i INTRODUCTION

New Zealand's competition law is contained in the Commerce Act 1986 (the Act). The merger control provision prohibits acquisitions of business assets or shares that have the effect or likely effect of substantially lessening competition in a New Zealand market.

The New Zealand Commerce Commission (NZCC) is an independent Crown entity responsible for administering the Act and determining applications for clearance or authorisation of proposed mergers.

The NZCC may grant clearance for a proposed acquisition if it is satisfied the acquisition will not be likely to have the effect of substantially lessening competition in a market. The NZCC may grant authorisation for a proposed acquisition if the applicant is able to demonstrate that the public benefit of the merger (efficiency or other gains) outweighs the detriment resulting from the lessening of competition.

The merger clearance and authorisation regime is voluntary. There are no compulsory notification thresholds.

i Relevant law

The purpose of the Act 'is to promote competition in markets for the long-term benefit of consumers within New Zealand'. The Act promotes competition by prohibiting restrictive trade practices and business acquisitions that reduce the level of competition between businesses.

Section 47(1) of the Act is the merger control provision. It provides that 'a person must not acquire assets of a business or shares if the acquisition would have, or would be likely to have, the effect of substantially lessening competition in a market.'

The NZCC has statutory powers enabling it to:

    1. grant, or decline to grant, applications for clearance or authorisation; and
    2. investigate and bring court proceedings for breaches of the merger control provision.

The NZCC cannot in its own right either determine whether the Act has been breached or impose penalties. Where the NZCC considers that an alleged breach of Section 47 warrants prosecution, it must bring civil proceedings before the courts and seek pecuniary penalties or other appropriate remedies.

ii Qualifying transactions

The Act does not provide any turnover or other thresholds over which a transaction is required to be notified. Instead, New Zealand's merger clearance regime provides a voluntary regime under which parties may (but do not have to) seek clearance or authorisation for a proposed acquisition (discussed in further detail in Section III, below). Clearance or authorisation is only available for proposed transactions and cannot be granted retrospectively.

The NZCC has specified 'concentration indicators' in its Mergers and Acquisitions Guidelines (July 2013) (see Section III.iii, below).

iii Application to overseas entities

Recent amendments to the Act repealed the former Section 4(3) (which extended the prohibition of certain acquisitions that lessen competition to acquisitions made outside New Zealand). Overseas acquisitions that lessen competition in New Zealand markets are now instead dealt with by the new section 47A, under which the NZCC may apply to the High Court for a declaration in respect of an acquisition by an overseas person. The High Court may make a declaration if it satisfied that:

    1. the overseas person has acquired a controlling interest in a New Zealand body corporate through the acquisition outside New Zealand of the assets of a business or shares; and
    2. the acquisition has, or is likely to have, the effect of substantially lessening competition in a market in New Zealand.

Applications must be made within 12 months of the date of the acquisition. A declaration may not be made in respect of acquisitions that have been granted clearance or authorisation by the NZCC.

The Court has discretion, in granting a declaration, to make further orders requiring any New Zealand body corporate in which the overseas person has a controlling interest to, for example, cease carrying on business in a relevant New Zealand market, dispose of shares or other assets, or take any other action the Court considers is consistent with the purpose of the Act (see Section II.iv).

iv Overseas Investment Act 2005

The Overseas Investment Act 2005 (OIA) applies to acquisitions by 'overseas persons' of a 25 per cent or more direct or indirect ownership or controlling interest in significant business assets, 'sensitive' land or fishing quota. Under the OIA, consent must be obtained from the Overseas Investment Office for qualifying transactions.

For the purposes of the OIA, an overseas person includes:

    1. an individual who is not a New Zealand citizen and who is not ordinarily resident in New Zealand;
    2. a partnership, body corporate or trust where an overseas person or persons have 25 per cent or more ownership or control (based on composition of a governing body or beneficial ownership); and
    3. a company incorporated outside New Zealand, or in which an overseas person or persons hold 25 per cent or more of: any class of share; the power to control the company's governing body; or voting rights.

An acquisition of 'significant business assets' occurs when the total expenditure involved, or price paid, or gross value of the assets (including shares) of the company or property being acquired, exceeds NZ$100 million.2

v Joint ventures

The merger control regime extends to joint ventures that acquire shares or assets. Other purely contractual transactions engaged in by joint ventures (for example, long-term and exclusive contracts) are governed by the restrictive trade practices provisions of the Act.

vi Industry-specific merger control

The same merger control provision applies to all industries.

ii YEAR IN REVIEW

i Applications from mid-2017 to mid-2018

Over the past financial year, nine applications for clearance were made to the NZCC.3 Of those applications, and as of the time of writing, the NZCC had cleared four applications (including one cleared subject to a divestment undertaking), declined one, and was still processing three. One application had been withdrawn by the parties.

