Eastern Multimedia Co., Ltd. violated the Fair Trade Law by merging with Hsin Taipei, Lien Ch'un, and Chin P'ing cable television companies without applying for the necessary approval.

Chinese Taipei

Case:

Eastern Multimedia Co., Ltd. violated the Fair Trade Law by merging with Hsin Taipei, Lien Ch'un, and Chin P'ing cable television companies without applying for the necessary approval.

Key Words:

concerted action, cable television

Reference:

Fair Trade Commission Decision of November 24, 1999 (the 420th Commissioners' Meeting)

Industry:

Cable television (8520)

Relevant Laws:

Article 11(1) of the Fair Trade Law

Summary:

1. A complaint was made that Eastern Multimedia Co., Ltd. ("Eastern Multimedia") had merged with a number of domestic cable television companies without applying for the necessary approval in violation of Fair Trade Law (FTL).

2. The Fair Trade Commission (the Commission) requested the Ministry of Economic Affairs to provide incorporation and amendment information for Eastern Multimedia, Eastern Multimedia-invested, and related cable television companies. This information showed that in 1996 and 1997 Eastern Multimedia invested in and established the following cable television companies: Lien Chou, Hsing Yang, Li Yung, Ming Ch'ang, Fei Ch'i, Chung Fan, Chung T'ai, Ch'ung Ch'i, Pu Shun, Ch'eng Ming, Hua Ch'uan, Jih Yang, Ta Chun, ? Ch'ang, Ch'ang Lien, Nan Lien, Chieh Ch'uan, Jung Yang ("the Direct Subsidiaries). Eastern Multimedia held equity stakes of 99% in all of these companies. Eastern Multimedia set up these companies in order to invest in Hsin Taipei, Chin P'in Tao, Lien Ch'un, and Hsin Chu Chen Tao cable televisions (the "Indirect Subsidiaries"). Eastern Multimedia did not reduce its equity stakes in the Direct Subsidiaries until 1999.

3. Eastern Multimedia planned and established the Indirect Subsidiaries with broadcast systems or community antenna television operators in the franchise area of the Indirect Subsidiaries by fixing the asset values of head end and network equipment owned by these operators. Eastern Multimedia then gave each operator an equity stake in the Indirect Subsidiary based proportionally on the number of the operator's subscribers. The operators then subscribed to the initial offering. By the end of 1997, all of the broadcast system operators had stopped broadcasting and had transferred their subscribers to the Indirect Subsidiaries except Hsin Yi Huan Le, Chen Tao Tien Yeh, Chin Pin Tao, and Ta An Wen Shan. Moreover, before 1998, the Indirect Subsidiaries had not yet passed the systems engineering inspection and were unable to engage in broadcasting operations by law. Consequently, they had no revenue. Nonetheless, the Indirect Subsidiaries operated the broadcast systems that they owned or participated in their management. Shortly after their establishment, the operators signed agreements assigning their head ends and network equipment to the Indirect Subsidiaries. Consequently, the operators now rent their head end equipment and network equipment from the Indirect Subsidiaries. The Indirect Subsidiaries have also signed agreements with their subsidiary broadcast systems to the effect that when the Indirect Subsidiaries pass the inspection of their system engineering and receive operating permits, the subsidiary broadcast systems will give their subscribers to the Indirect Subsidiaries.

4. When the Indirect Subsidiaries Hsin Taipei, Chin P'in Tao, Lien Ch'un, and Hsin Chu Chen Tao were established, Eastern Multimedia held 0 percent, 8 percent, 30 percent, and 26 percent respectively either in its own name or through its subsidiaries and trustees. Then in 1996 and 1997, Eastern Multimedia continued to buy more shares from other shareholders through its subsidiaries and trustees. By early 1998, Eastern Multimedia had registered these transactions and it held 70 percent, 37 percent, 63 percent, and 67 percent respectively in the four Indirect Subsidiaries.

When the Indirect Subsidiaries were established, Eastern Multimedia did not have directorships in any of the Indirect Subsidiaries with the exception of Lien Ch'un in which Eastern Multimedia held a majority of the directorships through its subsidiaries and in the name of its trustees. By the time the other three Indirect Subsidiaries held their general or provisional stockholder meetings in early 1998, however, Eastern Multimedia directly or indirectly held majorities on the board of directors of each of the four Indirect Subsidiaries: four directorships in Hsin Taipei, three directorships in Chin P'in Tao, four directorships in Lien Ch'un, and five directorships in Hsin Chu Chen Tao.

5. Market Conditions

According to the "1997 Subscriber Statistics for Cable Broadcasting Systems" promulgated by the Government Information Office (GIO), the Hsin Yi Huan Le Broadcasting System had approximately 48,000 subscribers in the Neihu, Hsinyi, and Sungshan Districts of Taipei City, its primary franchise areas. In these areas, Hsin Yi Huan Le Broadcasting System had two competitors: Fu Shih and Lung ch'ih with 9,000 and 20,000 subscribers respectively.

