Chapter 2: Mergers

New Zealand’s merger regime

Part 3 of the Commerce Act deals with anticompetitive mergers and Part 5 contains the merger review provisions. Section 47 of the Commerce Act prohibits any person from acquiring the assets of a business or shares, if that acquisition would have, or would be likely to have, the effect of substantially lessening competition in a market.

The Commerce Act provides two pathways for a merger to proceed:

• The prospective merger parties may apply to the Commission for ‘clearance’ (s 66). A clearance is a binding determination by the Commission that it is satisfied the merger is unlikely to substantially lessen competition. A clearance may be granted subject to undertakings by the parties to dispose of assets or shares. 
• The prospective merger parties may apply to the Commission for ‘authorisation’ (s 67). An authorisation is a binding determination by the Commission that, despite the merger being likely to lessen competition, it is satisfied that the benefits to the public of New Zealand are such that the merger should be permitted to go ahead. In practice, the Commission makes this assessment by balancing the benefits and detriments of the proposed merger. 

As these pathways are voluntary, parties may self-assess that the proposed merger is unlikely to substantially lessen competition and proceed at their own risk. Many acquisitions proceed on this basis, raising no competition concerns. The Commission also operates an informal courtesy letter process, where parties can notify it of the proposed merger to seek an informal view.

If a merger proceeds without a clearance or authorisation, and the Commission has concerns, the Commission (or any third party) can seek an injunction from the court to prevent the merger from going ahead. In addition, on application of the Commission, the court may impose pecuniary penalties for a breach or attempted breach of the prohibition against anticompetitive mergers (s 83), and/or an order for divestiture if the merger has taken place in the last two years (s 85). 

Why we are looking at merger issues 

Market structures, including the number and size of participants and the ease of entry and exit, are key determinants of market performance. Most mergers support the effective operation of markets through allowing the parties to achieve increased efficiencies, such as reducing transaction costs, sharing risk and capabilities, and obtaining scale economies.

However, mergers can harm competition through increasing the merged parties’ market power and their ability to increase prices and/or reduce quality of goods and services. A merger could also increase the likelihood of a smaller number of large firms coordinating their activities for their mutual benefit rather than competing for the benefit of consumers. This can reduce innovation, output, range of goods and services supplied and may increase prices.

Improvements to merger settings would enhance the Commission’s ability to scrutinise mergers to stop problematic market structures from forming. Effective merger review can reduce the need for future interventions including complex sector-specific regulation. We have identified some specific issues in the merger regime for review. 

Issue 1 – The ‘substantial lessening of competition test’ 

The ‘substantial lessening of competition test’ in the anticompetitive merger prohibition (s 47) requires a forward-looking analysis comparing the likely state of competition if the merger proceeds (the factual) with the likely state of competition if it does not (the counterfactual). The elements of ‘substantial’ and ‘lessening competition’ are defined as meaning ‘real or of substance’ and ‘including hindering or preventing of competition’, respectively.

In assessing the effect on competition in a market, the Commerce Act requires that reference must be had to all factors that affect competition, including competition from goods or services supplied by persons not resident or not carrying on business in New Zealand (s 3(3)). The Commission’s Merger and Acquisitions Guidelines outlines the framework that it applies. ^[7]

Why are we looking at this?

The ‘substantial lessening of competition test’ was introduced in 2001, replacing the previous test of ‘creating or strengthening a dominant position’ (the dominance test). The policy intent was:

• To capture a wider range of mergers that harm competition. This includes mergers where the merging parties do not have the high market share required to be found to be ‘dominant’, or where the merger may make it easier for coordination to occur in the affected markets. 
• To align with other prohibitions within the Act relating to anti-competitive agreements, so that mergers were subject to the same substantive test as arrangements between parties that were less than a merger. 
• To align with Australia’s merger test to support a single economic market. 

The merger test has been in place for over 20 years. It is timely to assess whether it is achieving its policy intent and continues to be fit for purpose for the foreseeable future. This assessment is also made in the wider context of ensuring our competition settings are fit for purpose.

