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Commerce Commission's Connor Healthcare decision

22 July 2015 - By John Land

On 27 February the Commerce Commission published its reasons for declining clearance to Connor Healthcare Limited to the acquisition of shares in Acurity Health Group Limited.1

The Commission treated the proposed transaction as an effective combination of two of the three private hospital groups in Wellington. The combination was of Wakefield and Bowen hospitals in Wellington (owned by Acurity Health Group Limited) with Boulcott Hospital in Lower Hutt (owned by Evolution Healthcare (NZ) Pty Ltd). This would have left only Southern Cross Hospital Limited as an independent hospital operator in the Wellington region.

Rare event

It is very rare for the Commission to decline an application for clearance of an acquisition or merger. This decision is the first negative decision on a significant merger proposal for some time.2

There are three important points that are reinforced by the Connor Healthcare decision.

First, a merger can be held to be anti-​competitive even when the interest in a competitive business being acquired is only a minority interest. In this case, the proposed effective interest in the Wakefield and Bowen hospitals was only a 25% interest. That was enough for the Commerce Commission to consider the proposal as if it was a full merger between the Wakefield and Bowen hospital business and the Boulcott Hospital business.

Secondly, the level of concentration in a market is very important to an assessment of whether a merger will be considered anti-competitive, particularly where new entry to the market is not likely. In a number of markets affected by the proposed merger, the Commission considered that there was a substantial lessening of competition because the number of competitors in the relevant market was being reduced from three to two, or from two to one.

Thirdly, an undertaking to divest assets can make all the difference. After the Commission originally declined clearance for the transaction on 11 December 2014, Connor Healthcare applied for clearance a second time. This time its application was supported by an undertaking to sell down the level of shareholding held in the company (Acurity Health Group) owning Wakefield and Bowen hospitals. On the basis of that divestment undertaking, the Commission then gave clearance to the transaction on 19 December 2014.3

Substantial influence

Evolution Healthcare is the owner of Boulcott Hospital. Its subsidiary company, Connor Healthcare, owned 11.7% of Acurity Health Group which in turn owned Wakefield and Bowen hospitals.

Connor Healthcare sought approval for a transaction which would effectively have taken Evolution's interest in Wakefield and Bowen hospitals from 11.7% to 25%.

The Commission considered that this 25% interest would result in Evolution having a substantial degree of influence over the actions of the corporate entity (Acurity) that owned Bowen and Wakefield hospitals.

This assessment was formed taking into account Evolution's shareholding in Connor Healthcare and the number of seats that it held on the Connor Healthcare board, Evolution's veto rights in respect of particular decisions, and indications made by Evolution that it wished to be heavily involved in operations and management decision-making of the corporate entity owning Wakefield and Bowen hospitals.

The Commission therefore assessed the proposed transaction as though it was a full merger between the three hospitals.4

Market competition

The proposed transaction affected a large number of markets for the provision of private elective surgical procedures. The Commission, in considering a merger, will not grant clearance unless satisfied that there is no substantial lessening of competition in each and every market affected by the merger.

In this case, the Commission had concerns in relation to a number of markets for the provision of elective surgical procedures for patients funded by health insurance companies and in relation to a number of markets for the provision of elective surgical procedures for self-funded patients.

The Commission stated that there were five markets where the proposed acquisition reduced the choice of insurance companies and self-funded patients from two hospital providers to one.

These were markets where Southern Cross Hospital did not provide the procedure in question or provided only limited coverage. Accordingly, the surgical procedure in question was only offered by either Boulcott Hospital or by the Wakefield/ Bowen hospital business. For example, this was the case with the market for private orthopaedic procedures (such as hip and knee replacements) in Wellington.

In relation to each of the markets where choice would be reduced from two providers to one the Commission held that the merger was likely to substantially lessen competition.

There were also four markets where the proposed acquisition reduced the choice of insurance companies and self-funded patients from three hospital providers to two.

These markets concerned urological procedures, ophthalmology procedures, gynaecology procedures and cardiology services. In three of these markets the Commission held that the merger was likely to substantially lessen competition. The exception was cardiology services where the Commission said that Boulcott Hospital's provision of cardiology services was unlikely to provide an effective competitive constraint in any event.

Precedent

The Commission referred to statements by the Court of Appeal in the Warehouse case5to the effect that the Commission was right to give weight to the theoretical concerns raised by a three to two merger in markets characterised by high barriers to entry.

The Commission indicated that it had concerns about the likelihood of entry into the markets for urology, ophthalmology and gynaecology procedures.

It accordingly held that in these markets the merger was likely to substantially lessen competition.

The Commission's decision is an important signpost that two to one or three to two mergers will be scrutinised carefully by the Commission. Such mergers may well be declined where there are concerns about the likelihood of entry of new competitors into those markets.

Divestment undertakings

The third important point arising from the Wellington Hospital merger case concerns the potential importance of divestment undertakings.

The Commission has the ability to accept structural undertakings in the form of an undertaking to divest assets or shares. (The Commission does not have the ability to accept behavioural undertakings such as an undertaking concerning future pricing or supply conduct.)6

In this case following the Commission announcement on 11 December 2014 declining the application by Connor Healthcare, Connor applied for clearance again. This time the application was accompanied by a divestment undertaking. Under this undertaking Connor and Evolution would divest assets and/or shares to the effect that Evolution would hold a maximum of 11.7% of the shares in Connor.

The effect of this undertaking was that Evolution would return to its pre-merger equivalent interest in the company (Acurity Health Group) that owned Wakefield and Bowen hospitals.

The Commission was satisfied that following the divestments, Evolution would not have the ability to influence the strategy or operation of either of the Bowen or Wakefield hospital businesses.

On this basis, the Commission gave clearance to the transaction subject to the divestment undertaking.

Delay in decision

One final comment on the release of reasons for the Commission's hospital decision is that the release of these reasons did take quite a long time.

The Commission announced its original decision to decline the transaction on 11 December 2014. It did not release its reasons for that decision until 27 February 2015.

A delay of this kind gives rise to some concerns.

How does an unsuccessful applicant for clearance know whether to exercise appeal rights without having the reasons for the decision? An unsuccessful applicant must lodge any appeal within 20 working days from the time of the Commission's decision to decline clearance.7

Knowing the Commission's reasons for the decision is surely fundamental to an assessment of whether an appeal has a good chance of success and is worth pursuing.

Alternatively, if an application for clearance is successful, how does an aggrieved customer or competitor assess whether to apply for judicial review of the clearance decision?

Knowing the Commission's reasons for the decision is likely to be critical to an assessment of whether there are good grounds for judicial review.

John Land is a senior competition law specialist and commercial litigator at Bankside Chambers in Auckland. Formerly a partner of Kensington Swan for 20 years, he can be contacted on 09 379 1513 or at john.land@bankside.co.nz.

  1. Connor Healthcare Limited and Acurity Health Group Limited [2014] NZCC 39.
  2. The previous most recent Commission decision declining a merger was Hamilton Radiology Ltd and Medimaging Ltd [2013] NZCC 7 decided on 27 March 2013, which involved a relatively small proposed transaction.
  3. Connor Healthcare Limited and Acurity Health Group Limited [2014] NZCC 43.
  4. Connor Healthcare Ltd decision, supra n.1, para 95.
  5. Commerce Commission v Woolworths Ltd (2008) 12 TCLR 194 (CA) at [200].
  6. Section 69A Commerce Act 1986.
  7. Section 91(2) Commerce Act 1986.

This article was also published in LawTalk 861, 27 March 2015, page 28.

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Last updated on the 23rd July 2015