Wednesday, 26 June 2019

It's happened again

It's easily done. A company decides to get out of a line of business, and sells the operation to someone else. A business decides to flag away retailing and stick to wholesaling, and sets up an exclusive retail arrangement with a distributor. A company buys another company in the same line of trade. All perfectly normal and (barring an acquisition of a competitor that would create substantial market power for the new combo) perfectly fine from a competition policy perspective.

But then the parties "jump the gun", as the jargon puts it. They start tidying their affairs - mutually agreeing things - before the divestment / distribution agreement / merger has actually gone into effect. That's where they risk falling foul of s27 of the Commerce Act (arrangements lessening competition) or, worse, s30 (price fixing). And things can really go pear shaped if the proposed divestment / agreement / merger falls over, as it can easily do. Now you can find yourself swinging in the wind when the Commerce Commission comes calling and wants to know why you're colluding with what is still an independent competitor.

The latest to find this out the hard way ($825K fine and $100K costs contribution) is Milfos, which among other things sells milk quality sensors and dairy herd management software (Commerce Commission press release here, High Court judgement here on the Commission's site). A proposed exclusive distribution agreement eventually turned to custard but the two companies involved went on coordinating the price of the milk sensors in the interim anyway.

It's not yet a full-blown Thing, but this has become one of those areas where a bit of probably not explicitly malign carelessness can now walk you into a heap of trouble. Nobody wants to be jumping at every imaginable legal risk, but it's now clearly advisable to add something else to the checklist when you're thinking of divestment or acquisition. If you'd like some more background info on what to look out for, have a read of what happened in a recent Australian case ('Too harsh?') which was cited in this latest Milfos episode, or on the wider general topic of gun jumping you might like 'Jumping the gun'.

The other thing that's started to pop up more in mergers is failure to get clearance from the Commission for potentially problematic ones. We went years without seeing the Commission sally forth and challenge a merger, and then there was a sudden blizzard of them in 2018 ('They're like buses'). Fortunately, most of them (listed here) have gone away with no further action, and to date only one has been pinged, and deservedly so ('Naïve? Casual? What?'). Two are still live.

I say "fortunately" because I like our system of voluntary notification of mergers. Most other developed countries have some sort of compulsory merger notification regime: we don't, and I like it that way. I wouldn't want it to fall over, which it assuredly would if it's discovered that merger parties are routinely trying to do an end run around it.  As a small economy,  we're already got at least our fair share of micromanagement superstructure: we don't need another dead hand process on top.

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