated to apply to ‘overseas enterprises

operating in Vietnam’. This term is not defined – therefore, the scope of application of the Law to foreign entities remain uncertain.

• In practice the Law applies to overseas enterprises that:

have a subsidiary, joint venture, a representative office or a branch in Vietnam;

provide services in Vietnam (eg foreign contractors) with or without an office in Vietnam; or

distribute their products into Vietnam directly or via a distributor

• Application of the law should be considered on a case-by-case basis

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Application to foreign-to-foreign mergers

Scenario 1

Beer CoBeer Co

Beer Co VietnamBeer Co Vietnam

Beer RUs Vietnam

Beer RUs Vietnam

Beer RUsBeer RUs

Scenario 2

Beer CoBeer Co

Beer RUs Vietnam

Beer RUs Vietnam

Beer RUsBeer RUs

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Notification thresholds • Generally, whether a merger transaction is notifiable in a particular jurisdiction

depends on whether:

there is a change of control; and

turnover/ market share/ value of assets thresholds are met.

• Offshore mergers of entities which generate turnover or trigger other relevant thresholds in particular jurisdictions may lead to notification requirements being triggered.

• Thresholds are determined by national law and can be based on turnover/ market share threshold/ value of the deal/ value of assets.

• A common test is:

global turnover (of one, two or all parties) threshold PLUS

domestic turnover (of at least two parties)

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Market share tests• Vietnam Competition Law relies heavily upon ‘market share’ as a determinant of liability

for most competition activities (merger control, anti-competitive agreements and abuse of dominant position)

• Difficult to apply this test in practice as market share is dependent upon ‘market definition’ which is a complex process and often regarded as ‘subjective’.

• Process for market share determination:

Step 1: Define the relevant market (consisting of the relevant product market and the relevant geographical market)

Step 2: Determine turnover of all enterprises operating in the relevant market;

Step 3: Determine the market share as the percentage of the company’s turnover over the total turnover of all enterprises conducting business in the relevant market.

• Example: Beer market vs premium beer market

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Market share tests

Sources of market information

• VCA reports on 20 sectors in Vietnam – useful indication of VCA’s view on market definition and market share calculation

• International precedents on market definition (e.g. by EU or US regulators)

• Market data by research companies (e.g. AC Nielson, Euromonitor, Canadean, IMS)

• Official data by Vietnamese authorities (e.g. departments of customs, tax, statistics). However, usually not released to private companies.

• VCA Competition Information Centre


Anti-competitive agreements

Regional update

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What are anti-competitive agreements?

Anti-competitive agreements or concerted practices (‘understandings’) between two or more companies which prevent, restrict or distort competition are prohibited

Price fixing

Market sharing

Limiting production/capacity/output

Bid rigging

Information exchange

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Cartels: a quick guide

Cartel

conduct

Australia China Hong

Kong*

India Indonesia Japan Malaysia Singapore South

Korea

Taiwan Thailand Vietnam

Price fixing ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓

30% combined

share

Market allocation

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓

30% combined

share

Restricting production/ supply

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓

30% combined

share

Bid rigging ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

Immunity/ leniency

✓ ✓ ✓ ✓ x ✓ ✓ ✓ ✓ ✓ x x

* Under the Competition Ordinance 2012 (substantive provisions of the Ordinance are expected to come into effect in mid-2015)

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Enforcement of cartels across Asia



Vietnam update

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Agreements in restraint of competition

Agreements prohibited where combined market share exceeds 30%

1. Agreements either directly or indirectly fixing prices of goods or services;

2. Agreements to share consumer markets or sources of supply of goods or services;

3. Agreements to restrain or control production, purchase or sale of goods or services;

4. Agreements to restrain technical or technological development or restrain investment; and

5. Agreements to impose on other enterprises conditions for entering into contract for purchase/sale of goods or services or to force other enterprises to accept unrelated obligations.

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Agreements in restrain of competition

Agreements prohibited per se regardless of market share

1. Agreements which prevent, impede or do not allow other enterprises to participate in a market or to develop business;

2. Agreements excluding from a market other enterprises not being parties to the agreement; and

3. Collusion to allow one or more parties to win a tender.

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VCA enforcement actions

Insurance companies case - 2008

• This case was initiated by the VCA.

