The Effectiveness Of Divestiture Under Indonesian Merger Control: A Comparative Analysis with the European Union

Indira Yustikania

Most competition laws hold a prominent place for merger control. Evolving responses to the role and importance of merger control have been reflected in the development of merger control regulation. In the European Union (“EU”), merger control is governed by Regulation 134/2009.[1]

In Indonesia, merger control is governed by Act 5/1999[2] and GR 57/2010.[3] Following the enactment of Act 5/1999, but prior to the issuance of GR 57/2010, Komisi Pengawas Persaingan Usaha (“KPPU”) heard two anti-competitive mergers: the Temasek and Carrefour cases. In both cases, respondents were found to have violated Act 5/1999 by abusing their dominant positions following the mergers.

As a consequence, each of the respondents was ordered to divest their shares in the acquired firms (although the KPPU’s ruling in the Carrefour case was later overturned by the Supreme Court). Divestiture is perceived by the KPPU as the most effective remedy in resolvingcompetition problems resulting from mergers. However, divestiture is not provided for under Indonesian merger control regulations and so its implementation and monitoring lack firm guidelines. Further, the effectiveness of divestiture rulings has never been comprehensively analysed by the KPPU.

I.       Divestiture In The EU

In the EU, remedial actions for mergers that result or are likely to result in the lessening of competition are heavily and meticulously regulated. As a background, the EU merger control regime adopts a compulsory pre-merger notification system. Prior notification is perceived as necessary to ensure effective control over mergers. So, when the Commission finds that a notified merger is anti-competitive, it must declare it incompatible with the common market.[4]

However, if the parties propose suitable remedies that can resolve such competition concerns, the Commission must approve the merger.[5] Thus, remedies are important tools that can fix competition problems caused by a merger and can preserve merger efficiencies.[6] The Commission has issued several notices and guidelines to guide undertakings and the Commission to design, implement, and monitor remedies when they are implemented.

The Commission has also issued the Remedies Study[7] that analysed the design, implementation, and effectiveness of remedies that it issued in the past. The Remedies Study showed that the remedies are dynamic and the Commission’s approach continues to evolve.[8] It also provided basis for the Commission to improve the regulatory framework on remedies and to issue the Revised Notice on Remedies.[9]

The Revised Notice on Remedies provides ranges of remedies and classifies remedies as structural, access, and behavioral.[10] Remedies accepted by the Commission in practice vary, from severance of links between competitors,[11] disposal of stand-alone businesses,[12] disposal of assets with carve-out,[13] transfer of intellectual property rights (“IPR”),[14] commitments to supply to or purchase from the divested business,[15] and access to infrastructure.[16]

The determination of the type of remedy suitable for eliminating competition concerns resulting from a merger is case specific,[17] depending on the harm that results or is likely to result from the merger[18] and the factors relating to the proposed remedy, such as the type, scale, and scope of the remedy proposed, in light of the structure and the characteristics of the relevant market.[19]

Divestiture is perceived as the most effective remedy that eliminates competition concerns resulting from the merger and it is also easy to implement and monitor. Divestiture can bring a permanent change in the market structure and remove adverse effects resulting from a merger, as it can create a new competition in the market.[20] Divestiture is usually conducted by way of disposing assets of the acquired business.[21]

Generally, it involves disposal of assets that is likely to offer competition in the market in the long term.[22] The Commission’s preference is for the disposal of a pre-existing, stand-alone business of the one of the merging parties, as opposed to carving out of the assets, personnel, and other resources of the merging parties’ business.[23]

Divestiture can only achieve its objective if the divested business is transferred to a purchaser who is capable of becoming a significant competitor in the relevant market.[24] The Revised Notice of Remedies sets out criteria of a suitable purchaser: (i) independence from the merging parties; (ii) possess adequate financial resources; (iii) posses relevant expertise; (iii) have the incentive and availability to maintain and develop the divested business; and (iv) there are no regulatory issues likely to delay the purchaser from acquiring the divested business.[25]

The Commission would generally request the merging firms to hold separate the business to be divested prior to their disposal.[26] The hold-separate commitment would ensure the continued independence, economic viability, marketability, and competitiveness of the assets or business to be divested and the competitiveness of the business.[27] The Remedy Study found that hold-separate managers play a crucial role in ensuring the independence of the divested business, its interim preservation from the parties, and its holding separate.[28]

The monitoring trustee shall also be appointed by the divesting party and is tasked with monitoring the disposal process and reporting to the Commission on progress.[29]The role of the monitoring trustee also includes submitting an opinion to the Commission on the suitability of the purchaser selected by the merging firms.[30]In the event the parties fail to implement their divestiture commitment within the determined period, a divestiture trustee may be appointed to consummate a sale at no minimum price and on any terms and conditions it considers appropriate to consummate the sale.[31]

