Regulatory Impact Statement
Executive summary
1. A review of the clearance and authorisation provisions in the Commerce Act considered whether there were ways to improve the effectiveness and efficiency of the clearance and authorisation regime under the Act. Overall, it concludes that the provisions are of a high standard and work well for our small economy and given resource constraints on the Commerce Commission ("the Commission"). Thus the review recommends that no change is necessary to all but four of the issues canvassed.
2. Legislative change is recommended relating to the Commission's processes and third party appeal rights against Commission determinations as follows:
- Merger clearance time frames: the statutory time frame for the Commission to make merger clearance determinations should be increased from 10 to 40 working days;
- Halting conduct while authorisation application to be determined: the requirement that parties halt conduct while the Commission is considering an application for authorisation of that conduct should be repealed, thus requiring the Commission to seek court orders if it considers the conduct is harmful to competition.
- Commission conferences: subject to (d) below, the right of an applicant and third parties to call a Commission conference in the course of considering an application should be repealed, such that conferences are called at the initiative of the Commission. The Commission should be able to call a conference at any time during its proceedings and not just after the release of a draft determination.
- Third parties' right to appeal Commission determinations: standing of third parties to appeal against Commission determinations (currently linked to participation at a conference) should be amended as follows:
- for authorisation determinations, third parties will have standing if they can satisfy the court that they have a significant interest in the determination and they participated in the Commission's proceedings on that determination; and
- for clearance determinations, third parties should not have standing to appeal. These parties will instead rely upon judicial review.
Adequacy statement
3. The Ministry of Economic Development (MED) confirms that the Code of Good Regulatory Practice and the regulatory impact analysis requirements, including the consultation RIA requirements, have been complied with. A RIS was prepared and MED considers the RIS and the RIA analysis undertaken to be adequate. A draft RIS was circulated with the Cabinet paper for departmental consultation purposes.
Status quo and Problem
Merger clearance time frames
4. Section 66(3) of the Act states that clearance determinations shall be made within 10 working days or such longer period as the Commission and the applicant may agree. If the Commission does not make a determination within the set or agreed time frame the clearance is deemed declined.
5. Prior to 1990 it was mandatory for businesses above a certain size threshold to seek clearance in order to merge. Under this system the majority of merger proposals had no impact on competition and thus 10 working days was adequate for the Commission to screen applications to clear those merger proposals requiring no further analysis.
6. The types of clearance applications the Commission now receives under the voluntary pre-notification regime are almost always complex and extensions are agreed as a matter of course. Only one of 56 clearance applications received between 2004/05 and 2006/07 was determined within 10 working days.
7. The Output Agreement between the Commission and purchase Ministers sets a performance standard for the Commission to determine clearance applications within 40 working days. In the same three year period to 2006/07, the Commission determined 66 percent of clearances within this time frame.
8. Merger applicants require certainty around timing and transparency in the Commission's clearance process given the time-sensitive nature of most merger agreements. Submitters are concerned that the current regime involves excessive delays with no indication upfront when a business can expect a decision and "time-drift" caused by the ability to extend the time frame as many times as the Commission deems necessary.9
Halting conduct while authorisation application to be determined
9. Section 59A of the Act empowers the Commission to authorise arrangements that are already in force. However, in such cases, section 59A(2) requires that all parties to the agreement discontinue giving effect to the arrangement while the Commission is investigating the application. Section 59A(3) empowers the Commission to waive this requirement if stopping the conduct would be likely to result in exceptional hardship to any of the parties.
10. Since this provision was enacted, the Commission has received one application for an arrangement that came into effect while the Commission was still considering the matter.10 In this case, the Commission considered that it could not require the parties to stop nor could it decline jurisdiction to consider the application for this reason. The Commission's draft determination in this case outlines its preliminary view that the arrangement is unlikely to lessen competition.
11. Consequently, there is reason to believe that the requirement to stop is unenforceable. However, if the provisions had been enforceable, there is reason to believe that disgruntled parties to arrangements could seek to use the provision for strategic purposes.
12. Parties can seek to continue the conduct by applying to the Commission, but the Commission submits that the requirement to demonstrate "exceptional hardship" may be too difficult a threshold to meet.
Commission conferences
13. Sections 62(6) and 69B(1) allow the Commission to call a conference of its own motion. Sections 62(3)-(5) allow the applicant or any other person who has been sent the draft determination to require the Commission to hold a conference (in relation to a trade practice authorisation).
