Business mergers and competition law have been receiving increasing attention in local media. On 24 September 2018, the Competition and Consumer Commission of Singapore (CCCS) that administers and enforces the Competition Act, ruled that Grab and Uber’s merger had infringed competition rules.
By removing Grab’s closest competitor in ride-hailing platform services (i.e Uber), Grab has made it challenging for potential competitors to scale and expand within Singapore markets.
This led to a substantial lessening of competition (i.e degree to which competition is affected) in contravention of section 54 of the Competition Act (explained below). The Grab and Uber merger were fined a total of $13 million as a result.
On 29 September 2018, the CCCS announced that it is looking into whether the acquisition of Kopitiam by NTUC Enterprise would infringe competition rules, but confirmed on 20 December 2018 that the acquisition will not lead to a substantial lessening of competition within Singapore’s markets.
In light of such high-profile business mergers, this article aims to explain the competition concerns and how businesses can notify CCCS of such concerns to avoid anti-competitive mergers.
Section 54 of the Competition Act prohibits mergers that have resulted, or may be expected to result, in a substantial lessening of competition within any market for goods or services in Singapore.
A “merger” is defined as:
- The merger of 2 or more undertakings which were previously independent of each other;
- An undertaking acquiring direct or indirect control of one or more other undertakings; or
- An undertaking acquiring the assets, or a substantial part of the assets, of another undertaking, such that the first undertaking is in a position to replace the second undertaking’s business
An “undertaking” refers to any entity capable of carrying on commercial or economic activities relating to goods or services. Such entities would include persons and companies.
However, as the intent of the Competition Act is to regulate the conduct of market players, it does not apply to the Government, any statutory body, or any person acting on behalf of the Government or a statutory body.
There is no precise threshold that indicates when a merger is considered to result in a “substantial lessening of competition” and is dependent on the fact and circumstances of each merger.
The CCCS has, however, provided the Guidelines on the Substantive Assessment of Mergers 2016 (Merger Assessment Guidelines) which sets out how parties should conduct a self-assessment of their merger for competition concerns that may result in a substantial lessening of competition (see below).
Even if a merger results in, or may be expected to result in, a substantial lessening of competition, it may still be allowed to go ahead if:
- The economic efficiencies that arise (or may arise) from the merger outweigh the adverse effects due to the substantial lessening of competition in the relevant market in Singapore. Such economic efficiencies could include lower costs (e.g. through economies of scale), greater innovation and choice (e.g. through greater R&D capabilities, which allow the merged entity to produce a wider and better range of products) or higher quality. However, the economic efficiencies must be “demonstrable” (i.e. parties must provide detailed and verifiable evidence which could include internal studies and reports) and “merger specific” (i.e. the efficiencies would only occur as a result of the merger, and not due to other scenarios that will result in less serious competition concerns);
- The merger relates to the provision of public services such as postal services, the supply of piped potable water, wastewater management services (including the collection, treatment and disposal of waste water), bus services by a licensed bus operator under the Bus Services Industry Act 2015, rail services by any person licensed and regulated under the Rapid Transit Systems Act and cargo terminal operations; or
- Parties to a merger have sought and obtained permission from the Minister for Trade and Industry for the merger to be exempted from the Section 54 prohibition on the ground of public interest considerations, such as on considerations of national or public security, or defence.
Powers of the CCCS
The CCCS is empowered to carry on activities that are advantageous, necessary or convenient for it to carry out its functions under the Competition Act, which include promoting and sustaining competition in markets in Singapore and eliminating practices that have an adverse effect on competition in Singapore.
Its powers include:
- Conducting investigations, and in the process requiring the production of specified documents or specified information, entering premises without a warrant, and entering and searching premises with a warrant
- Issuing guidelines relating to competition
- Imposing financial penalties on parties that have infringed competition rules if the infringement was intentional or negligent. The financial penalty imposed will take into consideration the seriousness of the infringement, turnover of the business, aggravating factors such as previous instances of anti-competitive behaviour, and the extent to which the infringing party has cooperated with the CCCS.
- Giving directions to market players to bring infringement of competition rules to an end. For example, in relation to the Grab-Uber merger, the CCCS’ directions included:
- Ensuring that Grab drivers are not required to work exclusively for Grab
- Removing Grab’s exclusivity arrangements with any taxi fleet in Singapore;
- Maintaining Grab’s pre-merger pricing algorithm and driver commission rates
If there is non-compliance with a direction, CCCS may apply to register the direction with a District Court.
On registration, the direction will have the same force and effect as an order of court, and further non-compliance with the direction by any person may put him in contempt of court.
What Businesses Can Do to Avoid Anti-Competitive Mergers
Market players should conduct a self-assessment on whether competition concerns may arise from their merger and, if so, whether they should notify CCCS of it.
There is no obligation or requirement for merger parties to notify the CCCS of their proposed merger, although merger parties have the option of notifying the CCCS and applying for a decision as to whether their proposed merger will infringe the Competition Act.
Consider if competition concerns will arise
Not all mergers would lead to competition issues. Some mergers enhance competition, while others may not have an effect on competition. Other mergers may lessen competition, but not substantially.
The CCCS has stated that competition concerns are unlikely to arise in a merger situation unless:
- The merged entity has/will have a market share of 40% or more; or
- The merged entity has/will have a market share of between 20% to 40% and the post-merger combined market share of the three largest firms is 70% or more
It should also be considered whether the merging entity will impair market competition, such as leading to collusion between firms or increased market power such that the merging entity is able to raise prices and/or reduce output or quality after the merger.
The CCCS has stated, in its Merger Assessment Guidelines, that a merger that leads to a significant and sustainable reduction of rivalry between firms to the detriment of customers is more likely to substantially lessen competition.
