Welcome to the March 2007 edition of the NZ Corporate Bulletin. Late 2006 saw a flurry of activity by the Commerce Commission and the Takeovers Panel. This bulletin highlights some of those activities and details how they may affect you and your business.

Advertising And Representations Concerning Products – Beware The Fair Trading Act

Considering a new advertising campaign, or labelling including questionable claims about your product? Recent prosecutions show that the consequences of not complying with the Fair Trading Act 1993 can be severe. Prosecutions have been across a range of different industries and the size of the fines awarded in these decisions, which are summarised below, serve as a strong reminder that all businesses must take care not to use advertising, labelling and marketing that could be misleading or deceptive.

$380,000 fine for misleading advertisements

Qantas was ordered to pay $380,000 in fines and $15,860 in costs after pleading guilty to 122 charges of breaching the Fair Trading Act. The charges related to misleading advertisements placed mainly in major newspapers from September 2001 to September 2002. In some advertisements the price was misleading because extra charges were not disclosed. Other advertisements were misleading because extra charges were imposed to cover normal operating costs, such as the cost of fuel, when they should have been included in the price. Air New Zealand was fined $600,000 for similar behaviour in June. As the Commerce Commission has said of these airline decisions, they are a reminder to all advertisers that the price they advertise must be the price that customers actually pay.

$900,000 fine for misleading labelling

Carter Holt Harvey was fined $900,000 for 20 breaches of the Fair Trading Act for misleading labelling of timber. Timber which was sold between July 2001 and November 2003 was labelled as being MGP10 grade (the grading given to the timber after it had been machine stress graded indicating its elasticity and strength) when Carter Holt Harvey knew the timber did not consistently meet that grade. It is estimated that around 20,000 new houses were built with Laserframe MGP10 supplied by Carter Holt Harvey during the period and sales of MGP10 in the period were approximately $63.4 million annually.

The Commerce Commission investigated after concerns were raised by the New Zealand Timber Industry Federation. After testing the timber and finding some did not meet the relevant grade, the Commission searched Carter Holt Harvey’s premises and seized company documents that showed Carter Holt Harvey knew, since 2001, that the timber was not consistently meeting the grade.

The Commerce Commission has stated that it sees the case as one of the most serious Fair Trading cases it has dealt with. The Commission is also prosecuting six former or current Carter Holt Harvey employees, and is considering further civil action.

$140,000 fine for misleading marketing

Electricity retailer, Energy Online, was ordered to pay $140,000 in fines and $6,300 in costs after pleading guilty to ten charges of breaching the Fair Trading Act for misleading its customers. $860,981 will also be refunded to affected Energy Online customers.

During 2003 and 2004, Energy Online marketed a price freeze to potential Hawke’s Bay and Waitemata customers, telling them that the ‘energy portion’ of their bill would not go up during the freeze period. Customers’ bills were increased during the price freeze with Energy Online passing on increased electricity distribution charges and also increasing its own overhead charges to most Hawke’s Bay customers by 70 percent. The Court found that the overall impression created by the price freeze was that prices would not go up at all, and this impression was misleading.

And a warning...

The Commerce Commission has formally warned the manufacturers of Pink Batts and GreenStuf insulation products that they may be breaching the Fair Trading Act because their insulation failed to meet the quality level claimed on the packaging. Testing of the products found that they did not meet the ‘R’ values claimed on the products’ packaging. The ‘R’ value indicates the level of insulation provided – the higher the ‘R’ value of an insulation product, the greater its capacity to prevent heat loss in winter and heat gain in summer. On receiving the Commission’s warning both companies moved immediately to correct the misrepresentations and ensure further representations are accurate.

Consumer Credit Contract – Blurry Fine Print Results In Prosecution

In the first successful prosecution under the Credit Contracts and Consumer Finance Act 2003 (CCCF Act), Senate Finance Limited (Senate) was fined $59,000. In addition, 17 affected customers were also awarded a total of $13,700 in statutory damages.

The CCCF Act came into force on 1 April 2005 and, among other things, requires every creditor under a consumer credit contract to ensure that key information, as set out in schedule 1 of the CCCF Act, is disclosed to the debtor before the contract is made or within five working days of the day on which the contract is made.

Senate, which provides finance to customers of car dealers, pleaded guilty to 17 breaches of the CCCF Act for not adequately disclosing the terms and conditions of its loans. The documents provided to customers had been faxed and photocopied and in some instances had become so distorted that they were impossible to read. In one instance, a customer was told to ‘use a magnifying glass’ if he had trouble reading the document.

Failing to disclose the terms and conditions of the contracts in question resulted in the contracts being unenforceable under the CCCF Act. Senate also pleaded guilty to eight charges under the Fair Trading Act for telling customers that the contracts were enforceable.

The prosecution serves as a reminder to creditors providing consumer finance that they need to comply with the disclosure requirements of the CCCF Act and that any attempt to enforce a contract that did not comply with the CCCF Act, such as sending default notices or taking repossession action, could be a breach of the Fair Trading Act.

