In brief

  • Significant reforms have been proposed to Australia’s competition laws and institutions.
  • There has been particular focus on areas where overly detailed laws have contributed to uncertainty, thereby imposing costs on business and the economy.
  • The Panel’s recommended changes to the law include:
    • combining the formal merger clearance process and the authorisation process into one single process,
    • significant amendments to the misuse of market power provisions, which could make it easier for the ACCC to allege a contravention, and
    • simplifying Australia’s cartel laws and relevant exemptions from cartel conduct (for joint ventures and vertical supply restrictions).

Overview

With the release of its draft report, the Harper Review has held true to its ‘root and branch’ objective. Many of the suggested reforms are a positive step towards creating a more focussed and effective competition regime. The question for us all is whether this will see competition blossom?

The Panel led by Professor Ian Harper shows a genuine effort to reinvigorate the promotion of competition by suggesting the simplification of competition laws and processes, and the reform of Australia’s competition institutions.  This is a good thing. In respect of changes to the Competition and Consumer Act 2010 (Cth) (CCA), many of the Panel’s recommendations propose changes that should correct past legislative curiosities that unfortunately pervade our law. Most changes will simplify and clarify, rather than radically change the law.

A constant critique in respect of the current law is that it is too complex and too prescriptive. The Panel has taken these comments on board and made suggestions for simplification across a range of areas. These include a simplification of the provisions dealing with cartels and joint ventures, as well as the elimination of standalone provisions in respect of exclusionary conduct which overlap with the cartel provisions. Proposed reforms of particular relevance to corporate clients are outlined below.

Merger approval process

The Panel concluded that the merger provisions in the CCA are working effectively. It also proposed a number of draft recommendations for improvement to both the informal and formal merger review processes.

(a) Informal merger approval process

The vast majority of submissions to the Panel supported the informal merger clearance process, considering it a flexible process for obtaining merger clearance.

Concerns were raised however, that the current informal merger process does not cater well for more complex mergers and that for these mergers the process can be slow or unpredictable, and lack transparency.

While the Panel recognised the public interest in ensuring the timely and transparent public administration of mergers, it concluded that it was undesirable to try to regulate an informal process. To this end, the Panel’s recommendations were limited to further consultation between the ACCC and the business community to develop a more timely informal review process outside any formal legal framework.

(b) Formal merger approval process

The formal merger process has not been used since its introduction into the CCA.

Seeking to provide a formal merger approval process that is an accessible and effective alternative to informal merger clearance, the Panel recommends combining the merger authorisation and formal merger clearance processes into one streamlined process.

While ultimately leaving the specific features of the process to be settled in consultation with business, competition lawyers and the ACCC, the Panel set out the following general framework:

  • the ACCC to be given responsibility for approving or opposing merger applications, with parties having a right of review to the Tribunal,
  • merger clearance to be granted on either a competition test or a public benefit test, allowing merger parties to make a single application addressing both issues (if relevant), and the ACCC to approve the merger on either test,
  • no prescriptive information requirements, although the ACCC to have the power to require production of business and market information in order to test the arguments that are advanced by the merger parties, and
  • strict three month timelines for each of the ACCC and the Tribunal to make a decision, which cannot be extended except with the consent of the merger parties.

These would be significant procedural changes to the current merger review processes. If implemented, it will be interesting to see whether such changes encourage use of the formal merger process in more complex merger transactions. In particular, the imposition of a three month timeline would overcome some of the perceived deficiencies in the informal merger process.

Misuse of market power

(a) Introduction of an effects test

A major proposal for reform by the Panel, and one which would result in a significant change to the law, is its recommendation that an ‘effects’ test should be introduced to section 46 of the CCA.

Section 46 prohibits a corporation that holds a substantial degree of market power from taking advantage of that market power for the purpose of substantially damaging a competitor, preventing the entry of a person into a market, or preventing a person from engaging in competitive conduct. This prohibition focuses on the purpose of the corporation engaging in the conduct.

Proponents of an effects test argue that the CCA should focus on conduct that lessens competition, rather than on the purpose of the conduct. It has also been asserted that a focus on subjective purpose makes it difficult for the ACCC to prove a contravention of section 46.

The Panel has recommended that the section be amended to introduce an effects test. The prohibition recommended by the Panel would apply to ‘conduct [that has] the purpose, or would have or be likely to have the effect, of substantially lessening competition’.

