On 9 July 2003, the Legislative Council (Legco) in Hong Kong passed legislation to grant the TA the power to regulate merger and acquisition activity in the telecoms sector. This was the culmination of a long process which began with the TA releasing a consultation paper on this topic on 17 April 2001. Since then, there has been considerable public debate about its merits, and the Bills Committee closely examined the bill for over a year after the government presented it to Legco on 15 May 2002. As a result, the government substantially revised the bill before Legco passed it. The government aims to have the merger control regime in operation by the end of 2003, after the TA has issued M&A guidelines, which will provide practical guidance on the implementation of the law.
Who will be affected?
Under this legislation, any person who acquires 'control' over a carrier would be caught by the merger control regime.More specifically, the TA's new power targets M&A activity undertaken by a person, either alone or with any associated person, that allows that person:
- to become the beneficial owner or voting controller of the voting shares in a carrier exceeding certain percentage thresholds (see below); or
- to acquire the power to influence the affairs of a carrier.
The legislation does not define the concept of 'beneficial owner', thus its meaning in the context of any particular M&A transaction depends on the operation of legal principles under trust law and equity. On the other hand, 'voting control' is defined in broad terms and extends to holdings through trusts, agreements, arrangements, understandings or practices. The TA can effectively 'look through' any structure or arrangement to determine the identity of the actual beneficial owner(s) or voting controller(s) of the voting shares in a carrier.
How will M&A activities be regulated?
- The process of merger control review
Briefly, the review process is:
- subject to the exemption for new entrants (see below), where there is a change in relation to a carrier, the TA may investigate such change to ascertain whether or not it has, or is likely to have, the effect of substantially lessening competition in a telecommunications market;
- if after conducting the investigation the TA determines that the change has, or is likely to have, the relevant anticompetitive effect, it will then need to consider whether that change has, or is likely to have, any public benefit that would outweigh any public detriment that may result from the change; and
- if the public detriment outweighs the public benefit, then the TA may direct the carrier to take necessary actions to eliminate, or avoid, the anticompetitive effect.
Triggers for merger control review
The merger control review is triggered whenever there is a change in relation to a carrier, which in turn is defined by reference to the concepts of 'beneficial ownership' and 'voting control'. A relevant change occurs when a person, either alone or with any associated person, becomes the beneficial owner or voting controller of the voting shares of the carrier by more than:
- 15 per cent;
- 30 per cent; or
- 50 per cent.
Any change of the person's shareholding within these thresholds will not trigger the TA's review. There is an important exemption for new entrants to the telecoms market. The 15 per cent threshold will not apply to any acquirer if it does not have, or does not concurrently acquire, more than 5 per cent of the voting shares in, and the power to influence the affairs of, another carrier. Accordingly, a new entrant's acquisition of voting shares in a carrier will not trigger the TA's review, unless and until its shareholding exceeds 30 per cent. A change triggering the TA's review also occurs when a person, either alone or with any associated person, acquires the power by virtue of any powers conferred by the constituent documents of the carrier or of its holding company or otherwise, to ensure that the affairs of that carrier are conducted in accordance with the wishes of the person. In other words, the acquisition of management control would be sufficient to trigger the TA's review, regardless of whether the acquisition is by way of share purchase or otherwise. TA's review The TA must initiate its review of a transaction within two weeks after becoming aware of the relevant change. While conducting the investigation, the TA must give all carriers and the acquirer a reasonable opportunity to make representations to it, and must consider them before forming its opinion about the transaction. It is expected that the M&A guidelines will require the TA's review to be completed within three months from the date of commencement. The guidelines are also expected to specify a set of criteria to be considered in determining anticompetitive effect, including:
- entry barriers;
- market concentration;
- degree of countervailing power;
- ability of the acquired carrier, or the acquirer, to significantly and substantially increase prices or profit margins;
- dynamic characteristics of the market (growth, innovation and product differentiation);
- removal of a vigorous and effective competitor;
- extent of remaining effective competition after the transaction;
- nature and extent of vertical integration;
- actual and potential level of import competition; and
- availability of substitutes.
The TA is required to take into account the matters set out in the guidelines in forming its opinion of a transaction. Obtaining prior consent A carrier, or its acquirer, may voluntarily approach the TA to seek prior consent for any proposed M&A transaction involving that carrier. The TA has the power to:
- refuse to give consent;
- give its consent, subject to the carrier taking certain actions, which could include divestiture;
- give its consent, if the TA is satisfied that the public benefit of the proposed transaction would outweigh the public detriment; or
- give its consent, if the TA is satisfied that the proposed transaction would not have the relevant anticompetitive effect.
As all carriers and the acquirer are to be given a reasonable opportunity to make representations on the proposed change, it seems that the TA would release details of the proposed transaction to the carriers in order for them to make representations. As such, the applicant would not be able to obtain the TA's prior consent for a transaction on a confidential basis. It is expected that the M&A guidelines will require the TA to determine the request for prior consent within one month for simple transactions, and within three months for complex transactions.
Costs of the TA
The costs or expenses of the TA in processing applications for prior consent are recoverable by the TA and are capped at HK$200,000.
Appeals to the Appeal Board
Any carrier affected by the TA's decision, and the acquirer, may appeal against the TA's decision within 14 days from the date they know, or ought reasonably to have known of, the decision. The Appeal Board's determination is final and binding. However, the Appeal Board itself may refer any question of law to the Court of Appeal.
Implications
The TA's power to review M&A activity is quite broad. It catches not only the activities undertaken by the acquirer, but also those undertaken by the acquirer's associated persons. Further, as noted above, the TA's review is triggered whenever there is 'a change in relation to a carrier. This phrase is in turn defined broadly by reference to beneficial ownership and voting control, and the power to influence the affairs, of a carrier. As such, any M&A activity to be undertaken in a telecommunications market by any person which would raise that person's shareholding above any one of the three quantitative thresholds, or allow that person to influence the affairs of a carrier, could be examined for its potential anticompetitive effect.
Given the types of action the TA may direct and the sanctions it may impose, it would be prudent for potential acquirers, where possible, to seek the TA's prior consent, particularly where there is likely to be an adverse effect on competition in the market. However, this means the proposed transaction may be publicised and subject to scrutiny by competitors. It would also be prudent for the potential acquirers to have a condition precedent to the completion of the transaction, that provides for the TA's prior consent to be obtained on terms that are reasonably satisfactory to them.
The passing of this legislation provides Hong Kong telecoms market participants with a clearer framework for managing the regulatory risk of M&A activities. The remaining question is how the TA will implement the merger control regime. The TA's imminent release of the draft guidelines for consultation will reveal its thinking and help answer this question.
For further information please contact
Robert Ashworth
T +852 2846 3460
F +852 2810 6192
E [email protected]
Connie Carnabuci
T +852 2846 3460
F +852 2810 6192
E [email protected]
