Commission Guidance On Business Acquisitions

Media Release

Issued 28 May 2001/61

Commission releases guidance on business acquisitions

The Commerce Commission is circulating a Practice Note to explain its approach to the changed threshold for business acquisitions under the amendments to section 47 of the Commerce Act.

The Government has amended the Act to prohibit business acquisitions that substantially lessen competition in any market. Previously the Act prohibited business acquisitions that resulted in dominance being acquired or strengthened in any market.

Under the amendment, the Commission will have to look both at what market power the merged entity would have in its own right, and also at what would happen to competition amongst the remaining firms if a competitor were removed. In either case the issue would be the same: would the merger, by removing a competitor, substantially lessen competition? Under the previous law, the Commission could only consider if a merged entity would, on its own, be dominant in a market.

The Practice Note builds upon and replaces the Business Acquisitions Guidelines published previously by the Commission, and takes account of overseas experience in applying the substantial lessening of competition threshold to mergers. New clearance and authorisation application forms are also available.

The Commission anticipates its approach will evolve as it considers the application of the new section 47 to the particular circumstances of each case before it.

"We will review our approach and update the Business Acquisition Guidelines after we have gained experience in applying the new threshold," Mr Belgrave said. "We welcome comments on our approach and will consider them in the review.

"We want to make the transition to the new regime as smooth as possible to keep compliance costs down for businesses and their customers, and to minimise uncertainty.

"We are distributing 300 copies of our Practice Note to business people, lawyers, economists, business advisors, academics and government organisations."

As a consequence of the change in the business acquisition threshold, the Commission has adjusted what are called the "safe harbours". These specify the levels of post-acquisition market shares below which the merged entity is unlikely to raise competition concerns. A comparison between the new safe harbours and the previous safe harbours is shown in the table below.

New safe harbours Previous safe harbours the merged entity would have 40 percent or less of the relevant market, unless there is a "concentrated market" in a "concentrated market" (where 3 firms total 70 percent or more of the relevant market) then the merged entity must have no more than 20 percent of the market the merged entity would have 40 percent or less of the relevant market; or the merged entity would have 60 percent or less of the market and at least one competitor would have at least 15 percent of the market.

"The new safe harbours are similar to those used in Australia, but have been adapted to take account of the unique characteristics of many New Zealand markets," Mr Belgrave said.

Mr Belgrave stressed that a business acquisition falling outside the new or previous safe harbours does not mean that the Commission necessarily believed that the acquisition is prohibited by the Act. Rather, the approach is that one falling within the safe harbours is unlikely to breach the Act.

"There has been some confusion about safe harbours," Mr Belgrave said. "If an acquisition is outside the safe harbours, then we ask further questions about the acquisition in order to test whether there is likely to be a substantial lessening of competition in a market. It does not mean that we believe that the acquisition breaches the Act."

Applications for clearance or authorisation registered under the previous regime, that is until and including Friday May 25, will be investigated using the dominance test. Applications registered today May 28 and in the future will be investigated using the substantial lessening test.

Copies Commission's Practice Note No. 4, and of Business Acquisitions Guidelines currently used, are available from the Commission's website, www.comcom.govt.nz, and from reception at its Wellington office, level 7 Landcorp House, 101 Lambton Quay.

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