New Zealand: Proposed Changes To Part 5 Of The Commerce Act - Reviewing The Review

Last Updated: 22 July 2007
Article by Mark Williamson and Oliver Turton

In this update, Mark Williamson and Oliver Turton cast a critical eye over some of the proposals contained in the recently released discussion paper relating to Part 5 of the Commerce Act 1986. Part 5 contains provisions dealing with Commerce Commission clearances and authorisations.

Background

A party seeking to buy assets or shares of a competitor can seek a clearance if it has competition concerns. The Commission will grant a clearance if it is satisfied that the acquisition will not, or will not be likely to, substantially lessen competition in a market. More rarely, an authorisation is sought for an acquisition or conduct where a party believes there is probably going to be a substantial lessening of competition but that the public benefits arising from the acquisition or conduct outweigh the detriment from the loss of competition.

For the sake of brevity, we consider only those proposals in the discussion document relating to the merger clearance regime. The views expressed are those of the authors and do not necessarily represent the views of DLA Phillips Fox or any of its clients.

Clearance time frames


The issue

The Commission has 10 working days to deliver its clearance decision or such longer period as the parties 'agree'. However, a request by the Commission to extend the period is literally an offer you cannot refuse, as the Commission will decline your clearance on the basis it cannot be 'satisfied' without more time to investigate. Only one of the last 52 clearance applications has been decided within the 10 working day period (our last clearance application took six months).

The proposal

The Ministry of Economic Development (MED) tentatively suggest that 30 working days should be adopted as the default time frame.

What's right with it

More often than not parties only seek clearance for complex mergers that are close to the line. Irrespective of anything, it simply takes time for the Commission to reach the 'correct' decision for these mergers.1 While lawyers gain a feel for the Commission's time frames, increasing the statutory time period provides clarity to the business community both in New Zealand and overseas. Also, parties don't have to deal with repeated requests for extensions from the moment they file an application.

What's wrong with it

A loss of the tension between applicant and the Commission, because the Commission is currently required to approach an applicant seeking an extension and publicly announce that such an extension has been agreed. Thirty working days (six weeks) becomes the norm with no pressure or incentive on the Commission to reach a decision faster. Human nature being what it is, the 48% of decisions that are currently made in less than 30 working days would, more than likely, move to 30 working days (although, to be fair, many are close to this already). There might be less incentive for the Government to better resource the Commission to make faster decisions.

The verdict

A change probably needs to be made to reflect reality, however, it will probably not do anything to shorten timeframes and might actually increase them. The underlying solution is greater resourcing for the Commission. Compromise? ...20 working days. Possibly little practical benefit as all competition practitioners know that the Commission generally takes five to six weeks.

Publication of written clearance decisions


The issue

Perhaps surprisingly, the Commission is not required to publish written clearance decisions. The Commission always does so but in recent years (as clearance applications have become more complex) the length of time between notice of decision and the release of written decision has increased (at last count, 35 working days – longer than the actual determination itself). This is not an issue if the clearance is granted, but if a clearance is declined, the applicant has 20 working days to appeal (unless extended by the Court).The 20 working days start from when the decision is made by the Commission, not when the written decision is released.

The proposal

Retain the status quo.

What's right with it

If your clearance application is declined, first your adviser should have told you prior to filing that there was a possible chance of a decline and the likely reasons why, and second, towards the end of the clearance process, the Commission generally tells you the issues it has with your merger. Accordingly, receiving written reasons should not normally delay filing an initial notice of appeal (although it is obviously essential for the preparation of the substance of the appeal).

Also, if you wish to wait for the written decision before filing, we can't see why a Court would ever fail to grant an appropriate extension of the 20 day period (particularly if the Commission did not object).

What's wrong with it

It seems to us a fundamental requirement of administrative law to give reasons for any form of substantive administrative decision. The Commission is required by the Commerce Act to give reasons when it makes a decision on an authorisation application, why not a clearance? As with the 10 day time period, we suspect that the lack of a requirement to give written reasons for a clearance dates back to the days when clearance decisions were intended to be, in a sense, 'quick and dirty'.

The verdict

On balance, let's get some certainty in the process by requiring the Commission to give public written reasons within perhaps 15 working days of its decision, and have the appeal period run from the date the applicant receives the Commission's reasons. Anything else has too many variables for parties trying to put together what are often very significant transactions.

The enforcement and variation of undertakings to divest shares or assets


The issue

The Commission may accept undertakings to divest shares or assets as a condition of approving a merger. However, there is no direct means for the Commission to enforce undertakings to divest shares or assets. The only option if a firm breaches an undertaking is to take a case to the High Court claiming that the merger substantially lessened competition.

