Tuesday, 24 May 2022

When there's a will ...

You don't often see competition reform feature in the Budget, but we did last week.

"We are ... committed to boosting competition in the New Zealand’s grocery sector to ensure people pay fair prices for food and other basics", Grant Robertson said in the Budget speech. "Today, we are introducing legislation that will remove barriers to new retailers entering the market. Specifically, this will prohibit the restrictive covenants on land that major grocery retailers use to limit site availability for competitors. Such covenants will be prohibited immediately once the Bill comes into effect, and I anticipate that competitors can begin to consider new sites shortly thereafter".

The Commerce (Grocery Sector Covenants) Amendment Bill is here. It defines Foodstuffs North Island Limited, Foodstuffs South Island Limited, and Woolworths New Zealand Limited as 'designated grocery retailers', and creates a new s28A of the Commerce Act whereby "Certain grocery-related covenants are treated as prohibited and unenforceable" by deeming them as "having the purpose, or as having or being likely to have the effect, of substantially lessening competition in the relevant market", and so pinging them under the existing s27 and s28 of the Act. s27 we all know and love - contracts, arrangements and understandings substantially lessening competition - and s28 is its equivalent for anti-competitive covenants.

In its grocery market study (summary here, whole shebang here), the Commerce Commission had identified "more than 90 restrictive covenants entered into by the major grocery retailers, the majority of which are still active" (6.77) and "over 100 exclusivity covenants in leases entered into by the major grocery retailers, the majority of which are still active" (6.80). Clearly, this isn't a small issue, and it may be rather bigger than the Commission thought. On its helpfully proactive 'Market study reporting dashboard', Foodstuffs North Island says that it alone has removed restrictive covenants from 78 out of 135 affected properties (the outstanding ones are on land it doesn't own any more, and they are approaching the current owners to bop those off, too).

So it's good news that the government has moved quickly to implement the Commission's recommendations 2A, 'Prohibit restrictive covenants that relate to the development of retail grocery stores' (discussed at 9.68 - 9.72) and 2B, 'Prohibit exclusive covenants in leases that relate to the operation of retail grocery stores' (9.73 - 9.79). Their impact may be overstated - my guess is that planning laws restricting the supply of land available for supermarkets may be more important, as may planners' inclination to protect competitors rather than to protect the competitive process (hence the Commission's 'Recommendation 1F: Retail grocery store development should not be able to be declined on the basis of adverse retail distribution effects on existing commercial centres') - and the supermarkets look to have been dismantling them anyway, but it's progress. 

It's helpful that the political pressure to 'do something' about rising prices in the shops - a key focus of the Budget - helped bring about a quick competition policy response, and you'll excuse me if I snarkily add, 'for once', given the tortuous processes in getting s36 reformed, cartels criminalised, and indeed setting up the market study regime itself. When there's a will, there's a way, as they say. Moving this quickly, incidentally, means that you've only got a very brief window for submissions: Friday, in fact. The submission link is here.

But I hope that the "it's the supermarkets wot done it" line about inflation doesn't get taken much further. In April the Commerce Minister, Dr David Clark, commented on the 7.6% rise in New Zealand food prices over the year to March, and said that "The March increase is above general inflation figures and highlights the role the grocery sector is playing in driving up prices. Rising food prices is a global issue. Omicron, ongoing disruptions to global supply chains and Russia’s invasion of Ukraine is putting pressure on prices in every country, but that is exacerbated here by the lack of competition at the checkout".

Hmmm. In the US, annual food price inflation was 8.8% in March; in Canada it was 9.7%; in the UK it was 6.7% in April. Overwhelmingly, inflation is not a matter of grocery industry structure, but a result of those other global factors that the Minister mentioned: he might have thrown in monetary policy, here and overseas, being left too stimulatory for too long after the initial Covid hit. Blaming the supermarkets, if only in part, for current food price inflation may play well to the galleries, but it's not a strong argument. If, as he said at the time, he had "not ruled out going further than the options that the Commission tabled in its final report", fair enough: quite a few folks (but not me) reckon the Commission didn't go far enough. But I wouldn't take that step on the back of a not very convincing line of attack on inflation.

Wednesday, 27 April 2022

First guest post - Ben Hamlin on s47 penalties

I'm really pleased to announce the blog's first guest post - from Ben Hamlin, Barrister (Ben@hamlin.law). Our shiny new Commerce Amendment Act 2022 has got most attention for its (welcome) rewrite of s36 along Australian lines, but as Ben explains, there are other provisions which you need to be on top of. Ben's written about the increased penalties which will apply from May 5 to parties who breach s47 (anti-competitive mergers or acquisitions). As it happens, the Commerce Commission has been more active in recent years in opening s47 inquiries: Ben reviews the history and draws the lessons. Enjoy!

