Nation Petroleum Corp. & Formosa

Case:

Key Words:

failing to file a merger report, specific market, promotion

Reference:

Fair Trade Commission Decision of September 13, 2007 (the 827th Commissioners' Meeting); Disposition Kung Ch'u Tzu No. 096148

Industry:

Gasoline Stations (4821)

Relevant Laws:

Article 6(1) ,11(1), 13(1) and 40(1) of the Fair Trade Law

Summary:

1. This case was originated from the newspaper reporting that: Two large oil station management organizations, National Petroleum Corporation (hereinafter called "National Corporation") and Formosa (hereinafter called "Formosa"), would form a "Formosa Petroleum Alliance" with 300 petrol stations. They planned to change their trademarks for a new business in July and make two-way uses of 1,550,000 membership cards and 550,000 co-branded cards and allow accumulation of points. As National Corporation and Formosa were all large-scale group enterprises, the FTC conducted an ex officio investigation to find whether their acts constituted a violation of the related provisions of the Fair Trade Law.

2. Findings of FTC after investigation:
   (1) In accordance with the organizational structure of National Corporation, the managing director of National Corporation managed the "business office" and "management office." The director of National Corporation, Tsai, Chia-chang, held a concurrent post as the managing director of the same company since October 17, 2000 when he was elected to serve as the managing director at the primary election. Until now, he has renewed his term of office since the primary election. Each term of office is three years and currently, his term of office expires on July 1, 2009. National Corporation held the 4th Meeting of the 8th Term of board of directors meeting on March 30, 2007 and it resolved that in order to meet the needs of the company's business, it rescinded the non-compete restraint placed on the managing director; it also permitted Tsai, Chia-chang to hold a concurrent post as the managing director of Formosa engaging s in similar businesses; in the same way, these news would be announced in the Market Observation Post System in accordance with law. Furthermore, Formosa also held a board of directors meeting on March 29, 2007 and resolved that the original managing director would be released from office and the company recruited Tsai, Chia-chang to be its new managing director. The resolution became effective since April 1, 2007; Tsai, Chia-chang would not be paid during the employment, and was in an unlimited term of office.
   (2) The material message shown in the Market Observation Post System of Taiwan Stock Exchange was that National Corporation made an announcement on March 30, 2007 that the managing director, Tsai, Chia-chang, held a concurrent post as the managing director of Formosa engaging in similar businesses; and it made the second important announcement on May 9 and 10 that it planned to file a merger report to the FTC regarding its intention to merge with Formosa. However, the Commission did not receive the documents on merger application.

3. Grounds for disposition:
   (1) In accordance with the text on the merger type set forth in Article 6(1)(v) of the Fair Trade Law, which provides that "directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise," "the director held a concurrent post as" was one of the aforesaid merger types. In addition, the evaluation of the controlling relationship between enterprises of the merger is divided into three parts, "legal control," "substantial control" and "substantial effects." Since the legal control is quite clear, the standard of substantial control or substantial effects between enterprises must be evaluated on a case-by-case basis, especially in the circumstance that the shareholding of a company does not reach the threshold or the number of directors does not reach a certain ratio. The merger relationship in terms of substantial effects or substantial control may still exist among enterprises. Without the legal control over Formosa in terms of holding the shares of Formosa or the appointment of directors in Formosa, the managing director of National Corporation, Tsai, Chia-chang, who served as the managing director of Formosa, had substantial effects on and decisions over the business operation or policies of Formosa.
   (2)It was found that on April 1, 2007, Formosa recruited the director of National Corporation, Tsai, Chia-chang, who held a concurrent post as the managing director of the same company, as Formosa's managing director, and the provisions related to such an employment and rescission of non-compete practice were passed in terms of the resolutions of the boards of directors of the two companies on March 29 and 30, 2007 respectively. The managing director of National Corporation managed the office of the managing director, management headquarters and business headquarters; Formosa's managing director was responsible for the manager office (management office and facility office), operation office (the business office in each area) and of accounting. These affairs had in fact covered the business and personnel affairs of the two companies, including purchasing and acquisition, targets of sale and decisions over conditions of business transactions, as well as employment of administrative staff in the status equivalent to or higher than the status of a main manager. Thus, the operations which made the managing director to have key operation strategies sufficient to affect the enterprises or manage the companies successfully or unsuccessfully were very apparent. It was clear that this type of control over a specific enterprise, holding a concurrent post as the managing director, fell under the merger type set forth in Article 6(1)(v) of the Fair Trade Law.
   (3)Furthermore, in accordance with Article 7 of the Enforcement Rules to the Fair Trade Law, the controlling business shall file a merger report to the FTC for the merger type, "where an enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise." In the same way, in accordance with Article 11(1)(iii) of the Fair Trade Law, the amounts of the sales of National Corporation and Formosa in 2006 all exceeded the threshold promulgated by the FTC; therefore, National Corporation in this case shall file a merger report to the Commission prior to its merger with Formosa. Nevertheless, it did not.
   (4)It was further found that, after Tsai, Chia-chang held a concurrent post as Formosa's managing director on April 1, 2007, the promotion programs executed by National Corporation and Formosa respectively in the preceding season (until June 30, 2007), the reduction of price for a co-branded card, application and handling of the premium by swiping a new card for the first time, price-reduction scheme for refilling the petrol in cash in regular days, and types of gifts, were different. Nevertheless, since the third season dated July 1, 2007, the joint promotions of the two companies on the membership day, the reduction of price within one day or accumulation of points, the refund by swiping a new card for the first time, accumulation of points in regular days and gift fly sheets, all proceeded in the same pace and gradually became alike. Even if the two companies, in name only, had no joint promotions, unified marks on products and services, and activities on exchange of stockholding, the competitive relationship between both parties regarding marketing in the channeling market had already been affected substantially.
   (5)In conclusion, through the means of holding concurrently as Formosa's managing director, National Corporation directly and indirectly controlled the business operation or the appointment or discharge of personnel of Formosa since April 1, 2007and this type of merger fell under the merger type set forth in Article 6(1)(v) of the Fair Trade Law. In addition, it was very clear that their integration of promotions and the harm caused to the level of competition in the channel market had constituted a merger. The amounts of the sales of National Corporation and Formosa in the last accounting year all exceeded the threshold promulgated by the Commission, but National Corporation did not file a merger report to the Commission prior to its merger with Formosa – it violated Article 11(1)(iii) of the Fair Trade Law. The FTC therefore ordered National Corporation to supplement a merger report or adopt necessary corrections within three months of the second day upon the arrival of this Disposition in accordance with Articles 13(1) and 40(1) of the Fair Trade Law and imposed it with an administrative fine of NT$ 1,000,000.

Appendix:
Nation Petroleum Corporation's Uniform Invoice Number: 2295890

Summarized by Yang, Chia-hui; supervised by Lin, Kin-lan