Introduction
1. The Council is pleased to present its submission in response to the Consultation Paper issued by the Office of the Telecommunications Authority (OFTA) outlining a proposal on regulating mergers and acquisitions in the telecommunications sector.
2. At the outset, the Council gives its full support to OFTA in its proposals to strengthen the regulatory procedures available, to enable it to assess mergers and acquisitions which may be expected to prevent, restrict or distort competition in a telecommunications market. Hong Kong consumers and businesses have benefited greatly from the liberalization of telecommunications markets over the years, and this has been due in large measure to the work of OFTA in administering the competition safeguards found in the Telecommunications Ordinance. The Council recognises the importance of ensuring that the 'regulatory tools' available for OFTA in providing those competitive safeguards keep pace with developments in the market.
3. The Council's submission addresses a number of issues raised by the TA in the Consultation Paper, and also some other issues which the Council considers worthy of consideration. Those issues are as follows.
Regulated transactions
4. The consultation paper notes a number of broad concepts that will be used in defining the meaning of the term 'transaction' or 'transactions' for the purpose of regulation. For example:
- direct or indirect control over voting shares; or
- direct or indirect influence by whatever means over a licensee.
5. The Council supports this approach of broadening the ambit of the Telecommunications Authority's (TA) regulatory approach, as it merely reflects the broad nature of control or influence that can be exercised in the marketplace over licensees. For the TA's powers to have relevance, in terms of preventing anti-competitive transactions between licensees from distorting competition in telecommunications markets, it stands to reason that the TA should not be constrained in his ability to examine those transactions which in his opinion raise a competition concern.
Notification of transactions
6. It is proposed that a carrier licensee under regulation should notify the TA and obtain his prior approval of any proposal of a transaction, or a series of transactions, if as a result, any person would have beneficial ownership or control of more than a certain percentage of the voting shares, or beneficial interest in the carrier licensee. The percentages which trigger the notification requirement are proposed to be in incremental stages beginning at 15% through to 30% and 50%.
7. The Council supports the creation of the notification requirement trigger points as a means to effectively monitor possible competition issues that may arise in the future. While many transactions might not raise concerns, a benefit to business can arise from such procedures. The reason is that having the TA put on notice of issues that may raise concerns on his part will mean that any concerns are addressed ex ante .
8. The worst case scenario for business in the circumstances of an acquisition or merger, would be if the TA indicates a concern and uses powers to challenge a merger or acquisition, ex poste , i.e. after a position has been reached. Such action would not be in the interests of shareholders, employees, or consumers of the firm or firms concerned. Prior notification of transactions would ensure that the regulator is given adequate notice and opportunity to indicate a concern, and in turn avoid the detrimental consequences of regulatory intervention that may seek to reverse a position that has already been reached.
Exemptions
9. The proposed regulation also excludes transactions under the situation where:
(a) credit institutions or other financial institutions or insurance companies, which hold, on a temporary basis, securities which they have acquired in a body corporate with a view to reselling them under certain circumstances (provided that they do not exercise voting rights in the meanwhile);
(b) liquidators and receivers who acquire control of the voting shares by virtue of their offices; and
(c) financial holding companies whose sole object is to acquire holdings in bodies corporate, and to manage such holdings and turn them into profit, without involving themselves directly or indirectly in the management of those bodies corporate.
10. The Council agrees with the proposal to provide exemptions but suggests the TA the base the exemption on principles similar to those provided in Article 3(5) of the Merger Control Regulations administered by the European Commission. In those circumstances exemption is granted only where a financial institution holds securities of a company:
- on a temporary basis
- with a view to reselling those securities; and
- where the institution does not exercise voting rights attached to those securities except with a view to their disposal.
11. The Council also notes that the TA would need to know the circumstances under which shares are held before it could be determined whether or not the circumstances of control give rise to a concern. As a result, the Council suggests that the TA should be informed about the transactions beforehand.
Joint ventures
12. The proposed regulation covers one undertaking obtaining control of another either by acquisition of the shares or assets of that undertaking, or otherwise obtaining influence. It is not clear from this what safeguards are in place for joint venture operations which may have similar anti-competitive effect to a merger or acquisition.
