Why New Zealand competition law doesn’t need behavioural undertakings
September 5, 2016
When a merger or acquisition raises competition law concerns, one of the things the parties can do to get the Commerce Commission across the line is to offer to divest part of the merged business. This is known as a ‘structural’ undertaking. It is, essentially, a commitment to sell off certain assets.
This is a device that is specifically incorporated into the Commerce Act. What the Commerce Act does not include ‘behavioural’ undertakings – essentially a promise that the merged entity will or will not undertake certain conduct.
There has been media comment recently suggesting that the omission of behavioural undertakings is an anomaly. Labour MP Clare Curran has even gone so far as to suggest a need to amend the Commerce Act to include such undertakings, although it is not yet clear whether this is Labour Party policy. Part of the concern appears to come from the NZME‑Fairfax New Zealand authorisation that the Commission is currently considering.
In this post I want to point out why it is perfectly sensible to allow structural undertakings but not behavioural undertakings. There are two reasons
First, let’s look at the problem we are trying to solve. Suppose the Commission is considering a merger, but it creates a risk of a reduction in competition. The application for approval of the merger is therefore likely to be declined. But, this is a borderline case and there are potential benefits to the New Zealand economy from the merger (due to scale efficiencies or some other reason).
To get the Commission across the line, the applicant proposes a solution that will guarantee more competition than would otherwise be the case. What’s the simplest way to do this? Usually, it would be to increase the number of competitors or at least remove some of the market concentration (ie, strengthen a competitor even if the number of competitors stay the same). This can be done by selling a piece of the merged business or some of its assets. That way, the sold piece of the business continues to compete against the newly merged entity.
Now, it’s important to remember that we like competition and that’s why this solution works. Can a behavioural undertaking achieve the same outcome? Perhaps, but it is much harder. The newly merged business has to promise to do (or not do) something. Does it promise not to compete against certain competitors? That might address its potential dominance but at the expense of robust competition. If it can monopolise a crucial input, does the merged business agree to make that input available to competitors as well? Perhaps, but at what price, and in what volumes? It gets very complicated very quickly and there is always a risk that it is a lack of competition, rather than the promotion of competition, that is mitigating any newly created market power. That’s a bad outcome in competition law terms.
Second, any undertaking is only as useful as its ability to be enforced. A structural undertaking involves the sale of a piece of the business. And once it’s gone, it’s gone. The merged business can just get it back because it belongs to someone else, and if it tried it would (almost by definition) need to seek a new approval from the Commerce Commission. Sure, there is some work to make sure the piece of the business is actually sold (and this can be harder than it sounds because you don’t want that piece of the business being run down before it’s sold off). But once the deal is done there is no need for ongoing enforcement efforts from the Commission.
What about behavioural undertakings? Well, at the most basic level, the new business can deliberately or inadvertently fail to satisfy the terms of the behavioural undertakings at almost any time. This means a constant enforcement effort from the Commission or some other party. This is expensive, and may undo most of the benefit of the merger in the first place.
These two reasons – maintaining competition and ease of enforcement – separate structural from behavioural undertakings. They are the reason that the Commerce Act provides for the former and not the latter, and they are the reason that in overseas jurisdiction where both are allowed regulators always prefer structural undertakings. Where behavioural undertakings are allowed, they are given only reluctantly.
So we have a legislative framework for mergers and acquisitions in New Zealand that makes sense. What, then, could be the reasons for change? To be honest, I’m not sure. The NZME‑Fairfax New Zealand authorisation seems to have convinced some people that behavioural undertakings are necessary, but the argument has not been made clearly. That merger has attracted public attention because of a range of issues that are not strictly relevant to the Commission’s assessment – employment opportunities for journalists, promotion of serious journalism – and one suspects that behavioural undertakings are wanted to deal with these issues.
If these are genuine issues (and I do have some sympathy for them) conferring on the Commission a new power to accept behavioural undertakings does not address them. The Commission is concerned with issues of competition and market efficiencies. At least as it is currently conceived it would never use a behavioural undertaking to address these peripheral issues.
It’s a bit unfortunate that just because the NZME‑Fairfax New Zealand merger is before the Commission for consideration that there is a belief that all possible problems should be addressed by the Commission. Media plurality, funding of journalism and related issues are vitally important, but they need to be addressed in an appropriate forum. The current risk is that in the hysteria serious damage is done to the integrity of our competition law by forcing it to address matters that are beyond its scope.