Comment
15. The discussion document outlined issues for consideration across four general themes: merger processes, trade practices, legal process and the framework for assessing costs and benefits. These issues are discussed below.
Theme One: Merger Issues
16. New Zealand has a voluntary pre-merger clearance regime. The prospective merger parties determine whether to apply to the Commission for clearance and, if it is desirable, to offer divestment undertakings to address any competition concerns. The Commission may clear the merger if it concludes that it is not anti-competitive. If the Commission declines to grant a clearance, the parties may proceed with the merger but in doing so they risk legal proceedings by the Commission or third parties.
Merger clearance processes
17. Section 66(3) of the Act currently provides that the Commission shall determine a clearance application within 10 working days or such longer period as the Commission and the applicant agree. If the time period expires without the determination, the application is deemed declined. This time frame is too short and extensions are agreed as a matter of course. Consideration was given to amending the Act to provide a new statutory time frame that was both challenging but achievable.
18. Submissions responded with a wide range of concerns relating to a perceived lack of transparency in the Commission's process and concerns with timeliness. Consequently, the Commission's scheduled best practice review of its clearance process has been very timely.
19. Based on an external review of its clearance regime2 the Commission has developed and released for consultation a draft set of guidelines3 aimed at increasing the transparency and timeliness of the clearance regime. Many of the options suggested by submitters to enhance the process have been picked up by the Commission. In particular, a new pre-notification merger procedure, the release of a "letter of issues" and "letter of concerns", a shortened process for straightforward merger proposals, and early notification of likely time frames and regular updates on any changes are all to be adopted.
20. In regard to time frames, officials recommend that the Act should be amended to extend the time frame for merger clearance determinations from 10 to 40 working days. This brings the statutory time frame in line with the Commission's current performance measure and it is consistent with international practice.
Written reasons
21. The Commission is not required under the Act to provide reasons in writing for its clearance determinations. However, it does so as a matter of course, although this may be some time after it has made its determination. Some submitters outlined concerns that the delay impaired their ability to appeal in a timely manner, given that the reasons were important to inform such an appeal.4
22. Officials consider that mandating a time frame for the release of the Commission's reasons could extend the total time the Commission takes to make determinations while it also completes written reasons for release. This delay would affect all clearances, not just those that might be subject to appeal. It may also delay the consideration of new applications for clearance due to resourcing constraints. This runs counter to the timeliness concerns expressed and thus a trade-off is required between the benefits of the timely release of written decisions to reduce uncertainty businesses face around a decision to appeal, and the overall incentives to provide timely decisions to merging parties.
23. Moreover parties can apply to the Court for an extension to the time frame for within which they can appeal a decision, or lodge an appeal without the availability of a written decision. In the latter situation the High Court can order the Commission to produce an affidavit outlining its decision (but the parties bear some risk that they will need to amend the grounds for appeal once the reasons are available).5 Thus no further change is required.
Behavioural undertakings for merger determinations
24. The Commission may accept undertakings to divest assets or shares from applicants to address competition concerns as part of its merger determinations. However, it cannot accept behavioural undertakings. Behavioural undertakings include restrictions on prices charged or the conduct of the merged entity. Consideration was given to allowing the Commission to also accept behavioural undertakings.
25. International experience shows that behavioural undertakings are poor at addressing structural problems. Such undertakings amount to allowing an anticompetitive merger to proceed subject to ongoing regulation by the Commission. As a form of company-specific regulation, behavioural undertakings impose significant monitoring and enforcement costs on the Commission and create a risk of market distortions. While the submissions generally supported allowing behavioural undertakings, I consider that the Act should not be amended to provide for them.
Informal "letter of comfort" procedure
26. The discussion document sought views on whether the Commission should adopt an informal "letter of comfort" procedure similar to the Australian Competition and Consumer Commission (ACCC) to supplement the statutory clearance process. Under that approach, an ACCC letter of comfort does not provide statutory immunity for the merger.
27. There was mixed support in submissions. However, an informal pre-merger process could raise legal risks for the Commission and would lack transparency and accountability. The Commission has introduced a new pre-merger discussion process within the current statutory clearance framework. This will allow for applicants to hold confidential talks with the Commission prior to submitting an application, which should address the submitters' concerns. No further change is required.