13. The Council is concerned that joint venture arrangements may be entered into between corporate entities that circumvent the regulatory supervision envisaged in the proposed mergers and acquisitions regulations and procedures.
14. The Council recommends therefore that a provision be included that requires operators to also notify the TA of their joint venture operations, which would allow assessment of these types of arrangements between the parties, in the same way that proposed mergers and acquisitions are examined.
Who Should be Regulated
15. It is proposed that the regulation should initially apply to carrier licensees (network operators), however, the TA has noted that it could extend to cover non-carrier licensees (mainly service providers) if necessary. An alternative proposal would be for the regulation to be applied across the board to all classes of licensees. In these circumstances exemption from the provisions would be granted by the TA to specific license holders.
16. The Council's view is that in general, all encompassing regulatory oversight, with discretion to exercise an exemption provision is preferable to a situation where a regulator is limited in reach and must seek an extension of power to meet unforeseen, but not unexpected circumstances. Such an approach reduces the possibility of regulatory loopholes from emerging, or of delays occurring in the application of competitive safeguards, which could arise if the regulator is constrained.
17. The pace at which the telecommunications industry is developing, and the process of convergence with other related sectors, means that the relative strengths and competitive positions of market participants across the range of licences may rapidly change, and give rise to the need for close regulatory oversight. The Council's position therefore, is that the regulation should apply across the board to all classes of licensees, and that exemptions be provided by the TA at its discretion.
Guidelines
18. The TA has also issued guidelines outlining the factors the TA will take into account in gauging the effect on competition of a particular merger or acquisition. The guidelines also state, at para.3.13, that the TA will generally only start to assess mergers and acquisitions if the merged entity would supply:
- 40% or more of the market; or
- at least 15% of the market, and the concentration ratio of the four (fewer) largest companies in the market is 75% or more.
19. The TA has outlined an approach to competition analysis, in defining the scope of market and assessing the level of competition based on following factors.
- Market share and concentration
- Barriers to entry
- Import competition
- Vertical integration
- Countervailing power
- Production efficiencies
- Industry dynamics
20. The approach to be taken by the TA, in assessing competition and in applying thresholds for analysis, is similar to that taken by other competition authorities in comparable economies. The Council therefore supports the TA in his approach as noted in the guidelines.
21. However, there is one issue which the TA has raised in the guidelines on which the Council would like to specifically comment, and provide suggestions. This concerns the issue of efficiencies.
22. From overseas experience, it is noted that only a small percentage of mergers notified to a competition authority are challenged and most of them occur in concentrated markets. Virtually any significant horizontal merger involves some loss of direct competition and would thus be at least slightly anti-competitive, in the absence of any efficiencies. This means that the question of efficiencies needs to be closely examined whenever there is a competitive concern. However, the guidelines only briefly discuss the efficiency factor (at para 3.21 to 3.23) by drawing reference to the economies of scale argument. It can be anticipated that operators will use the efficiency argument to challenge any TA decision that rules against a merger or acquisition.
23. The Council urges the TA to closely examine any efficiency claims based on simple scale economies, regardless of whether they relate to vertical or horizontal mergers or acquisitions. The reasons being that
- such scale economies can, at least in principle, be achieved unilaterally without a merger, and consumers are likely to benefit if firms compete to do so; and
- if simple scale-economy efficiencies are indeed merger-specific, doubts would remain whether they would be large enough, within the bounds of accepted concentration ratios, to sufficiently pass on benefits to consumers.
24. In addition, the Council suggests that the TA should clarify in the guidelines that any claimed efficiencies must be specified and verified, in the sense that they are not vague or speculative, but credibly will indeed happen if the transaction proceeds.
25. In these circumstances, conditions should be placed on any mergers or acquisitions, where they are accepted on the grounds that efficiencies are expected to arise, that if they do not occur, remedial action should follow. Whether this involves divestiture, or another means of addressing the loss in consumer welfare, should be specified at the time the acceptance is given by the TA of the efficiency arguments given by relevant parties.