Discussion

The evidence of whether the ‘substantial lessening of competition test’ has met the policy intent of capturing a wider range of harmful mergers is mixed for the first 10 years of its operation. Research analysing the first decade following the reform concluded the Commission applied a similar standard to the previous dominance test for single firm market power. The Commission was willing to support mergers from ‘two to one’, with reliance on claims of potential entry or expansion and countervailing buyer power. ^[8]

More recent Commission ex post reviews of selected merger cases looked at whether forward assumptions the Commission may have relied on in assessing the proposed merger eventuated. ^{[9] [10]} Some of the findings in these reviews are:

• The likelihood and extent of potential entry and expansion is commonly overstated by market participants.
• Market participants tend to overestimate the ability and likelihood of third parties to exercise countervailing buyer power.
• Dynamic markets may require alternative analytical frameworks for defining relevant markets and assessing likely competitive effects. 

These reviews highlight the challenges in conducting a forward-looking assessment in dynamic markets. These challenges extend to the complexities of assessing the likely risk of increased coordination in concentrated markets. While these challenges exist, they do not of themselves indicate a failing in the competition test.

In April 2023, the ‘substantial lessening of competition’ test was extended to also apply to the prohibition against a single firm with substantial market power engaging in conduct to harm competition (s 36). This test now applies to all three classes of prohibitions under the Commerce Act, which enhances the coherence of the provisions and promotes business certainty. 

The Australian Competition Review included an in-depth review of its merger regime and the performance of the ‘substantial lessening of competition test’. It concluded that the following types of acquisitions do not appear to be adequately captured under Australia’s merger laws:

• Creeping or serial acquisitions (a series of small acquisitions which individually do not result in material changes to market concentration, but form part of an overall consolidation strategy).
• Acquisitions by incumbents of nascent competitors (i.e. by a leading company in its industry of a firm who may potentially pose a serious competitive threat to that leading company).
• Expansions into related markets, including by digital platforms. This includes where the acquisition enhances the competencies of the merger parties even though they operate in separate markets. For example, a merger that leads to a consolidation of control over data (eg, Google/Fitbit). 

We are exploring whether similar concerns arise with the application of the ‘substantial lessening of competition test’ in New Zealand. Specifically:

• In relation to creeping acquisitions, like many overseas jurisdictions, New Zealand has also seen serial or roll-up strategies in some sectors, such as veterinary and funeral-related services. Such strategies can result in supply efficiencies and benefits for consumers, but there is a risk that over time an unchecked series of consolidation will harm competition. Section 3(7) of the Commerce Act allows for aggregation of other conduct or arrangements by the relevant parties when assessing certain anti-competitive arrangements or conduct. The introduction of a creeping acquisition provision for the merger regime would create consistency in the approach to applying the ‘substantial lessening of competition’ test across the merger and anti-competitive conduct provisions.
• In relation to entrenchment of market power, New Zealand courts have confirmed that the substantial lessening of competition test involves a change along the spectrum of market power. ^[11] The Commission has successfully blocked mergers involving nascent (ie potential future) competition, such as Woolworths and Foodstuffs proposed acquisition of the Warehouse in the grocery sector. In addition, it has successfully blocked vertical mergers where the parties operate in related markets (eg SkyTV and Vodafone and, more recently, Alpha Theta Corporation and Serato). The Australian reforms have codified what is the New Zealand position in this regard, but it may be useful to explicitly clarify this in the Commerce Act.

We are considering the following options, along with any options suggested by submitters:

• Maintaining the status quo – The Commission’s Merger and Acquisitions Guidelines reflect lessons learned and new case law under the current legislative settings. 
• Targeted alignment with the proposed reforms in Australia – Under this option, the Commerce Act could be amended as follows:
  
  • To clarify and make explicit in the Commerce Act that the ‘substantial lessening of competition test’ includes ‘creating, strengthening, or entrenching a substantial degree of market power in a market’. This amendment could apply in relation to mergers only (as per the Australian Amendment Bill) or throughout the Act wherever this test applies.
  • To provide that acquisitions by the acquiring party in the past three years for target firms supplying or acquiring the same goods or services may be combined when assessing the competition impact of the current acquisition (ie creeping acquisitions).

These changes would make more explicit for businesses the approach the Commission will take when applying the substantial lessening of competition test. They will also give the Commission a power to take into account the cumulative effect of acquisitions within a short timeframe, and specify what it will consider when applying the test in these circumstances.

The changes will also support the objective of maintaining a Single Economic Market with Australia. Since July 2019, 71 per cent of merger clearance applications received by the Commission involved a least one party (either directly or indirectly) having a presence in Australia. Over the same period, about 22 per cent involved merger transactions also considered by the ACCC under its informal merger review. 

