In our October 2011 FYI, we updated you on the Government's introduction of the Commerce (Cartels and Other Matters) Amendment Bill (Bill) into Parliament. The Bill was referred to the Commerce Select Committee (Committee) in July 2012. The Committee released its report on the Bill on 13 May 2013.
The Committee has suggested some significant changes to the original Bill. In this FYI, we outline the main changes suggested by the Committee, and look ahead to the Bill coming into force.
The original Bill contained a prohibition on "cartel provisions", which were defined as provisions in a contract, arrangement or understanding with the purpose, effect or likely effect of price fixing, restricting output, market allocating or bid rigging. The Committee has recommended the removal of the automatic prohibition on bid rigging. The Committee took the view that including an additional prohibition on bid rigging would create uncertainty.
The removal of the prohibition on bid rigging does not mean that bid riggers can get away "scot free". It seems likely that agreements between bidders that are of particular concern will be caught by the price fixing or market allocating prohibitions, or otherwise by the general prohibition in section 27 on contracts, arrangements or understandings that have the purpose, effect or likely effect of substantially lessening competition in a market.
The Committee has retained the new collaborative activities exemption and clearance regime, which replaces the current joint venture exemption. The Committee has not provided any guidance as to what may constitute a "collaborative activity", although we still think that the exemption is likely to be wider than the current joint venture exemption.
The Committee has also amended the Bill to allow the Commerce Commission to revoke clearances if there is a material change in circumstances. We can expect to see the Commerce Commission developing guidelines on its approach to assessing collaborative activity clearances prior to the Bill coming into force. The Committee has also invited the Commerce Commission to issue guidelines on the applicability of certain provisions in the Bill, in particular the collaborative activities exemption, to franchise agreements.
There has been concern that collaborative activity clearances were not available for existing arrangements once the Bill comes into force. The Committee has taken these concerns on board to some extent. However, rather than allowing clearances for existing arrangements, the Committee has recommended a nine month transitional period, under which no proceedings can be taken under the new cartel prohibitions for arrangements entered into before the Bill comes into force. During this period, proceedings can still be taken under the current price fixing prohibition.
Unfortunately, this transitional period does not give the peace of mind that a clearance regime would have done. Rather than being able to seek clearance and continue with existing arrangements, it will now be necessary to assess how likely arrangements are to fall foul of the new laws and, if necessary, to "re-jig" those arrangements to ensure compliance. Alternatively, in some instances it may be possible to "re-enter" into arrangements and seek clearance for the "new" arrangement.
Criminal penalties and defences
Unsurprisingly, the Committee has not disturbed the Bill's inclusion of criminal penalties, which include up to seven years in prison for individuals. These criminal penalties will come into force two years after the Bill passes into law.
The Committee has narrowed the defence to the cartel offence. As introduced, the Bill provided for a defence to a cartel charge if the defendant honestly believed that one of the exemptions from the cartel prohibition (that is, collaborative activities, vertical supply arrangements and joint buying) applied. The Committee has narrowed this defence, to only apply in cases where the defendant is involved in a collaborative activity (but not a vertical supply arrangement or joint buying arrangement) and the defendant:
- honestly believed that the cartel provision was reasonably necessary for the purposes of the collaborative activity; and
- that belief existed when the cartel provision was entered into or given effect to.
This significant narrowing of the defence means that, in order to avoid any possibility of criminal penalties, clients will need to have a high degree of confidence that one of the exemptions applies.
Since its inception, the Commerce Act has included an exemption for contracts, arrangements or understandings in so far as they relate to the carriage of goods by sea to or from New Zealand. The Shipping Act 1987 contains a separate competition regime for outwards shipping. This exemption and regime reflected a view, held by Governments around the world, that the benefits of reliable and regular ocean shipping outweighed any detriment resulting from a lack of competition between carriers. Accordingly, international carriers could enter into arrangements with one another that, but for the exemption, could breach the Commerce Act.
In 2012, the Productivity Commission issued a report following its investigation into International Freight Transport Services. The report made a number of recommendations in relation to international shipping. As a result of the report, the Government asked the Committee to consider the removal of the exemptions for international shipping.
Following approval from Cabinet, the Committee's report recommends the removal of the exemptions for international shipping, and the repeal of the separate regime in the Shipping Act. As a result, agreements between carriers will now be subject to the Commerce Act and it will be necessary to apply for authorisation, or a collaborative activities clearance, to continue with such arrangements if they potentially breach the cartel prohibitions.
The repeal of the exemptions for shipping will not come into effect until two years after the Bill is passed. During this two year transitional period, carriers who wish to continue with arrangements that would have been exempted will be able to apply to the Commerce Commission for clearance or authorisation of those arrangements, so those arrangements can continue once the repeal of the exemption takes effect.
The Productivity Commission also made recommendations relating to the regulation of civil aviation, which is currently regulated by both the Commerce Act and the Civil Aviation Act 1990. While a review of the Civil Aviation Act is on-going, the Committee recommended that a transition to a full Commerce Act regime be considered as part of this review.
The Bill provides a regime under which the Commerce Commission can apply to the High Court for a declaration that an acquisition by an overseas person has, or is likely to have, the effect of substantially lessening competition in a market in New Zealand.
The Committee has clarified when an application can be made, by amending the new section 47A to make it clear that the regime only applies when an acquisition is made by an overseas person outside New Zealand. An application can be made when the overseas person acquires a controlling interest in a New Zealand company, through the acquisition of either shares or assets. The Committee recommended that the controlling interest threshold for shares, votes or dividend entitlements be reduced from 50% to 20%, to bring the Commerce Act in line with the Takeovers Code.
If the High Court makes a declaration, it can make a variety of orders, including requiring the company to cease carrying on business in New Zealand or to dispose of shares or assets.
The Committee has recommended various other amendments, including providing an explicit exemption from the cartel prohibition for maximum resale prices and a provision making it clear that a company cannot indemnify its directors, employees or agents for civil or criminal proceedings.
The Bill awaits its second and third readings in Parliament. The Government has stated that the Bill is a "Category 3" priority, and will be passed in 2013 if possible.
Given the uncertainty of when the Bill will come into force, and the relatively short nine month transitional period for existing arrangements, now is an opportune time for clients to start reviewing their current arrangements for compliance with the new laws. Just because an arrangement complies with the Commerce Act now does not mean that it will comply with the new provisions.