Commerce Act Amendment - Take 2

Phil Taylor, Partner | May 2001

"I am aware that law firms have been advising their clients of the proposed changes and I consider that any firms at risk have had sufficient time to adjust". Trevor Mallard, Acting Minister of Commerce

Proposed amendments to the Commerce Act are designed to broaden the range of conduct and transactions subject to the Act, increase the likelihood breaches will be detected and increase penalties. Significantly, the changes lower the thresholds in respect of both mergers and acquisitions and the use of market power.

The Labour Government recently introduced the Commerce Amendment Bill (No.2) which the Select Committee has considered and reported back to Parliament. The Bill could be passed into law on relatively short notice, with its main provisions taking effect the following day.

Key changes

Mergers and acquisitions (section 47)
The new threshold will prohibit mergers and acquisitions "substantially lessening competition" in a market, a much lower test. Guidance no doubt will be taken from Australian decisions and the approach of the Australian Competition and Consumer Commission (ACCC), although the smaller, more concentrated domestic economy is likely to influence the New Zealand interpretation. The change means the Commerce Commission is likely to investigate a significantly greater number of merger and acquisition transactions. The voluntary notification regime remains intact.

The ACCC Merger Guidelines indicate it will give further consideration to a merger or acquisition where:

• the post-merger combined market share of the four largest (or fewer) firms is 75% or more and the merged firm supplies at least 15% of the relevant market; or
• the merged firm supplies 40% or more of the relevant market.

These twin thresholds acknowledge that mergers and acquisitions facilitating the unilateral exercise of market power and those that facilitate "tacit" collusion have the potential to substantially lessen competition.

An example of an acquisition that may facilitate tacit collusion and thereby substantially lessen competition is the acquisition of a small but vigorous competitor by a leading participant in the relevant market, even where a significant number of firms remain post-acquisition. Such firms often increase competition in a manner disproportionate to their size and therefore their "removal" may have the prohibited effect. Further, the potential for tacit collusion increases as an industry becomes more concentrated and therefore transactions reducing the number of major participants in an industry from 4 to 3, and from 3 to 2, are likely to attract greater scrutiny from the Commerce Commission.

Key considerations will remain:

• the number of active competitors remaining post-acquisition;
• barriers to entry; and
• the level of imports.

A merger or acquisition is unlikely to substantially lessen competition where entry is likely, because existing firms are likely to be constrained by the threat of that entry and therefore behave in a manner consistent with competitive outcomes. Further, a substantial lessening of competition is unlikely to occur where the level of imports of comparable and competitive goods has been at least 10% over recent years and is likely to continue.

Use of market power (section 36)
Section 36 is the sole provision in the Act prohibiting the unilateral exercise of market power for certain anti-competitive purposes. The section is often relied on by participants in utility industries to gain access to a competitor's network, although the section's application is far broader.

The proposed amendment will align the New Zealand law with Australia and will prohibit a firm taking advantage of a substantial degree of power in a market for a prohibited purpose.

In practical terms the amendments to section 36 are likely to increase the number of firms subject to the section and may make it simpler to prove the firm exercising the power had the requisite purpose.

Firms which do not have a high degree of market control (i.e. are not "dominant"), but which can behave persistently in a manner different from the behaviour a competitive market would enforce, may find themselves with a substantial degree of power in a market and be subject to the amended section 36. Indeed, it is possible to argue that more than one firm may have a substantial degree of market power. Again, barriers to entry and the level of imports will remain key considerations. Firms with a high market share in industries where barriers to entry are significant or imports are low are at risk.

The replacement of the word "use" with "take advantage of" is unlikely to significantly alter the recent approach of the New Zealand courts in this respect.

A further amendment provides that purpose may be inferred from relevant conduct and circumstances, which may simplify proving that a firm held a prohibited purpose.

Exclusionary arrangements (section 29) - Good news!
Section 29 effectively prohibits competitors agreeing for the purpose of restricting a competitor's access to suppliers and customers, or making such access subject to conditions. Because section 29 is an absolute prohibition, i.e. there is no threshold test, it can have the effect of prohibiting behaviour that is not necessarily anti-competitive. This will change.

The amended section 29 will provide a defence for arrangements that would otherwise be exclusionary, but do not have the purpose, effect, or likely effect of lessening competition in a market in a manner that is real or of substance.

Greater deterrence

Maximum corporate penalties for a breach of the restrictive trade practices provisions are increased to the greater of either:

• $10 million (previously $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 New Zealand turnover of the body corporate and its inter-connected bodies corporate.

The maximum penalty for individuals is unchanged at $500,000 each but a court now must order an individual who has engaged in certain conduct to pay a penalty unless there are good reasons not to.

In addition:

• companies are prevented from indemnifying a director, servant or agent in respect of liability or costs relating to penalties for price-fixing;
• courts will have the power to ban serious offenders (where the offence relates to price-fixing or exclusionary behaviour) from involvement in the management of a body corporate for a period of up to 5 years; and
• a court may order exemplary damages.

There are a number of other (mainly administrative) amendments, including provision for "cease and desist orders" and providing the Commission with increased flexibility when imposing price control.

Note: This newsletter is based on the Commerce Amendment Bill (No. 2). At the time this newsletter went to print the Bill had not been passed into law and therefore it is possible, but unlikely, that the eventual legislation may differ from that proposed in the Bill.