Changes to the prohibition of acquisitions that would result in a substantial lessening of competition under section 50 of the Trade Practices Act (TPA) appear inevitable. Since the inquiry into the grocery sector in 2008, discussion and proposals to amend the test for assessment of proposed mergers and acquisitions have been extensive. The discussions have focused on how to address what is known as creeping acquisitions, and the way in which section 50 can prevent corporations that hold a substantial degree of power in a market from enhancing that market power through a series of small acquisitions that do not result in a substantial lessening of competition, as required under the TPA.
In mid 2009, the Federal Government proposed to address creeping acquisitions by reference to whether an acquisition is by a corporation that already holds substantial market power. Recently, the concept of a “material lessening” of competition test, and an “any lessening” of competition where a corporation holds a substantial share of a market was introduced into Parliament by Senator Xenophon. Most recently, the Federal Government has released a commitment to changing section 50 by reference to a market, being a local, regional or national market.
Irrespective of which proposal is adopted, the most recent proposals to amend the mergers and acquisitions provisions have the potential to dramatically change the way any proposed merger or acquisition is assessed by the ACCC.
What is a creeping acquisition and who will it affect?
A corporation that holds a substantial degree of power in a market is likely to face further scrutiny should it seek to increase its market share through a merger or acquisition under the Federal Government’s latest proposal to address “creeping acquisitions”. “Creeping acquisitions” being the term used to refer to a series of small acquisitions that individually would not substantially lessen competition in a market, but collectively may have that effect.
Progression of proposed reform
First discussion paper – as reported by Norton Rose Australia in October 2008
On 1 September 2008, the Minister for Competition and Consumer Affairs (Minister) released a discussion paper, foreshadowing options for legislative changes to the merger provisions of the TPA. The discussion paper outlines two specific options for legislative reform to prohibit creeping acquisitions. As reported by Norton Rose Australia in July 2009, they are:
- The “aggregation model” which would prohibit a firm making an acquisition if that acquisition, when combined with other acquisitions made within a specified time period, would be likely to substantially lessen competition in a market; and
- The “substantial market power” model which would prohibit a firm possessing a “substantial degree of power in a market” from making an acquisition if the acquisition would result in any lessening of competition in a market.
Second discussion paper – as reported by Norton Rose Australia in July 2009
The “any” lessening of competition proposed in the Federal Government’s original substantial market power model was met with strong opposition. Interested parties argued that the threshold for a breach of section 50 being “any” lessening of competition had the potential to undermine the “substantial lessening of competition” test prevalent throughout the TPA.
The proposed “substantial market power” model in the second discussion paper retained the threshold element of a corporation holding substantial market power. However, it imported a new test of “enhancing” that market power.
The second discussion paper also proposed a creeping acquisition assessment through Ministerial declaration. It was proposed that the Minister hold the power to unilaterally “declare” a corporation or a product/service sector subject to a “creeping acquisition” law where the Minister has concerns about the potential for, and/or actual, competitive harm from creeping acquisitions, or acquisitions by a corporation with substantial market power.
The Minister would also be empowered to set appropriate thresholds for the mandatory notification of acquisitions to the ACCC, with such acquisitions to be assessed in accordance with the substantial market power model proposed above. Such minimum thresholds are said to be “applied with minimal burden while still maximising transparency and accountability”1.
Bill introduced by Senator Xenaphon
The proposal to amend the TPA by Senator Xenophon - the Trade Practices Amendment (Material Lessening of Competition – Richmond Amendment) Bill 2009 - is independent of the Government proposals. It provides for a substantial shift in the analysis of the competitive effects of a merger or acquisition in a market through the introduction of a:
- “material” lessening of competition test;
- a “substantial market power” threshold as the starting point for assessing creeping acquisitions; and
- where a corporation holds “substantial market power” the relevant test will be “lessening of competition”, without any further qualification.