***

Increasing penalties for anti-competitive mergers

Merger activity is booming, so practitioners in that field might be forgiven if they had overlooked the forthcoming increase in penalties for mergers that contravene section 47 of the Commerce Act.

The increase is worth noting, but also provides an opportunity to reflect on merger enforcement in recent years.

The potential penalties for mergers are on the up

The first substantive provisions of the Commerce Amendment Act 2022 come into force on 5 May 2022, including an increase in the corporate financial penalties associated with mergers that substantially lessen competition. From 5 May onward, the maximum penalty will be the greater of:

(i)                  $10 million:

(ii)                 either,—

(A) if it can be readily ascertained and if the court is satisfied that the contravention occurred in the course of producing a commercial gain, 3 times the value of any commercial gain resulting from the contravention; or

(B) if the commercial gain cannot readily be ascertained, 10% of the turnover of the person and all its interconnected bodies corporate (if any) in each accounting period in which the contravention occurred.

As is often the way, the change in merger penalties barely rated a mention in the passage of the Commerce Amendment Act 2022. At the third reading Hon Andrew Little, speaking in the place of Hon David Clark, noted:[i]

Another important way that the Act protects the competitive process is through its prohibition against anti-competitive mergers or acquisitions. For this prohibition to be effective, it needs to be able to deter entities that may benefit significantly, in commercial terms, from the merger. The bill ensures this can happen by increasing the monetary penalty the courts can impose if entities are found to have contravened the prohibition.

This change brings the penalty into line with contraventions of Part 2 of the Act, and broadly into line with the penalties for a breach of the equivalent provision in Australia.[ii] The increase from $5,000,000 to $10,000,000 is also broadly in line with inflation since the penalty was set in 1990.[iii]   

So far, very orthodox: deterrence through ensuring that the potential benefits are outweighed by the potential penalties.

Does an increase in non-notified merger investigations suggests inadequate deterrence?

An interesting further justification was provided in the Cabinet paper approving the decision to increase the penalty. The Courts have cautioned against placing much weight on cabinet papers when interpreting legislation.[iv] Any judges reading may wish to avert their eyes.

The paper noted that: [v]

“Since the beginning of 2018, the Commerce Commission has undertaken investigations into eight possibly anti-competitive mergers for which clearance or authorisation was not sought. This suggests that the current penalties for anticompetitive mergers are not acting as a sufficient deterrent.”

Does it? As the readers of this blog will be aware, the penalty is only part of the optimal deterrence equation. The probability of detection and prosecution is equally, if not more, important.

The Commission’s merger enforcement 2010/11 to present

The Commission’s published merger statistics show that there was indeed a real spike in s47 investigations.[vi] In the seven years between 2010/11 and 2016/17 there were a total of 11 section 47 investigations decided. Yet in the two years 2017/2018 and 2018/2019 a further 11 section 47 investigations were decided.

Financial year

 10/11

 11/12

 12/13

13/14

14/15

15/16

16/17

17/18

18/19

19/20

20/21

21/22 HY

Total

Clearances (s 66)

 

 

 

 

 

 

 

 

 

Total applications decided

10

10

8

12

14

12

7

9

11

9

8

10

120

Unconditional clearance

8

8

6

9

11

9

3

5

8

9

6

6

88

Clearance with divestment

2

1

0

2

1

2

0

1

2

0

2

1

14

Declined

0

1

1

0

2

1

3

2

0

0

0

0

10

Withdrawn

0

0

1

1

0

0

1

1

1

0

0

3

8

Section 47 investigations

 

 

 

 

 

 

 

 

 

Number decided

1

3

2

1

2

1

1

7

4

1

2

0

25

Table 1 Source: Commerce Commission Merger Determination and Enforcement Statistics - December 2021

What could have caused the jump? It is difficult to distinguish correlation and causation. But many competition law tragics will remember a heady period where the Commission blocked five transactions in 13 months: Sky/Vodafone February in 2017, Aon/FPIS in March 2017, the NZME/Fairfax Authorisation was declined in May 2017, Vero/Tower in July 2017, and Trade Me/Limelight in March 2018. Appeals were filed against three of the decisions (Sky/Vodafone, NZME/Fairfax, Vero/Tower), but two were withdrawn and the NZME/Fairfax appeal proceeded unsuccessfully.