In addition, there are no means for the Commission to amend an undertaking once a clearance or authorisation decision has been made.

The proposal

The MED concludes that a change is needed to allow the Commission to seek orders from the Court requiring compliance with undertakings along with the power to correct, punish and compensate. Regarding amendments, the MED recommends that the original applicant should be able to ask the Commission to approve minor variations.

What's right with it

Dealing with divestments is a thorny issue for regulators the world over (one need only look across the Tasman at the issues the ACCC faced in the Toll/Patrick acquisition). The proposal may be a way of bringing more openness and transparency to the process.

It also aligns us with Australia where section 89B undertakings under the Trade Practices Act are enforceable by the ACCC.

We agree it makes sense for minor variations to divestment undertakings to be permitted.

What's wrong with it

Careful thought needs to be given because the clearance process is voluntary and it does not follow that, because a merger is cleared with a divestment2 (that is, at least in theory, volunteered by the applicant), the merger is unlawful without the divestment. To maintain the integrity of the clearance process and its relationship with section 47 of the Commerce Act,3 a party who seeks a clearance but then does not comply with its terms should be in the same position as a party who proceeds without a clearance. That is, subject to the risk that the Commission will conclude that an acquisition substantially lessens competition and take appropriate court action (which may result in forced divestment). A party should not be forced to divest an asset without a thorough enquiry as to whether the divestment is required to protect competition.

The verdict

This is a difficult area, however, on balance we would favour retaining the status quo, as provided the Commission negotiates robust divestment agreements and takes appropriate enforcement action arising from the merger when required, the current system appears adequate.

Behavioural undertakings


The issue

When considering a clearance application, the Commission can accept undertakings to dispose of assets or shares as a condition of granting a clearance. However, the Commission is expressly prohibited from considering behavioural undertakings relating to the post acquisition conduct of the merged entity (for example, agreeing to keep prices below an agreed level or providing access to an essential facility).

The proposal

Retain the status quo.

What's right with it

Almost everyone agrees that behavioural undertakings are problematic. Put simply, they turn the Commission from a forward-looking adjudicator of competition effects into a regulator over some prescribed period (the 'correct' duration of which is highly problematic). They are also inflexible and unresponsive to market changes.

What's wrong with it

In limited circumstances, the ACCC has indicated a willingness to use behavioural undertakings to supplement structural undertakings (Toll/Patrick is a good example of this). In a perfect world, we would have the resources and confidence in the Commission to allow it to judge when it was appropriate to accept behavioural undertakings.

The verdict

The world is not perfect. Given our size and resources, the MED's recommendation to retain the prohibition on behavioural undertakings is probably a good one. Applications for clearance might take even longer if the Commission had to consider and negotiate behavioural undertakings.

Informal pre-merger process


The issue

Although the Commission welcomes informal notification of proposed mergers (and may give an indication as to whether clearance is required) it does not give letters of comfort. This is in contrast to the ACCC which operates a more structured informal pre-merger system. It has been suggested to the MED that a letter of comfort process akin to the Australian system would provide a useful supplement to the formal clearance system.

The proposal

Retain the status quo.

What's right with it

We have traditionally been strong advocates for our formal merger process which our experience suggests is admired overseas. A good adviser can tell you whether a clearance is required (and, if needed, this can be confirmed by an informal and confidential meeting with the Commission). If the merger is sufficiently close to the line that an adviser is unsure as to the competition effects, it probably needs a proper look by the Commission, with accompanying market enquiries, for a client to be comfortable it will not breach section 47 by proceeding without clearance.

What's wrong with it

Confidentiality and reducing uncertainty are generally critical in the context of a merger. A process which allows business to get an increased level of comfort (albeit limited) while retaining confidentiality should be looked at carefully.

The verdict

We find the prospect of a confidential tick by the Commission very appealing but on balance let's focus on improving the formal system and better publicise the willingness of the Commission to entertain informal approaches.

Closing date for submissions

Submissions to the MED close on 10 August 2007, so there is still time if you wish to make a submission.

Footnotes

1. And a much longer time for an applicant to appeal an incorrect decision made in haste.

2. For example the Pernod/Ricard merger was cleared with a divestment. The merger proceeded but the divestment did not take place. The Commission investigated and found that the merger, even without the divestment, did not and was not likely to result in a substantial lessening of competition.

3. Which, in short, prohibits mergers which substantially lessen competition.

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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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