At the time of writing, the NZCC had not received any applications for authorisation.

ii Average time frames for clearance applications

Over the past financial year, the average time frame between registration of a clearance application and the NZCC's final decision was 73 working days. The average number of working days to reach a decision has been steadily increasing, climbing from 60 working days in the 2015–2016 financial year to 82 in 2016–2017, reflecting the increasing complexity of the clearance applications filed, and several high-profile declined clearances.

iii Merger clearance decisions of interest

Merger clearance decisions of interest, published in the past 12 months, are described below.

Heinz/Cerebos4

The NZCC in March 2018 granted clearance for HJ Heinz Company (New Zealand) Limited (Heinz) to acquire Cerebos Pacific Limited's (Cerebos) New Zealand food and instant coffee business subject to a divestment undertaking. The transaction (under which Heinz would acquire 100 per cent of the shares in Cerebos' subsidiary Cerebos Gregg's Limited) was part of an international transaction through which Heinz's parent, the Kraft Heinz Food Company, would acquire Cerebos' New Zealand, Australia, and Singapore food and instant coffee business through its local subsidiary companies.

Heinz offered an undertaking to divest the Gregg's red, barbecue and steak sauce businesses as well as the F Whitlock & Sons Worcestershire sauce business. In making its decision, the NZCC primarily focused on the national markets for the manufacture, importation, and wholesale supply of a number of table sauces to supermarkets and the food service industry.

NZCC Chair, Dr Mark Berry, said that the NZCC believed that the merger of the number one and two wholesale suppliers to supermarkets of red sauce, barbecue sauce, steak sauce, and Worcestershire sauce would be likely to result in a substantial lessening of competition in each of those markets. However, the divestment offered by Heinz was sufficient to remedy the competitive harm the merger would cause.

Trade Me/Limelight Software5

The NZCC in March 2018 declined to give clearance for Trade Me Limited (Trade Me) to acquire 100 per cent of the shares in Limelight Software Limited (Limelight), trading as Motorcentral.

Trade Me is an online marketplace and classified advertising platform. Limelight is a Christchurch-based supplier of motor vehicle dealer management (DMS) software. DMS software is used by motor vehicle dealers to manage their businesses and includes functionality such as keeping track of inventory, customer relationship management, and uploading vehicle listings to online advertisers.

The NZCC was not satisfied that the acquisition would not have (or not be likely to have) the effect of substantially lessening competition in markets for the supply of (1) online motor vehicle classified advertising to motor vehicle dealers (the advertising market), and (2) DMS software to independent motor vehicle dealers (the DMS market).

Dr Mark Berry noted that:

Trade Me is an important advertising platform for car dealers and we were concerned the merger could result in Trade Me creating barriers for dealers who do not use Motorcentral's DMS. Likewise, we were concerned Motorcentral could create barriers for dealers who want to list on rival advertising websites or any new potential entrants.

iv Recent legislative changes

The Commerce (Cartels and Other Matters) Amendment Act 2017 (the Amendment Act) was passed in August 2017 and made a number of significant changes to the Act.

The Amendment Act provides for greater alignment with Australia by enabling the NZCC to apply to the High Court for a declaration that a wholly overseas merger has the effect of substantially lessening competition in a market in New Zealand where:

    1. the overseas person has acquired a controlling interest in a New Zealand body corporate through the acquisition outside New Zealand of the assets of a business or shares; and
    2. the acquisition has, or is likely to have, the effect of substantially lessening competition in a market in New Zealand.

The Court has the discretion, in granting a declaration, to make further orders requiring any New Zealand body corporate in which the overseas person has a controlling interest to:

    1. cease carrying on business in New Zealand, in the market to which the declaration relates, no later than six months after the date of the declaration (or any longer period specified by the court); or
    2. dispose of shares or other assets specified by the court; or
    3. take any other action (including disposing of shares or other assets) that the court considers, in all the circumstances, is consistent with the purpose of the Act.

    Breach of such orders could expose parties to penalties of NZ$500,000 for individuals and, in any other case, NZ$5 million. The purpose of these provisions is to encourage applications to the NZCC, and to extend the use of its merger remedies to overseas mergers that could impact competition in a New Zealand market.

