Competition Law

29 Jan 2009

Commerce Act Update

The Commerce Commission has released new guidelines to assist businesses and their advisers when applying to the Commission for clearance to merge or acquire the assets or shares of a business. In this FYI, we take a look at the new process guidelines, as well as some recent developments of interest in Australia.

New Process Guidelines

Under the Commerce Act 1986, the Commerce Commission is responsible for assessing applications for clearance from businesses seeking to acquire or merge with other companies or businesses. Applications for clearance are voluntary. Where the Commission grants clearance, the transaction is protected from proceedings for breach of sections 27 (which prohibits contracts, arrangements or understandings which substantially lessen competition) and 47 (which prohibits acquisitions which would have, or would be likely to have, the effect of substantially lessening competition within a market) of the Commerce Act.

On 26 November 2008, following a period of public consultation, the Commission released the new 'Mergers and Acquisitions Clearance Process Guidelines'. The Guidelines set out the process and establish indicative timeframes that the Commission will follow when considering clearance applications, while also outlining the communication that will occur between the parties. The Guidelines are designed to be read alongside, and applied in conjunction with, the Commission's 'Mergers and Acquisitions Guidelines' which provide detail on the way in which the Commission will, amongst other things, define the relevant market and apply the 'substantial lessening of competition' test (either for the purpose of considering an application for clearance or as part of an investigation).

Key aspects of the Guidelines are the following elements of the process by which the Commission will consider any clearance application -

pre-notification discussions

• Statement of Preliminary Issues
• Letter of Issues
• Letter of Unresolved Issues
• increased guidance as to timeframes for the clearance process

Pre-Notification Discussions

Pre-notification discussions are conducted between the Commission and a potential applicant prior to the making of an application for clearance. The main purpose of the discussions is to expedite the assessment of an application for clearance by clarifying the information and evidence likely to be required by the Commission and allowing for effective planning of the clearance application assessment. Because pre-notification discussions are not a compulsory element of the clearance process, applicants can choose whether to engage in such discussions with the Commission. The Guidelines provide that pre-notification discussions are not intended for transactions that are hypothetical in nature, and the Commission will need to be satisfied that there is a 'good faith intention' to proceed with the proposed acquisition or merger.

The Guidelines formalise what had previously been an informal process, and as such they are not an entirely new feature of the clearance process. However, the formalisation of the procedure for pre-notification discussions provides a framework for such discussions and greater focus for parties wishing to engage with the Commission prior to the making of a clearance application.

‘Statement of Preliminary Issues’, ‘Letter of Issues’ and ‘Letter of Unresolved Issues’

The ‘Statement of Preliminary Issues’ is a document prepared by the Commission which outlines the Commission's initial view of the competition issues that could arise if a proposed merger or acquisition were to proceed. The Commission aims to publish the ‘Statement of Preliminary Issues’ within 15 days of a clearance application being made (and no later than 25 days after receipt of an application) and will usually  place a public version of the document on its website. The purpose of the 'Statement of Preliminary Issues' is three-fold: to increase the transparency of the process; to allow interested parties the opportunity to consider the issues identified by the Commission; and to facilitate the submission of further information which might assist the Commission's assessment of a clearance application.

A ‘Letter of Issues’ and, in more complex matters, a ‘Letter of Unresolved Issues’ will also be prepared by the Commission, and are designed to give applicants for clearance an opportunity to respond to issues and questions raised by the Commission during an assessment of a clearance application. A ‘Letter of Issues’ aims to outline the relevant issues identified by the Commission, and invites the applicant to provide any further information which may address the issues raised. Importantly, a ‘Letter of Issues’ is not a final decision and should not be taken as an indication that the Commission intends to decline the application for clearance.

Where issues raised by the Commission in the ‘Letter of Issues’ have not been or can not be sufficiently addressed by the applicant, the Commission is likely to send a ‘Letter of Unresolved Issues’ to the applicant. This is designed to give the applicant a further opportunity to provide relevant information or submissions as well as additional evidence to allay the Commission's concerns.

These aspects of the Guidelines reflect an increasing trend seen throughout 2008 of use by the Commission of this type of procedural element in clearance applications. The resultant improvement in communication around critical issues is to be applauded.

Timeframes

The Guidelines provide an indicative timeline for the Commission's assessment of a clearance application. The following steps are included:

Within 10 days of receiving an application, the Commission will provide a draft timeline for the assessment of the application (taking into account resource requirements and the likely complexity of the matter)

• By day 15, the Commission will publish a ‘Statement of Preliminary Issues’
• By day 25 the Commission will give clearance in straightforward applications, or send a ‘Letter of Issues’
• Day 30 involves a meeting with the applicant and provision of an updated tentative timeline (where necessary)
• By day 40, the Commission will give, or decline to give, clearance. For more complex applications, the Commission will send a ‘Letter of Unresolved Issues’ and seek an extension
• In instances where an extension is obtained, the Commission will meet with the applicant regarding the ‘Letter of Unresolved Issues’ (by day 45), and give a final decision (day 60+)
• Prior to the release of the Guidelines, little information was available as to the timeframes that applicants could expect in a clearance application. Although the statutory timeframe is 10 working days, the Commission’s ‘Statement of Intent’ provides that the Commission aims to have applications for clearance determined within an average of 40 working days of registration of an application. The more detailed, staged timeframes provided by the Guidelines should offer greater certainty for parties involved in the clearance application process around timing, an aspect which has been the source of some frustration in the past.