The Bill introduced into Parliament on 26 November 2009, proposes to retain the current wording in section 50(1), with a corporation being prohibited from directly or indirectly acquiring shares or assets that would have, or be likely to have, the prescribed effect on competition. However, the considerable departure from current law is the proposal to amend the threshold for a likely breach of the Act to a “material” lessening of competition, replacing the well known “substantial” lessening of competition test.
The Bill states that its purpose in amending section 50 is to strengthen Australia’s anti merger law and to address the issue of creeping acquisitions. It has been argued that the current “substantial” threshold for analysis of whether a merger or acquisition will lessen competition is too high, resulting in a number of controversial mergers having recently been approved. The Explanatory Memorandum notes that the proposed “material” test will assess whether a merger or acquisition will have a “pronounced or noticeably adverse effect” on competition. This, it is suggested, is a more rigorous standard by which a determination can be made as to whether a merged entity would be able to exercise market power post merger.
The meaning of “substantial” has been the subject of judicial debate not only in the context of section 50, but in other existing provisions of Part IV of the Act. Judicial guidance on the interpretation of “substantial” provides a flexible meaning of the word in the context of the conduct’s effect on competition. Held to mean considerable, big, or not merely nominal2, it is arguable that a departure from what has become a standard benchmark will create an ambiguous test that is inconsistent with other provisions in Part IV.
Federal Government proposal released in January 2010
The Minister for Innovation, Industry, Science and Research announced on 22 January 2010 that the Federal Government is committed to fulfilling its election promise to ensure that the ACCC has the power to reject acquisitions that would substantially lessen competition in any local, regional or national market. Notably, the press release refers to a “substantial” lessening of competition being the competition test applicable to assess a merger or acquisition.
The major change to section 50 is likely to focus on section 50(6) which will enable the Court (and the ACCC in its assessment of mergers) to look at national, state and regional (including local) markets. The Federal Government is also likely to change section 4 of the TPA to remove the exception for acquisitions in the “ordinary course of business”. This will seek to bring into the scope of section 50 major supermarket chains’ acquisitions of new greenfields sites. Notably, the Minister’s press release only mentions the issue in relation to supermarkets. The application of the new law would, however, apply beyond the scope of the supermarket industry.
A bill is yet to be released by the Federal Government on its January 2010 proposal.
The way forward
It is evident from interested party submissions in the first two discussion papers that there is a divergence of views on the need to establish a “creeping acquisitions” law, let alone the manner in which any legislative reform to section 50 of the TPA should take place. The possible reach of Federal Government’s proposed changes may extend to a corporation achieving organic growth or those that dominate a market due to innovation. Extension of the provisions of section 50 to potentially capture corporations experiencing high growth may have the unwanted effect of potentially stifling investment, development and innovation in a market.
As currently proposed, the legislation will not distinguish between a corporation which has achieved growth through smart and effective business practices, rendering its competitors uncompetitive, and a corporation which develops market share through regular, small acquisitions of its competitors over time. Failure to distinguish how growth is achieved may inhibit innovations and result in a failure to address the Federal Government’s underlying “creep” concerns.
The proposal by Senator Xenaphon, will, if accepted, have a significant effect on current merger processes. Without any judicial guidance on the difference between a “substantial” and a “material” lessening of competition, and a wholly new test for those corporations with a substantial share of a market, a considerable amount of uncertainty will be unavoidable. How the ACCC, Australian Competition Tribunal and the Courts would assess mergers under these provisions is unknown.
It would perhaps be extraordinary that once a corporation reached an undetermined market share threshold it would be prevented from acquiring further businesses in the market in which it competes. The proposed legislation could arguably have the undesirable effect of stifling future acquisitions and hindering the ability of an entity to grow its business.
Where to from here?
Senator Xenaphon’s Bill has been referred to the Economics Legislation Committee which is due to report its findings in May 2010.
The Government has announced it will consult with the State and Territory governments on its proposed amendments to the TPA. A date for release of draft legislation is currently unknown.
The only thing we can be certain of at this point in time is that it appears inevitable that section 50 is set to change.