    Other amendments to the Act included:

      1. amendment of the statutory time frame for a clearance decision from 10 to 40 working days;
      2. a new cartel provision, replacing the former price fixing prohibition. The new prohibition arguably captures a broader range of conduct (including price fixing, output restriction, and market allocation);
      3. new exceptions to the cartel prohibition for collaborative activities (replacing the joint venture exemption), vertical supply contracts, and joint buying and promotion agreements;
      4. a new clearance regime for collaborative activities that will allow businesses to test proposed collaborations with the NZCC to obtain greater legal certainty before entering into the arrangements; and
      5. an increase in fines for failing to assist the NZCC in its investigations from NZ$10,000 to NZ$100,000 for an individual, and from NZ$30,000 to NZ$300,000 in all other cases.

    iii THE MERGER CONTROL REGIME

    i Overview

    The NZCC can either:

      1. grant clearance for a merger or acquisition if it is satisfied that the acquisition will not have, or would not be likely to have, the effect of substantially lessening competition in a market; or
      2. grant authorisation if it is satisfied that the merger or acquisition will result, or is likely to result, in such benefit to the public that it should be permitted.

    ii Competition assessment

    The NZCC assesses applications for merger clearance by applying a 'with and without test' – comparing the likely state of competition with the merger (the factual) with the likely state of competition without the merger (the counterfactual).

    The NZCC considers the possible range of scenarios with and without the merger, discards those it concludes are unlikely, and compares the most competitive likely 'without the merger' scenario with the likely 'with the merger' scenario. It describes this as a 'worst case' scenario, on the basis that if the scenario that gives rise to the greatest competition concerns does not result in a substantial lessening of competition, none of the other likely scenarios will.

    The test the NZCC ultimately applies is 'if we are not satisfied that competition would not be substantially lessened, compared to any of the scenarios likely to arise without the merger, we must decline clearance'.

    The NZCC considers:

      1. the constraint on the merged entity (and market generally) from existing and potential competitors (including imports);
      2. conditions of market entry and expansion;
      3. the countervailing power of buyers;
      4. any enhancement in the ability of the remaining competitors to collude (either expressly or tacitly); and
      5. whether the transaction removes a particularly aggressive or destabilising competitor.

    iii Filing requirements and thresholds

    The Mergers and Acquisitions Guidelines specify the following concentration indicators. An acquisition is unlikely to raise competition concerns if, post-merger:

      1. the merged entity would have less than a 40 per cent market share and the three largest firms (i.e., the merged entity and the two nearest players) together would have less than 70 per cent of the relevant market; or
      2. the merged entity would have less than a 20 per cent share in a market where the three largest firms together would have more than 70 per cent of the relevant market.

    The concentration indicators are merely an administrative screening tool; while the NZCC recommends seeking clearance if the indicators are exceeded, the majority of mergers that are granted clearance exceed the concentration indicators.

    iv Process for seeking clearance

    Applications for clearance must be made in the prescribed form and be filed with the NZCC with the statutory filing fee of NZ$3,680.

    The NZCC encourages parties to provide advance notice of clearance applications to the NZCC and to engage in confidential pre-notification discussions with the NZCC.

    The NZCC generally publishes a statement of preliminary issues on its website at an early stage of its investigation when considering an application for clearance. It also seeks information from competitors, suppliers, customers and any other interested parties and interviews the applicant and vendor.

    Following this public consultation process, the NZCC may send a letter of issues to the applicant seeking further information and highlighting initial competition concerns, giving the applicant and vendor an opportunity to address these concerns.

    In complex cases where issues remain unresolved, a subsequent letter of unresolved issues may be sent at the 40-working-day stage. This may be the final opportunity for the applicant to provide evidence to allay the NZCC's concerns.

    The statutory time frame for a clearance decision was recently amended from 10 to 40 working days. This reflected the fact that the 10-working-day statutory period was unrealistic.

    The actual time frame varies depending on the level of complexity of the acquisition and the analysis required. The time frame could be as short as three weeks for a straightforward merger and more than six months for a very complex merger. In the current financial year, the shortest time to complete an application was 32 working days, and the longest was 116 working days.

    To address potential structural competition concerns, applicants may include divestment undertakings of specified assets or shares as part of an application (for example, if the merged entity's potential market power poses concerns in a particular product market or geographical area).

    Such undertakings are deemed to form part of the clearance or authorisation, and approval is void if the undertaking is contravened. Accordingly, if the terms of the undertaking are breached, the NZCC may take enforcement action through the courts.

    v Process for seeking authorisation

    A party can apply for authorisation where there is a real risk that a proposed acquisition is likely to result in a substantial lessening of competition. If the NZCC is satisfied that the public benefits will outweigh the lessening of competition associated with the proposed acquisition, then it will grant authorisation.