Theme Two: Restrictive Trade Practices
Clearance of restrictive trade practices
28. The review considered whether a clearance regime should be established in the Act for restrictive trade practices.
29. Currently a business cannot apply to the Commission for a clearance of an arrangement in order to test the presumption that the arrangement is not likely to be anti-competitive. Businesses must instead apply for an authorisation and argue their case on net public benefit grounds.6
30. The arguments raised in submissions for a clearance regime essentially relate to addressing the following problems:
- a clearance regime would enable business to address uncertainty as to whether the restrictive trade prohibitions apply to transactions; and
- a perception that the per se prohibitions7 capture some conduct that is either pro-competitive or competitively neutral, and as such, a new modified clearance regime should be established (as an alternative to the current section 58 authorisation procedure) to exempt conduct caught by these prohibitions if there is no likely substantial lessening of competition (i.e. create a competition defence).
31. These concerns can be addressed by other more cost effective and efficient means than creating new approval regimes in the Act. A clearance regime for trade practices would require the Commission to substitute for the role of professional advisers. There is also a risk that the Commission would be drawn into rubber-stamping clearance applications for trade practice activity that does not substantially lessen competition. Alternatively, if the Commission grants clearance, there would be additional ongoing costs of monitoring compliance and ensuring that the clearance does not confer immunity to arrangements that subsequently harm competition as market conditions change.
32. One of the issues being addressed in the current baseline review of the Commission is the extent to which it should engage in education and produce guidelines to inform businesses on the application of the Act. Increasing the Commission's efforts in this way may be a more effective means of addressing business concerns regarding uncertainty.
33. No further change is required.
Collective bargaining notification regime
34. The review carried out extensive analysis of the possibility of introducing a new collective bargaining notification regime, similar to the regime added to the Australian Trade Practices Act in 2007.
35. The purpose of a collective bargaining notification regime (notification regime) is to allow a group of competitors acting in a collaborative manner to exercise a degree of countervailing market power against the large organisation whom they are negotiating with. A notification regime would provide immunity for the notified conduct if the Commission did not object to it within a certain timeframe.
36. There are two distinct features that characterise a notification regime as different from an authorisation process:
- the onus of proof being on the competition authority; and
- the shorter time frame for decision making.
37. The problem that arises from the reverse burden of proof imposed by a notification regime is that the Commission would be making quick decisions in short time frames on arrangements that may require reasonably complex analysis. It is the parties to the notification process that have the best information, not the Commission, and thus the risk that if the regime is too permissive then anticompetitive conduct will be immunised.
38. Because of the information problem outlined above, driven by the reverse burden of proof aspect, the Commission would necessarily be incentivised to only allow easy cases. This appears to be what has occurred with the Australian regime.
39. In the 18 months since its introduction, the ACCC has received seven notifications of collective bargaining arrangements (only one in 2008), of which one has been opposed and one has been withdrawn. Consultation undertaken with interested parties in Australia has indicated a general dissatisfaction with the Australian regime. For the notifications that the ACCC has allowed to stand, the composition of the groups have been very small relative to the total size of the markets considered, and thus the arrangements are likely to have very little impact on competition. Because of the onus of proof issue, this is an inevitable outcome of any notification regime.
40. The Commerce Commission has initiated a project to explore means to improve its authorisation process and reduce the costs to applicants by introducing a streamlined process. Therefore, the Commission should be able to deal with any easy cases in an effective and timely manner. The Australian experience tends to support this view. The ACCC has adopted a "short form" authorisation process and this has been used by some parties as an alternative to the collective bargaining notification regime. Over the same time frame that the notification regime has been in place, the ACCC has made determinations on at least nine applications for collective bargaining through its authorisation process.8
41. Overall I consider that creating a collective bargaining notification regime would not generate sufficient economic benefit to warrant devoting limited time and resource to it.
Jurisdiction test
42. Section 27 of the Act prohibits agreements that have the purpose, effect or likely effect of substantially lessening competition. Section 58 allows a person to seek authorisation of such conduct if that person considers that section 27 would or might apply. The Commission holds the view that the Act also includes a jurisdiction test in which it must first determine whether the conduct in question lessens competition. If the Commission concludes there is no lessening of competition then it returns the application.