• In 2008, 19 non-life insurance companies, representing 99.79% of the automobile insurance market in Vietnam, were found as having violated Article 8.1 of the Law on Competition on price fixing agreements.

• It was established that at the annual meeting of non-life insurance companies' management on 15 September 2008 signed Agreement on cooperation among non-life insurance companies on vehicle insurance and Schedule of fees for automobile insurance. This agreement was to fix the automobile insurance fees.

• The parties were each fined for 0.025% of their 2007 annual turnover.

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VCA enforcement actionsAnother insurance companies case - 2013

• Global Insurance JSC filed a complaint regarding 12 insurance companies that signed an agreement fixing prices for insurance for students in Khanh Hoa Province.

• On 12 August 2013, the Vietnam Competition Council confirmed that that price fixing agreement was prohibited under Article 8.1 of Competition Law. The combined market share of the 12 insurance companies was 99.81%.

• After 3 months of implementation, 12 companies signed an agreement to terminate the price fixing agreement after realising that it was in breach of the Competition Law.

• Because companies voluntarily ceased their illegal actions, the Vietnam Competition Council did not impose any fine.



Panel discussion

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Industry associations

• Take care at industry association meetings. They have often been a hub for anti-competitive agreements, particularly price fixing.

• Don’t stay silent if price fixing or market allocation is discussed –leave the meeting and make sure it is noted.

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Joint venture arrangements

• Joint venture with competitors

Information exchange

Joint production/marketing arrangements

‘spill over’ effects

• Issues to consider:

Will the JV lead to coordination between the JV parents in other markets?

Will the JV be used by the parties as a vehicle to exchange information, collude and restrict competition in the same product market in which the JV is active?

• Vietnam: No concept of joint venture exemption under the law. No enforcement precedent to date

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Avoiding anti-competitive conduct in vertical agreements

• In Vietnam, it is unclear under the Vietnam Competition Law whether the relevant provision on agreements in restraint of competition applies to vertical agreements between different players in the distribution chain – e.g. agreement on market sharing between a manufacturer and a distributor

• Regionally, cartel conduct generally covers agreements between ‘vertical’ competitors as well as horizontal competitors. Such conduct includes:

Pricing discussions: supply price vs resale price

Tenders: legitimate discussions between supplier and customer on wholesale product supply vs sharing information on downstream tender behaviour

Territories/ permitted customers: legitimate exclusive dealing restraints vs illegal ancillary restraints

Agency arrangements: true agency vs sham

Discussions on market conditions: general trends vs future commitments


Abuse of dominant position

Regional update

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What is abuse of dominant position?• Unilateral abuse of a dominant position which prevents, restricts or distorts competition is prohibited:

Exclusionary behaviour: limiting output/capacity; restriction of supply; foreclosure of competitors

Exploitative behaviour: predatory pricing; excessive pricing

• Vertical restraints are very common in Asia: many industries rely on third parties to access markets

• In principle, vertical restraints raise fewer concerns than horizontal restraints because they are often pro-competitive

• However, vertical restraints are an increasingly risky area because there is increasingly greaterenforcement against vertical restraints

• Certain vertical restraints (e.g. retail price maintenance (RPM) is presumed to be anti-competitive in some jurisdictions

• A degree of market power is generally required to see competition concerns arise

• Where concerns exist, they relate to:

Foreclosure of suppliers/ distributors (inter-brand competition)

Reduction of competition between distributors/ competitors (intra-brand competition)

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Retail price maintenance (RPM)

• Vertical restraints relating to price are deemed more harmful because they constrain the power of distributors/ retailers to set prices

• Retail price maintenance (RPM):

Distributors/other resellers should be free to unilaterally determine their own resale price and factors that determine the price for e.g. profit and discount

Fixing the resale price is prohibited in some jurisdictions

Real “recommended prices” are not RPM

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Approaches to RPM in APAC• Singapore (exemption approach): RPM is exempt from the prohibition of anti-

competitive agreements. However, Minister for Trade and Industry may apply prohibition where vertical agreement is considered anti-competitive

• Indonesia & India (rule of reason): Prohibition on minimum RPM if it causes unfair competition to the extent that it results in an appreciable adverse effect on competition, outweighing pro-competitive effects

• Thailand (market share based/abuse of dominance): Prohibition on “dominant” business operators unreasonably imposing conditions on other business operators

• Australia (RPM is per se illegal): Any attempt to restrict or deter customers reselling below a certain price is strictly prohibited. Enforcement by ACCC is aggressive.