Questions for consultation

1. What are your views on the effectiveness of the current merger regime in the Commerce Act? Please provide reasons.

2. What is the likely impact of the Commission blocking a merger (either historically, or if the test is strengthened) on consumers in New Zealand? Please provide examples or reasons. 

3. Has the ‘substantial lessening of competition’ test been effective in practice in preventing mergers that harm competition? Please provide examples of where it has, or has not, been effective.

4. Should the ‘substantial lessening of competition’ test be amended or clarified including for:

- Creeping acquisitions? If so, should a three-year period be applied to assessing the cumulative effect of a series of acquisitions for the same goods or services

- Entrenchment of market power (eg including acquisitions relating to small or nascent competitors)?

- In relation to just the merger provisions or wherever the test applies in the Commerce Act?

If so, how? Please provide reasons.

5. How important is it for the ‘substantial lessening of competition’ test in the Commerce Act to be aligned with the merger test in Australian competition law, for example, to provide certainty for businesses operating across the Tasman and promote a Single Economic Market? Please provide reasons and examples.

6. How effective do you consider the current merger regime is in balancing the risk of not enough versus too much intervention in markets?

Issue 2 – Substantial degree of influence

Section 47 prohibits acquisitions that substantially lessen competition. If the acquisition relates to a takeover or full merger between the parties, there is a clear transfer of control of the acquired business or assets. The acquired firm ceases to act independently, as the merged parties are no longer distinct. However, this assessment is more complicated in the cases of partial acquisitions of shares or assets below the level that results in persons becoming ‘interconnected’ bodies corporate as defined in s 2(7) of the Commerce Act. 

The Commission’s Mergers and Acquisitions Guidelines outline that mergers can sometimes involve a firm (directly, indirectly or jointly) acquiring partial control of a target firm or assets. ^[12] Such mergers can result in a substantial lessening of competition when they give the acquirer a “substantial degree of influence” over the target firm’s business decisions, and that influence can be used to harm competition.

Why are we looking at this?

The Commission proceeds on a case-by-case assessment of the extent of influence between relevant businesses to establish if an acquisition contravenes the prohibition. The Act treats any two entities that are interconnected bodies (as defined) as being the same actor. That is, any two bodies are to be treated as “interconnected” if:

• One of them is a subsidiary of the other (with ‘subsidiary’ defined in section 5 of the Companies Act relating to majority control of composition of the board, voting rights, shares and rights to dividends)
• Both of them are subsidiaries of the same body corporate or are interconnected with bodies corporate that are interconnected.

However, criteria or bright lines for assessing a ‘substantial degree of influence’ are not prescribed, and there is only very limited guidance in s 47(4). 

The New Zealand High Court considered the meaning of ‘substantial degree of influence’ in Commerce Commission v New Zealand Bus Ltd (2006). ^[13] It looked at parties’ shareholdings, rights to appoint directors, the historical basis of the relationship between the companies and any significant financial links. In that case, the court concluded that an acquirer’s existing 26 per cent shareholding in a target company, accompanied by the right to appoint one of four directors of the target company, was not sufficient to establish that the acquirer was able to exercise a substantial degree of influence over the target company for the purposes of the transaction.

In practice, the Commission can (and does) look beyond simple shareholding percentages to the underlying facts and what the acquisition means for competition. The fact that two firms are not associated or not interconnected does not mean that the Commission cannot take a lesser relationship into account. For example, the Commission was not inhibited in investigating Vero’s completed acquisition of 19.9 per cent shareholding in Tower under the merger prohibition in s 47. This investigation was closed when Vero subsequently sold its shareholding to Bain Capital. ^[14]

We are exploring whether the Commerce Act could provide more clarity on this issue. For example, the Act could set out criteria or bright lines for assessing the degrees of influence, which are used by other jurisdictions with administrative merger regimes. This may provide more certainty to businesses and the Commission. 

Discussion

The proposed Australian merger reforms include changes to the scope of regulated acquisitions, focusing on acquisitions “…that provide control or the ability to materially influence the acquired business or are capable of affecting the competitive structure of a market” ^[15]. “Control” of a body corporate is defined by reference to Australian corporation law as the capacity to directly or indirectly determine the policy of the body corporate in relation to one or more matters. Matters to be considered include:

• The practical influence the person can exert (rather than the rights it can enforce). 
• Any practice or pattern of behaviour affecting the policies of the body corporate (even if it involves a breach of an agreement or a breach of trust). 