14. The main purpose of a conference from the Commission's perspective is to provide for a means of obtaining information and testing views. From the parties perspective a conference serves to allow the applicant to be heard directly by the decision-maker and, attendance at a conference confers appeal rights on third parties.
15. The issue is whether the applicant and/or a third party should be able to require the Commission to hold a conference. The primary concern with the provision is that it could act to delay the Commission's decision if a conference is called where the Commission feels it would serve no purpose. In addition, third parties can use the ability to call a conference to game and delay the system. To date there has been one instance of a party (the applicant) invoking the right to call a conference when the Commission considered that it was not required.
Third parties' right to appeal Commission determinations
16. Section 92(a) and (c) of the Commerce Act outlines standing to appeal against Commission determinations for clearance or authorisation. The applicant has standing and, in the case of mergers, so does the person whose assets or shares are proposed to be acquired. Third parties have standing if they participated in a Commission conference.
17. Persons entitled to participate in a conference are:
- any person whose presence at the conference the Commission considers would be desirable (s64(1)(b)); and
- in the case of a restrictive trade practice authorisations, any person who received a draft determination (s64(1)(b)), being:
- a person who the Commission considers has a sufficient interest in the application (and who the Commission has given notice of the application or who contracted the Commission giving notice of their interest in the application (s62(2)(b) and (c))), or
- a person who the Commission considers may assist the Commission in its consideration of the application (s62(2)(d)).
18. It is not automatic that the Commission will hold a conference for clearances and authorisations. In the case of mergers, a decision to hold a conference is at the Commission's discretion, although it may need to obtain agreement from the applicant to extend the statutory time frame for consideration of the application to accommodate the conference. In the case of restrictive trade practice authorisations, the Commission may hold a conference at its own discretion or at the request of the applicant or any other person to whom the Commission has sent a draft determination.
19. The issue is whether the linking of third party appeal rights to participation in a conference is efficient and equitable.
Objectives
20. The terms of reference outline that it is generally accepted that the clearance and authorisation provisions in the Commerce Act are of a high standard. Thus the intention of the review is to draw on experience to date to test whether changes to the provisions would improve the effectiveness and efficiency of the overall regime.
21. Specifically, changes to the status quo would need to improve the timeliness and/ or the quality of outcomes without increasing disproportionately the cost of administering or participating in Commission's processes, and without effecting natural justice.
Options Considered
Merger clearance time frames
22. Apart from retaining the status quo of 10 working days, officials also considered the option of a 30 working day statutory time frame for determining a clearance application. The time frame should be realistic but challenging, and balance the parties' requirements for timely decision-making with the Commission's statutory obligations to follow due process and produce quality outcomes.
23. Too rigid of a time frame is not appropriate because mergers are not of equal size and complexity. Some decisions will be determined quickly (for example, within 25 working days), while others may take longer. A 30 working day time frame, based on past performance, would only see approximately 50% of clearance applications determined within the statutory time frame.
24. In addition the Commission needs to retain the ability to extend the time frame with the agreement of the parties on a case-by-case basis.11 Placing restrictions on the extension process could have adverse consequences for the quality of decision-making and may impede cases where an extension would benefit the applicants, such as limiting the Commission's ability to consider divestment undertakings offered in response to letters of concern.
Preferred Option
25. On balance we favour a statutory time frame of 40 working days. This is still a challenging time frame within which the Commission and all parties involved will have to work to. It is consistent with the performance measure currently set in the Output Agreement, and it is comparable with other international regimes.
26. In addition the Commission are currently consulting on a draft set of merger clearance guidelines. The purpose of the guidelines is to improve transparency and thus promote certainty in the process.
27. This option imposes no additional compliance cost on business and will focus the Commission's efforts in improving the efficiency of this process.
Halting conduct while authorisation application to be determined
28. Four alternative options to the status quo and the preferred option (repealing the requirement to halt conduct) were considered as follows:
- leave unchanged the requirement to halt the conduct, and instead to give the Commission greater discretion to allow the conduct to continue (i.e. by lowering the exceptional hardship threshold in section 59A(3));
- provide for the requirement to stop to be enforceable (e.g. by deeming the application to lapse or authorisation to be declined), through the same mechanisms as for enforcing Part 2, by including reference to this section in some or all of section 80(1)(a) (pecuniary penalties), section 81(a) (injunctions) and section 82 (damages);
- change the standard in section 59A(3) to the standard that applies for interim injunction, by using words such as "if in the opinion of the [decision-maker] it is desirable to do so";
- change the process in section 59A(3) from a Commission decision to a new right for a person who wishes to engage in the conduct to apply to the Court for an interim Order to be allowed to engage in the conduct specified in the Order, pending a decision on the authorisation application.