• Japan (RPM is per se illegal): There has been limited enforcement action. During the last three years, the JFTC took action and issued a cease-and-desist order in one RPM case.

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Enforcement of RPM across Asia

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Minimum advertised price (MAP)

• MAP may act as a final price for sale and may amount to RPM

• Australia has strict rules on MAP: for e.g. (2013) ACCC denied authorisation to Narta International Pty Ltd’s proposed MAP on a wide range of electrical goods, on the basis of potential for reduced competition and the likelihood of consumers paying higher prices.

• In other APAC jurisdictions, MAP is generally permitted in the absence of enforcement mechanism by supplier.

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Rebates

• May be problematic if combined with high market share or strong bargaining power

• They are generally analysed using the effects-based approach by considering whether

the rebates amount to an abuse of market power which foreclose rivals from the ability to compete, and

whether they are applied in a discriminatory way

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Exclusive dealing

• Includes exclusive supply, exclusive territories, selective distribution arrangements and resale restrictions

• Prohibitions are always strictly enforced in APAC

• If thresholds of market power are met (where applicable), exclusive dealing arrangements are usually assessed on a “rule of reason” basis

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Exclusive dealing

• Malaysia: Exclusive dealing is considered under cartel provisions. Exclusivity clauses are common where there are legitimate justifications.

• South Korea: Exclusive dealing is assessed in light of dominance provisions and whether the intention was to substantially reduce competition in the market. This is balanced against whether the infringement is reasonable.

• Taiwan: Exclusive dealing is prohibited where the arrangements impact on fair competition and anti-competitive effect outweighs the benefits to the economy/ public interest.

• Singapore: Exclusive dealing is usually permitted if it is based on merit, and there are legitimate justifications for such exclusivity.

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Tying/ bundling

Can be pro-competitive

Concern arises where it restricts buyer’s choice, occurs as a result of the seller’s dominant position in the market; or has an exclusionary effect on other sellers.

Bundles including ‘must have’ products often raise issues


Abuse of dominant position

Vietnam update

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Dominant position• An individual enterprise will be deemed to be in a dominant market position if

it has:

a market share of 30% or more in the relevant market; or

is capable of substantially restraining competition.

• The following groups of enterprises will be deemed to be in a dominant market position if they act together in order to restrain competition:

2 enterprises with a market share of 50% or more in the relevant market;

3 enterprises with a market share of 65% or more in the relevant market;

4 enterprises with a market share of 75% or more in the relevant market.

• No 'capability to restrain competition' limb in the group of enterprises’ test.

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Overview of Vietnamese law• Selling goods or providing services below total prime cost, aimed at excluding competitors;

• Fixing an unreasonable selling/purchasing price or fixing a minimum reselling price for goods/services, thereby causing loss to customers;

• Restraining production or distribution of goods and services, limiting the market, or impeding technical or technological development, thereby causing loss to customers;

• Applying different commercial conditions to the same transactions aimed at creating inequality in competition;

• Imposing on other enterprises conditions precedent prior to signing contracts for purchase/sale of goods or services;

• Forcing other enterprises to accept obligations which are not related in a direct way to the subject matter of the contract; or

• Preventing market participation by new competitors.

