Dialogue: Law still blurry round the edges

By MARK BERRY*

The recent amendments to the merger provisions of the Commerce Act have received wide publicity.

Foodstuffs initiated procedural skirmishes in relation to the Commerce Commission's clearance of the Progressive/Woolworths proposal. The application for clearance of the proposal was lodged when the old test of dominance applied to mergers. But before the application was decided the prohibition against mergers changed from the test of dominance to a substantial lessening of competition.

The question in the Woolworths case is which regime applies: dominance or the new test of substantially lessening competition?

The Judiciary wants the new test to apply, the Government the old. The outcome is a mixed legislative response. The Court of Appeal's ruling on Progressive/Woolworths will stand. But 10 other proposals are to have the benefit of the old dominance threshold.

Why all the fuss over which threshold is to apply?

A concern has existed for some time that mergers have been blocked by the commission and the courts only in rare cases where bone-crushing dominance was likely to result. A legislative solution was seen as a way to capture mergers which fell short of the high market-power threshold of the old test of dominant market position.

This resulted in the passing of the first of the Commerce Amendment Acts in May this year. Much was made of the introduction of these tougher merger laws.

But what does the new test mean?

Lawyers and economists may well hold different views.

An economic approach suggests that the amendment does not mean all that much. "Substantial lessening of competition" or "dominance" both relate to a concept of market power.

Background papers suggested that the new test raised questions of unilateral market power as well as the potential for coordinated conduct post-merger. Thus, a merger should be prohibited if either the merged entity was likely to acquire unilateral power, or the merger would likely result in the market being characterised by actual or tacit collusion post-merger where this had not occurred pre-merger.

The unilateral market power test is the approach under the old dominance test. The same questions about concentration, barriers to entry and the like come into play.

Without clear measures of market power it is impossible to accurately assess where on the scale likely market power may register.

It is naive to say that mergers can be measured in a way which establishes a clear distinction between the "dominance" and "substantial lessening of competition" thresholds.

Economists will probably be sceptical that merger activity will result in more collusion.

But legal analysis suggests that some meaning must be given to the clear legislative intention that a lower threshold has been introduced.

The words "substantially lessening competition" do suggest a lower threshold than that of "dominance". But without any theoretical framework to explain the difference between both thresholds, the assessment of the distinction will be unpredictable.

The way to resolve this uncertainty may centre upon whether decision-makers invoke an economic bias. The commission may have economic sympathies. This is already apparent from the first two clearances it granted under the new regime: PMI/CGU and Canterbury Meat Packers/Phoenix Meat.

These mergers involved high aggregations in market share and an industry with a history of past collusion. Despite these features, the commission's economic approach meant the analysis was much the same under the new regime.

Given the potential influence of lay members of the High Court, this trend may become apparent in the initial judicial assessments of the issue. But this may not be the case, and the ultimate forum, the Court of Appeal, does not involve laypeople.

What does the new merger threshold mean for business? A much tougher set of rules may not necessarily apply in practice. Most cases are handled by the commission, with limited rights of appeal. Uncertainty persists that courts may view the matter on a purely legal basis.

* Mark Berry was deputy chairman of the Commerce Commission until this year and is a consultant with Chapman Tripp.