In 2005, the Commission issued a Remedies Study that analyzed the design, implementation and, effectiveness of 96 remedies in 40 decisions made between 1996 and 2000.[32]Generally, the Remedies Study concluded that: 57% of 85 remedies were effective, 24% raised unresolved design or implementation issues, 7% were ineffective, and 12% were unclear.[33]

Particularly on divestiture, it concluded that: 56% of 64 remedies were effective, 25% were partially effective, 6% were ineffective, and 13% were unclear.[34]More particularly: 79% of 84 divestiture remedies raised design and/or implementation issues;[35]21 of 84 remedies raised unresolved scope of the divested business issues,[36]and 40 of the 84 remedies raised purchaser suitability issues,[37]and 57% of the 84 divestiture remedies were effective, 24% were partially effective, 7% were ineffective, and in 12% of the remedies was unclear.[38]

II.      Divestiture in Indonesia

When the KPPU finds that a notified merger is anti-competitive, it may accept commitments to resolve its competition concerns.[39]. However, there are no rules or guidance as to how commitments should be designed. Thus, the merging parties may propose any commitments they consider appropriate for resolving the competition concerns.[40]

When the KPPU is comfortable with the proposed commitments, it will make the remedies a condition of its “clearance decision” and allow the parties to implement the remedies within a timeframe that it considers appropriate.[41]It will then monitor the implementation of the remedies.[42]Unlike in the EU, there are no rules or guidance in Indonesia as to how remedy implementation should be monitored by the KPPU. If the parties do not implement the remedies as agreed, the KPPU cannot stop the merger.[43]It may, nonetheless, initiate an investigation of the merger after it has been completed.[44]

Furthermore, under Act 5/1999, when KPPU finds that a merger is anti-competitive, it is only empowered to revoke the merger and impose fines between Rp 1 billion and Rp 25 billion.[45]In practice, KPPU has never exercised its power to revoke. Revocation is irrelevant and ineffective in eliminating competition concerns resulting from a merger, as it is impractical, expensive to enforce, cannot restore the market to its previous condition, distorts market operation, and harms general public and innocent shareholders.

Instead, it ordered divestiture as remedial actions for mergers that are anti-competitive, as they are proven to be the most effective remedies that resolve competition concerns. Carrefour andTemasek cases are the evidence. Divestiture remedies are not regulated under Indonesia merger regulations and KPPU is not conferred a power to impose them ex-post merger completion. Revocation was also among the several powers that was conferred to the German competition authority, FCO, prior to 1998 when it adopted both post-merger and pre-merger notification regime.[46]

In practice, there were very few cases in which a completed combination has been revoked, because all significant mergers were required to be pre-notified and if they were perceived to be anti-competitive, their completion would be prohibited.[47] Divestiture, on the other hand, is perceived as the most effective remedy implemented ex-post to mitigate competition problems arising from mergers.

Australia, Canada, and US are countries that are in favor of implementation of this remedy as it could end illegal mergers, deprive antitrust violator from taking benefits resulting from the illegal mergers, and break up monopoly power.[48] The Supreme Court has applied ex-post merger divestiture in numerous cases, such as in du Pont v. United States, Ford Motor Co. v. United States,[49]and California v. American Stores Co.[50]The Department of Justice also preferred divestitures “because they are relatively clean and certain, and generally avoid costly government entanglement in the market.”[51]

III.    A Benchmark for Divestiture in Indonesia

Changing the prevailing legal framework with regards to remedies is of immense importance.First, divestiture remedies (as proven to be the most effective remedies), along with other structural, behavioral, and access remedies, must be made available under Indonesian merger control as remedial actions or sanctions to mitigate adverse effects resulting from completed mergers.

The KPPU also needs to issue guidelines on how these remedies should be designed, implemented, and monitored during implementation. This should include designing of procedures for proposing remedies by the merging parties during consultation stage, asset identification and viability, purchaser suitability, the timing of remedies implementation, and the monitoring of remedies implementation.

The KPPU should also conduct an assessment of the effectiveness of remedies implementation as a basis for improving the legal framework on remedies and to avoid difficulties and issues arising from remedies implementation in the future. Second, the KPPU must be provided with the power to impose remedies ex-post merger completion.

To date, the KPPU’s power to impose ex-post remedies is questionable due to the absence of such power in the merger regulations. Therefore, when deciding appropriate remedies it can consider whether such remedies fall within its powers. Third, the KPPU must be conferred with the power to issue injunctions to prevent the merging parties from completing the merger if the KPPU finds it to be anti-competitive and taking measures that could render the divestiture impossible or more difficult.