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Common clauses in distribution agreements

• Common clauses in distribution agreements will be prohibited if the company has a dominant position:

Exclusivity: restriction on sale of other competitors’ products

Territorial restrictions: restriction on sale within the designated area

Retail price maintenance

• Alternative options:

Area of primary responsibility

Recommended retail price

Rebate system

Shorter contract term

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VCA enforcement activities16

14

12

10

8

6

4

2

0 2006 2007 20102008 20112009 2012 2013 2014

Preliminary investigation Formal investigation Decision

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VCA enforcement activitiesTan Hiep Phat v. Vietnam Brewery Limited case – 2010

• THP produces Laser beer, while VBL produces Tiger, Heineken, etc.

• VBL signed exclusive contracts with retailing stores and the stores are not allowed to advertise, introduce or sell beer of other brands.

• In 2010, THP sent a complaint to the VCA claiming that VBL violated Competition Law as VBL abused its dominant market position in the premium beer market.

THP’s market definition: beer market was divided into 3 segments: premium beer, traditional beer and low-price beer (binh dan)

VBL had 85% of the premium beer market

• After investigation, VCA found that VBL holds a market share of less than 30% and hence does not have dominant market position. VCA suspended the case.

VCA’s market definition: national beer market without any segmentation. VBL has 22.4% of the total beer market in Vietnam.

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VCA enforcement activities

Megastar case

• In March 2010, six Vietnamese cinemas filed a claim to the VCA against Megastar for abuse of dominant position by unreasonably increasing the per-ticket fee which Megastar charges cinema exhibitors on films that Megastar distributes.

• In 2014 the VCA completed its second supplementary investigation and reported to the Vietnam Competition Council.

• In August 2014, the Vietnam Competition Council suspended this case.

• Vietnamese cinemas has appealed this decision and this case is still on-going.

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VCA enforcement activitiesVinapco abuse of monopoly position

• Vinapco is a subsidiary of Vietnam Airlines and had a monopoly over supply of air fuel in domestic airports.

• Its two main customers were Vietnam Airlines and Jetstar Pacific, which are the two main airlines in Vietnam.

• In early 2008 Vinapco and Jetstar Pacific had a dispute over the sale price of air fuel. Vinapco was proposing to increase the fuel price to Jetstar Pacific while keeping the lower price for its parent company, Vietnam Airlines.

• While the parties were still negotiating, Vinapco ceased the supply of fuel to Jetstar Pacific's planes on 1 April 2010 causing delay to more than 5,000 passengers on 30 domestic flights of Jetstar Pacific.

• In this case, Vinapco was found by the Competition Council as having violated Article 14.3.2 of the Law on Competition on prohibited acts of abuse of monopoly position. Vinapco was fined for VND3.37 billion (around USD200,000) which was 0.05% of its turnover in 2007.


Competition compliance

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Competition compliance• Increasing number of antitrust regimes globally and the rise of antitrust enforcement

• Over 120 countries now have merger control, and many more have antitrust regimes

• Generally, domestic competition law is applicable to all firms, whether located in the territory or not, and where their

behaviour or transactions have an “effect” within the territory

• Merger control: transactions may trigger potential filings in many jurisdictions

• Change in enforcement authorities’ focus from traditional cartels to new forms of coordinated behaviour for e.g.

benchmark setting arrangements

• Rise of antitrust enforcement in China

• Since 2013, there has been rapid increase in enforcement of non-merger anti-monopoly law provisions, with

sweeping investigations across industries and higher fines

• There has been recent international focus on cases investigated in other

jurisdictions for e.g. Qualcomm and Microsoft (2015)

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Approaches to compliance• Many different legal regimes and approaches across Asia

• How can a business ensure compliance throughout the region?

• the stringent approach

• the custom-built approach

• the tiered approach

• Ways to manage risk

• Instill a culture of compliance which is distilled from the top

• Ensure competition law awareness at every level of the business and provide escalationmechanism

• Conduct internal audits and arrange training for sales/ marketing

• Set out clear policies and internal protocols on new contracts

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Our contacts

Clara Ingen-Housz

PartnerHong KongTel: +852 2901 [email protected]

Linh Bui

PartnerHo Chi Minh CityTel: +84 8 3822 [email protected]

Carolyn Oddie

PartnerSydneyTel: +61 2 9230 [email protected]


Q&A session

the rising tide of competition regulation in asia pacific

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