43. The main advantage of the jurisdiction test is that it is a useful means of filtering applications that do not raise substantial competition issues.
44. Those submitters in favour of revoking the test argued that authorisation should be available to applicants to address uncertainty, regardless of whether the Commission considers that the proposal lessens competition. They argue that this is particularly desirable for arrangements requiring large sunk investments and where market conditions may subsequently change raising competition concerns.
45. However, if the Commission has found that an arrangement is unlikely to lessen competition, it would be unusual for the courts to reach a view that the conduct substantially lessens competition. Consequently, the risk of successful third party action will be low. The review was unable to identify evidence supporting the claim that the Commission's use of a jurisdiction test deters certain beneficial conduct.
46. If market conditions change over the life of the arrangement, the parties should have incentives to modify the arrangement to address any competition concerns in the first instance. Alternatively, the Act (section 59A(1)) currently provides that parties may apply for authorisation of an existing arrangement if competition concerns subsequently arise. This would enable a more informed assessment of the public benefits and detriments. I consider that no change is necessary.
Reopen an authorisation due to material change
47. The Commission is empowered to revoke, amend or replace an existing authorisation if there has been a material change in circumstance. In effect, this provision allows the Commission to take away the protection of the authorisation because of events that were unknown at the time the application was considered.
48. The review considered whether this provision has deterred long-term investment by creating regulatory uncertainty. Of the three occasions where the Commission has used this power, only one was on the Commission's own initiative (the others were at the request of the parties to the arrangement). In that one case, the authorisation was largely redundant due to a change in circumstances and the effect of its revocation was minimal.
49. An ability to reopen authorisations, if there has been a material change in circumstances, is a useful safety valve. As markets are dynamic, there is a risk that significant public detriments could result from a material change in circumstances. Before intervening in any authorisation, the Commission would carry out a public benefits and detriments analysis, and therefore it would only intervene if the public harm outweighs the costs. In addition, removing the ability of the Commission to intervene may cause it to be risk averse and impose additional conditions on the authorisation in the first place. As identified by submitters, the benefits of an authorisation may become less clear cut if the Commission does not have the safeguard of intervention if it should become necessary to protect competition. I consider that no change is needed.
Halting conduct while authorisation application to be determined
50. Section 59A(1) of the Act empowers the Commission to authorise arrangements that are already in effect. However, section 59A(2) requires that the applicants stop giving effect to the arrangement while it is considering the application. This requirement to halt minimises the harm that might arise from arrangements that by definition "lessen competition", by requiring the parties to halt conduct until the claimed public benefits had been substantiated.
51. The Commission states that the provision is unenforceable, but even if it was, the requirement that conduct could only proceed if the parties could demonstrate exceptional hardship (section 59A(3)) is a very high test which would be difficult to meet. The concern raised in the discussion document is that this provision could discourage genuine parties from applying for authorisation or, alternatively, it could be used by disgruntled parties to arrangements for strategic purposes.
52. The problem with section 59A(2) is that it is underpinned by the presumption that an arrangement subject to an authorisation application will be harmful to the public. However, there is no rationale to underpin that presumption. In addition an effect of the presumption is that the parties are required to halt the conduct, which in turn means that parties will have significant disincentives to apply to the Commission for an authorisation.
53. Parties should be able to use this provision where market conditions have changed after the arrangement came into force, but where the parties consider the public benefits of the arrangement continue to outweigh the detriments.
54. I consider that this provision should be repealed. This would mean that the Commission would have to apply to the court for orders to stop the conduct if it has competition concerns.
55. The Commission does not support the repealing of this provision. In the Commission's view there is a reasonable case for a presumption that conduct for which an authorisation is sought would harm competition. From this perspective, the Commission feels that it is not unreasonable that there be an expectation that the conduct should stop unless there is a good reason for it to continue.
56. In addition the Commission believe that repealing this provision increases the scope for "gaming" of the authorisation process. It could create an incentive for businesses to enter into potentially anti-competitive arrangements, and then apply for an authorisation because the onus would then be on the Commission to initially show competitive harm.