Chin P'in Tao had approximately 72,000 subscribers in the Chungshan, Tatung, and Nankang Districts of Taipei City, its primary franchise areas. In these areas, Chin P'in Tao had two competitors, Ta Ch'eng and Ch'ang Teh with 10,000 and 8,000 subscribers respectively.

Ta An Wen Shan had approximately 53,000 subscribers in the Ta-an and Wenshan Districts of Taipei City, its primary franchise areas. In these areas, Ta An Wen Shan had one competitor: Wan Hsiang (Pao Fu Broadcasting) with 19,000 subscribers.

Chen Tao Broadcasting had approximately 50,000 subscribers in Hsinchu City, its primary franchise areas. In these areas, Chen Tao Broadcasting had one competitor: Chu Ho (Shuang Lien Broadcasting) with 19,000 subscribers.

6. Prior to its amendment the Article 6(1)(i) and 6(1)(v) of 1992 FTL regulated mergers as the "hold[ing]or acquiring [of] the shares or capital contributions of another enterprise to an extent of representing more than one-third of the total voting shares or the total capital stock of such other enterprise" and "directly or indirectly control[ing] the business operation, or the employment and termination of the personnel, of another enterprise." Article 6(2) also provides that "In computing the shares or capital contributions referred to in Item 2 of the preceding paragraph, the shares or capital contributions held or acquired by an enterprise(s) controlled by, controlling, or affiliated with the subject enterprise shall be included." Article 11 provides that "If any of the following circumstances shall exist in respect of a merger of enterprises, an application for approval shall be filed with the central competent authority:

(1) As a result of the merger the enterprise(s) will have one third of the market share (1/3);

(2) One of the enterprises in the merger has one fourth of the market share ( 1/4); or

(3) Sales for the preceding fiscal year of one of the enterprise in the merger exceeds the threshold amount publicly announced by the central competent authority.

Article 13 provides that:

Where any enterprise(s) fail to file an application for any merger that is required for approval, or proceeds with the merger despite that the application is not approved, the Central Competent Authority may prohibit such merger, prescribe a period for such enterprise(s) to split, to dispose of all or a part of the shares, to transfer a part of the operations, or to remove certain persons from positions, or make any other necessary dispositions.

Article 40 provides that:

Where any enterprise(s) fail to file an application for any merger required for approval or proceeds with such merger despite that the application is not approved, in addition to the disposition pursuant to the provisions of Article 13, and administrative penalty of not less than one hundred thousand nor more than fifty million New Taiwan Dollars shall be assessed upon such enterprise.

Article 40 clearly states the legal consequences that an enterprise faces if it merges without meeting its obligation to apply in advance.

7. Article 6(1)(ii) of the 1992 FTL provides that "holding" or "obtaining" a specified level of equity in another enterprise constitutes one form of merger. The form of the "holding" or "obtaining" must, however, include holding in name or in actuality to meet the intent of the FTL's provisions regarding merger. Article 1 of the Trust Law provides that "The term 'trust' refers to the legal relationship in which the settlor transfers or disposes of a right of property and causes the trustee to administer or dispose of the trust property according to the stated purposes of the trust for the benefit of a beneficiary or for a specified purpose. Articles 22, 24, and 31 of the same law to set out the obligations of the settlor to exercise the care of a prudent administrator, to administer trust property independently, and to make reports.

Eastern Multimedia held stock in the Indirect Subsidiaries through its trustees. Although the shares may have been held in name, the trust relation requires that the trustee manage or dispose of the stocks that the trustee holds according to the interests of the settlor, Eastern Multimedia, or the purpose of the trust. Given that Eastern Multimedia did not disavow instructing the trustee to exercise certain shareholder rights, Eastern Multimedia should be considered the de facto shareholder.

In computing the shares or capital contributions, Article 6(2) of the 1992 FTL provides that the shares or capital contributions held or acquired by an enterprise(s) controlled by, controlling, or affiliated with the subject enterprise shall be included. Accordingly, Eastern Multimedia did not, as it stated, acquire 75%, 58%, 88%, and 76% equity stakes through subsidiaries in which it held a 99% equity stake and in the name of its trustees in 1997. In fact, Eastern Multimedia's shareholding filings show that its registered holdings through its holding companies and under the name of its trustees were: 70% of Hsin Taipei on 5 January 1998, 37% of Chin P'in Tao on 8 June 1998, 63% of Lien Ch'un on 28 May 1998, and 67% of Hsin Chu Chen Tao on 31 December 1997. The details of the holding assignments, moreover, prove that Eastern Multimedia's investments constitute merger under Article 6(1)(ii) of the FTL prior to its amendment.

8.

