On 6 May 2009 the Federal Government released its second discussion paper on creeping acquisitions (Discussion Paper).
Creeping Acquisitions and Section 50
“Creeping acquisitions” is a term used to describe the conduct of a company which, through a number of small acquisitions, substantially lessens competition within a market. While each acquisition considered in isolation from the rest would have no or nominal impact on competition, the cumulative effect of these acquisitions would have the effect, or likely effect, of substantially lessening competition within a market. The conduct also encompasses ‘a [company] with a substantial degree of power in a market acquir[ing] small competitors’.
Acquisitions which substantially lessen competition are prohibited under section 50 of the Trade Practices Act 1974 (Cth) (TPA). Section 50 prohibits a corporation from directly or indirectly acquiring shares in a company or acquiring any assets of a person (which includes a corporation) if the acquisition would have the effect, or likely effect, of substantially lessening competition.
However, the scope of section 50 of the TPA does not prohibit creeping acquisitions as it does not consider the cumulative effect of a number of small acquisitions over a period of time, but rather only considers each acquisition as an isolated transaction. Consequently, the Government and the Australian Competition and Consumer Commission have perceived that there is a loophole in section 50 for companies to side step the prohibitions on anti-competitive acquisitions because a company might either undertake a number of small acquisitions of shares or assets or a number of acquisitions of small competitors. The result would be a lessening of competition within the relevant market.
The Government’s Proposal
The Government has proposed two options to address the issue of creeping acquisitions. These options are based on creating a new provision within section 50 of the TPA.
The Government’s first suggestion is to create a new provision in section 50 that ‘prohibits mergers and acquisitions that enhance a corporation’s existing substantial market power.’ A proposed draft of the new sub-section reads:
- A corporation that has a substantial degree of power in a market must not directly or indirectly: acquire shares in the capital
- of a body corporate
- 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.
This proposal is specifically limited to companies which have a substantial degree of market power. A substantial degree in market power means a significant, but not absolute, freedom from competitive restraint. Within each market what constitutes a substantial degree of market power will vary. The proposed provision prohibits any enhancement of that company’s market power. A company which is deemed to have a substantial degree of market power would be prevented from acquiring smaller companies or making a number of small acquisitions of shares or assets if the effect of those acquisitions substantially lessens competition.
The first option suggested by the Government creates a blanket prohibition on all companies which are considered to have a substantial degree of market power.
The second option involves the introduction of a creeping acquisitions law which operates similar to the Price Surveillance provisions of the TPA. Under the second option, the Minister would be given ‘unilateral’ power to apply the creeping acquisitions laws to a corporation or a product/service sector where the Minister has concerns about potential and/or actual competitive harm from creeping acquisitions by corporations with substantial market power.
This option does not impose a blanket prohibition on companies which have a substantial degree of market power from enhancing that power by making a number of small acquisitions. Rather, the creeping acquisition laws are limited to either a corporation or product/service sector and are applied under ministerial discretion. This option is said to be able to address creeping acquisitions on an as needs basis.
The Response from the Private Sector
The Government’s decision to enact legislation to deal with creeping acquisitions has sparked criticism from both the legal and private sectors. These criticisms focus mainly on the negative impacts that the new laws will have on business growth and established legal principles, for example the principles relating to the concept of substantial lessening of competition. Further, there is concern that creating a provision that specifically targets ‘small-scale acquisitions [represents] a level of intervention that could be out of proportion with the size of competitive harm and consumer detriment associated with [creeping acquisitions]’.
The Way Forward
While the Government is aware of these concerns and criticisms, it still perceives creeping acquisitions as an important issue that needs to be addressed in Australia. The law relating to creeping acquisitions will be an important area for small and large businesses to be aware of both in terms of the laws relating to acquisitions, the types of acquisitions that will be prohibited and in terms of the remedies and penalties that the ACCC and Courts can enforce against companies in breach of the laws.