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01 April 2008
In November 2007 the High Court of New Zealand reversed the Commerce Commission's decision to reject clearance applications by the two existing supermarket competitors to acquire up to 100% of the shares in the country’s leading general merchandise trader, The Warehouse. The applications were declined on the basis that the acquisition would lead to a substantial lessening of competition in the market.
As the regulator of competition and trade, the commission can grant clearance for business acquisitions where it is satisfied that the acquisition is unlikely to have the effect of substantially lessening competition in the relevant market. Clearance gives the applicant one year's protection from claims that the acquisition breaches competition law.
The two main supermarket competitors in New Zealand are Foodstuffs and Woolworths. There have been no new market entrants in 20 years.
The Warehouse is a general merchandise trader. In 2006 it entered the food market by opening a 'supercentre' - a shop in which both general merchandise and food are available. It has since opened three stores in different cities under the name 'Warehouse Extra'. These stores have been less successful than expected and The Warehouse has not yet decided whether to abandon the supercentre concept. Both Foodstuffs and Woolworths wished to acquire up to 100% of the company's shares and applied to the commission for clearance.
The commission rejected both applications, considering that acquisition by either competitor would substantially lessen competition in the market. The commission considered the impact on competition within a five-kilometre radius of each Warehouse Extra store. Foodstuffs and Woolworths appealed to the High Court.
The High Court allowed the appeals on the grounds that neither acquisition would be likely to lessen competition substantially in any market.
The court was critical of the commission's conclusions and the evidence on which they were based. It considered that the evidence of the success of supercentres overseas, relied upon by the commission, was not particularly relevant to the present analysis. The court criticized the commission for applying the general rule that a 'three into two' merger usually leads to competitive concerns, rather than referring to the particular facts.
The court approached the issue by considering the difference between competition in the market if the acquisition were to occur (ie, the factual) and competition in the market if the acquisition were not to occur (ie, the counterfactual). It considered the likely outcome if: (i) the three existing Warehouse supercentres were to continue for a limited time, but then be reconfigured to general merchandise; or (ii) the stores were to continue with a sufficient improvement to lead to further stores being opened. It held that the difference between these counterfactuals and the factual was unlikely to be material. Therefore, the loss of The Warehouse as an independent retailer was unlikely to lessen competition substantially.
The court noted the following points:
Much of the evidence upon which the court relied is unavailable in the public judgment. Nonetheless, the decision clarifies the application of competition law and the appropriate approach to establish whether an acquisition is likely to lessen competition substantially under the Commerce Act.
The Commerce Commission has been granted leave to appeal the High Court decision of November 2007. The appeal has been set down for hearing by the Court of Appeal in late April 2008.
For further information on this topic please contact Ian Denton or Felicity Monteiro at Wilson Harle by telephone (+64 9 915 5700) or by fax (+64 9 915 5701) or by email (email@example.com or firstname.lastname@example.org).
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