Far Eastern Department Stores Co., Ltd. and Pacific SOGO Department Stores Co., Ltd.

Case:

Key Words:

department stores, merger

Reference:

Fair Trade Commission Decision of December 21, 2006 (the 789th Commissioners' Meeting); Letter (95) Kung Ch'u Tzu No. 095175

Industry:

Other Retail Sale in General Merchandise Stores (4719)

Relevant Laws:

Article 6(1)(v) and 11(1)(iii) of the Fair Trade Law

Summary:

1. This case originated from a complaint stating that: in order to control its competitor, Pacific SOGO Department Stores Co., Ltd. (hereinafter called "Pacific SOGO"), Far Eastern Department Stores Co., Ltd. (hereinafter called "Far Eastern") used the subsidiaries of Far Eastern and By-Yang Investment Co., Ltd. (hereinafter called "By-Yang Investment") to increase its shares in Pacific Liu Tung Investment Co., Ltd. (hereinafter called "Pacific Liu Tung Investment"), the parent company of Pacific SOGO, through its trust account with Shanghai Commercial Bank Ltd. (hereinafter called "Shanghai Commercial Bank"). The fact that Far Eastern indirectly controlled the business operation or personnel appointment of Pacific SOGO fell under the merger type set forth in Article 6(1)(v) of the Fair Trade Law. Additionally, both Far Easter and Pacific SOGO reached the merger filing threshold in terms of their sales amount for the previous fiscal year. Far Eastern should have filed the merger with the FTC in advance in accordance with the law but failed to do so. Thus, Far Eastern was in possible violation of Article 11(1) of the Fair Trade Law.
2. Findings of FTC after investigation: Pacific Liu Tung Investment acquired 78.56% of Pacific SOGO's shares during 2002 and continued to increase investment afterwards. After Pacific SOGO processed capital decrement/increment in June 2003, Pacific Liu Tung Investment currently possessed about 78.6% of Pacific SOGO's shares. It was sufficient to determine that Pacific Liu Tung Investment and Pacific SOGO share a controlling/subordinate relationship and that Pacific Liu Tung was the parent company of Pacific SOGO. Far Eastern and its subordinate employed their trust account with Shanghai Commercial Bank to participate in the capital increased by cash of Pacific Liu Tung Investment during 2002 and acquired 54.45% of Pacific Liu Tung Investment's shares. Though said shares acquired by Far Eastern and its By-Yang Investment through their trust account with Shanghai Commercial Bank were owned by Shanghai Commercial Bank, Far Eastern actually had the right to decide how to use the trust funds according to the trust agreement entered by Shanghai Commercial Bank and Far Eastern. Additionally, Far Eastern or a third party entrusted by Far Eastern should give specific instructions in operation scope or method, investment target, utilization method, amount, conditions and terms of trust funds. Shanghai Commercial Bank would then follow such instructions to administer and dispose of the trust funds, attend shareholders' meetings, and exercise the voting right. Therefore, though said shares were owned by Shanghai Commercial Bank, the administration, disposition or exercise of shareholder's rights was still carried out pursuant to Far Eastern's instructions.
3. Grounds for disposition: Article 6(1)(v) of the Fair Trade Law provides that "where an enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise" should be considered as one of the situations of merger. Article 11(1)(ii) of the same Law provides that "in the event that the sales for the preceding fiscal year of one of the enterprises in the merger exceeds the threshold amount (NT$10 billion or more for non-financial institutes and NT$ 1 billion for the merged enterprises) publicly announced by the central competent authority, a report shall be filed with the central competent authority prior to the merger." In this case, the shares of Pacific Liu Tung Investment owned by Far Eastern and its By-Yang Investment and the shares of Pacific SOGO owned by Pacific Liu Tung Investment both exceeded 50% of the shares of the possessed companies. Through such "control of possession" or "legal control," Far Eastern and By-Yang Investment can completely control the shareholders' meeting and board of directors of Pacific Liu Tung Investment and indirectly control the business operation and personnel appointment of Pacific SOGO through the controlling/subordinate relationship between Pacific Liu Tung Investment and Pacific SOGO. Such a merger type shall meet the descriptions set forth in Article 6(1)(v) of the Fair Trade Law. The sales of Far Eastern and Pacific SOGO in 2001 were respectively NT$16.92748 billion and NT$26.05559 billion which exceeded the merger threshold announced by the FTC. In accordance with Article 11(1)(iii) of the Fair Trade Law and Article 7(1) of the Enforcement Rules to the Fair Trade Law, Far Eastern shall file a report with the FTC prior to the merger with Pacific SOGO. However, Far Eastern failed to do so and therefore violated Article 11(1) of the Fair Trade Law. Upon consideration of the past case handling pattern regarding enterprises failing to report merger and the impact on relevant market competition, the FTC ordered Far Eastern to make a supplemental report or any necessary corrections in accordance with Article 13(1) of the Fair Trade Law and imposed an administrative fine of NT$ 1.02 million on Far Eastern in accordance with Article 40 of the Fair Trade Law.

Appendix:
Far Eastern Department Stores Co. Ltd.'s Uniform Invoice Number: 03521905
Pacific SOGO Department Stores Co. Ltd.'s Uniform Invoice Number: 21257316
Pacific Liu Tung Investment Co., Ltd.'s Uniform Invoice Number: 70377128
By-Yang Investment Co., Ltd.'s Uniform Invoice Number: 23418577
Shanghai Commercial Bank Ltd.'s Uniform Invoice Number: 03036306
Summarized by Liao, Hsien- Chou; Supervised by Chen ,Yuhn- Shan