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Brief Counsel

Select committee fine tunes new cartel regime – and adds shipping

22 May 2013

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The changes the select committee is recommending to the Commerce (Cartels and Other Matters) Amendment Bill are mostly small and should make the new cartel regime more predictable.

The exception is the removal of international shipping’s exemption from the Commerce Act, which is strongly opposed by the international shipping industry.

Key changes at a glance

  • A nine month transitional period will be provided for existing contracts and arrangements which may contain cartel provisions during which the Commerce Commission may not seek pecuniary penalties.  This is on top of the two year delay before criminal sanctions for cartel conduct come into force.
  • The Commission will not be able to decline to clear a collaborative activity which meets certain criteria.  However, it will be able to revoke a clearance if there is a material change of circumstances.
  • International shipping will be covered by the Commerce Act 1986 and by the new cartel regime but not aviation, which will continue to be regulated by the Civil Aviation Act 1990 (which is itself under review). 
  • The Commission retains the right to seek a court order where it is concerned an overseas acquisition of a “controlling interest” in a New Zealand company will have anti-competitive effects.  However the threshold for what constitutes a “controlling interest” has been reduced from 50% to 20%.  

Transitional window for existing arrangements

We think that the nine month grace period before pecuniary penalties apply is a sensible approach.  It will give companies more time to review their affairs and existing arrangements before being exposed to the risk of proceedings under the new law. The existing law will continue to apply to those arrangements during this time.

Changes to the clearance regime

Similar to the current merger clearance process, an entity will be able to apply to the Commission to test whether a proposed contract or arrangement contains a prohibited cartel provision. 

Some types of arrangements containing cartel features will be permitted where they are within the scope of the “collaborative activity” exception and will not otherwise lessen competition.  The Committee recommends two small changes to this regime.

  • The Bill is amended to require that the Commission must clear a collaborative activity arrangement which contains (or potentially contains) a cartel provision if it is satisfied the arrangement meets the listed criteria.  Previously, the Commission had a wider discretion to decline clearance.  We think this change is desirable as it provides more certainty of outcome.  
  • If granted, a clearance immunises the parties from challenge under the Commerce Act.  But the immunity will no longer be unlimited as the Bill now gives the Commission the ability to revoke clearances if there is a material change of circumstances.  This is aligned with the Commission’s current powers to revoke an authorisation, although it will likely be several years before the Commission first invokes this power – and, therefore, before we get guidance on the degree of materiality required.

Other changes to the new cartel regime

  • Exemption for maximum resale prices: the Bill now includes an express exemption from the prohibition on cartel conduct for suppliers stipulating maximum retail prices.  This is a welcome change and brings the New Zealand regime into line with Australia. 
  • Franchise arrangements: the Committee has responded to concerns raised by franchise trade associations, and others, and has invited the Commission to develop specific guidelines for the application of the Bill to franchises.  Again, this is a welcome development and, once published, the guidelines should provide greater certainty to business.
  • Bid rigging is no longer a standalone category of cartel conduct: references to “bid rigging” have been deleted from the Bill to reduce confusion.  The Committee thinks (correctly, in our view) this type of behaviour is adequately covered by other categories of cartel conduct such as price fixing and market allocating.

International shipping in, civil aviation out

Following the Productivity Commission’s report last year arising from its inquiry into international freight transport services, the Committee was asked by the Cabinet to consider removing the exemptions currently applying to international shipping and civil aviation. 

The Committee called for further submissions on these issues, and has now recommended that international shipping be covered by the Commerce Act after a two year transitional period.  Many of the importers and exporters who submitted in favour of a change will view this as a positive development.  

In contrast, the Committee recommends that international air services remain in their existing regulatory framework and outside the Commerce Act pending the completion of the review into the Civil Aviation Act 1990.

Controlling interest test amended

Reduction of the “controlling interest” threshold for overseas acquisitions to 20% is more conservative than we would have expected.  Although 20% is aligned with the fundamental rule in the Takeovers Code, the Commission has generally taken the view that an under 30% shareholding is only likely to give rise to substantial influence and therefore potential competition concerns if there are other factors at play. 

Setting the bar at 20% may broaden the types of overseas transaction which come within the Commission’s scrutiny.  If that scrutiny reveals New Zealand competition concerns then the Commission may seek a court order to stop the firm trading in New Zealand or to force its divestiture of shares or assets. 

What next?

The Bill will return to Parliament for its second reading in fairly short order.  The timeline from there is less certain.  It is likely to be late 2013 (and more likely early to mid 2014) before the Bill passes its third reading and is made into law. 

This gives you plenty of time to consider how the new law may affect you and to set your house in order.  Below are some steps you might consider.

  • Identify all relationships with competitors throughout your company or group.
  • Assess those relationships for “cartel risks” (seeking professional advice if there is any doubt).
  • Review your policies around interactions with competitors.
  • Check the company’s representatives on any trade associations (by their nature, usually made up of competitors) understand that the cartel prohibitions apply to the association and its members.

Chapman Tripp’s earlier commentaries on the Bill are available here and here.
 
Our thanks to Colin Fife for writing this Brief Counsel.

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