By Nicholas Aurelius Karosta, Muhammad Kavin Maliki, Farrel Ezra, and Marulitua Lumban Tobing (Corporation and Anti-Monopoly Division)
INTRODUCTION
The practice of mergers is a common occurrence in business practice. Mergers allude to the consolidation or the voluntary fusions on broadly equal terms of two or more companies into a single legal entity. It is a strategic move in business where the two or more existing companies combine their ownerships, assets, and operations to form a new unified company. This phenomenon happens between companies who want to power up their strategy, increase sales and profits, grow revenues, and gain market share. Besides being beneficial in terms of incomes, by merging two or more companies, it could also expand the companies to new territories and unite common products.
From a larger perspective the process of merging can lead to cost efficiencies and economies of scale and a more competitive company, which in turn, will lead to a better competing market economy benefiting both the corporations and the consumers. Even though mergers may be beneficial to an extent, it may lead to several disadvantages to both the corporations and the market economy. Be as it may, mergers can potentially have adverse competitive effects, where it would affect the market concentration, reducing the number of competitors in an industry. This could result in less competitive pricing, reduced choices for consumers, and potentially lower quality products or services. Furthermore, through merging, this may lead to the formation of Monopolistic or Oligopolistic structures in the market economy, where smaller firms will not be able to compete with it, by increasing/lower prices, raising barriers to entry (making it harder for smaller firms to enter and compete). These cases indicate that mergers have the ability to disrupt competition. Therefore, provisions on competition law must be carefully and meticulously enforced.
ANALYSIS
Indonesia’s Antitrust laws are anchored in Law No. 5 of 1999 (“Law 5/1999”), which addresses the Prohibition of Monopolistic Practices and Unfair Business Competition[1]. This legislation is essential for maintaining fair and competitive business environments. The Commission for the Supervision of Business Competition (“KPPU”) was established in accordance with the Prohibition of Monopolistic Practices and Unfair Business Competition Law in Law 5/1999 which is aimed to promote and protect fair competition. A vital instrument in regulating mergers are post-merger notifications.
Under Government Regulation Number 57 of 2010 (“GR 57/2010”), companies conducting mergers with a total valuation of Rp. 2.500.000.000.000,00 (two trillion and five hundred billion rupiah) or a total sale valuation of Rp. 5.000.000.000.000,00 (five trillion rupiah), must notify KPPU at most 30 (thirty) days after the merger has taken place[2]. This form of merger notification is called post-merger notification, named in accordance with its nature of notifying after the merger has taken place. The notification will then be assessed by the KPPU to ensure that the merger does not have any anti-competitive implications. Completing this review, the KPPU may either accept the notification, conditionally accept the notification with obligations for the company to alter or stop certain business activities or reject the notification altogether. While the obvious ideal would be an acceptance of the notification, problems may arise should the KPPU conditionally accept or reject the notification.
Following a conditional acceptance, the company is compelled to alter their business activity. This may damage the company’s plans moving forward. Alternatively, a complete rejection would be far more catastrophic as the company would incur significant financial loss. Requirements for post-merger notifications can be administratively taxing for companies that are merging or purchasing. It can take an extensive amount of labour and capital to prepare and submit the required information to antitrust authorities. There are significant legal and advisory expenses involved in navigating the post-merger notification process, such as legal fees for merger notifications, compliance, and regulatory authority negotiations. and could have unforeseen repercussions or trigger a collapse of the company. In the worst-case scenario, intentional violations of competition law might incur criminal charges.
The assertion that post-merger notification doesn’t conform to the economic approach to law is because it creates unnecessary inefficiencies which might result in economic loss when a rejection is issued. An economic approach to law can be highlighted as an interdisciplinary field, applying economic theory as well as quantitative methods to evaluate legal issues, policies and institutions to conform to economic efficiency and social welfare[3]. The obvious inefficiency becomes clear when comparing post-merger notifications with pre-merger notifications. Post-merger notifications not only harm economic efficiency, it causes potential financial loss to the company and harm towards competition as it allows potentially anti-competitive mergers to take place first.