In comparison, s 26 of the United Kingdom Enterprise Act 2002 distinguishes three levels of interest that result in the merger parties ceasing to be distinct. These are if there is a:

• Material influence by the acquirer over the policy of the target entity (usually requires at least a 25 per cent shareholding, influence at the board, or an ability to exert financial control). 
• De facto control, where the acquirer does not have a controlling interest in a company, but is nonetheless able to unilaterally determine a company’s policy by influencing shareholder votes. It can also include “…situations where an investor’s industry expertise might lead to its advice being followed to a greater extent than its shareholding would seem to warrant”. ^[16]
• Controlling interest, where the acquirer has more than 50 per cent of the voting rights in a company. This would be equivalent to the Commerce Act concept of being ‘interconnected’. 

In Singapore, the Competition Act defines “control” for the purposes of a merger as “the ability to exercise decisive influence” ^[17]. The Competition and Consumer Commission of Singapore generally deems this to exist if an acquisition involves 50 per cent of voting rights. Where an acquisition involves 30-50 per cent of voting rights, there is “a rebuttable presumption that decisive influence exists”.

These are indicative thresholds only, and lower levels of voting rights could constitute control in certain circumstances. For example, acquiring a minority shareholding can give the acquirer decisive influence when they can veto strategic decisions, such as major investments and the appointment of senior management. Singapore competition law also includes the concept of de facto control, which is assessed on a case-by-case basis.

We are considering the following options, as well as any options suggested by submitters:

• Status quo – the Commerce Act does not include any bright lines to assist in the assessment of the degree of influence between businesses (that are not interconnected) as part of the competition assessment of a merger. The Commission must be satisfied that a proposed merger (including any change in influence between the parties) is unlikely to substantially lessen competition before it may grant clearance.
• Include explicit criteria to supplement the test of ‘substantial degree of influence’ – this could involve the Act making explicit the factors that should be considered when assessing a substantial degree of influence, for example any veto rights over strategic decisions such as a company taking on debt / getting more capital that could stunt their potential growth. The purpose of this change is not to introduce a threshold, but to make clear the matters to be considered in applying test. 

Questions for consultation

7. Do you consider that the current test of ‘substantial degree of influence’ captures all the circumstances in which a firm may influence the activities of another? If not, please provide examples.

8. Should the Commerce Act be amended to provide relevant criteria or further clarify how to assess a substantial degree of influence? If so, how should it be amended? Please provide reasons.

Issue 3 – Assets of a business

Another aspect of the merger regime that could benefit from more clarity is the treatment of “assets of a business”. Section 47 prohibits acquisitions of “assets of a business” or shares that would or would be likely to substantially lessen competition. The terms ‘assets’ and ‘business’ are defined in s 2(1) as follows:

• “assets” includes intangible assets.
• “business” means any undertaking "that is carried on for gain or reward; or in the course of which goods or services are acquired or supplied otherwise than free of charge”. 

Why are we looking at this?

The phrase “assets of a business” in the Commerce Act is unclear. It could refer to any assets held by a business (eg inventory in a shop) or it could require a focus on the activity to which the assets relate and whether the assets are capable of operating as a business concern. ^[18] This interpretation creates uncertainty for acquisitions of assets, such as machinery, licences or quotas, or undeveloped land where it is unclear how that land will be used.

Discussion

The definition of ‘assets’ and ‘business’ in the Commerce Act do not provide clarity on the scope of assets captured by s 47, particularly when a party is looking to make a partial acquisition of assets. 

Some statutes explicitly state when the prohibition in s 47 applies to remove any uncertainty. For example, s 138 of the Radiocommunications Act 1989 provides that management rights in relation to radio frequencies and spectrum licences are deemed to be ‘assets of a business’ for the purposes of the Commerce Act. We consider that this case-by-case approach is unsatisfactory. 

If an acquisition of an asset did not relate to ‘a business’ activity, this may mean that the acquisition would be subject to Part 2 of the Act dealing with contracts, arrangements or understandings that substantially lessen competition (s 27). However, the prohibitions in Part 2 of the Act would not engage the Commission’s merger clearance regime, and remedies available for contraventions of anticompetitive arrangements do not include the option of a divestment order (as provided in s 85). 