It is possible that blocking a number of high profile mergers in quick succession caused some parties to avoid clearance. In any event, the increase in section 47 investigations did not escape the Commission’s attention. In August 2018, the Commission announced its priorities for 2018/2019, and ‘non-notified mergers’ was among them. The Commission’s then Chair was quoted as saying:[vii]

“New Zealand is one of a few jurisdictions with a voluntary merger clearance regime and the Commission is seeing an increase in non-notified mergers. Over the past 2 years we have opened five investigations into non-notified mergers. The success of a voluntary regime relies on the credible threat of enforcement proceedings so we will act quickly in these cases to prevent adverse impacts on competition in markets.”

Opening investigations is, of course, the easiest part of the process, and does not mean any competition issue exists. Competition investigations can start, stop, or spend a long time in between, and are often a black box to the outside world. Up until July 2017, little information appears to have been published unless a section 47 investigation resulted in litigation.

Fortunately, in July 2017, the Commission had announced that it intended publish a record of section 47 investigations on its website, to ensure the public and market were aware of investigations into potentially anti-competitive transactions.[viii] As a result, the Commission’s case register records outcomes for 11 section 47 investigations since the beginning of 2018.

A breakdown of them is instructive:

Without going into the merits of any of these individual cases, the outcomes overall suggest that the Commission was right to have some concerns but appears to have been able to address them. While headlines tend to focus on declines and penalty cases, divestures can equally represent a significant outcome for competition. In some cases, such as Platinum Equity/OfficeMax litigation, or the recent Ampol/Z Energy clearance, the entire existing New Zealand business is divested. It is also clear that some deals are ultimately stopped because of competition concerns, which can see investigations halted or clearance applications withdrawn.[ix]

This burst of section 47 activity may not be permanent. The Commission’s register indicates that while three section 47 investigations were commenced in mid-2020, there have been none commenced since August 2020 despite a veritable boom in merger activity. Instead, the 2021/2022 year appears to be one for the books in terms of merger clearances, with 15 applications decided in the first three quarters.

One possible explanation for this is that the Commission’s announced focus on non-notified mergers, followed up with investigations, has resulted in the pendulum swinging back towards parties seeking clearance. The increased probability of detection may have been what was missing, rather than the size of the penalties.

Conclusions

One busy year is not enough to draw firm conclusions, and we are working with small numbers in any event. But I would suggest three conclusions can be drawn, for what they are worth, from the data we have.

First, the Commission’s decision to regularly publish data on its merger work, and the decision to make section 47 information public on its register, assists in analysis and understanding of the Commission’s work in context. 10 years ago, a practitioner would need to rely on insider knowledge, intuition, or a lengthy series of OIA requests, to attempt to understand what was going on.

Second, the Minister was right that there was an increase in section 47 investigations, but it does not necessarily follow that a penalty increase was needed for that reason alone. If in the future there is a decrease in voluntary notifications, perhaps because of the cluster of blocked transactions, then the appropriate response might be more investigation. That may require resourcing and appropriate enforcement tools, rather than another increase in penalties.

Third, the Commission’s performance should be assessed in context. The Commission has not declined a clearance since Trade Me/Limelight, more than four years ago. But that does not mean that the Commission has not been busy enforcing New Zealand’s merger laws in other ways. Anyone viewing New Zealand as a soft touch could be in for a surprise.

And from 5 May, it is potentially a much larger one.

Ben Hamlin, Barrister.

Disclosure: Ben Hamlin was Deputy General Counsel, Competition, later Chief Legal Adviser, Competition, at the Commerce Commission between February 2017 and March 2022. His views are his own.



[i] Commerce Amendment Bill, Third Reading, 17 March 2022.

[ii] See section 76 of the Competition and Consumer Act 2010 (Cth).

[iii]  The RBNZ Inflation Calculator indicates that a basket of goods worth $5 in Q2 1990, when the Commerce Amendment Act 1990 was passed, would be worth $9.60 in Q4 2021, the most recent available data.

[iv] See for example, A Labour Inspector v Southern Taxis Ltd [2021] NZCA 705 at [51].

[v]  Cabinet Paper “Review of Section 36 of the Commerce Act and Other Matters: Policy Decisions” (18 February 2020) at [56], available online here.

[vi] Merger determinations and enforcement statistics – December 2021, available here.

[vii] Commerce Commission “Commission releases 2018/19 priorities” (press release, 9 August 2018) available online here.

[viii] Dr Mark Berry, “Opening remarks” (Competition Matters 2017, Wellington, 21 July 2017).

[ix] For example, the recent Cargotec/Konecranes and Aon/Willis Towers Watson mergers were both cancelled because of competition concerns.