This is reflected under KPPU Decision Number 23/KPPU-M/2019 concerning Alleged Violations of Article 29 of Law 5/1999 and Article 5 of Government Regulation 57/2010 regarding Late Notification of the Takeover of PT Jambi Prima Coal Shares by PT PLN Batubara. KPPU found that PT PLN Batubara has conducted an illegal merger of shares simply because it had failed to submit a notification to the KPPU. As a result, PT PLN Batubara was forced to pay a fine of Rp. 1.000.000.000,00 (one billion rupiah) as a penalty. Although financially damaging, this penalty was rather moderate when considering the KPPU has the authority to reject the merger altogether which will undoubtedly cause more financial damage for the company.
Interestingly, merger notifications do not entail such a high risk for the company in other jurisdictions. For instance, the US also mandates merger notifications but does so before the merger takes place, this is known as pre-merger notifications. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), pre-merger notifications and a mandatory reporting and waiting period for certain transactions are introduced as a legal instrument aiding the FTC in its supervisory function[4]. These laws collectively serve to prevent monopolistic practices and unfair competition, fostering a climate of healthy market competition. Companies engaged in mergers and acquisitions in the US are required to notify regulatory bodies, namely the Federal Trade Commission (“FTC”) about their proposed merger before it is even planned. Pre-merger notification has the same objectives as post-merger notification, to give regulatory bodies the opportunity to evaluate the merger’s possible effects on competition and make sure that antitrust laws are complied with. The only difference is that whilst post-merger notifications are done after the merger takes place, pre-merger notifications are submitted before the merger is done.
While the differences between the two systems are minor, its outcome is completely different. Because notifications are submitted prior to any merger, the FTC could provide companies with legal certainty on if the merger is legal or not. Companies would be spared from any expenditure should the FTC inform them that the merger wasn’t allowed to go through. Furthermore, this system functions to prevent anti-competitive mergers from taking place at all as opposed to the post-merger notification which acts as a repressive instrument. It will also prevent economic loss from the forced cancellation of the merger from ever being realized in the first place. Simply speaking, pre-merger notifications would present legal certainty to corporations, realize economic efficiency, prevent financial losses to the companies, and stop anti-competitive mergers from ever taking place[5]. In relation to notifications given both before and after a merger, pre-merger notice is undoubtedly preferable. Overall, a global consensus has been made that in the effort of providing legal certainty and achieving effieience, parties planning a merger should be allowed to obtain legal certainty through pre-merger notifications[6].
CONCLUSION
The utility of a merger notification is clear, it is an instrument used by the FTC and KPPU alike to ensure antitrust law compliant mergers. However, post-merger notification, currently in effect in Indonesia, carries a potentially negative impact. Unlike its US counterpart, KPPU receives merger notifications after mergers are carried out and checks them for compliance with competition law. The adverse effects would be if a rejection is issued, the merged companies would have to significantly alter their business activities or to completely split again, bringing significant economic losses. Furthermore, this would imply that the current regulatory scheme is passive in the understanding that KPPU would wait for an illegal merger to take place first before taking action.
A plausible amendment would see the pre-existing model of merger notifications to adapt the FTC’s scheme of pre-merger notifications. This scheme would see companies consulting with KPPU before the merger and obtaining legal certainty on if the planned merger could be carried out or not. It prevents financial loss suffered by the company if the mergers were to be rejected at a later stage. Furthermore, it is also preventive in nature as it stops potentially illegal mergers before they are done.
SOURCES:
[1] Undang-Undang Nomor 5 Tahun 1999 Tentang Larangan Praktek Monopoli dan Persaingan Usaha Tidak Sehat.
[2] Pasal 5, Peraturan Pemerintah Nomor 57 Tahun 2010 Tentang Penggabungan Atau Peleburan Badan Usaha Dan Pengambilan Saham Perusahaan Yang Dapat Mengakibatkan Terjadinya Praktek Monopoli Dan Persaingan Usaha Tidak Sehat.
[3] Cento. G. Veljanovski. “The Economic Approach to Law: A Critical Introduction”. British Journal of Law and Society 7, no. 2. (1980); 158-193. https://doi.org/10.2307/1409659.
[4] 15 U.S.C. § 18a. Hart Scott Rodino Act.
[5] Amadea Muljanto and Kholis Rosiah. “Efektifitas Penerapan Notifikasi Pra-Merger Berdasarkan Sudut Hukum Persaingan Usaha”. Notarius 16, no.2. (2023); 978-988. https://doi.org/10.14710/nts.v16i2.44707.
[6] International Competition Network, “ICN Recommended Practices for Merger Notification and Review Procedures”, (Recommendation., International Competition Network, 2017), 8.