Australian competition law simply prohibits acquisitions of shares or assets of a person or corporation that substantially lessen competition. ^[19] The Australian Amendment Bill has made it clear that the concept of “asset” includes any kind of property, as well as legal or equitable rights that are not property, such as goodwill, intellectual property rights, or contractual rights such as leases. This allows the law to focus on the “substance of what is being acquired or disposed of, rather than the legal form”. ^[20] However, this level of specificity may be unnecessary in New Zealand given our voluntary merger clearance regime. 

We are considering the following options, as well as any options suggested by submitters:

• Status quo – The term “assets of a business” in the Act has created uncertainty, and will likely continue to do so in future without a legislative amendment. 
• Amend section 47 to refer simply to “assets” – This would provide businesses, the Commission and other stakeholders with more clarity as to the scope of assets, and therefore transactions, that fall within the mergers regime. It could also help deter anti-competitive practices such as land banking.
• Amend the definition of “assets” – Along with removing the wording “of a business” from sections 46 and 47, the interpretation section of the Commerce Act (s 2) could provide a more detailed definition of “assets”, such as that set out in the Australian Amendment Bill. ^[21]

Questions for consultation

9. Do you consider the term “assets of a business” in section 47 of the Commerce Act is unclear or unduly narrows the application of the merger review provisions in the Act? 

10. If you consider there is a problem, how should this phrase be amended? For example, by:

a. referring simply to “assets”? or

b. further defining “assets” in the Commerce Act? If so, how?

Issue 4 – Mergers outside the clearance process

Since 1990, the clearance regime under the Commerce Act has operated on a voluntary basis. Merger parties may apply to the Commission for clearance of any proposed merger. A clearance gives legal immunity to the merger parties for a period of 12 months to merge without risk of liability under the Commerce Act. 

Merger parties may also elect to proceed with a merger without first obtaining clearance. In such cases, the Commission (or any other party) may bring court proceedings to injunct anticipated mergers or seek divestments or damages in relation to completed mergers. The Commission can also seek the imposition of pecuniary penalties for breaches or attempted breaches of section 47. 

To increase deterrence of anti-competitive mergers proceeding outside the clearance process, the Commerce Amendment Act 2022 increased the maximum pecuniary penalties for anti-competitive mergers to $10 million or three times the illegal gain, or if the illegal gain was unknown, 10 percent of annual turnover. 

Why are we looking at this?

The Commission has an active enforcement programme for non-notified mergers. ^[22] While the Commission has successfully blocked some mergers, investigating a merger outside of the clearance process and taking an enforcement proceeding presents challenges.

For example, where a merger is moving quickly or involves non-public companies, the Commission may not be aware of an anticompetitive acquisition before it completes, nor may it have gathered sufficient evidence to apply to the court for an injunction to stop it completing. Time is critical because mergers involve permanent structural changes to industries. If a merger has completed, it can be difficult to unwind through divestments and, even if divestment is achieved, competition may have been significantly impaired in the interim. There is a strong public interest in ensuring harmful mergers are blocked before they are implemented.  

The 2022 OECD Economic Survey of New Zealand noted these challenges and risks. It recommended granting the Commission a ‘call-in’ power to order merger parties to apply for clearance whenever the Commission sees a risk the proposed merger could substantially lessen competition. It recommended that this call-in power should be complemented with a power to halt the integration of the merger parties until the Commission had completed its investigation. 

We are exploring whether it would be useful for the Commission to have more powers to investigate and deal with mergers that operate outside the clearance process. 

Discussion

New Zealand is one of the few OECD countries with a voluntary merger regime. The Australian Amendment Bill provides for a formal mandatory and suspensory clearance regime administered by the ACCC. This means that prospective mergers that exceed certain thresholds would need clearance from the ACCC before closing, and parties will be legally prohibited from closing notifiable transactions unless the ACCC grants clearance (or authorisation). The notification thresholds will be set by legislative instrument, and may include different thresholds, such as for the major supermarkets. 