57. However I consider that the gaming risks are minimal. The parties to the agreement remain at risk of court action in relation to conduct that precedes the date of authorisation. The fact that authorisations can not apply retrospectively strongly deters such conduct.
Commission conferences
58. The Act provides for applicants and third parties to call a Commission conference in relation to clearance and authorisation applications. The main purpose of a conference is to enable the Commission to obtain information and test views with the parties. The other benefit of a conference is that it enables the parties to appear and be heard before the Commissioners.
59. With regards to the right of applicants and third parties to call a conference, I consider that this power should be removed. However, this recommendation is conditional on Cabinet's agreement to a subsequent recommendation in this paper relating to de-linking appeal rights from participation in a Commission conference.
60. The Commission is best able to make the assessment of whether a conference is desirable to gather and test information relative to other more cost effective means. In addition, the Commission is subject to administrative law requirements to follow due process and hence it will have incentives to ensure that sufficient consideration is given to the parties' views. This change also has the potential to see quicker, more efficient information gathering and decision-making as a result, particularly relevant if a "streamlined or short-form authorisation" process is eventually implemented.
61. I consider that the discretion to call a conference should be the Commission's alone and that the Commission should be able to call a conference at whatever point it considers would be most beneficial (such as upon the release of "issue papers"), and not just after the release of a draft determination.
Theme Three: Legal Processes
62. The only remaining issue under this theme is third parties' right to appeal Commission clearance and authorisation determinations. The other issues were considered by EDC on the 6 November 2007 [EDC (07) 212 refers]. Third party appeal rights should not be linked to whether a person has participated in a Commission conference.
63. Linking third party appeals rights to participation in a conference means that the creation of appeal rights becomes a consideration as to whether the Commission holds a conference in the course of a proceeding. Consequently it may result in the under use of conferences as a means of obtaining and testing information relative to other measures. In addition, third parties are effectively denied appeal rights in relation to time-sensitive proposals, such as clearances, while a broad class of persons are conferred standing in other cases. It is preferable that the statute be explicit on what appeal rights are intended.
64. The choice of appeal rights for third parties is a balance between ensuring timely and cost effective determinations versus natural justice and quality of regulatory outcomes. Given these considerations, officials consider that a distinction should be made between merger clearances and authorisations.
65. In relation to clearances I consider that the current practice should be codified such that third parties do not have standing to appeal. Rather, their rights would be limited to judicial review and, in the case of those who participated in the Commission proceedings, a right to join an appeal. Allowing third parties to appeal a Commission determination may undermine the integrity of the voluntary clearance regime, the purpose of which is to reduce the risk of litigation and thus provide certainty. If the scope of appeal rights widens so that more appeals occur, applicants may choose to opt out of the process altogether.
66. For authorisations which are generally less time-sensitive, I consider that third parties should have standing to appeal if they have a significant interest, for example, in the determination (as demonstrated to the court). In addition, the person should have participated in the Commission's proceedings, such as by a written submission. The two elements ensure that the parties have a direct and significant interest in the matter and continue to have incentives to participate in the Commission's processes, thus reducing the risk of "forum shopping".
Theme Four: Framework for assessing costs and benefits
67. The review considered a number of issues relating to the analytical framework applied by the Commission when assessing public costs and benefits as part of its authorisations procedure.
68. I consider that the framework is sound and consistent with international best practice. The Commission adopts a total welfare approach, which is neutral in relation to wealth transfers between consumers and producers. Costs and benefits incurred offshore can be taken into account to the extent that they flow back to New Zealand. Such an approach makes sense in a small economy which is dependent on its domestic companies having scale to compete internationally. Claims that the Commission is not able to take into account international competitiveness issues are not well-founded.
69. In addition, the Commission's approach to the assessment of costs and benefits is becoming more sophisticated and is informed by feedback from the courts. Recent court cases have clarified the importance and use of counterfactuals and market definitions, which will provide useful guidance to competition practitioners. Quantification used appropriately, ensures that the Commission's assessments are transparent and objective. Overall, submissions were supportive of the Commission's approach.
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