1 October, 2015
Introduction
On 25 September 2015, the Competition Commission of Singapore (“CCS”) issued for public consultation various amendments to its guidelines. This is the first major overhaul of most, if not all, of the CCS‟ guidelines since the Competition Act (Cap. 50B) (“Act”) came into force on 1 January 2006. This public consultation is open from 25 September 2015 to 6 November 2015. As this is the first time that the CCS is undertaking a substantive and wide-ranging review of its guidelines, stakeholders would be well advised to review the public consultation papers and submit their responses to the CCS.
There are a number of points / issues arising from the proposed changes. This update only sets out these changes but does not comment on them. A private session will be held on 14 October 2015 to discuss the key issues arising from these changes.
Substantive Assessment of Mergers
The merger regime in Singapore is a voluntary one, and businesses are generally advised to undertake a self-assessment on whether their proposed merger is likely to result in a substantial lessening of competition within any market in Singapore. In the 2012 Guidelines on Merger Procedures, the CCS had introduced various initiatives, including allowing for a confidential advice to be sought from the CCS and allowing for a „safe harbour‟ for small and medium enterprises whose turnover in Singapore in the financial year preceding the transaction is below S$5 million and whose combined worldwide turnover in the financial year preceding the transaction is below S$50 million.
To further assist businesses in Singapore in undertaking a self-assessment, in the Draft Guidelines On The Substantive Assessment Of Mergers (“Draft SAM Guidelines”), the CCS proposes the following –
(a) Pursuant to the Section 54(2) of the Act, a merger occurs if, inter alia, one or more persons or undertakings acquire control of the whole or part of other undertakings. On this, in the Draft SAM Guidelines, the CCS sets out various examples of when the acquisition of a minority shareholding will fall within the ambit of a merger for the purposes of the Act. This includes situations where the minority shareholders have the right to veto decisions that are essential for the strategic commercial behaviour such as the budget, business plans, and / or appointment of senior management, or where the minority shareholder is effectively in control of the decisions made at such meetings.
(b) The CCS confirms, in the Draft SAM Guidelines, that there is no precise threshold when looking at what constitutes substantial lessening of competition (“SLC”). It then goes further to state that a merger is more likely to lead to a SLC if the merger leads to a significant and sustainable reduction of rivalry between firms over time in the market, and this is likely to occur where the merger creates, maintains or enhances market power. The CCS then describes „market power‟ as the ability to sustain price profitability above competitive levels, or the ability to obtain prices lower than their competitive levels. On this, the CCS will examine the effect of the merger on all customers of the merged entity, including immediate, subsequent and intermediate customers.
(c) The CCS includes a new section describing mergers between competitive buyers. In this section, the CCS states that such a merger may result in a SLC if the merged entity has the ability, whether unilaterally or in coordination with other firms in the market, to exercise market power when buying products or services. This includes cases where the merged entity has the ability to profitably depress the prices paid to suppliers to a level that is lower than the competitive price for a significant period of time, and leads to a reduction in the amount of supplies by such suppliers.
(d) In assessing whether a merger is likely to or results in a SLC, the CCS makes clear that it is not limited to only one theory of harm, but will develop one or more theories of harm.
(e) When assessing the counterfactual, i.e. the conditions of competition without the merger, the CCS states that it will not be limited to only looking at the status quo, but will take into account the likely and imminent changes in the structure of competition in the relevant market. On this, the CCS sets out a list of non-exhaustive factors that it will look at, including whether there are concurrent merger transactions in the same relevant market, whether a firm is about to enter or exit the market, or whether there are changes to the relevant regulatory structure of the market. Where there are a number of counterfactuals, the CCS will consider the scenarios that are most likely to occur.
(f) In the Draft SAM Guidelines, the CCS specifies that it will take into account product differentiation when assessing non-coordinated effects of a merger. In relation to this, the CCS recognises that where there is a merger between firms supplying close substitutes, there will likely be an increase in the price of either or both of the substitutes. This is particularly likely to be the case where the products of the merging entities pre-merger are each other‟s closest substitutes. On the other hand, where the merger involves homogeneous products, the analysis will likely focus on output and / or capacity.