We consider that a change to a mandatory and suspensory merger regime in New Zealand is not required as the current voluntary merger regime is working well. While some potentially anti-competitive mergers may be implemented without the Commission’s knowledge, the Commission has an effective mergers intelligence function that detects the vast majority of non-notified mergers in its monitoring or through complaints. There is also a well-developed and understood informal ‘courtesy letter’ process, whereby prospective merger parties can notify the Commission of proposed mergers and the Commission can give an indication of whether it considers the proposed acquisition requires further scrutiny. Over the last five years, the Commission made decisions on 60 clearance applications, ranging from eight to 21 decisions in any year. 

The voluntary regime allows the Commission to focus on those prospective mergers that are self-assessed as posing the greatest risks to competition. No minimum thresholds are stipulated preventing the Commission from looking at smaller acquisitions, which is a concern in other jurisdictions. It also has the benefit of flexibility, allowing the Commission to calibrate its resources appropriately depending on the size and complexity of the transaction. Based on overseas experience, we anticipate that the Commission would require significant additional resources to operate a mandatory regime given the number of ‘technical’ filings (ie applications that fall within filing thresholds but do not raise competition issues) it would likely receive.  

Competition authorities in overseas jurisdictions have additional powers to investigate mergers that operate outside their administrative merger processes:

• The United Kingdom merger regime provides for voluntary notification of proposed mergers, but this is supported by the United Kingdom Competition and Markets Authority (CMA) having additional powers to stay a prospective merger and/or require merger parties to ‘hold separate’ their assets for a period while the CMA investigates. ^[23]
• In Germany, the Bundeskartellamt (German Federal Cartel Office) is empowered to impose an obligation on a company to notify it of any of its acquisitions in certain sectors of the economy. Prior to issuing such a request, the Bundeskartellamt must have conducted a sector inquiry in one of the economic sectors affected and be satisfied that future mergers by this company could significantly restrict competition in these sectors.
• In the United States, a transaction does not have to be of a significant size for the Department of Justice or Federal Trade Commission to be able to challenge it under antitrust laws. The threshold is if either the FTC or DoJ believes a deal would substantially lessen competition. However, mergers over a certain size must be notified and will be reviewed. ^[24]

We are considering the following options, along with any options suggested by submitters:

• Status quo – New Zealand’s voluntary mergers regime appears to be working well. The Commission should continue its monitoring and enforcement regime, including educating businesses on the benefits of clearance.  
• Amending the Commerce Act to confer additional powers on the Commission in relation to non-notified mergers –Three options are being considered, and one or more of them could be introduced:
  
  • Stay and/or hold-separate powers – This would allow the Commission to suspend the completion or implementation of a potentially anti-competitive merger without needing to apply to court for an interim injunction.
  • Call-in powers – This would allow the Commission to require parties to apply for clearance if it becomes aware of a potentially anti-competitive merger, e.g. through its monitoring.
  • Company-specific mandatory notification power – This would allow the Commission to require certain companies with substantial market power or over a certain size to notify the Commission of any acquisitions. This mandatory notification power, by itself, would not have suspensory effect. 

Questions for consultation

11. What are your views on how effectively New Zealand’s voluntary merger regime is working?

12. Do you consider non-notified mergers to be an issue in New Zealand? Please provide reasons.

13. What are your views on amending the Act to confer additional powers on the Commission to strengthen its ability to investigate and stop potentially anti-competitive mergers? In responding, please consider the merits of each of the options:

a. A stay and/or hold separate power

b. A call-in power

c. A mandatory notification power for designated companies.

Issue 5 – Behavioural undertakings

Behavioural undertakings are effectively commitments that merger parties make as part of a review of their prospective merger about how they will behave post-merger to remedy possible competition concerns. The differ from structural undertakings, which are commitments to dispose of assets or shares to address competition concerns as part of the merger.

Behavioural undertakings fall into two broad categories:

• Measures that facilitate horizontal rivalry by: 
  
  • Limiting foreclosure of the market by placing constraints on tying or bundling of products and preventing the use of long term or exclusive contracts;
  • Restricting the effect of vertical relationships on competition, and such measures may relate to mandating access for downstream competitors to key inputs and regulating the price, terms and conditions of that access; and 
  • Changing buyers’ behaviour through such things as requiring disclosure of information to consumers or by requiring the use of open tenders. 
• Measures to control outcomes and ensure efficiency gains of the merger are passed on to consumers. Such measures may include controls on the price, output and quality of products provided by the merged entity. ^[25]

Why are we looking at this?