To conduct an accurate assessment, businesses should also be aware of how the CCCS evaluates a merger.
The CCCS focuses on how the competitive constraints on the merger parties and their competitors might change due to the merger. It first defines the relevant market, and then reviews how the market structure changes.
For example, the post-merger entity may have a combined market share that is much larger than that of the pre-merger entities, allowing it to increase prices without fear of losing customers to its weaker competitors.
Where there is such an imbalance of market power in favour of a merged entity, the CCCS may find that there are competition concerns that warrant further investigations and, possibly, sanctions.
Seeking confidential advice on the merger from the CCCS
Instead of notifying the CCCS, businesses that wish to keep their proposed mergers confidential for the time being, but yet wish to consult the CCCS on whether or not their mergers would infringe the Competition Act, may approach CCCS for confidential advice.
However, the following conditions must be met:
- The merger has not been completed.
- There is a good faith intention to proceed with the transaction, as evidenced to the satisfaction of CCCS by the party or parties requesting the confidential advice. Such evidence could be in the form of a draft sale and purchase agreement.
- The merger must not have already been made public. Under exceptional circumstances, the CCCS may consider giving confidential advice to such mergers, but the requesting party or parties must provide good reasons as to why confidential advice is necessary.
- It is uncertain whether or not the merger situation raises concerns such that notification may be appropriate. Such uncertainty may arise, for example, due to a lack of relevant precedents that may help indicate whether the merger will be anti-competitive.
- The requesting party or parties must keep CCCS informed of significant developments in relation to the merger situation in respect of which confidential advice was obtained. Such significant developments include the completion date or abandonment of the merger.
To apply for confidential advice, parties may contact the CCCS at 1800-325-8282 or via email.
Basic information about the merger will have to be provided to the CCCS, such as parties’ names, sector/industry, timeline of the proposed merger, evidence of good faith intention to proceed with merger and reasons for seeking confidential advice.
Pre-Notification Discussion with the CCCS
If, after a self-assessment, competition concerns have been determined to be likely to arise, merger parties may choose to apply for a Pre-Notification Discussion (PND) with the CCCS.
Through a PND, merger parties who intend to submit a notification for decision to the CCCS can identify the information needed for a complete submission or required for assessing the merger.
To request a PND, a written request should be sent to email@example.com or by post with the following information:
- For mergers that have not been carried into effect: enough evidence to show the good faith intention of the merger parties to carry out the proposed merger (e.g. correspondence between the parties indicating their intention to enter into the merger)
- For mergers which have already been carried into effect: information about the merger that is publicly available (e.g. official press releases)
- Details of the merger (e.g. timeline and key milestones)
- Description of the relevant market(s) and sector(s) involved and the anticipated impact of the merger on competition in those market(s) and sector(s)
Parties must also submit a draft application (comprising a Form M1 and supporting documents) to CCCS no less than 5 working days before the scheduled PND.
Submitting a merger notification to the CCCS
Parties may choose to notify the CCCS if after conducting a self-assessment, they have serious concerns as to whether the merger will lead to a substantial lessening of competition. Merger parties are not required to go through a PND before submitting a merger notification.
The merger notification process may consist of up to two phases:
Phase 1 review: Parties should first complete Form M1 and submit it to the CCCS, together with the prescribed fee (see below) and supporting documents. Such supporting documents include the annual reports and accounts for the parties, business plans, market research reports.
After receiving Form M1, the CCCS will conduct a preliminary assessment (i.e. Phase 1 review) which is expected to be completed within 30 working days. The merger will be cleared at the Phase 1 review if the CCCS is able to reach a favourable decision at this stage.
If the CCCS requires further information or clarifications, parties may be asked to submit Form M2. After receiving Form M2, the CCCS will commence Phase 2 review to conduct a more detailed assessment, which is expected to take up to 120 working days.
Forms M1 and M2 can be found on the CCCS’ website.
Costs of Applying for Notification
- Where all the merger parties are small or medium-sized enterprises (i.e sales turnover is less than $100 million and business has less than 200 employee): $5,000
- In the case of mergers by acquisition of control or assets (including a joint venture merger), where the acquirer(s) is a small or medium-sized enterprise, and direct or indirect control of the acquirer(s) is not or will not be acquired: $5,000
- Where the turnover of the target undertaking or turnover attributed to the acquired asset does not exceed $200 million: $15,000
- Where the turnover of the target undertaking or turnover attributed to the acquired asset is between $200 million and $600 million: $50,000
- Where the turnover of the target undertaking or turnover attributed to the acquired asset is above $600 million: $100,000
Risk of Non-Notification
Under the Competition Act, the CCCS may conduct an investigation if there are reasonable grounds for suspecting that the merger, or proposed merger, is anti-competitive.
Such reasonable grounds may include complaints from third-parties and indications that the merged entity may, for example, have a market share of 40% or more.
If CCCS carries out an investigation and ultimately identifies a merger (that has already taken place) to be anti-competitive, the merger may have to be unwound and financial penalties may be imposed on merger parties.
What the Public Can Do to Ensure Mergers Do Not Disrupt the Competitive Landscape
Members of the public can file a complaint with CCCS if they suspect that any business is engaged in anti-competitive conduct, such as a merger that substantially lessens or will substantially lessen competition.
The complaint may be made via an online form, email or post.
Interested parties are also invited to submit their views on active proposed acquisitions on CCCS’ Public Consultation page on their website.
It is important to be alive to the potential competition issues that may be raised by proposed business mergers.
From the standpoint of parties to the merger, the last thing they would want is for the CCCS to impose a hefty financial penalty and/or give directions to remedy the competitive landscape which could be disruptive to their business.
From the consumer’s perspective, it is undesirable if the merged entity exploits its market dominance by, for example, raising prices and reducing the quality of its products.