Commission settlement with British Am Tobacco

Commission agrees out of court settlement with British American Tobacco – includes brand divestment

The Commerce Commission has settled out of court with British American Tobacco Holdings (New Zealand) Limited (BAT) for alleged breach of the former section 47 of the Commerce Act. The settlement includes divestment of certain international cigarette brands with an estimated net present value of $10 million, plus a contribution of $350,000 to the Commission’s costs.

The Commission alleged that following the global merger in 1999 between BAT and Rothmans International BV and their subsidiaries, the New Zealand companies acquired a dominant position in the New Zealand markets for tobacco products and pre-rolled cigarettes. The Commission issued proceedings in July 2001 seeking orders for divestment of shares or cigarette brands and pecuniary penalty.

Commission Chair John Belgrave said the settlement resolves a case that raised some important issues under the Commerce Act, not least of which was the application of the Act to off-shore business acquisitions.

“The Commission alleged the relevant transaction was a merger agreement between the two New Zealand subsidiary companies. BAT argued that the transaction was no more than a reconstruction of the companies already under common control following the international merger.”

In settling, BAT continued to deny liability under the Commerce Act.

“The proceedings raised issues relating to whether the international transactions were covered by the jurisdiction of the Commerce Act,” said Mr Belgrave.

Mr Belgrave said the case raised substantial issues as to the interpretation of the former sections 47 and 48 of the Act, the effect of interconnection and, more significantly, the application of section 4 of the Act relating to the extent of the Commission’s ability to enforce jurisdiction over international transactions, as was referred to in the judgment of Williams J (21 December 2001) on a strike out application by BAT: [73] The final matter is to consider what effect s4 has on the transaction under review. Section 4 (1)(3) extends the operation of s47 to the foreign acquisition of shares or assets in New Zealand businesses to the extent the acquisition affects New Zealand markets. Any affecting suffices. That plainly catches the Transaction Agreement and the 31 May, 20 July and 26 August Deeds to the extent that they affected the New Zealand tobacco products markets as, it is clear, they did. The Commerce Act 1986 therefore extends to those transactions although whether, in default of any New Zealand equivalent of the Australian s50A (Trade Practices Act), the Commission can do anything effective about it remains a matter of doubt.”

A copy of the judgment is available from the Commission. Contact Jackie Maitland (refer details below).

The agreed settlement includes: the defendants divesting themselves of certain cigarette brands namely Sportsman, Cameo, Pacific, Topaz, Northpole, Matinee and the Three Castles tobacco brand; the party acquiring the brands, if required, to be granted the right to manufacture the divested brands on normal commercial terms for a period not exceeding five years; the party acquiring the brand will, if required to, have access to all requisite retail furniture in New Zealand for a period not exceeding 12 months; and the defendants to pay the Commission a contribution to its costs of $350,000.00 (plus GST if any).

Background

Section 4 Application of Act to conduct outside New Zealand

This Act extends to the engaging in conduct outside New Zealand by any person resident or carrying on business in New Zealand to the extent that such conduct affects a market in New Zealand…

(3) Without limiting subsection (1) of this section, section 47 of the Act extends to the acquisition outside New Zealand by a person (whether or not the person is resident or carries on business in New Zealand), of the assets of a business or shares to the extent that the acquisition affects a market in New Zealand.

Section 47 (In the form in which it was prior to re-enactment on 26/05/01) Certain acquisitions prohibited

No person shall acquire assets of a business or shares if, as a result of the acquisition,- That person or another person would be, or would be likely to be, in a dominant position in a market; or That person’s or another person’s dominant position in a market would be, or would be likely to be, strengthened. For the purposes of this section and section 48 of this Act, where two or more persons are interconnected or associated and together are in a dominant position in a market, each of them is deemed to be in a dominant position in that market. For the purposes of this section and section 48 of this Act, a person is associated with another person if that person is able, whether directly or indirectly, to exert a substantial degree of influence over the activities of the other. A person is not able to exert a substantial degree of influence over the activities of another person for the purposes of subsection (3) of this section, by reason only of the fact that – Those persons are in competition in the same market; or One of them supplies goods or services to the other.

Section 48 (in the form in which it was prior to repeal on 26/05/01) Bare transfer of market dominance excluded

Nothing in section 47 of this Act applies to the acquisition of assets of a business or shares if – (a) Before the acquisition either – The person acquiring the assets or shares; or The business the assets of which are acquired or the body corporate in which the shares are acquired, as the case may be, -

already had a dominant position in a market; and

(b) The acquisition has not resulted or will not result in the strengthening of that dominant position.

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