(g) The CCS also introduces the factors that it will take into consideration when assessing the merging entities‟ ability to engage in the following coordinated effects – the ability to align behaviour in the market, the incentive to maintain coordinated behaviour and the sustainability of coordinated behaviour. In relation to the ability to align behaviour, the factors include the level of concentration in the market, the degree of homogeneity of the firms‟ products and the degree of similarity between the firms. In relation to the incentive to maintain coordinated behaviour, the factors include the degree of market transparency, stability of demand and costs, and degree of excess capacity in the market. In relation to the sustainability of coordinated behaviour, the factors to be looked at include the existence of significant barriers of entry, presence of countervailing buyer power and stability of market shares over time.
(h) The CCS proposes to remove the 2 year time frame that it considers timely when assessing entry by potential competitors. In the Draft SAM Guidelines, the assessment of potential entries by the CCS will be dependent on the specific facts and characteristics of each market in question, and whether entry by a potential competitor will be timely varies from market to market.
(i) In relation to countervailing buyer power, the CCS sets out in the Draft SAM Guidelines various factors that it will consider when assessing whether there is countervailing buyer power in the relevant market. These factors include examples of customers switching between the merger parties pre–merger, whether the buyer has a large volume order, and other documents evidencing the ability of customers to resist attempts by the merger parties to raise prices.
(j) The CCS also expressly recognises in the Draft SAM Guidelines that mergers can generate efficiencies and increase rivalry such that SLC is prevented from occurring. However, the onus is placed on the merging parties to demonstrate such efficiencies based on the available information and based on documentary evidence. On this, the CCS also provides more detailed descriptions of the types of efficiencies that it will look at when assessing a merger. This includes supply-side efficiencies, demand-side efficiencies and dynamic efficiencies.
(k) Finally, the CCS confirms in the Draft SAM Guidelines that vertical mergers will be assessed in similar aspects to horizontal mergers.
Drawing on the experience of other jurisdictions such as the European Commission and the UK Competition Markets Authority, the CCS proposes to introduce a fast track procedure for Section 34 and Section 47 investigations.
The purpose of this fast track procedure is to allow the CCS to more effectively and efficiently enforce the Act, and to allow parties being investigated the opportunity to admit liability for infringing the Competition Act and be eligible for a fixed percentage reduction (proposed to be set at 10%) in the amount of financial penalty they have to pay.
However, parties are not obligated to accept the fast track procedure, and even when the fast track procedure has started, both the CCS or any of the parties being investigated may decide to discontinue the fast track procedure at any time. When this happens, the process will revert to the normal investigation procedure, and any information or documents provided in the course of the fast track process will be deemed withdrawn and cannot be used as evidence by the CCS against the parties.
The fast track process has four stages – initiation, discussion, agreement and acceptance. Each of these stages will be discussed in greater detail below.
Initiation
The CCS has the discretion in deciding, on a case by case basis, whether an investigation is suitable for the fast track procedure. In deciding whether such an investigation is suitable, the CCS may take into account factors such as: the number of parties in the investigation, the number of parties that have proactively indicated to the CCS their willingness to engage in the fast track discussion, whether the parties‟ relative positions will have foreseeable divergences, whether the parties‟ may have contradicting positions in relation to the attribution of liability, and in general to what extent are there facts which may be contested.
If the CCS decides that an investigation is suitable for the fast track procedure, it will initiate the procedure by sending a letter to each party in the investigation to invite the parties to indicate their interest, within a 2 week timeframe (unless an extension is granted), in engaging in discussions.
This decision to initiate can only take place before any infringement decision (“ID”) is made, but may be before or after a proposed infringement decision (“PID”). If the parties decide to enter into discussions, then CCS and each such party will enter into the next phase of the procedure, which is the discussion stage.
Discussion
During this stage, the CCS and each party that has opted to continue with the fast track procedure will enter into discussions on (i) the scope and gravity of the conduct, including the infringements the CCS is contemplating making a PID/ID about; and (ii) the possible range and/or quantum of financial penalties.
The CCS may, if appropriate, inform the party about what evidence was used to determine the scope of the contemplated infringement; and non-confidential versions of key documents that may be necessary for the party to ascertain its own position in relation to the contemplated infringement.