29. The first alternative option, lowering the "exceptional hardship" threshold to for example, "hardship", would require the Commission to divert resources to assessing whether or not the parties should halt. This would be a separate process involving an assessment of the financial circumstance of the parties, and not the competition implications which is the focus of the authorisation application.
30. For all of the alternative options, there remains a presumption that an arrangement will be harmful to the public. However there should not be a presumption that an arrangement will be harmful, as the parties will have significant disincentives to apply to the Commission in such cases given their continuing liability.
Preferred Option
31. MED recommend that sections 59A(2) (that all parties to the agreement discontinue giving effect to the arrangement while the Commission is investigating the application) and section 59A(3) (empowering the Commission to waive this requirement if stopping the conduct would be likely to result in exceptional hardship to any of the parties) be repealed.
32. Parties would likely use this provision where market conditions have changed after the arrangement came into force, but the parties consider the public benefits of the arrangement continue to outweigh the detriments. Consequently, the parties should only be required to stop when there is an indication that the conduct could be harmful in that case, taking into account the relative costs of doing so.
33. It is preferable that the law incentives parties to come forward for authorisation before entering into an arrangement. This is achieved by making sure that the parties remain liable under the Act unless and until the arrangement has been authorised.
34. The generic mechanism of the Commission applying to the court to seek a temporary injunction to stop the conduct should be sufficient. It need not do this immediately, but just as soon as it has sufficient information to be concerned. This would not require the Commission to divert significant resources, as the impact on competition will be considered as part of the authorisation process so the information requirements of the two processes would be relatively complementary.
Commission conferences
35. Apart from the status quo and the preferred option, the review considered two additional options as follows:
- limit the right to call a conference to the Commission and the applicant;
- allow the applicant and any party to whom a draft determination has been sent to ask the Commission to call a conference, but leave it to the Commission to decide; and
36. All of these options were considered on the assumption that third party appeal rights will be no longer be linked with the conference process.
37. The case for allowing the applicant the right to retain the power to call a conference is stronger than the case for allowing a third party to require a conference. Unlike a third party, an applicant is unlikely to want to delay the process. Submitters argued that if the decision was left to the sole discretion of the Commission, there is a danger that no conferences will be held. The ability of an applicant to participate in a conference is considered important because there is the perception from submitters that a conference is the only means that applicants can be heard directly by Commission members.
38. However empowering the applicant to be able to call a conference, when it is not necessary, may not be an effective use of the Commission's time and resources.
39. Repealing the right of applicants and third parties to call a conference would not diminish the rights of parties to have their views taken into account because section 61(3) of the Act states that the Commission must take into account any submissions made to it by the applicant or any other person.
40. Moreover, even without the specific legislative mandate to require the Commission to call a conference, an applicant (or even a third party that participated in a Commission process) could request of the Commission that a conference be held. It would then be up to the Commission to decide whether a conference would add value.
Preferred Option
41. MED is of the view 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"). This change would involve repealing section 62(3), (4) and (5), and would bring this part of the Act into line with the Commission's regulatory functions, with the potential to see quicker, more efficient information gathering and decision-making as a result.
42. MED also considers that if a "streamlined authorisation" process is implemented as has been discussed in the Cabinet paper, the consideration of trade practice authorisations may become frequent. It would be important in this instance to limit the ability of third parties intervening in order to delay the process. It may also be important in order to facilitate speedier decision-making, to empower the Commission to call a conference at any stage in its investigations.
43. Whether to call a conference requires consideration by all parties of the trade-off between the timely and cost-effective decision, and the perception that natural justice has been achieved. However in terms of merger analysis, there is no provision for a conference to be called by the applicant or parties, it is surmised because merger decisions need to be concluded quickly.