Guidelines a positive step forward

In general terms, the Guidelines will provide greater assistance to those applying for clearance from the Commission, while the provision for greater levels of communication between applicants and the Commission will result in more transparency in the process, and hopefully more logical and consistent results.

Australian Developments

Developments in Australia are always of interest in a New Zealand context, given the significant similarities between the Commerce Act 1986 and the Australian Trade Practices Act 1974, the cooperation arrangement between the Commerce Commission and the Australian Competition and Consumer Commission (ACCC), and the desire for harmonisation in trans-Tasman competition law. A number of recent Australian developments are of particular interest in the New Zealand context. We discuss these below.

New Merger Guidelines

In November 2008, the ACCC released a new set of Merger Guidelines, replacing guidelines which had been in operation since 1999. The new guidelines, which more closely accord with the ACCC's approach in recent years, introduce several significant changes. The most notable change from the previous guidelines is the provision of a new notification threshold. Under the new guidelines, parties to a merger are encouraged, but not required, to notify the ACCC where both the products of the merger parties are either substitutes or complements and the merged firm will have a post-merger market share of greater than 20% in the relevant market. The new notification threshold can be contrasted with the 'safe harbour' market concentration test provided in the previous guidelines, under which the ACCC encouraged notification where the merged firm would have a market share of 40% or greater, or if the four largest firms would have more than 75% of market share following the merger.

Misuse of Market Power - Changes to Trade Practices Act

Amendments to the provisions of the Trade Practices Act relating to the misuse of market power have recently been passed by the Senate. One such change introduces a prohibition on the supply of goods or services for a sustained period of time at a price that is less than the relevant cost to the corporation of supplying those goods or services. Such conduct is prohibited even if the corporation cannot, and may never be able to, recoup the losses incurred. Where this type of behaviour is shown, it will still be necessary to demonstrate that in so acting, the corporation has taken advantage of its substantial market power.

Predatory pricing, as described above, has always been within the ambit of section 36 of the Commerce Act 1986. However, as has previously been the case in Australia, the New Zealand courts have narrowly interpreted the circumstances in which predatory pricing conduct can be said to constitute taking advantage of market power (requiring a recoupment element). As a result claims of predatory pricing have been difficult to make out. The Australian provision now expressly states that recoupment need not be proven to establish a breach of section 46 of the Trade Practices Act. This is contrary to the current position regarding predatory pricing in New Zealand.

The Australian amendment is likely to make proving a breach of competition law significantly easier. It remains to be seen whether a similar amendment to the Commerce Act is proposed as a result.

Creeping Acquisitions - Proposed Changes

Concerns have been raised in Australia around the issue of 'creeping acquisitions'. This is when a series of small acquisitions, which individually do not permit ACCC intervention, have the cumulative effect over time of substantially lessening competition in a market. Like the Commerce Act, the Trade Practices Act currently applies only to individual transactions, creating a perceived loophole for 'creeping acquisitions' that the Australian Government has highlighted as requiring urgent attention.

Two options for change are currently being considered. The 'aggregation model' would prohibit an acquisition if, when combined with acquisitions made by the corporation within a specified period, the acquisition would be likely to substantially lessen competition in the market. Alternatively, the 'substantial market power' model would prevent a corporation making an acquisition if it already has a substantial degree of power in a market and the acquisition would result in any lessening of competition in that market. A hybrid of these two models is also an option for reform.

The proposed changes appear to be a response to specific market developments and conditions in Australia, and it is debatable whether a need for similar reform exists in New Zealand. Express restrictions on 'creeping acquisitions' have the potential in some market environments to limit small-scale new entry. Accordingly, a compelling competitive benefit should be demonstrated before similar legislative change is mooted for New Zealand.

The Criminalisation of Cartels

In March 2008, our FYI titled 'Cartel Cases - The New Wave of Competition Law Litigation', discussed the dramatic increase in the number of cartel investigations and High Court claims in New Zealand in the last couple of years. Cartels are formed when competing companies or individuals agree to work together to ensure prices are kept high instead of competing to offer a better deal to customers (or suppliers). 

Cartel behaviour has long been criminalised in the United States and Canada, and Australia has recently taken steps towards criminalisation with the introduction into Parliament in December of the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008. The Bill proposes to make it a criminal offence for a corporation to make or give effect to a contract, arrangement or understanding between competitors (or persons that would otherwise be competitors) that contains a cartel provision. The Bill is currently before the Senate Economics Committee, with a report back due on 20 February 2009.

In New Zealand, significant monetary penalties may be imposed for cartel conduct in breach of the Commerce Act and individuals involved may be excluded from future management of a company. However, criminalisation in Australia may be expected to increase the likelihood of criminalisation being considered in a New Zealand context, and developments in this area are awaited with interest.

Authors

Anne Callinan

Partner - Dispute Resolution

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Shelley Cave

Partner - Corporate & Commercial

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James Craig

Partner - Dispute Resolution

DDI: +64 9 977 5125

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Peter Hinton

Partner - Corporate & Commercial

DDI: +64 9 977 5056

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Elisabeth Welson

Partner - Corporate & Commercial

DDI: +64 4 924 3400

Mobile: +64 29 924 3400

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