Each party will be allowed to state its views on alleged facts, classification of the infringement, gravity and duration of the infringement, and its liability for its involvement in the infringing conduct. These views must be supported by evidence.
If the discussion stage leads to an understanding between the CCS and parties regarding the scope of the potential infringement and the range of potential penalties, then each party will be given a timeframe to express their intention and willingness to utilise the fast track procedure moving forward. This is done by way of a “Fast Track Procedure Submission” to the CCS which sets out the terms of the fast track procedure.
The CCS has said that it will typically only proceed with the fast track procedure when all parties in a potential infringement decision agree to the procedure. However, depending on the facts of each case, the CCS may still proceed with the fast track procedure even if not all parties proceed with the discussion stage, or further.
Agreement
At the end of the discussion stage, each party who has come to an understanding with the CCS will make their fast track procedure submissions to the CCS and then sign an agreement with the CCS containing the following:
(a) acknowledgment of the party‟s liability for the infringement and its involvement in it;
(b) agreement to cooperate throughout CCS‟ investigation;
(c) an indication of the maximum amount of financial penalty each party would accept, which will include any leniency discount and fast track discount;
(d) acknowledgement that the CCS reserves the right to adjust figures in applying the penalties provided that the final penalty does not exceed the maximum amount the party has indicated, and to make further adjustments which may reduce the final penalty without further notice to the party;
(e) confirmation that the party has requested to use the fast track procedure;
(f) confirmation that the party has been sufficiently informed of the contemplated infringements and that it was given the opportunity to be heard;
(g) confirmation that the party will not make extensive written representations, request to make oral representations, or request to inspect documents and evidence in CCS‟ file; but that the party may provide a concise memorandum to identify any material factual inaccuracies in a PID, if one is issued; and
(h) acknowledgement that if the party brings appeal proceedings before the Competition Appeal Board (“CAB”), the CCS reserves the right to apply to the CAB for a penalty amount different from that calculated in the ID, and may require the party to pay CCS‟ full cost of the appeal regardless of the outcome.
Any other terms, besides the above, that have been agreed between CCS and the party during the discussion stage will also be stated in the agreement.
A party will only be deemed to have accepted the fast track procedure when it has entered into the fast track agreement with the CCS.
Acceptance and CCS’ decision
After the agreement is signed, the CCS will issue its PID or ID, depending on the stage at which the fast track procedure was initiated. If a PID is issued, the party may make concise representations within a limited time period to identify any material factual inaccuracies in the PID.
The PID/ID will provide for a 10% reduction in the financial penalty, in addition to any leniency reduction. For example, if a party is granted a 40% reduction due to leniency, and a further 10% due to the fast track procedure, the party will receive a total of 50% reduction in penalty.
Note that at any point, the CCS retains the right to issue a PID/ID that departs from the position agreed between the party and the CCS during the fast track procedure. If it does so, the party will be notified, and the investigation will revert to the normal procedure.
Review of the Leniency Regime
The leniency programme in Singapore allows undertakings which are participating in cartel activities to disclose the existence of such cartels to the CCS, and in so doing, obtain immunity from / a reduction in the financial penalties they would otherwise face for such cartel activity. In its review of the leniency programme guidelines, the CCS has proposed both procedural and substantive changes in the CCS Guidelines on Lenient Treatment for Undertakings Coming Forward with Information on Cartel Activity (the “Draft Leniency Guidelines”).
The key changes in the Draft Leniency Guidelines are outlined below:
(a) The Draft Leniency Guidelines extend the scope of the leniency programme to include coercers and initiators of cartel activities. However, such coercers and initiators of cartel activities will not be eligible for total immunity – they may only receive a reduction in their financial penalty of up to 50%.
(b) Leniency applicants will now need to satisfy more conditions in order to succeed in their application. In particular, leniency applicants will be required to –
(i) Unconditionally admit to the conduct for which leniency is sought. They will also be required to detail the extent to
which this conduct had an impact in Singapore by preventing, restricting or distorting competition; and
(ii) Provide a waiver of confidentiality to the CCS, in respect of any jurisdiction where the applicants have similarly sought leniency or any other regulatory authority for which they have informed of the conduct.