This change may make it easier for the ACCC to bring successful prosecutions in this area. The ACCC has stated that it has not brought proceedings in a number of circumstances where a dominant firm has used its market power with significant economic effects because it would have been difficult to establish the proscribed purpose.

(b) Defence

The Panel has responded to concerns that an effects test would over-reach and lead to a chilling of competitive behaviour by suggesting a defence to section 46. The corporation relying on the defence to section 46 would bear the onus of showing that the conduct in question:

  • would be a rational business decision by a corporation that did not have a substantial degree of power in the market, and
  • would be likely to have the effect of advancing the long-term interests of the consumer.

The Panel has sought submissions on the scope of the defence.

The introduction of a defence that will create an evidentiary burden on companies is unlikely to satisfy critics of the effects test proposal on the grounds that it may ‘chill’ legitimate competitive conduct. In particular, there may be concerns about what ‘advancing the long-term interests of consumers’ means.

We expect there to be a number of submissions to the Panel in relation to this proposal.

(c) Cleaning up

The Panel also recommends repealing a number of amendments made to section 46 which, in our view, reflect ineffective and unnecessary attempts over time by Parliament to ‘clarify’ section 46. Amendments targeted for repeal include:

  • the specific prohibition against predatory pricing,
  • amendments clarifying the meaning of ‘take advantage’, and
  • amendments stating how the causal link between the substantial degree of power and anti-competitive purpose may be determined.

Simplification of cartel laws

The CCA’s cartel provisions have been roundly criticised as being overly complex and prescriptive. Reflecting those concerns, the Panel’s draft report concluded that the provisions in their current form are excessively complex and fail to provide business with sufficient clarity and certainty.

Without providing specific drafting, the Panel’s draft report recommends a simpler and shorter form of the current law. While this recommendation is not expected to radically alter the substance of the existing law, a simpler law is to be welcomed. Of course, it remains to be seen whether simplified provisions can make their way into legislation, where the notion of simplicity can be lost in the drafting.

The Panel’s draft report also proposes simplifying exemptions to cartel conduct - for joint ventures and vertical supply restrictions.

The Panel considered the current joint venture defence required businesses to comply with unnecessary technical requirements which added to business compliance costs. The Panel’s draft report instead recommends a simple but broad exemption for joint ventures and similar business collaborations that do not have the purpose or effect of substantially lessening competition.

Simplification of the current joint venture defence is sure to be welcomed by the business community. The specific requirements of the current provisions are difficult to apply with certainty, leading to companies spending significant time and money structuring arrangements to ensure that they can receive the protection of the joint venture defence.

The Panel’s draft report also recommends the introduction of a new exemption for restrictions imposed in vertical supply arrangements that do not have the purpose or effect of substantially lessening competition. While an exception to the cartel laws already exists for conduct that can be characterised as exclusive dealing, the Panel was concerned that this exception does not cover all forms of vertical supply restrictions. The recommendation for a broader exemption, assessed under a competition test, is a sensible proposal that will add clarity and certainty in this area.

Conclusion

Some of the Panel’s draft proposals are to be welcomed, and will clearly have the intended effect. For other proposals, particularly where the Panel has requested further consultation, the devil may be in the detail.

In the debate that is to come, many will focus again on the proposed changes to section 46 (which generally follow what the ACCC has suggested). The Panel has tried to reflect the public debate, by acknowledging the potential for regulatory over-reach. We will need to wait for the next round of consultation to know where the Panel finally lands on the proposal to include a business strategy exception.

We applaud the proposal to consolidate and streamline the formal merger processes that currently sit alongside the largely effective informal clearance process. The existing formal processes are extremely burdensome and are unable to fulfil their intended purpose of providing greater transparency, timeliness and accountability for the few complex mergers that need those features. The Panel’s draft report proposes to combine the formal processes by allowing the ACCC (and the Australian Competition Tribunal, on review) to consider both competition issues and public benefits (including merger efficiencies). While there may be other ways to deal with this, the draft proposal may work.

Of course it remains to be seen how calls for a simplified and streamlined CCA will make their way into legislation.

We await the Panel’s final recommendations to make sure the efforts to review the ‘root and branch’ allow competition to blossom.

For a detailed overview of the report click here.