1. In considering strategies to respond to the problems identified in Section 4, it is useful to examine what methods are employed in other competition jurisdictions to respond to the same issues. This section reviews how the jurisdictions of Australia, Canada, Germany and the United States respond to mergers and acquisitions, and to the abuse of market/monopoly powers. These countries are reviewed as the first two are relatively small economies like New Zealand. The German jurisdiction provides an example of one of the most stringent regimes in the world. The United States is included as its jurisdiction is typically regarded as being at the forefront of competition law.

Australia

Mergers and Acquisitions

2. Australia applies a competition test to the consideration of proposals for mergers and acquisitions. The threshold is one of "substantial lessening of competition" and is contained within section 50 of the Australian Trade Practices Act 1974. This provision states that a merger or acquisition that would have the effect, or be likely to have the effect, of substantial lessening of competition is prohibited.

3. Section 50(3) sets out the matters which must be taken into account in determining whether the acquisition would have the effect, or likely effect, of substantially lessening competition:

the actual and potential level of import competition on the market;
the height of the barriers to entry to the market;
the level of concentration in the market;
the degree of countervailing power in the market;
the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins;
the extent to which substitutes are available in the market or are likely to be available in the market;
the dynamic characteristics of the market, including growth, innovation and product differentiation;
the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor; and
the nature and extent of vertical integration.

4. As in New Zealand, authorisation is available for mergers and acquisitions that are likely to result in a benefit to the public which would outweigh the detriment from the loss of competition.

Abuse of Market Power

5. Section 46 of the Trade Practices Act covers the use of dominance in the Australian context. However, instead of requiring dominance for the threshold test in Australia, the Trade Practices Act requires "a substantial degree of market power."

6. The Australian case law on section 46 tends to suggest that the market power required by this threshold is less than that required to "dominate" a market. The concept of a substantial degree of market power has similarly been defined as being "large or weighty". Accordingly, the courts have tended to define this threshold of "substantial" market power as an element less than control and less than the power to determine the prices of a substantial part of the market. Further, in addition to monopolies, section 46 applies to major participants in an oligopolistic market.⁵⁶ Accordingly, the Australian threshold is interpreted at a lower level than the single firm only threshold which tends to apply in New Zealand.

Canada

Mergers and Acquisitions

7. The Canadian jurisdiction also applies a "substantially lessening of competition" to mergers and acquisitions. Under section 92 of the Canadian Competition Act 1986, the following factors are considered in determining whether there has been a substantial lessening of competition:

the extent to which foreign products, or foreign competitors, provide, or are likely to provide, effective competition to the businesses of the parties to the merger or proposed merger;
whether the business, or a part of the business, of a party to the merger or proposed merger has failed, or is likely to fail;
the extent to which acceptable substitutes for products supplied by the parties to the merger, or proposed merger, are or are likely to be available;
the extent to which effective competition remains, or would remain, in a market that is or would be affected by the merger or proposed merger;
any likelihood that the merger or proposed merger will, or would, result in the removal of a vigorous and effective competitor;
the nature and extent of change and innovation in a relevant market; and
any other factor that is relevant to competition in a market that is, or would, be affected by the merger or proposed merger.

8. Mergers will not be challenged where the post-merger market share of the merged entity would be less than 35 percent. Similarly mergers will not be challenged where the exercise of market power by two or more firms in the relevant market will be greater than in the absence of the merger where:

the post-merger share of the market accounted for by the four largest firms in the market would be less than 65%, or
the post-merger market share of the merged entity would be less than 10%.

9. The Canadian legislation requires notification of major mergers to the Canadian Bureau of Competition Policy before they may be consummated. Companies are obliged to notify the Bureau of a proposed merger when two thresholds are met. These are:

the parties must have total assets in Canada or gross annual revenues from sales in, from or into, Canada of over $400 million ($ Canadian); and
the value of assets to be acquired or gross revenue from sales generated by those assets must exceed $35 million. (Note in the case of a corporate amalgamation, the threshold is $70 million).

10. The Canadian model also allows for authorisation of mergers that would otherwise breach the Act where the merger is likely to bring about efficiency gains that outweigh any detriment from the loss of competition. Within that analysis the Canadian legislation prevents a redistribution of income between two or more persons from being considered as an efficiency gain.

Abuse of Market Power

11. The Canadian legislation prohibits the use of a dominant position to substantially lessen competition. The restrictions are contained within sections 78 and 79 of the Competition Act. For the restrictions to apply, one or more persons must substantially control a class of business in Canada. They must have engaged in, or currently be engaging in, anti-competitive acts having the effect of preventing or lessening competition substantially. Consideration is given to whether or not the anti-competitive activity is the result of a business's superior competitive performance.

12. The test in the legislation is whether "one or more persons substantially or completely control of a market". That test allows for consideration of situations of joint dominance.

Germany

Mergers

13. The German treatment of mergers is probably the most strict in the OECD. The German restrictions contain a double definition for dominance in the consideration of mergers - market domination and paramount market position. Mergers that create or strengthen either position are prohibited.

14. The German legislation contains rebuttable presumptions of dominance. Dominance is presumed if the following market share thresholds are exceeded:

for single-firm dominance - a market share of at least one third;
for oligopolistic dominance - three or fewer undertakings reaching a combined market share of 50%, or five or fewer undertakings reaching a combined market share of two thirds.

Although the Bundeskartellamt can initially use the statutory presumptions, it subsequently has to actually determine that its own findings and the arguments put forward by the parties confirm rather than rebut the presumption.

Abuse of Market Power

15. As in the other three competition jurisdictions, in Germany the conduct of dominant and powerful enterprises is not per se subject to statutory control. Certain practices are prohibited only where the enterprise abuses its market power. Under German law, market-dominating enterprises must not unfairly hinder other enterprises nor, in the absence of facts justifying such differentiation, treat other enterprises differently. The same definitions of dominance that apply for merger control, also apply here.

United States of America

Mergers and Acquisitions

16. The Clayton Act is the general merger statute that covers combinations including joint ventures and open market acquisitions. The test under section 7 of the Clayton Act, is whether the transaction is likely to harm competition, or tend to create a monopoly. The law is prospective, and allows for the prevention of a merger in the showing of likely future effects. It is not necessary to prove actual, historic effect or non-competitive conditions.

17. The statutory test for mergers is phrased explicitly in terms of competitive effect. The Department of Justice's Merger Guidelines revolve around a market definition protocol, which is based on demand substitution incentives and behaviour as proxies for cross-elasticity of demand. A critical component is the long-term significance of entry. The guidelines also specify the methods used to identify and characterise market participants, presumptions about the structural measures, and set standards for evaluating likely competitive effects of entry.

18. The U.S. jurisdiction also has a pre-merger notification process. The reporting requirement for this is sales or assets of about $U.S.15 million.

Abuse of Market Power

19. Unlike the jurisdictions of Australia or Canada, the U.S. jurisdiction refers directly to the concept of monopolisation to deal with unilateral misuse of market powers. Section 2 of the Sherman Act prohibits the abuse of monopolisation or dominance. This section states:

"Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among several States, or with foreign nations, shall be deemed guilty of a felony, and on conviction thereof, shall be punished by fine not exceeding ten million dollars if a corporation, or, if any other person, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court."

What this section prohibits is conduct that, by unfair means, achieves or maintains a monopoly, principally by excluding other efficient competitors. Implicit in section 2 of the Sherman Act, is the possibility of more than one company sharing a monopoly position, although it is more commonly used in the context of single firm monopoly.

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Printed: 24/11/2009