Unlike comparable overseas jurisdictions, the Commission is only able to accept undertakings to dispose of assets or shares from merging parties to address competition concerns. This restriction applies in the merger clearance and authorisation setting, and in resolving legal proceedings in relation to enforcement merger investigations.

The 2024 OECD Economic Survey of New Zealand recommends allowing the Commission to accept behavioural undertakings. It identifies concerns that the Commission’s inability to accept behavioural undertakings may result in it preventing some potentially beneficial mergers from proceeding subject to those behavioural undertakings. It gives examples of acquisitions of startups or nascent competitors by a larger firm or cross-border mergers where the Commission could focus on New Zealand-specific measures or accept and enforce undertakings accepted by overseas competition regulators to allow the merger to proceed. 

We are interested in exploring whether it would be useful to allow the Commission to accept behavioural undertakings relating to the post-merger conduct of the merged entity to address any competition concerns and enable it to grant clearance or authorisation, or resolve enforcement proceedings.

Discussion

It is widely accepted that behavioural remedies are not as effective as structural remedies (ie disposing of assets or shares) in dealing with structural problems like mergers.  The competition issues in mergers arise from increases in market power. Behavioural remedies may address one particular means of foreclosing the market or creating barriers to consumer switching, but there are a wide range of behaviours that firms with market power can take to harm competition. Measures aimed at facilitating horizontal rivalry are frequently ineffective.

Some of the other risks and costs involved in allowing for behavioural undertakings include:

• Behavioural undertakings can be difficult to draft so that they are specific enough to be workable and effective, but flexible enough to adapt to changing markets. This is a particular issue in fast-moving markets, technically complex subject matter or those characterised by high levels of innovation. 
• Merger parties have incentives (and, in some cases, obligations to their shareholders) to behave in ways contrary to the letter and spirit of behavioural undertakings.
• They require monitoring and impose ongoing costs on the Commission.
• Detection of breaches, and circumstances that justify amending the undertakings, can be difficult.
• Changes in circumstances can require re-visiting the undertakings, which involves cost to all parties and undermines certainty. 

Given this, the circumstances where behavioural undertakings have been used overseas are generally limited. Examples include where: 

• A divestiture is not feasible or subject to unacceptable risks (e.g. if the target firm is in financial difficulty and there are no alternative buyers) and prohibiting the merger from proceeding is not practical (e.g. where substantial parts of the merging entities operate in various jurisdictions and there are multi-jurisdictional constraints on prohibiting such a merger).
• It supports a divestment remedy.
• The undertakings are expected to be limited in duration, such as due to fast changing technology. 
• The merger results in significant efficiencies that will be passed on to consumers, which any structural remedy would substantially reduce, and behavioural remedies are able to preserve those efficiencies.

Our preliminary assessment is that the circumstances where the Commission has declined a merger due to its inability to accept behavioural undertakings is limited and at the margin. These related to:

• Global mergers which are cleared by other relevant overseas jurisdictions, but which are unable to be cleared in New Zealand. In this case there is the associated risk that the target business exits New Zealand. An example is Reckitt Benckiser’s 2015 acquisition of Johnson & Johnson, a global deal that received clearance overseas, including in the United Kingdom where it was subject to a licensing arrangement. An equivalent remedy was not available in New Zealand and clearance was declined, leading to Johnson & Johnson discontinuing some of its products in New Zealand.
• Digital platform mergers where competition issues tend to be about access to a platform, data, or information. Such issues often do not lend themselves to being solved by selling assets or shares. For example, some commentators consider that the Sky/Vodafone merger would have been cleared had the Commission been able to accept behavioural undertakings. ^[26]

However, the fact that the Commission is not required to consider offers of behavioural undertakings as part of its clearance and authorisation procedure, likely reduces the Commission’s costs and the duration of these proceedings. 

In Australia, the ACCC can accept behavioural undertakings in a merger. These are “…remedies designed to modify or constrain the behaviour of the merged firms, by mandating the price, quality or output of the merged firm’s goods or services, or otherwise modifying their dealings with other firms” ^[27]. These help address the ACCC’s competition concerns for a period, but they tend not to be accepted on a permanent basis “due to the inherent risk to competition combined with the monitoring and enforcement burden such remedies create”.  The Australian Amendment Bill has made some technical modifications to the ACCC’s process for considering behavioural undertakings.

