Taiwan Tele-Shop Co., Ltd. applied for approval to combine with 215 enterprises, including Cheng Hsin Communications
Case:
Taiwan Tele-Shop Co., Ltd. applied for approval to combine with 215 enterprises, including Cheng Hsin Communications
Key Words:
franchise, merger, vertical integration
Reference:
Fair Trade Commission Decision of February 1, 2001 (the 482nd Commissioners' Meeting); Letter (90) Kung Er Tzu No. 8916676-001
Industry:
Wireless Telecommunications Equipment Manufacturing Industry (3162 )
Relevant Laws:
Summary:
1. Background of the merger application: Taiwan Tele-Shop Co., Ltd. ("TTS") is primarily a retailer of mobile phone telecommunications devices and sales agent for the subscription of the mobile phone service. Concurrently, TTS is a sales agent for products from a number of well-known mobile phone suppliers, including Nokia, Motorola, and Ericsson. As the market for telecommunications products is growing more competitive daily, TTS intends to develop a joint venture bringing together two hundred and fifteen allied stores to operate a chain of Taiwan Cellular Service Centers ("service centers"). The purpose of this combination is to integrate sales channels, lower marketing and management costs, promote competition among brand-name products, and integrate the telecommunications services and mobile telecommunications device markets. The businesses involved in the planned combination have already drafted and signed a contract for the franchised service centers and are awaiting approval from the competent authorities. Once the relevant procedures are completed, the planned merger will proceed. Therefore, in accordance with Article 6(1)(iv) of the Fair Trade Law (FTL), which states "frequently conducts business operations jointly with another enterprise, or is entrusted with the operation of another enterprise," businesses have submitted an application for combination with the Fair Trade Commission (the Commission). 2. According to the investigation by the Commission, the Commission found as follows: (1) This merger is characterized as a voluntary alliance, and participants may be classified as full-scale franchises or general franchises. The former includes those companies forming an alliance with TTS, and subsidiaries of those companies operating franchised service centers. The latter classification refers to the franchising of sole proprietorship businesses. Operations of the two classes of franchise differ. Two types of contracts have been signed by the participants: 1) Taiwan Tele-Shop Co. Ltd. Franchise Service Center Contract (full-scale); and 2) Taiwan Tele-Shop Co. Ltd. Franchise Service Center Contract. There are twenty-four companies participating in the large-scale alliance. (2)TTS provides mobile phone handsets and accessories, and has been authorized by Taiwan Cellular Corporation to operate the service centers. TTS sales in 1999 totaled NT$11,627,146,000. For sales figures for the other two hundred and fifteen companies participating in the merger, please refer to the Commission. Shares held by TCC shareholders in some of the other companies involved in this merger amount to only approximately 0.1%-1.5%. These minor shareholdings do not constitute a controlling interest. (3)Analysis of controlling relationships (i)Control over the sales of TTS franchises The products sold by franchisees are to be purchased from TTS. With the exception of Taiwan Cellular Corporation's mobile phone numbers, for which franchisees must comply with prices set by Taiwan Cellular Corporation, TTS does not place any limits on the range of prices of other products sold by franchisees. Moreover, TTS has not set a quota on the dollar amount of products franchisees must order each month. The contract stipulates only a minimum volume of new mobile phone service accounts (sales) that must be achieved, and not a volume of products ordered. (ii) TTS control over franchise holders' earnings, finances, and personnel issues Earnings of franchise holders stem from commissions for the sales of mobile phone service, handset sales, sales of package deals and commissions from the collection of mobile phone usage fees. TTS does not share in these profits and does not guarantee profits. All profits and losses are borne by the franchisee. TTS is involved in neither the financial affairs nor personnel decisions of the franchisees. (iii) Legal status of TTS and franchisees following the merger Franchisees are not required to legally merge with TTS. Therefore, franchisees and sole proprietorships are legally unaffected and continue to exist as entities, sell products under their own name, and issue their own invoices as required by law. Franchisees may not represent or sell products from other telecommunications service providers within the designated Taiwan Cellular Service Center. There are, however, no restrictions on companies or sole proprietorships participating in other sales networks or operating service centers for other telecommunications services providers under the same company name. (iv)Use of TTS products and system of identification of alliance members Service centers operated by alliance members should promote the service and image of TTS. As such, alliance member service centers shall identify themselves as such through use of the TTS trademark and corporate logo. TTS does not, however, expressly forbid or limit the concurrent use of trademarks or logos that are the exclusive domain of alliance member companies or sole proprietorships. 