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 over time.
Deacons reported in its October 2008 Competition and Consumer Law Update1 on the Government’s first proposal for “creeping acquisition” reform. In that article, it was noted that in some circles there is a perception that section 50 of the Trade Practices Act 1974 (Cth) currently fails to capture “creeping acquisitions” as a small acquisition may not of itself result in a substantial lessening of competition. Two options for legislative reform to section 50, proposed to enable the ACCC to “close the loophole” on “creeping acquisitions”, were set out for public comment: (i) the aggregation model; and (ii) the substantial market power model.
Submissions were received from a number of interested parties including the ACCC, large supermarket chains, grocer and small business associations, and law councils both in Australia and the USA. The Government proposes that the key concern raised in submissions was with respect to the “creep” by corporations that hold a substantial degree of power in a market. Consequently, the concept of substantial market power, and the manner in which corporations with such power can be prevented from “enhancing” that power through small acquisitions, is the focus of the government’s second discussion paper.
Substantial market power
The “any” lessening of competition proposed in the 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 latest proposed “substantial market power” model still contains the threshold element of a corporation holding substantial market power. The new test is that of “enhancing” that market power:
A corporation that has a substantial degree of power in a market must not directly or indirectly:
(a) acquire shares in the capital of a body corporate; or
(b) acquire any assets of a person;
If the acquisition would have the effect, or be likely to have the effect, of enhancing that corporation’s substantial market power in that market.
The delineating feature of the latest model is the focus on an “enhancement” of market power rather than “any” lessening of competition in a market. The consistent element between the two proposals is the focus on a corporation that, at the time of the proposed merger or acquisition, holds substantial market power. Although the Government proposes the “enhancing” element to be a slight amendment to section 50, there are considerable implications for corporations with a significant presence in a market. A new legislative test, thresholds and levels of economic and legal analysis will be a prerequisite to considering a proposed acquisition. Moreover, the revised substantial market power test imports a complex economic assessment of the relevant market to the initial legal equation.
The proposed substantial market power model effectively imports two concepts of market power into one provision. The concept of market power and the misuse of that power in that, or any other market, is evident today in section 46 of the TPA (the misuse of market power provisions). Conclusive judicial guidance on section 46 to date has displayed particular difficulties in establishing the level of market power held by a corporation. The Government has recognised that any assessment under the proposed section 50 is likely to include analysis of whether the firm in question has the ability “to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product”.2 This is one consideration in ascertaining whether a corporation has substantial market power. Without further guidance either legislative, or through the ACCC’s merger guidelines, corporations that may hold power in a market that might not be of competitive concern to the ACCC may nonetheless be caught by the proposed provisions.
The latest discussion paper introduces the prospect of the Minister triggering the application of a “creeping acquisitions” law. It is 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”3.
The way forward
It is evident from interested party submissions that there is a divergence of views as to 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 the 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 drafted, the proposed legislation does not distinguish between those corporations who have achieved growth through smart and effective business practices, rendering its competitors uncompetitive, and those who develop market share through regular, small acquisitions of its competitors over time. Failure to distinguish how growth is achieved has the potential ability to inhibit innovation and would potentially be incongruous with addressing the Government’s underlying “creep” concerns.
The extent of the “creep”, the minimum threshold for what constitutes a substantial degree of power in a market and the introduction of the concept of “enhancing” market power, will no doubt be the subject of further discussion, to ensure that in introducing any additional regulation over acquisitions does not have any unintended effects upon a corporation’s ability to operate competitively and efficiently, and achieve growth in a free market. The concept of “enhancing” of market power is not defined in the TPA, nor is it a term of reference used throughout the legislation. Without clear direction as the qualitative or material element to this term, it is possible that the strict interpretation of “enhancing” could encompass any acquisition of any assets. The degree or level of “enhancement” required to trigger the proposed provisions is perhaps critical in providing commercial certainty to a corporation that holds a substantial degree of power in a market when assessing its future acquisitions.
The Government is welcoming submissions on its latest proposal by 10 July 2009. In particular, it seeks the views of interested parties’ on the unintended consequences of the proposal, and alternative regulatory or non-regulatory options that may address “creeping acquisition” concerns.
The Government’s focus on closing the “loophole” in section 50 and reducing the ability for corporations that hold a substantial degree of power in a market to increase that power is gathering momentum. A corporation should be cognisant that its position in the market may become a relevant factor in evaluating future growth plans through small acquisitions. A new level of merger and acquisition regulatory scrutiny may be on the horizon.