The New Zealand Commerce Commission is currently consulting on draft guidelines to replace the existing Mergers and Acquisitions Guidelines (clearance guidelines) and Guidelines to the Analysisof Public Benefits and Detriments (authorisation guidelines).
Draft Clearance Guidelines
The current clearance guidelines are nine years old, whereas the updated guidelines reflect the Commission's current practice, as well as current international thinking on merger assessments, and are therefore a welcome update.
The draft guidelines state that the Commission will look (depending on the circumstances) closely at acquisitions of as little as 10 per cent of the target firm. The previous guidelines referred to a 15 per cent shareholding (although did note that in some circumstances lower levels may raise concerns). This 15 per cent figure was itself a decrease from the 20 per cent figure in the earlier guidelines.
One of the main changes to the Commission's analytical approach since the guidelines were last updated relates to the counterfactual, or the 'with and without' test, used to determine whether a merger or acquisition is likely to cause a substantial lessening of competition in a market. This test asks whether competition with the merger (the 'factual') is likely to be substantially less than the level of competition without the merger (the 'counterfactual').
Previously the guidelines stated the appropriate 'without' situation was to be determined on the basis of a "pragmatic and commercial assessment of what is likely to occur in the absence of the proposed acquisition." The draft guidelines reflect the High Court and Court of Appeal findings in the 'Warehouse' case (see our previous column: A different ball game! Assessing the counterfactual in New Zealand and Australia, NZ Lawyer, issue 169, 23 September 2011), which entitle the Commission to measure the effect of the acquisition against all 'likely' counterfactuals (possibly more than one).
The draft guidelines reflect the Commission's approach since that time, whereby it measures an acquisition against the most competitive of the 'likely' counterfactuals. Considering multiple counterfactuals is a quirk of New Zealand law. For instance, the Australian Federal Court effectively rejected the multiple counterfactual approach in Australian Competition and Consumer Commission v Metcash Trading Limited  FCA 967 in favouring a balance of probabilities approach to identify the most appropriate counterfactual. In theory at least, the different approaches mandated by the New Zealand and Australian courts could result in different outcomes, notwithstanding similar fact patterns.
The SNNIP (small but significant and non-transitory increase in price) test is a framework to assist defining the boundaries of a market for the purposes of the competition law assessment. The Commission frames the test as:
"whether a hypothetical sole supplier of a set of products (or locations) wouldprofitably increase sales by increasing prices for at least one of the merging firms' products (or locations by a small, but significant, amount."
The earlier guidelines stipulated a five to 10 per cent price increase as the measurement for the SSNIP test, while this has changed to five per cent in the draft guidelines. While no specific basis is cited for the change, there is likely to be limited practical impact – in most cases data issues mean a strict quantitative assessment cannot be made in any event.
A welcome addition to the draft guidelines is the concept of multi-sided platforms. The guidelines recognise that certain industries, such as newspaper publishers, must service two markets simultaneously where demand from one group is dependant on the other (eg readers and advertisers). The Commission concedes that such circumstances can complicate the SNNIP test and this requires them to take into account competition effects on both sides of the market.
Conglomerate and Vertical Mergers
The updated conglomerate and vertical mergers sections are good examples of the draft guidelines' closer adherence to internationally accepted merger assessment standards. In the previous guidelines the Commission's focus in assessing conglomerate mergers (where merging firms are neither direct competitors nor operating upstream or downstream of one another) was on the possibility of the elimination of a potential new entrant. The new guidelines recognise the key issue with conglomerate mergers is potential foreclosure of competitors due to complementarity of demand for the merging firms' products (e.g. through bundling or tying). Likewise, the new guidelines focus on the issue of foreclosure when assessing vertical mergers, including the ability and incentives of the firm to foreclose competitors. These changes more closely reflect the approach of the European Union and other major competition regulators.
The draft guidelines include new references to certain economic tools. For example, they reference the use of "diversion ratios" (being a tool to measure the 'closeness' of competition between two firms). While the Commission has been employing this approach in appropriate cases in recent years, and it has proved popular with a number of overseas jurisdictions (e.g. it appears in the equivalent UK guidelines), the previous guidelines did not refer to it. Use of diversion ratios indicates a move away from a heavy reliance on market definition towards an assessment of closeness of competition, which is an increasing trend overseas. By and large, this is a positive development, provided appropriate use is made of these tools and their limitations recognised.
Draft Authorisation Guidelines
It would appear that the Commission's authorisation guidelines were in even greater need of updating: the pre-existing guidelines were last updated in 1997. Unlike New Zealand's clearance regime, there are few international authorisation regimes with any similarity to ours (particularly given our strong emphasis on quantitative analysis in authorising business conduct) meaning that changes in international practice have less influence on the Commission's approach to authorisations. Accordingly, changes are based primarily on the Commission's learning through the applications that have come its way since 1997 and subsequent court challenges.
While authorisation applications are relatively infrequent compared to clearances (there have been only seven since the 1997 guidelines were released, compared with hundreds of clearances) they are significantly more detailed and also more likely to be subject to appeal. Accordingly, it is unsurprising that the updated guidelines make frequent reference to two appeals from the Commission's authorisation determinations in the Air New Zealand/Qantas and Wool Scouring cases. The Commission successfully defended both of those appeals (one against a decision to decline and one against a decision to grant authorisation).
Submissions on both sets of draft guidelines are due by 5pm on Tuesday 13 April 2013.