Third parties' right to appeal Commission determinations
44. Apart from the status quo and the preferred option, the review considered two further options for third party appeal rights, as follows:
- remove standing to third parties for appeals against clearance determinations only;
- third parties should be able to seek leave of the High Court to appeal authorisations through a general test – if party participated in the Commission's processes (such as providing a written submission), and the High Court thought fit; and
45. Currently, if a conference is called, a broad class of persons may gain appeal rights, including persons who may have no direct or financial interest in the transaction (e.g. professional advisers and experts). If no conference is held, parties can only appeal by judicial review or by joining an appeal. MED considers that it is desirable to give greater certainty to third parties as to their appeal rights, independent of a decision to hold a conference.
46. The current provisions, especially for clearances, do not perform well against the natural justice and accountability objectives because when a conference is not held third parties are denied standing. This is tempered by the availability of other appeal mechanisms such as judicial review and the ability to join an appeal. However the former appeal mechanism is limited to appeal on points of law and the latter is unlikely to be of use to third parties in cases where an authorisation or clearance has been approved. The harm caused by limited access to standing is difficult to ascertain.
47. The current provisions also perform poorly against the certainty and cost objectives, although this detriment is limited in the case of clearances given that a conference is rarely called. A very broad appeal right could cause unnecessary delay and cost to the Commission, the courts and the parties to the proposal. There is a risk of parties, and in particular competitors, using appeals to delay or frustrate transactions.
48. These costs and risks are particularly felt for time sensitive transactions such as mergers. Any increase in the ability of 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. However if the scope of appeal rights widens so that more appeals occur, applicants may choose to opt out of the process altogether. This may be a risk even if more appeals do not actually eventuate, as uncertainty can be driven by the design of a regime as much as the practice.
49. Moreover for merger clearances it can be argued that the Commission takes adequate account of third party issues through submissions received and discussions held. Merger clearances are granted where the Commission finds no or very limited competition and consumer detriment. In addition, the Commission does not call conferences in the context of clearance applications at present anyway and so in practice, there would be no real change to standing for third parties wishing to appeal a determination.
Preferred Option
50. MED recommends that third parties should be able to seek leave of the High Court to appeal authorisations through a specific test – if party participated in the Commission's processes (such as providing a written submission), and it can demonstrate it has a material interest.12
51. The objective of appeal provisions is to provide an adequate check on the quality of the Commission's decisions and to provide adequate access to justice for those materially affected by decisions. In addition, the provisions should be designed to improve business certainty and to reduce the overall cost of seeking clearance or authorisation. Consequently, there is a trade off between natural justice and business certainty.
52. Given these arguments, MED recommends that third parties do not have a broader standing to appeal than is currently available to them, that is, judicial review and joining an appeal.
53. However, there is a stronger case for third parties to have standing to appeal in the case of authorisations. Transactions subject to authorisations have an adverse impact on competition and on consumers. By there nature authorisations in general come with higher risks and higher costs (and greater benefits on the other side).
54. One of the alternate options discussed above, and MED's recommended option, both retain the requirement for the parties to participate in the Commission's processes, thereby limiting the potential for forum shopping. However the preferred option is provides for a higher threshold in that the party has to demonstrate a material interest, rather than leaving it to the court's final discretion to allow the appeal. In addition the preferred option is likely to perform better in terms of transparency and predictability. The material interest test could provide a useful filter in weeding out vexatious and strategic appeals.
55. The preferred option also provides more guidance to the Courts. In practice there may be little difference between allowing the Court the discretion to decide and standing based on material interest. However having the guidance is likely to reduce some time for Court in determining standing.
56. Overall, the provision of access to justice and in the case of authorisations, and with a well designed test to filter out mischievous appeals, MED recommends that appeal rights conferred on third parties should be by way of demonstration of material interest.
Implementation and Review
57. There are only four legislative changes recommended as a result of this review, all of which are minor and non-urgent. Officials recommend that these changes be included in the next suitable legislative vehicle rather than developing a specific bill to consider these issues now.
58. A public announcement on the overall outcomes of the review of the clearance and authorisation provisions of the Act will be made by the Minister of Commerce following Cabinet decisions.
Consultation
59. The Treasury, the Commerce Commission and the Ministry of Justice have been consulted on the outcomes of the review and support the recommendations in the Cabinet paper.
60. The Ministry of Justice sought comments from the judiciary who were unable to comment within the time frame given. It is unlikely that there will be any concerns raised by the judiciary, however to the extent that there is we will work with the judiciary to reach a resolution.
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