23/08/2022·4 mins to read
Competition law trend watch: Why are so many clearance applications being withdrawn?
The New Zealand Commerce Commission (NZCC) has not declined a clearance application since March 2018. At first glance, this might look like good news for prospective mergers with a competition angle - but all is not what it seems. In other news, we’ve just had our third ever instance of pecuniary penalties for a non-notified merger.
In this article we give an update on the NZCC’s recent merger activity, including trends and key learnings from applications that did not make it through the notification process. We also break down the latest case of penalties being awarded for a non-notified merger and discuss what this all might mean for prospective merging parties.
While the NZCC hasn’t declined a single application since 2018, there have been nine applications withdrawn over that time.
For each application withdrawal, the Statement of Preliminary Issues, Statement of Issues or Statement of Unresolved Issues reveal where the NZCC anticipated issues for the proposed merger.
Common issues included a high number of third party submissions, disagreement on market definition and vertical effects.
In other news, the third ever instance of pecuniary penalties for a non-notified merger involved penalties imposed on Objective Corporation Limited, totaling $1.54 million.
Clearance withdrawals on the rise - key trends and learnings
As we said above, the NZCC has not declined a clearance application since March 2018. However, when reviewing the NZCC’s case register we can see that 30% of applications which have had an outcome recorded this year did not receive clearance. So what happened to these clearance applications?
In each instance, the application was withdrawn by the applicant mid-way through the clearance process. In total, since March 2018 there have been nine withdrawn applications.
In the clearance process, there are generally three stages at which a clearance is likely to be withdrawn. Firstly, this may occur after the NZCC releases its Statement of Preliminary Issues (SOPI). Usually a SOPI is relatively formulaic, setting out timing for the application and the areas which the NZCC intends to focus its analysis on. However, in some cases the SOPI may provide an early indication that the NZCC has concerns with the proposed merger.
Next is a Statement of Issues (SOI). Not all clearance applications receive an SOI - they are generally only sent to merging parties where the proposed merger is complex and the NZCC has concerns about potential competition issues that may arise from a proposed merger. Although the NZCC says a SOI is not a “final decision”, it often indicates there are hurdles to overcome in order to get the application over the line.
Thirdly, in some cases there can be a Statement of Unresolved Issues (SOUI). The NZCC will send a SOUI if, following submissions on the SOI, the NZCC has unresolved concerns. At this stage, it is relatively unlikely that the NZCC will give clearance without substantial steps being taken by the applicant, for example divestment undertakings.
Of the nine applications withdrawn since March 2018, four withdrawals occurred after receipt of the SOPI, four withdrawals occurred after receipt of the SOI, and one withdrawal occurred after receipt of the SOUI. Of these nine withdrawals, three were withdrawn even after the parties had taken steps to offer divestment undertakings or otherwise amended their application.
So what can we learn from these withdrawn applications? While the exact reason for a withdrawal is not often provided, some trends or common issues in these applications are set out below.
In some instances, the clearance applications received a significant number of third party submissions on either the SOPI or SOI. To head off this risk, we generally recommend that potential applicants consider likely objections from third parties early. If an applicant can anticipate who may object to their application and why, they can engage in stakeholder management early on in the process as well as address the anticipated complaints in the application.
In other instances, the NZCC’s concerns had their roots in disagreement with the parties regarding the appropriate market definition for the competition analysis. Merging parties should remember that the NZCC may have a different view of the relevant markets than the parties have typically adopted for their own commercial purposes. Parties should test their market definitions to understand whether it could potentially be further segmented geographically, or for certain customer or product types.
The NZCC also occasionally raised concerns about vertical effects arising from proposed mergers where the applicant had mainly focused on horizontal issues. Merging parties should always consider if there are potential vertical effects and head off any potential issues in their application, even if they view these potential effects as remote.
Non-notified mergers remain a focus
The NZCC recently published a reminder to New Zealand businesses about the risks associated with non-notified mergers. This reminder came in the wake of penalties of $1.54M being imposed on Objective Corporation Limited (Objective) for its non-notified acquisition of Master Business Systems Limited (MBS). The companies were each other’s closest competitors in the supply of software to building consent authorities to assist with running consenting systems.
An aggravating factor in this instance was that the conduct was deliberate, given the MD of MBS was discovered to have told the Chief Executive of Objective that the acquisition would “effectively hand over the New Zealand market” to Objective. The fact that Objective did not intend to breach the Act was not relevant, given the knowledge of the effects of the acquisition should have “raised a red flag.”
The $1.54 million penalties were significant in the circumstances, as Objective’s revenue for the 2020 financial year for the supply of building consent software was $3.8 million.
This is only the third instance of penalties being imposed for a non-notified merger. The highest penalties imposed to date are $3.4 million, imposed on First Gas in 2019.
We recommend that potential merging parties seek competition advice early on in relation to their potential mergers, even if any competition issues arising from the proposed merger aren’t immediately obvious. It may be that a quick analysis early on in the process can save the parties from headache and hidden costs further down the road.
This case also serves as a good reminder that in the course of an investigation, the NZCC can (and likely will) review all communications between the parties regarding the merger, as well as any documents created. Adopting competition protocols early on to manage communications between parties is important.
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