    The NZCC compares the benefits of the acquisition against likely counterfactuals. Section 3A of the Act provides that, when assessing public benefits, the NZCC is required to have regard to any efficiencies that will result or will be likely to result. In the past, the NZCC has stated that public benefits can be derived from:

      1. economies of scale;
      2. economies of scope;
      3. better utilisation of existing capacity; and
      4. cost reductions, including those due to reduced labour costs, greater specialisation of production, lower working capital and reduced transaction costs.

    The 'public' is the public of New Zealand. Benefits to foreigners are counted, but only to the extent that they also benefit New Zealanders.

    Overall, public benefits are net gains in economic terms. The NZCC applies a total welfare test, and transfers of wealth between groups of New Zealanders are generally ignored. The authorisation application process requires the public benefits to be quantified, usually through detailed economic evidence.

    The NZCC follows the below process for investigating and considering an authorisation application:

      1. the NZCC engages with the applicant in pre-notification discussions;
      2. the authorisation application is registered and a public version is published on the NZCC's website;
      3. submissions from interested parties are received and considered by the NZCC, and public versions are published on the NZCC's website;
      4. the NZCC publishes a draft determination on which further submissions may be lodged and considered;
      5. the NZCC may hold a 'conference' to discuss issues raised by the application, if it thinks this would be useful; and
      6. a final decision is made by the NZCC to grant or decline to grant authorisation, based on all the evidence received or gathered, and a public version of the decision is published.

    The authorisation process is both more time consuming (with a 60-statutory-working-day period, subject to extensions), and more expensive than the clearance process (the application fee is NZ$36,800.

    As a result of these factors, in 2009 the NZCC introduced a new streamlined authorisation process for proposed acquisitions that have clear public benefits and a limited impact on competition. The streamlined process has a statutory time period of 40 working days. To date, the streamlined process has not been used for authorisation of a merger.

    vi Remedies

    A wide range of remedies are available to the NZCC in the event it considers that a merger is likely to substantially lessen competition. These include prosecution and the ability to seek significant penalties of up to NZ$5 million for companies and NZ$500,000 for individuals.

    The NZCC may also apply to the High Court for a divestment order in relation to any of the shares or assets specified in the order. The NZCC's principal counsel (Competition) has described divestment, which is required in 10 per cent of cases, as a blunt remedy.6

    The NZCC has the power to seek 'cease and desist' orders from an independent cease and desist commissioner appointed under the Act, although this power has only once been utilised and looks likely to be repealed. In addition, any person (but most likely a competitor of the acquiring company) may:

      1. apply to the High Court for an injunction preventing an acquisition or attempted acquisition;
      2. bring an action for damages suffered as a consequence of an acquisition in breach of the Act; and
      3. apply to the High Court for a declaration that a proposed acquisition would breach the Act.

    vii Appeals

    A decision of the NZCC to grant, or decline to grant, clearance or authorisation can be appealed or can be subject to judicial review proceedings in the High Court. Judicial review is the only option available to third parties affected by, but not involved in, a transaction that has been cleared or authorised by the NZCC.

    Under Section 92 of the Act, the following persons may appeal against a clearance decision by the NZCC:

      1. the person who applied for the clearance; and
      2. any person whose assets or shares are proposed to be acquired.

    In respect of an authorisation decision by the NZCC, the applicant and any other person who has a direct and significant interest in the application; and participated in the Commission's processes leading up to the determination, may appeal.

    NZME/Fairfax7

    In May 2017, the NZCC declined NZME and Fairfax's application for clearance and, alternatively, authorisation to merge their media operations in New Zealand. The merger would have combined New Zealand's two largest newspaper networks and news websites, with about 90 per cent of daily newspaper circulation, and the largest reach for online New Zealand news by a significant margin. The NZCC concluded that NZME and Fairfax were each other's closest competitors in both advertising and New Zealand news content production. The NZCC was of the view that the merger would remove the close rivalry seen in both those markets and result in readers and advertisers facing price increases along with a reduction in news quality.

    The applicants had sought an authorisation for the merger in the alternative, on the basis that if a lessening of competition was final, the merger would result in such a benefit to the public that it should be permitted. Balancing the benefits and detriments of the merger, the NZCC thought that the quantifiable benefits (reduced operational costs) were far outweighed by the detriment flowing from a loss of media plurality (even though this could not be quantified).

    The applicants appealed the decision not to grant clearance, arguing that the NZCC's approach to market definition was flawed. The applicants also appealed the decision not to grant authorisation, arguing that the NZCC did not have jurisdiction to consider detriments beyond economic or financial detriments and that, even if it were able to consider such detriments, the view on loss of media plurality was speculative.