If the Commerce Act was amended to allow the Commission to accept behavioural undertakings, it would be necessary to consider a range of operational and funding matters for how the regime would operate. For example, when the Commission may accept and vary a behavioural undertaking, enforcement tools, and funding arrangements. 

We are considering the following options, along with any options suggested by submitters:  

• Status quo – Retaining the prohibition on accepting behavioural undertakings in s 69A and s 74A of the Commerce Act could keep the merger regime simpler since the Commission only needs to consider structural undertakings in assessing mergers.
• Amend Commerce Act to allow the Commission to accept behavioural undertakings – As mentioned above, this could allow potential beneficial mergers to be cleared, resulting in efficiencies and other benefits for consumers. We consider it would be most useful in cases where there are no structural remedies available, and when monitoring compliance with the undertaking would not be costly or complex.
• Amending the Commerce Act to allow the Commission to impose conditions (including accepting behavioural undertakings) as part of an authorisation proceeding only – This would limit the behavioural conditions to focus on achieving net public benefits in circumstances where the merger is likely to lessen competition. 

Questions for consultation

14. Should the Commission be able to accept behavioural undertakings under the Commerce Act to address concerns with mergers? If so, in what circumstances?

Footnotes

[7] Mergers and acquisition guidelines (May 2022). 

Merging or acquiring a company(external link) — Commerce Commission

[8] Pickford, Michael (2011). Merger regulation in New Zealand: Did the change from dominance to a substantial lessening of competition make a difference? 19 Competition and Consumer Law Journal 2. See also Michael Pickford, A comparison of merger regulation in New Zealand and the United States (2012). 20 Competition and Consumer Law Journal 95.

[9] Csorgo, Lilla and Harshal Chitale. (2017). Targeted ex post evaluations in a data-poor world, New Zealand Economic Papers, Vol 51, No 2, pages 136-147. The Commission relied on new entry in 17 markets of the 40 evaluated, and entry occurred in 12 of those. Some of the reasons for why entry did not occur included changes in source market conditions for imports and investment choices (opportunity cost) for potential entrants.

[10] Ex-post review of NZCC merger decision (2023/24)(external link) — Commerce Commission

[11] Air New Zealand Ltd and Qantas Airways Ltd v Commerce Commission and ORS HC AK CIV 2003- 404-6590 (May 2004).

[12] Refer footnote 6.

[13] Commerce Commission v New Zealand Bus Ltd. (2006). 11 TCLR 679, 8 NZBLC 101,774 (HC)

[14] Vero Insurance New Zealand Limited; Tower Limited (2018)(external link) — Commerce Commission

[15] Exposure Draft Explanatory Materials - Treasury Laws Amendment Bill 2024: Acquisitions, 2.5

[16] Ibid, 4.33.

[17] Merger Control Laws and Regulations Report (2024) Singapore(external link) — International Comparative Legal Guide

[18] Mark Berry and Anne Riley, Beware the new business acquisitions provisions in the Commerce Amendment Act 1990, (1991) 21 Victoria University Wellington Law Review.

[19] Competition and Consumer Act 2010. (2010). s 50(external link) — Federal Register of Legislation

[20] Ref 2.27.

[21] Refer Australian Amendment Bill, clause 51ABN Acquisition of assets, page 25.

[22] Case register(external link) — Commerce Commission

[23] Competition and Markets Authority (2021). Interim measures in merger investigations [PDF, 483KB](external link) — publishing.service.gov.uk

[24] Under the Hart-Scott-Rodino Act, the FTC and DoJ review most of the proposed transactions that affect commerce in the United States and are over a certain size, and either agency can take legal action to block deals that it believes would “substantially lessen competition.” Although there are some exemptions, for the most part current law requires companies to report any deal that is valued at more than $101 million to the agencies so they can be reviewed.

Merger review(external link) — Federal Trade Commission

[25] International Competition Network Merger Working Group (2005) Merger Remedies Review Project: Report for the fourth ICN annual conference.

[26] S Keene, Russell McVeagh, LEANZ Seminar Lessons from Vodafone/Sky – Do we have the right merger control settings for a small economy? 21 November 2017.

[27] Merger guidelines (2017)(external link) — ACCC

< Chapter 1: Overview and context of the review | Chapter 3: Anti-competitive conduct >