(c) Procedurally, the key changes in the Draft Leniency Guidelines primarily relate to the marker system. The marker system essentially secures a leniency applicant‟s position in the queue for immunity / leniency, in situations where it is unable to provide all the requisite information at that moment. However, the marker system will not apply to undertakings which are not the first to come forward. The marker procedure in the Draft Leniency Guidelines is summarised below –
(i) In requesting for a marker, the applicant must provide: the name of the undertaking; a description of the cartel activity; a definition of the market affected by the cartel activity; and the impact of the conduct on the relevant market in Singapore.
(ii) Once a marker has been granted, the applicant must perfect it by providing sufficient information regarding the cartel activity to allow the CCS to exercise its formal powers of investigation or advance its investigation. If an undertaking fails to perfect its marker, the next undertaking in the queue will then be eligible to obtain immunity or a higher reduction of its financial penalty of up to 100%.
(iii) When a leniency applicant has perfected its marker, the CCS will subsequently issue a letter to the applicant confirming the perfection of the marker and the grant of conditional immunity / leniency. However, such conditional immunity / leniency will be revoked if the applicant fails to comply with the conditions and obligations stipulated therein. The grant of immunity / leniency will occur when a Provisional Infringement Decision is issued.
(d) The Draft Leniency Guidelines clarify that applicants may provide information by way of an oral corporate statement and provide more information about the process, namely that oral corporate statements will be recorded and transcribed at the CCS‟s premises. The CCS may request for the applicant or its legal representatives to provide secretarial and/or administrative support in this regard.
(e) The Draft Leniency Guidelines also set out what happens to information submitted to the CCS in the course of a leniency application. In particular, if a leniency application is withdrawn or rejected, the leniency applicant may choose to either withdraw the information submitted, or still provide the information to the CCS as a mitigating factor in reducing the financial penalties to be imposed. If information is withdrawn by the applicant, CCS is not prevented from using its formal powers of investigation to obtain the information.
Other Proposed Changes
In addition to the changes set out above, the CCS also proposes to update the definition of a Small and Medium Enterprise (“SME”) to reflect the new definition of SME by SPRING Singapore. SPRING Singapore‟s new definition is that an SME refers to an undertaking of annual sales turnover of less than S$100 million or not having more than 200 employees.
Apart from the above, in the Draft Guidelines on the Section 34 Prohibition (“Draft Section 34 Guidelines”), the CCS makes clear that the unilateral disclosure of information by one undertaking to another may constitute an infringement of the Act, where such unilateral disclosure is the result of a request by the recipient or where the recipient of the information accepts the disclosure. The CCS also clarifies that apart from the hard core agreements involving price-fixing, bid-rigging, market sharing or output limitations, once an agreement is found to have as its object the restriction of competition, it will also be regarded as restrictive of competition to an appreciable extent and consequently, there is no need for the CCS to prove appreciable adverse effects on competition. Further, the CCS clarifies that any information exchange with the objective of restricting competition will be considered as a restriction of competition by object.
Finally, the CCS in the Draft CCS Guidelines on the Appropriate Amount of Penalty (“Draft Penalty Guidelines”) sets out a 6 step process which the CCS uses when calculating the financial penalty that it will impose on an undertaking for an infringement of the Act. On this, the CCS provides a clear definition of „relevant turnover‟, i.e. the turnover of the business of the undertaking in Singapore for the product and geographic market affected by the said infringement.
Concluding Remarks
This consultation paper marks the first time that the CCS is undertaking a substantive overview of its guidelines since the Act came into force more than 10 years ago. It presents a valuable opportunity for businesses to provide feedback to the CCS on the proposed changes and areas for further change or clarification. Businesses who wish to submit their responses to the consultation are encouraged to start preparing early in order to meet the deadline of 6 November 2015. Businesses are also advised to review the consultation paper carefully and understand the implications of the proposed changes so that they are better prepared to respond to these changes if they are passed.
For further information, please contact:
Kala Anandarajah, Partner, Rajah & Tann
kala.anandarajah@rajahtann.com