    The High Court dismissed the appeals. On the clearance issue, the Court concluded that the NZCC's approach was sound and that the merger would affect the news and advertising markets identified by the NZCC. On the authorisation issue, the Court endorsed the NZCC's approach and agreed with the NZCC that 'a substantial loss of media plurality would be virtually irreplaceable.'

    viii Limitation period

    Proceedings for penalties and damages in relation to the merger provisions can be commenced within three years after the matter giving rise to the contravention arose. Proceedings seeking a divestiture can be commenced within two years from the date on which the contravention occurred.

    An appeal must be filed within 20 working days from the release by the NZCC of its written reasons for granting or declining to grant clearance.

    ix Use of expert economists

    Parties engage expert economists to prepare an expert economic report to submit to the NZCC where the application for clearance is particularly complex. In authorisation applications, such economic analysis is usually required to quantify the public benefits and detriments. Lay members (often economists) are appointed to assist judges of the High Court in certain competition law cases.

    iv OTHER STRATEGIC CONSIDERATIONS

    New Zealand's merger control regime is voluntary. This means the parties to a proposed acquisition must decide whether or not to make an application to the NZCC.

    In some cases, the decision will be clear: where no competition concerns arise, a clearance will not be required, just as when a transaction gives rise to material aggregation, applying for clearance will be advisable to mitigate the risk of challenge.

    Typically, key considerations include:

      1. whether the acquisition forms part of a global transaction that is being notified in overseas jurisdictions; and
      2. the profile of the industry and merging parties involved, and the likelihood of the transaction raising concerns for the NZCC.

    Ultimately, the parties' appetite for risk will determine whether they decide to apply to the NZCC to obtain protection for their acquisition, or whether they prefer to proceed without that protection.

    v OUTLOOK & CONCLUSIONS

    i Proposed legislative changes

    Two bills proposing amendments to the Act have been introduced in 2018.

    The Commerce (Criminalisation of Cartels) Amendment Bill was introduced into Parliament in February 2018 and proposes a new criminal cartel offence. The new offence largely replicates the drafting of a 2011 bill that originally proposed criminalisation for cartel conduct. The offence was removed in 2015 due to concerns about the potential 'chilling effect on pro-competitive behaviour' while the other amendments (without the criminal offence) came into force in August 2017 (see Section II.iv).

    In April 2018, a bill was introduced to Parliament that would amend the Act and introduce a new competition studies regime. If passed, the amendments would allow the NZCC to initiate competition studies either where directed to by the Minister or of its own accord. In either case, the Minister or the Commission must be satisfied that it is in the public interest to carry out a competition study. The bill also proposes to update the regulatory regime for airports to improve its effectiveness and introduce an enforceable undertakings regime into the Act.

    ii Pending applications

    As at the time of writing, the NZCC is considering one application for clearance, which was registered in April 2018.

    Ingenico/Paymark

    The NZCC registered an application for Ingenico Group SA (Ingenico) to acquire 100 per cent of the shares in Paymark Limited (Paymark).

    Ingenico is a global payment services company offering point of sale (POS) payment terminals, electronic payment software, and transaction services. Ingenico is a wholesale supplier of its POS terminals to resellers and operates a digital payments gateway business called Bambora. Paymark is an operator of a 'payment switch' and is owned by four of New Zealand's five major trading banks. Paymark's 'payment switch' receives electronic requests for transfer of funds from merchants at the point of sale and routes them to the appropriate bank for transfer of those funds. Paymark also provides a range of services complementary to 'payment switching' as well as some eCommerce offerings.

    The NZCC has noted that the proposed merger raises vertical effects in that it would combine two firms that provide services at different levels of the supply chain. The NZCC plans to look at whether the merger would, among other things, make it harder to gain access to Paymark's 'payment switch' or related services in order to foreclose firms that either supply terminals in competition with Ingenico or provide digital gateway services in competition with Paymark and Bambora.


    Footnotes

    1 Ross Patterson and Oliver Meech are partners and Kristel McMeekin is a senior associate at MinterEllisonRuddWatts.

    2 This may be amended to include an alternative monetary threshold in accordance with regulations if and when the Trans-Pacific Partnership Agreement comes into force in New Zealand.

    3 The NZCC's financial year runs from 1 July to the following 30 June.

    4 HJ Heinz Company (New Zealand) Limited and Cerebos Gregg's Limited [2018] NZCC 2 (8 March 2018).

    5 Trade Me Limited and Limelight Software Limited [2018] NZCC 1 (8 March 2018).

    6 'An insider's reflections on merger clearances', presentation to Law & Economics Association NZ, 26 April 2016, p. 12.

    7 NZME Limited and Fairfax New Zealand Limited [2017] NZCC 8 (2 May 2017).