Commerce Commission Alleges Price Fixing Of Credit Card Interchange Fees

Do you ever become frustrated that some small retailers refuse payment by credit card? In all likelihood this will be because it will be required to pay a cut of the transaction sum to Visa, Mastercard, or the relevant bank or financial institution.

The Commerce Commission has issued civil proceedings against Visa, Mastercard and 11 banks and other financial institutions for alleged price fixing in relation to credit card interchange fees.

What are interchange fees?

Interchange fees are fees charged by credit card companies to retailers relating to credit card use by the retailer’s customers. Interchange fees can be as much as 1.8% of each credit card transaction. Although the retailer is charged the interchange fee, it is not permitted to recover this fee directly from credit card holders under its contractual arrangements with the financial institutions and therefore must recover the fees by increasing prices across the board. This increases prices for all customers regardless of whether they pay by credit card, Eftpos or cash.

Commerce Commission’s claims

The Commerce Commission has alleged that fixing the interchange fees is anticompetitive and is in breach of sections 27 and 30 of the Commerce Act 1986. The Commerce Commission’s allegations do not allege Visa and Mastercard have colluded with one another, but that the two credit card companies have fixed prices with their respective shareholder financial institutions.

Under section 80 of the Commerce Act 1986, penalties for price fixing of up to NZ$10 million per breach or, either three times the value of any commercial gain resulting from the breach or 10% of the turnover of the company, may be imposed against each of the parties to the action.

In 2004, New Zealand Visa and Mastercard transactions totalled NZ$19 billion. In 2004, there were 2.1 million Visa cards and 900,000 Mastercards in use. It has been estimated that the interchange fees cost businesses in New Zealand between NZ$350 million to NZ$400 million annually.

Civil action

Further to the Commerce Commission’s allegations, a group of high profile retailers have also brought an action against Visa, Mastercard and the 11 banks and other financial institutions seeking damages for the alleged price fixing of the credit card interchange fees.

Regulation of interchange fees overseas

The Australian Reserve Bank has recently regulated interchange fees to drop from 0.93% to 0.5% of any particular transaction. The Australian Reserve Bank issued the standard interchange fee of 0.5% after considering the cost of processing, authorisation, fraud, fraud prevention and funding interest free periods. Visa and Mastercard are now required to publish the weighted average interchange fee in each scheme. This newly imposed rate will apply for three years from 1 November 2006. An investigation of credit card interchange fees is also currently under way by the UK Office of Fair Trading.

Takeovers Panel Proceedings

At the end of 2006, the Takeovers Panel (Panel) suffered a small setback in its strategy to prevent code companies (that is, companies listed on a registered exchange or that have 50 or more shareholders and $20,000,000 or more of assets) using the scheme of arrangement provisions under the Companies Act 1993 to avoid the Takeovers Code.

The Panel was involved in proceedings in the High Court and the Court of Appeal in relation to an amalgamation of the Dominion Funds group of companies under Part XV of the Companies Act. All three companies in the Dominion Funds group were code companies for the purposes of the Takeovers Code.

The Panel had indicated in May 2006 that it would seek to be heard when the High Court was considering approving schemes of arrangement or amalgamations involving code companies. This was following the Transpacific/Waste Management ‘amalgamation’ which the Panel considered to be an attempt to avoid the higher shareholder approval threshold required of the Takeovers Code. A formal takeover under the Takeovers Code would require acceptance by at least 90% of the shareholders of the companies being taken over, whereas only 75% shareholder approval is required for schemes of arrangement or amalgamations under the Companies Act.

The Panel was concerned that the approval threshold required of the shareholders in each company under the amalgamation, being a special resolution of those voting by postal vote with no need for a quorum of shareholders, could result in the amalgamation being approved by a very small number of shareholders in each company.

The Panel applied to the High Court for leave to be heard as to the adequacy of the initial orders relating to the process to be followed in the Dominion Funds amalgamation. The High Court agreed with the Panel’s submission that the Court should amend its initial orders so that the amalgamation required the support of shareholders representing the majority of those entitled to vote, rather than those entitled to vote and voting. The point being, that in widely held companies many shareholders will not exercise their rights to vote, so a majority will generally be achieved with substantially less than 50% of all shareholders.

The promoters of the scheme appealed the High Court’s decision to the Court of Appeal, challenging the Panel’s entitlement to intervene in their court proceedings. The Court of Appeal reversed the order made by the High Court. The principal reason given by the Court for its decision was a practical concern that the amalgamation could receive overwhelming shareholder approval from those entitled to vote and voting but, due to shareholder apathy, could fail to secure support from the holders of a majority of the voting rights in each amalgamating company. The Court also observed that this appeared to be an orthodox amalgamation (not involving shareholders being forced to exit with cash) and not an attempt to avoid the Takeovers Code. In that regard, the case may not have involved the most suitable facts for the Panel to flex its muscles.

The Panel has recommended changes to the law in relation to schemes of arrangement and amalgamations affected under the Companies Act. These recommendations are currently with the Minister of Commerce. In the meantime, the Panel has indicated that it will continue to seek to be heard by the Courts on schemes of arrangement and amalgamations involving code companies. The Panel recommends that any code companies contemplating entering into a scheme of arrangement or amalgamation, discuss their intentions with the Panel at an early date.

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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.