Hon Paul Swain
16 August, 2000 Speech Notes
Address to Institute of Directors – Embargoed to presentation at 7.15am – 16 August - Auckland

One of my key goals as Commerce Minister is to improve New Zealand confidence in investing in local business. We're looking at a number of ways of achieving that – the ones I'd like to talk about today are the Commerce Act changes, Takeovers Code and Insider Trading.

Commerce Act Changes
Earlier this month we referred proposed amendments to the Commerce Act to the Commerce Select committee. The Act is being strengthened to give the Commerce Commission more teeth and to bring New Zealand in line with its key trading partner Australia.

The objective is to ensure that competition law is robust, and that the benefits of competition can be enjoyed by all classes of consumers.

To bring us into line with Australia we will amend Section 36 of the Act which deals with anti-competitive behaviour by dominant firms in a market.

We are replacing the phrase “dominance” with the lower threshold of “a substantial degree of power in a market”; and replacing “use” with “take advantage of". This means the section will apply to a greater number of firms and markets.

The merger and acquisition restriction in section 47 is also to be refocussed to align with Australia. That will restrict mergers that have the effect of substantially lessening competition and will allow the High Court and Commerce Commission to take into account the full range of anti-competitive mergers.

Other matters in the package include:
 Increasing the penalties for offences by body corporates from the existing maximum of $5 million up to $10 million;
 Removing the requirement for the Commerce Commission to give an undertaking as to damages when seeking interim injunctions;
 Removing a provision in the existing bill that may have inadvertently prohibited some franchising and other similar pro-competitive agreements;
 Enabling the Commerce Commission to issue cease and desist orders to direct lawbreakers to comply with the Act in a timely manner.

These will all act as deterrents to companies thinking of acting anti-competitively.

The supplementary order paper and Commerce Amendment Bill are to be passed this year. Submissions on the SOP can be made to the Commerce Select Committee and I encourage you to take part in this process.

I recognise too that these changes may create some uncertainty for business at first, but aligning our law with Australia's is designed to lessen that uncertainty. I have invited the Commerce Commission to prepare new merger guidelines to help business understand how the new provisions will be applied.

Takeovers Code
The government intends to promote a healthy investment environment in New Zealand. There are a number of factors contributing to the under-performance of the New Zealand sharemarket - one of these factors is, in the government's view, the regulatory environment within which it operates.

We are currently doing a number of things to improve this regulatory environment. In particular, we are planning to introduce a takeovers code, strengthen our insider trading regime and review the Securities Regulations 1983.

The implementation of a takeovers code will ensure that small investors get fair treatment in takeover situations and will improve overseas perceptions of our market. This will go some way towards improving investor confidence.

The 1995 Takeovers Code has been returned to the Takeovers Panel so that the Code can be considered in light of changes in the New Zealand market over the last five years and overseas experience with takeovers regulation.

The 1995 Code recommended a practical compromise between the competing interests of small investors and large institutions. It allowed for rules to be waived by way of agreement at a meeting of shareholders. In this way the code provided a flexible and somewhat less onerous approach than some overseas regimes.

The code provided an equal pricing provision for any offers which would result in an interest above 20%, and required any such offer to extend to 50% of voting securities.

A major advantage of the equal pricing provision is that small shareholders participate in takeover bids. Another potential advantage of a takeovers code is that it would require anyone seeking to extend their holding above a threshold to take a controlling share of the company. This effectively avoids conflicts between two or more controlling interests.

The Takeovers Panel has sought public feedback on technical aspects of the Takeovers Code. I expect the Panel will report back to me with a revised Code this month.

Some legislative changes will need to be made in order to allow the Securities Commission staff to provide support and administration services to the Panel.

It is also important that there is a transitional phase before the code comes into effect. This will, amongst other things, let companies amend their constitutions to conform to the requirements of the code.

It is expected that the legislation will be in place for the code to come into effect by mid 2001.

NZSE and ASE merger talks
You may have heard this week that the New Zealand and Australian stock exchanges have begun merger discussions.

That is something that we welcome and have said we will help facilitate. There are advantages in a merger including greater access to capital, lower compliance cost and less uncertainty for business.

As I said, by and large there are a lot of similarities between the Australian and proposed New Zealand regime.

We are fortunate to have restarted work on our code given the news of a possible merger of stock exchanges. This is a logical step, given the harmonisation of our commerce laws as I mentioned earlier.

Insider Trading
An adequate and effective insider-trading regime plays an important role in determining how New Zealand and overseas investors perceive the New Zealand market. Ineffective law may undermine confidence in the market.

Since our insider trading laws were introduced in 1988 no one has been found liable for insider trading.

We do not know how pervasive insider trading is. In order to be able to say with certainty that our insider trading system is effective, we should have adequate systems to detect where insider trading is happening.

We also need to have systems for effective enforcement. Currently enforcement is limited to private civil actions.

We want to look at options for strengthening private enforcement to make it easier for individuals to bring legal action and reduce costs. In particular:
 Improving the systems to detect insider trading activity, which could include formalising the relationship between the NZSE and the Securities Commission.
 Improving enforcement of the current insider trading law, by improving the private enforcement regime and enabling the Commission to undertake civil enforcement actions.
 Implementing disclosure provisions that will make insider trading activity more detectable.
 The possibility of introducing criminal penalties;
 Improvements to the definition of 'insider' and other provisions of the Securities Amendment Act 1988. This would provide greater clarity in the interpretation of the Act.

I am aware that there is also some concern about the adequacy of the legislative provisions dealing with insider trading and I will be seeking your views on this.

A public discussion document setting out options for dealing with these issues will be released by the end of this month. I hope to take some proposals to Cabinet by the end of February 2001.

Conclusion
It is vitally important that we get this investment environment right. For too long issues such as Commerce Act reform, Takeovers Code and insider trading laws were put in the too hard basket.

This government's objective is to promote competition in markets for the long-term benefit of consumers – I believe these moves will go some way towards that. I look forward to your comments.

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