Issue E: Informal Pre-Merger Processes
Background
64. The Commission has advised us that it welcomes informal notification by parties of proposed mergers. The Commission may indicate to the parties whether the proposal is likely to raise competition issues so that the parties can make their own assessment of any risk and whether they should apply for a clearance.
65. The ACCC also operates an informal pre-merger system. Unlike the Commerce Commission, the ACCC will issue a letter of comfort stating that it would be unlikely to take enforcement proceedings in relation to the merger. However, those letters are subject to significant qualifications, particularly in the case of a confidential review. The Australian system is described more fully in Table Three.
Table Three: The Informal Process in Australia
| Feature |
The Australian informal process |
| Information requirements |
The parties are encouraged to provide information as outlined in the ACCC's merger guidelines. |
| Timeframes |
The indicative times for considering proposals are (a) 2-4 weeks for a confidential review and (b) 2-8 weeks for a public review. These timeframes can be extended by the ACCC. |
| Third party involvement |
Third parties are not involved in confidential reviews. The ACCC posts details of non-confidential merger reviews on its website. A preliminary assessment is made before the ACCC asks parties for formal submissions. |
| Confidential guidance |
The ACCC will express a view on whether the transaction would be likely to be approved were clearance to be sought. |
| Written reasons |
For non-confidential proposals, the ACCC releases a statement of issues outlining its preliminary view. Written reasons are not always provided. |
| Protection |
Informal decisions do not provide immunity from third party proceedings. |
| Appeal rights |
The applicant cannot appeal an informal decision. |
66. Another difference in Australia is that there was no formal merger clearance system until the beginning of 2007. It might be concluded that:
- The letter of comfort-based informal system was a pragmatic response to the absence of a formal clearance system; and
- The formal process was introduced in Australia to fix a number of weaknesses in the informal system, including a lack of legal certainty and transparency.
The issue and the option
67. It has been suggested to us that a letter of comfort process akin to the Australian system would provide a useful supplement to the formal clearance system.
Analysis
Timeliness
68. The ACCC aims to complete confidential reviews within four weeks.23 However, it can decide to convert a confidential review into a public review at a later time. The ACCC has stated that it will take up to eight weeks or longer to complete a public review of complex mergers. Outcomes in 2005/2006 are summarised in Table Four.
Table Four: Timeframes for the Australian informal process24
| Time |
Percentage |
| Less than two weeks |
54% |
| Two to four weeks |
25% |
| Four to six weeks |
11% |
| Six to eight weeks |
2% |
| Eight weeks or more |
8% |
69. On the face of it, these outcomes indicate that the Australian informal process leads to more timely outcomes than the formal New Zealand clearance process (see Table One). However, our view is that Table One and Table Four should not be compared. The fact that more than half of the informal decisions are made in less than two weeks in Australia indicates that the ACCC's informal system may attract a substantial proportion of straightforward merger proposals that would never come to the attention of the Commission through the formal clearance process in New Zealand.
Cost Effectiveness
70. Having an informal clearance system in New Zealand could have two impacts with different cost effectiveness implications:
- It would divert some formal applications into the informal system – Our view is that the total cost to all parties and the Commission would be lower under the informal system. The Commission would not need to complete the analysis to the same standard under the informal system because it would be able to re-look at the same merger at a later stage and challenge it in the High Court if necessary; and
- It would attract extra merger proposals – At present law practitioners with Commerce Act expertise "filter out" merger proposals that do not raise serious competition concerns. An informal system may well lower the filtering threshold. In some cases it might mean that lawyers would advise their client to seek a letter of comfort where they would otherwise recommend not approaching the Commission. This would have adverse implications from a cost effectiveness perspective. The Commission may need to divert resources from potentially important matters to merger investigations with only minor or no competition implications.
Accountability, transparency and predictability
71. A letter of comfort process would fare poorly under this criterion, particularly letters that have been granted following a confidential review, which would not allow for testing of the information provided by applicants with other parties. The reasons for decisions would not always be clear and it would be difficult to know whether the Commission is applying a consistent standard. The Commission would not be properly accountable. In addition, the informal process does not provide the parties with the certainty that their merger will not be challenged in the High Court.
Effective participation by interested parties
72. An informal process would sometimes provide for some level of participation by interested parties. It would not on other occasions.
Clear and consistent legislation
73. As a general rule, legislation is better if it works in the way that one would expect based on a plain reading. Thus, a letter of comfort would fare badly against this criterion. It would be a non-statutory process that would operate in parallel with the statutory clearance system.
Conclusions
74. An informal letter of comfort system would, at times, reduce the amount of time for proposed mergers to be considered by the Commission. However, the time saved would be at the expense of the legal certainty that is provided by formal clearance and some due process protections that underpin the Act and the legal system more generally. Our view is that the due process deficiencies should be given a considerable amount of weight. Overall, our view is that a letter of comfort system would not fit New Zealand's circumstances.
Question
Q6. Should the Commission consider introducing an informal pre-merger letter of comfort system?
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