Upcoming Mallesons seminarsChanges to Australia’s merger control laws will affect every Australian company, regardless of whether they are currently involved in a corporate merger or acquisition.
What do you need to do?Be prepared for the introduction of new laws regarding creeping acquisitions. If you are likely to be involved in mergers or acquisitions involving smaller firms in the future, you may wish to make a submission to the Government (submissions are due by 10 October 2008).
Anthony Haly
Senior Associate
Caroline Coops
Partner
T +61 3 9643 4097
Sydney
Dave Poddar
Today the Government released a Discussion Paper calling for public comment on the best way forward for a creeping acquisitions law. The discussion paper outlines two proposals to deal with creeping acquisitions, and invites submissions in relation to this issue by 10 October 2008.
Proposal to introduce creeping acquisition-specific laws
Creeping acquisitions have recently been considered in both the ACCC’s Grocery Inquiry, and a report by the Senate Economics Committee into the creeping acquisitions legislation proposed by Family First. Creeping acquisitions refer to a series of acquisitions undertaken over time that individually do not substantially lessen competition in a market in breach of section 50 of the Trade Practices Act (TPA), but that taken together may have a significant competitive impact.
In its Grocery Inquiry Report, the ACCC recommended that section 50 of the TPA be amended to specifically deal with creeping acquisitions, although it acknowledged that such acquisitions were not currently an issue in that industry. The Senate Economics Committee Report released on 27 August 2008 also concluded that the current provisions of the TPA are insufficient to deal with creeping acquisitions.
The Discussion Paper proposes changes to section 50 that would apply across all industry sectors, not just to the supermarket and grocery industries. Interestingly, no examples are given of industries in which creeping acquisitions are currently considered to be an issue.
The Discussion Paper briefly sets out two potential approaches to deal with creeping acquisitions:
- An ‘aggregation’ model, which would prohibit an acquisition where that acquisition, aggregated with all other acquisitions by that corporation during a specified period of time, substantially lessens competition in the relevant market.
- A ‘substantial market power’ model, under which a corporation with substantial degree of power in a market would be prohibited from making an acquisition if it would result in any lessening of competition in that market (i.e. as opposed to requiring a substantial lessening of competition).
Difficulties with a backward-looking ‘aggregation' model
Acquisitions are currently assessed under section 50 using a forward-looking test which compares the likely state of competition with the acquisition to the likely state of competition without the acquisition. It is unclear how this ‘with-and-without’ test would function if the ACCC or a court could also ‘look backwards’ and aggregate previous acquisitions.
There are also temporal issues in terms of how far back the ACCC or a court would be able to go in assessing the effect of a series of acquisitions (for context, Family First’s proposed legislation permits the ACCC or a court to consider acquisitions over the previous six years). It is unclear how changes in market boundaries or dynamics will be addressed (such as industry consolidation or disaggregation). An aggregation model is also likely to impose significant uncertainty and onerous compliance costs upon businesses seeking to assess the impacts of their merger activity over time.
An aggregation model is also likely to lead to an increase in the time taken by the ACCC to consider acquisitions under its popular informal clearance process, given the increased scope of the issues to be considered.
The flaws of a stricter anti-competitive test
The second approach proposed in the Discussion Paper represents a significant departure from current Australian competition policy.
The TPA does not currently prohibit companies from having market power or a particular market share, rather it seeks only to prevent the misuse of market power once acquired. By imposing a stricter standard for acquisitions by a company with substantial market power (i.e. any lessening competition is prohibited, rather than a substantial lessening of competition), the proposed amendments are likely to equate to a de facto market share cap, preventing companies with market power from increasing their market share other than organically.
The Discussion Paper acknowledges the common pro-competitive benefits of acquisitions, which often include productive, allocative and dynamic efficiencies such as better management, economics of scale and scope, and innovation. There is a risk that the path proposed by the Discussion Paper represents a disincentive to achieving these pro-competitive benefits.
Finally, it is unclear whether this approach would consider the net competitive effect of the acquisition (i.e balancing pro-competitive effects with anti-competitive effects), or whether the existence of any anti-competitive effect is intended to be sufficient to prohibit the acquisition.
Going forward
Given the economy-wide impact of any changes to the merger control provisions in the TPA, it is critical that the Government’s consultation be as broad as possible.
Please contact us if we can assist with a submission to the Government in relation to this issue or if you would like specific advice on the potential application of the Government’s proposals.