The Commerce Commission’s revised Mergers and Acquisitions Guidelines provide a useful dissection of the methodologies the Commission applies to M&A applications and much new substantive material, along with some minor changes in terminology.
They do not completely rewrite the Commission’s approach to merger regulation but that was never the intention. Rather, they update existing practice to reflect recent case law developments - in particular the Court of Appeal decision in The Warehouse case1.
The Commission has made several changes it considers “worth highlighting”.
The Commission has provided a useful explanation of how it conducts and applies a counterfactual assessment, now called the ‘with and without’ test. This compares the likely state of competition if the merger proceeds (often referred to as the factual) with the likely state of competition if it does not (often referred to as the counter-factual) and decides whether competition would be substantially lessened on the basis of that comparison.
Reflecting the precedent set by the Court of Appeal in The Warehouse case, the Commission has specified that it will assess more than one counterfactual where there are multiple scenarios that are likely without the merger.
Some substantive guidance as to how probable a potential counterfactual must be in order for the Commission to consider it would have been helpful but, unfortunately, all the Commission says on this point is that something can be likely even when the chance of it occurring is less than 50%.
Conditions of entry and expansion
The M&A Guidelines change the language from ‘barriers to entry’ to ‘conditions of entry’, reflecting that the courts have been using this more expansive concept for some time. The shift acknowledges that the focus of any inquiry is on the practical economic impact of the relevant conditions of entry. This avoids the abstract and generally unproductive debate about whether those conditions meet the technical threshold an economist would apply to a “barrier to entry”.
Market definition – a framework for analysis
The Commission acknowledges, in the introduction to the Guidelines, that market definition is “a tool to aid competition analysis, rather than an end in itself” and that relevant markets need not always be defined precisely. This will enable it to consider products which impose a competitive constraint even if they fall outside the defined market. This is a sensible approach, following the approach of the High Court in Brambles2 and – again - emphasises the need to assess the overall practical economic effects of the transaction and to avoid getting hung up on an economist’s abstract view around market boundary issues.
The M&A Guidelines set out a more detailed explanation of how the Commission will assess mergers between competing buyers. This is a helpful addition to the limited discussion provided in the 2003 guidelines.
Role of efficiencies
Using the M&A Guidelines, the Commission has clarified the analytical approach it will apply to efficiencies, including the types of efficiencies that are relevant (namely variable cost savings or product enhancements that increase product demand). However, the Commission is still of the view that mergers which rely on efficiency effects are better dealt with under the authorisation regime as they will rarely be sufficient to prevent a substantial lessening of competition
The M&A Guidelines also see some minor changes in terminology. The first is a change from ‘market share safe harbours’ to ‘concentration indicators’, on the basis that the term ‘safe harbour’ created “an unwarranted degree of comfort” among transacting parties. This change is not reflective of a change in substance.
The second is dropping the label ‘maverick’, but retaining the underlying concept. “Maverick” was used in the 2003 guidelines to describe a particularly aggressive competitor relative to other firms in the market or which otherwise has a destabilising effect.
What is missing?
There are still some areas which could have benefited from further clarification:
- whether there may be a formalised process of private discussion with the Commission where parties can decide whether to make an application without disclosing their actions to the market
- whether statements of unresolved issues during the clearance or authorisation process could recognise issues that have been settled by the Commission – for instance which market(s) are being analysed, or which counterfactuals are relevant, and
- how the Commission approaches dynamic characteristics of a market – for example the ability of technological advancements to act as a significant constraint.
These gaps will need to be addressed in the Commission’s clearance decisions and by the courts.
Chapman Tripp’s earlier commentary is available here.