US maritime regulators punt on merger of Japanese carriers

US maritime regulators punt on merger of Japanese carriers

Complex legal questions surround the merger of Japan's "Big Three" container lines.

US maritime regulators on Tuesday rejected an agreement that would have allowed the top three Japanese container lines to merge operations, saying they didn’t have the authority to review and approve the creation of a new entity.

The US Federal Maritime Commissioners voted 4-0 to reject "K" Line, MOL, and NYK Line’s plan to share information with each other ahead of the merging of their container operations in July, saying the Shipping Act of 1984 doesn’t provide them authority to review and approve mergers. FMC Commissioner Mario Cordero didn’t vote, as he’s leaving agency to lead the Port of Long Beach and his last day will be May 12.

"This decision by the FMC in no way precludes the Japanese carriers from merging their container trade business units into a single stand-alone company," FMC Commissioner William Doyle said in a statement. "Rather, the vote recognizes that the FMC cannot approve certain actions that would allow the three Japanese companies to act as a merged entity prior to actually merging."

The Department of Justice in conjunction with the Federal Trade Commission (FTC) will decide whether to allow the carriers to merge operations for US services. The three carriers don’t plan to begin operations as a new entity until April 1, 2018. The merger would create the world’s sixth-largest container line and allow the new entity, for now known as “J-3,” to better compete in a rapidly-consolidation industry grappling with overcapacity.

The vote to reject the agreement comes a day ahead of a House subcommittee hearing in which lawmakers are expected to question container lines, marine terminals, and the FMC on allegations that major shipping line alliances are unfairly squeezing third-party suppliers, namely tugboat operators.

The Japanese carriers’ joint venture proposal has fueled legislators’ interest in reviewing the Shipping Act of 1984, which gives carriers limited antitrust immunity. Although the three Japanese carriers aren’t seeking an alliance, original language allowing them to plan third-party services ahead of becoming a single entity rankled tugboat operators. Thomas Allegretti, president and CEO of the American Waterway Operators (AWO), told last month that the three carriers shouldn’t be able to jointly contract until they are fully merged.

"These provisions would violate 'gun jumping' laws that forbid the sharing of competitively sensitive information or the premature combining of the parties," said Doyle. 

He noted the carriers' proposed agreement, known as the Triparite Agreement, sought to transfer shares or ownership interst in US marine terminals to those owned and/or operated by Japanese carriers, an activity beyond the scope of FMC's authority. 

Some marine terminals and stevedores are worried shipping line alliance members are utilizing power that arises from tight profit margins and fewer carriers with which to negotiate due to industry consolidation. The number of major carriers has fallen from 20 to 17 in the last few years and will go to 10 in 2018, if planned mergers go forward, no more are announced, and none become the next Hanjin Shipping by collapsing.

To some, the DOJ's decision to subpoena major carriers at a March 15 Box Club meeting confirmed those fears. Quoting unnamed sources familiar to the issue, a Wall Street Journal report said the DOJ's investigation centers on alleged carrier collusion against tugboat operators and other suppliers.