Unwrapping MBIE's review of the Commerce Act: A Trans-Tasman Perspective

Hot on the heels of the 2023 Australian competition review, the Ministry of Business Innovation and Enterprise (MBIE) is undertaking a targeted review of New Zealand's principal competition law legislation, the Commerce Act 1986, with many of the provisions under review having not been reviewed for over 20 years.

New Zealand's review is thematically consistent with many of the changes proposed in the recent review of Australia's merger control laws. In this update, we "unwrap" the merger related areas of focus in MBIE's discussion document and look at what insights we can glean from our experience with the recent changes in Australia.

 

A need for change?

Although the upcoming review is set to be the most comprehensive in 20 years (and is occurring in parallel with an organisational review of the Commerce Commission), New Zealand is no stranger to competition law reform. In recent years, amendments to the Commerce Act have updated the misuse of market power provision, introduced market studies, and enacted broader cartel related provisions (including criminalisation).

The purpose of the upcoming review is to address concerns about New Zealand's "low productivity levels" and to ensure that competition settings "remain fit for purpose". This echoes the purpose of the Australian reforms, which have been focussed on addressing slowing productivity growth and responding to a perception of increasing market concentration.

Importantly, MBIE has endorsed regulatory alignment with Australia to support the objective of maintaining a Single Economic Market with Australia. This desire for Australian alignment is reflected in many of the proposed topics of reform in the discussion paper, meaning the Australian changes may provide important insights as to potential changes in NZ.

 

What's being proposed?

The proposed reforms span the breadth of the Commerce Act with a particular focus on merger control and anti-competitive conduct. If implemented, the reforms will introduce several tools to the New Zealand competition regime that have been available to overseas regulators for some time. However, some of the proposals break new ground and remain untested in any jurisdiction. We discuss the key merger related proposals below, in particular, how similar changes have played out so far in Australia.

 

Potential changes to New Zealand merger control process

No broad mandatory notification regime

A key aspect of the proposed reform is the rejection of a mandatory merger notification regime (such as the one that has just been enacted in Australia). We expect that this omission will generally be well received in the New Zealand context and we agree with MBIE that the existing voluntary regime is working well.

It is worth noting, however that in practice, courtesy notifications of potential mergers (outside the formal clearance process) are becoming increasingly common to mitigate the risk of a Commission-initiated investigation. This is a response to the Commission's well publicised focus on non-notified mergers and related enforcement.

While a broad brush mandatory notification regime has been rejected, MBIE is considering some more targeted changes, which could include empowering the Commission to require certain companies with substantial market power or over a certain size to notify the Commission of any acquisitions. This may operate similarly to the Australian mechanism which will allow the Minister to target specific industries or companies of concern.

Changes to substantive merger control test

MBIE are exploring alignment with the changes to the substantive test that the Commission applies in assessing mergers. This includes:

• clarifying that the current "substantial lessening of competition test" includes acquisitions that "create, strengthen or entrench a substantial degree of market power"; and
• allowing the Commission to aggregate the impact of all acquisitions by the parties over the past 3 years when assessing an acquisition's competitive effect (three year look-back).

The general consensus amongst Australian competition lawyers is that the 'market power' change will not significantly alter the existing merger test, which already permits the consideration of the impact on an acquirer's market power. However, we expect that the Australian regulator will be eager to test the limits of the amended test, which could result in challenges for some acquisitions, particularly for larger firms in concentrated markets.

The 'three year look-back' was introduced in Australia to directly target 'serial' or 'creeping' acquisitions. That is, where a firm gradually increases its market share by making multiple individual acquisitions in an industry, none of which individually meet the threshold to block the acquisition, but which result in the firm controlling a substantial portion of the market. Examples cited in the Australian context include acquisitions of pet stores by pet shop giant Petstock, and the acquisition of small hardware shops by Bunnings. Competition regulators in many jurisdictions have viewed serial acquisitions as an ongoing pain point.

The three year look-back is a novel approach to address this issue, which has not been tested in any jurisdiction (including Australia where it has only just been introduced). We expect that, if implemented, it will result in a high degree of scrutiny on private equity firms with consolidation or 'roll-up' strategies. Firms may need to carefully consider the timing and sequencing of some acquisitions.

We expect that regulators internationally will be watching New Zealand and Australia carefully to see how these changes pan out in practice.

Behavioural undertakings

Currently, the Commerce Act empowers the Commerce Commission to only accept structural undertakings (i.e. promises to divest certain assets) to allow an otherwise anticompetitive merger to occur. For merger clearances, the undertaking provisions first emerged in 1990, at the height of New Zealand's adoption of free market principles. Behavioural undertakings (undertakings to act in a certain way) with the corresponding need for ongoing central monitoring and enforcement were viewed with extreme suspicion in the merger regulation context and were expressly outlawed. This position survived the 2001 change to New Zealand's merger regime.

In what would bring New Zealand in line with overseas regulators, it is proposed that the Commerce Commission will be able to accept behavioural undertakings from parties to allay competition concerns. This would also align the merger clearance regime with the authorisation regime that applies to restrictive trade practices.

Our experience is that regulators in other jurisdictions continue to take a cautious approach to behavioural undertakings. However, introducing them as an option in New Zealand would be a welcome addition, providing a further tool to limit the risks to competition for some deals.

Technical changes

Technical changes are also being proposed, such as clarifying the definitions of "assets", "business", and "substantial degree of influence". The discussion document also invites submissions on the Commerce Commission receiving new powers to "call-in" parties to apply for a clearance if the Commission becomes aware of an anti-competitive merger (something that, in practice, can already happen), and the power to suspend potentially anti-competitive mergers without needing to apply to the Courts for an interim injunction. The proposal to introduce this latter power will need to be looked at very carefully in the context of New Zealand's voluntary merger control regime.

 

Changes outside the merger regime

The Commerce Act currently prohibits anticompetitive "contracts, arrangements or understandings". It does not, however, currently capture conduct that is neither unilateral, or falls below the threshold of an "understanding" with another party. The paper explores introducing a prohibition on "concerted practices" (such as price signalling). This would align New Zealand law with Australia's.

The equivalent Australian provision was introduced in 2017, in order to address concerns that certain anti-competitive conduct (sharing of price information) did not fall within the definition of a 'contract, arrangement or understanding' and was not being captured by the Australian equivalent of section 27 of the Commerce Act. However, the New Zealand Courts have historically taken a broader approach to interpreting the definition of 'understanding' in the Commerce Act, which raises the question of whether there is a need for a separate provision in New Zealand.

The discussion paper also considers amendments to the framework for the collaborative activity exception. MBIE recognises that the process as currently contemplated is potentially chilling businesses from engaging in collaboration. Options being explored include empowering the Commission to "issue binding rules that create a safe harbour from the prohibitions" or to issue "class exemptions".

 

What next?

MBIE is inviting comment and feedback on the discussion document with a deadline of 7 February 2025. While this is just the start of the reform process, the short time frame over the holiday period is disappointing given that some of the changes have been 20 years in the making. If you would like more information on the proposed reforms or assistance with drafting a submission, our Australasian team is, as always, happy to assist.