3. Reasons of the application for approval are unnecessary: (1)Article 6(1)(iv) of the FTL defines one of the criteria for use of the term "merger" as: "Frequently conducts business operations jointly with another enterprise, or is entrusted with the operation of another enterprise ... " "Joint operations" in this sense refers to a number of businesses that have a formalized contractual agreement regarding the common sharing of profits and losses under a single unified leadership structure to fully integrate operations. Distribution of profits and losses under this type of structure is based upon the share of each participating company's investment as a ratio to the whole or the real value of each participating company as a ratio to the whole. This is applicable to those who regularly conduct joint operations. The "entrusting of the operation of another enterprise" refers an enterprise turning over its entire operations for the use of a caretaker enterprise. This requires the caretaker enterprise to operate the entrusted enterprise under the name of the origin al enterprise, and operating profits or losses remain the sole domain of the original enterprise. In this case, however, the 215 companies entering into the merger must, after combination, be solely responsible for their own operating expenses, profits or losses. They also maintain independent authority over personnel decisions and may continue to operate under their own company name. These conditions clearly demonstrate that the above-mentioned clause is inapplicable in this case. (2)The standards for merger contained in the FTL are intended to prevent the concentration of economic power and thus affecting competition. In this case, companies participating in the merger are existing entities that will continue to operate in a given area. Following the merger, neither the area of operations nor the names of these participating companies will change. The only changes will be remodeling, new computer systems and the hanging of a sign reading "Taiwan Cellular Service Center." These constitute willful acts to enter into the merger for the purpose of authorization to operate a "Taiwan Cellular Service Center." Thus the planned merger is not compliance with the standards governing mergers as outlined in the FTL. Each enterprise's willful entry into the combination makes Article 6 of the FTL inapplicable in this case and negates the need to apply for Commission approval for the merger. (3)Referring to the article "Standards of Retail and General Agent Contracts and Combinations" in Volume 4, Issue 3 of the Fair Trade Journal; the production, marketing and operational strategies of enterprises in the same field are different from the concept of a simple merger. If a number of enterprises have no organizational connection or cooperative relationship and maintain only a simple trading relationship between buyer and seller, this relationship is only to the extent of "distribution relationship," which is designed simply to deliver products to the consumer. If that distribution relationship exists among upstream and downstream companies in the same field of business, however, it may in principle constitute a "vertical integration" of those enterprises. Such a relationship would likely be subject to the provisions of Articles 18, 19 (i), 19(ii), 19(iv) and 19(vi) of the FTL relating to restrictions on competition. In the case of TTS, merger participants willingly entered into the merger, which is characterized by a high degree of autonomy among the participants. TTS has no control over the personnel decisions, finances, profit and risk or product pricing structures of merger participants. Thus the franchise contract for the Taiwan Cellular Service Centers is a "pure operations management contract" and is not compliance with the standards governing mergers contained in the FTL. If in the future a situation arises whereby TTS and merger participants are found in violation of provisions against unfair competition contained in Articles 18 and 19 of the FTL, it may possibly fall within the sphere of business operations rights, leaving the Commission little room to intervene. Appendix: Taiwan Tele-Shop Co., Ltd.'s Uniform Invoive Number: 16739840 Summarized by Yang, Chia-Hui; Supervised by Shin, Gin-Tsun