According to Article 202 of the Company Law, "The transaction of business of the company shall be decided by the board of directors. Unless this Law or the articles of incorporation provide that certain matters must be resolved at the shareholders' meeting, all may be decided by resolutions of the board of directors." Article 206(1) of the same Law states "Unless otherwise provided herein, resolutions of the board of directors shall be adopted by a majority of the directors at a meeting attended by a majority of the directors." If Eastern Multimedia obtained more than one half of the seats on the boards of directors at the Indirect Subsidiaries Hsin Taipei, Chin P'in Tao, Lien Ch'un, and Hsin Chu Chen Tao though its subsidiaries or trustees, it would then be able to perform certain directorial duties on the boards of directors of these companies through its subsidiaries or trustees. In this way, Eastern Multimedia would be able to control the management and decide personnel matters of the Indirect Subsidiaries. The Commission found that through its subsidiaries or trustees Eastern Multimedia obtained more than half of the seats on the boards of Directors at the Indirect Subsidiaries at general or provisional shareholder meetings on February 11, 1998 (provisional), June 30, 1998 (annual), June 30, 1998 (annual), and July 25, 1998 (provisional) respectively. These acts constitute merger under article 6(1)(ii) of the FTL before its amendment.

9. When the Commission calculates market scope by merging enterprises and market share, it should consider actual market conditions in accordance with Article 5(3) of the FTL and [the meaning of] "actual" in Article 5(3) of the FTL Enforcement Rules so as to adapt to economic changes. The 1993 Cable Television Law [since amended] took force on August 11, 1993. The GIO then announced the Temporary Regulations Governing the Administration of Cable Television Program Transmission Systems on November 9, 1993, thereby providing existing broadcast system operators and community antenna television operators with a legal basis for continuing their operations. Article 69(3) of the 1993 Cable Television Law, however, provided that "After this Law becomes effective, from the day when the legally established Cable Television systems begin to broadcast programs, the cable broadcast systems described in the preceding paragraph, in the same area [as the legally established systems] must immediately stop broadcasting and their original registration will become invalid." Consequently, some of these broadcast system and community antenna television operators applied for and obtained construction permits under the 1993 Cable Television Law to operate cable television systems so as to be able to operate on a permanent basis. Thereupon, broadcast system operators and cable television operators began to coexist. Legally Broadcast system operators were transitional in nature; during this transition Cable Television operators were not in business. This was simply a transitional phenomenon conforming to the relevant laws and regulations that had no effect on the markets. The Commission should take into account the actual relationship between these cable television operators and the broadcasting systems that they owned to determine the market position of cable television operators. In this case, the planning, rental and transfer of assets, common management, and subscribers transfers prove that during the transitional period when both the Indirect Subsidiaries [cable television operators] and the broadcast system operators coexisted, there was in actuality a continuity in their management. Through their broadcasting system operators, the Indirect Subsidiaries were able to exert a certain influence on related markets. Consequently, the market position of the cable television companies in this case may be determined from the operations of their subsidiary broadcasting systems in order to coordinate with the management policies of the GIO and prevent operators with a considerable influence over the market from diverging from the law and thereby tallying more closely with the purpose of determinations of market position made under the FTL.

10. In reality, cable system operators derive more than 90 percent of their revenues from video. Consequently, the number of viewers affects not only their video and advertising income, but also the pricing of their licensing for television programming. Therefore, when we calculate market share, we should use the number of viewers in the region where the cable operator may compete or within the range of other related operators as a criterion for the determination. These cable operators may legally operate only in areas announced by the GIO. Consequently, the pan-regional operations of their broadcasting systems would seem to obtain no real benefit. Even if there are trans-regional viewers, these would constitute a special case in small numbers. The specific market range in this case should be based on the cable television operations franchise announced by the GIO. If we use this standard as our basis to judge, the Hsin Yi Huan Le, Chin Pin Tao, Ta An Wen Shan, and Chen Tao broadcasting systems have market shares of 62.3%, 80%, 73.6%, and 72.4% respectively in their franchise areas. This exceeds the threshold for mergers for which Article 11(1)(ii) of the 1992 FTL provides. Consequently, when Eastern Multimedia, Hsin Taipei, Chin Pin Tao, and Lien Chun merged, they should have applied to the Commission for approval. Eastern Multimedia earned NT$ 2.06 billion in revenues in 1997. This exceeds NT$20 million, the standard set for merging in Article 11(1)(iii) of the 1992 FTL. This also required Eastern Multimedia, Hsin Taipei, Chin Pin Tao, and Lien Chun to apply to the Commission for approval.

11. In sum, Eastern Multimedia held or acquired share holdings in Hsin Taipei, Chin Pin Tao, and Lien Chun though 99%-controlled subsidiaries and in the name of its trustees. In each case, Eastern Multimedia's holdings were more than one third of total issued shares. Eastern Multimedia also indirectly controlled management and personnel decisions at these companies with the exception of Lien Chun, thereby meeting the threshold criteria for merger as defined in Article 6(1)(i) and 6(1)(ii) of the 1992 FTL. By failing to apply to the Commission when so required, Eastern Multimedia violated Article 11(1) of the 1992 FTL. Having considered the circumstances including Eastern Multimedia's size and market position, the gravity of the damage that these the illegal acts inflicted upon the trading order, the market position of the merged companies, and the improper expected profits realized from these illegal acts, the Commission fines Eastern Multimedia NT$ 800,000 on each count for a total of NT$3.2 million.

Appendix:

Eastern Multimedia Co., Ltd.'s Uniform Invoice Number: 89396814

Summarized by Liu Ch'i-jung;

Supervised by Ch'en Hui-p'ing

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