Commerce Act: This time there will be change!

Phil Taylor, Partner | September 2000

After a few false starts over the last year the Commerce Act is now set to be significantly amended. A Supplementary Order Paper introduced to Parliament at the beginning of August amends the Commerce Amendment Bill introduced under the previous National Government.

Why change?

The reasons for the changes are threefold. First, it is intended to bring New Zealand's competition laws more in line with those of Australia. This is expected to reduce the costs of trans-Tasman business. Secondly, some of the amendments are intended to provide greater deterrence e.g. increased penalties. Thirdly, certain amendments are aimed at avoiding a reduction in competition due to mergers and acquisitions.

When?

The amendments have been referred to the Commerce Select Committee. Submissions to the Select Committee can be made up to 15 September. However, the extensive debate that has led to these final proposals indicates that any substantive change through the Select Committee process is unlikely.

The amendments are expected to become law by the end of 2000/early 2001.

Mergers and acquisitions: Do it now

The current merger and acquisition threshold of dominance is to be lowered. The new test (consistent with Australia) will prohibit acquisitions which will have the effect or likely effect of substantially lessening competition in a market. This means that more acquisitions will fall within the Commerce Act threshold.

An example is provided by the proposed Wattyl acquisition of Taubmans in 1996. The respective market shares in Australia of Wattyl, Taubmans and the other major player, Dulux, if considered under the current New Zealand test, would have been within the Commerce Commission's "safe harbours" test. In New Zealand, therefore, the proposed acquisition would have been unlikely to come under Commission scrutiny at all. The ACCC (the Commission's Australian equivalent), however, concluded (adopting the lower threshold test) that the proposed acquisition would substantially lessen competition in the market.

The lower threshold will mean that many more mergers and acquisitions will need to be authorised by the Commission to proceed. The authorisation process remains intact. Mergers that fall within the lower threshold may be authorised if the public benefits of that merger outweigh the detriments.

The changes may also increase the number of mergers and acquisitions for which clearance will be desirable. This will be especially true in the first few years following the amendments when the application of the new threshold will be uncertain. The Commission will provide some guidance. Guidelines are to be published soon. These are likely to draw from the ACCC's guidelines but may take into account New Zealand's smaller domestic economy.

The changes will therefore make it more difficult for some mergers and acquisitions to proceed and increase compliance costs when they do. Those contemplating acquisitions should consider whether they might fall within the proposed test but not the current test. This may be a reason for proceeding with plans sooner rather than later.

Monopolies and now also oligopolies

The Supplementary Order Paper includes amendments directed at tightening the interpretation of section 36 (which prevents a party with a dominant position in a market from using that position for an anti-competitive purpose).

The most significant amendment is changing "dominant position" to a "substantial degree of power in a market". Australian case law suggests the effect of this change will be that the section will now apply to major participants in oligopolistic markets (essentially markets with a small number of participants, each of which is large in size). These markets were previously untouched by the dominance test.

A further proposed change is to replace the word "use" to "take advantage of". This again brings consistency with Australia. It is uncertain whether this will make any substantive difference. Australian case law has interpreted "take advantage of" as meaning "use". However, the change may provide the courts with the opportunity to reconsider the disputed "use" test adopted by the Privy Council in the Telecom and Clear litigation.

A further proposed amendment is to expressly provide that purpose can be inferred from the circumstances surrounding certain conduct.

Greater deterrence

The proposed penalty sections increase corporate penalties to the greater of either:

• $10 million (an increase from $5 million); or
  
  
• three times the value of any commercial gain, or expected gain, or if the actual or expected gain cannot be readily ascertained, 10% of the turnover of the body corporate and its inter-connected body corporate.

In addition:

• Cease and desist orders to be issued by the Commerce Commission have re-emerged. These orders effectively create a formal administrative injunction. That means that the Commission will be given greater powers to achieve early control of alleged anti-competitive behaviour without having to apply to the courts.
  
  
• The Commerce Commission will not be required to give an undertaking as to damages when they do seek an injunction.
  
  
• A prohibition on a company indemnifying a director, servant or agent in respect of liability or costs relating to pecuniary penalties has been limited to liability or costs arising from price fixing breaches under section 30 of the Act.
  
  
• Courts will have the power to ban serious offenders from involvement in the management of a body corporate for a period of up to 5 years.

What hasn't made it in?

The proposed provisions deeming bid rigging, market allocation and output limitation agreements to substantially lessen competition in a market have been removed.

Is a submission worthwhile?

The prospects for change are slight. Submissions on the penalty provisions are unlikely to be worthwhile. Readers who may contemplate business purchases might consider making a submission on the changes to the mergers and acquisitions threshold test. A submission would need to address whether the Australian test is appropriate in New Zealand. If you would like assistance in preparing a submission please contact Phil Taylor in the Auckland office, Jill Mallon in the Wellington office, or your usual Bell Gully adviser.

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