Upcoming Mallesons seminarsAll corporations seeking to undertake mergers or make acquisitions in Australia.
What do you need to do?These corporations should speak to one of our competition experts to consider whether a failing firm argument would be relevant to merger assessment.
Lisa Huett
Partner
T +61 3 9643 4163
Sydney
Vishal Ahuja
Sharon Henrick
Kristin Leece
Dave Poddar
Luke Waterson
Melbourne
Amanda Bodger
Caroline Coops
Renae Lattey
Andrew Monotti
Shanghai
Martyn Huckerby
(贺墨亭)
The global financial crisis has significantly impacted markets across the world, leading to corporate failures and market consolidation. In this context, there has been some debate in competition circles of the increased possibility of gaining merger clearance on the basis of a target company’s imminent failure.
In particular, it may be possible to gain clearance for transactions raising significant competition concerns on the basis that, absent the merger, the target would otherwise fail and exit the market, thereby leading to a diminution in competition. These so called ‘failing firm’ arguments may well become more common in the coming period as companies seek to acquire failing firms.
Development of the failing firm defence
The failing firm defence was first recognised by the United States Supreme Court in International Shoe Co. v FTC (1930) where the Supreme Court held that the target was facing “financial ruin” and that, in those circumstances, the least anti-competitive result would be to allow the target to be acquired, rather than to exit the market altogether. The failing firm defence was subsequently refined in Publishing Co. v United States (1969) and later adopted by the United States Fair Trade Commission and United States Department of Justice in their joint Merger Guidelines.
Scope and application of failing firm arguments in Australia
There is no failing firm defence in Australian law. Neither section 50 of the Trade Practices Act 1974 (Cth), nor the Australian Competition and Consumer Commission (ACCC) Merger Guidelines recognise a failing firm defence that might permit a merger that would otherwise result in a substantial lessening of competition. However, where a firm is failing (i.e. it is in imminent danger of failure, with the consequence that its assets would exit the market), the failing firm argument may be taken into account when conducting a merger review to determine whether there is likely to be a substantial lessening of competition if the merger does not proceed with the result that the failing firm exits the market.
In particular, the failing firm argument may form an essential element of the counterfactual analysis in which the ACCC determines the likely nature of competition in the market absent the merger.
Recent merger guidance - Primo/Hans
The ACCC’s position on failing firms has been recently highlighted in relation to the proposed acquisition of Hans Continental Smallgoods Pty Limited (Hans) by P&M Quality Smallgoods Pty Limited (Primo).
Despite the significant anti-competitive effects identified, the ACCC concluded that, given the imminent failure and market exit of Hans, and the absence of alternative purchasers, Primo’s acquisition would not “result in a substantially less anti-competitive outcome” than permitting Hans to fail (i.e. the relevant counterfactual).
However, the ACCC stated that it would assess any failing firm argument rigorously, and indicated that, in order to rely on the argument, the parties will be required to provide detailed and objective evidence clearly demonstrating that:
- the target will fail and cannot be successfully restructured absent the merger;
- its assets (including brands) will exit the market absent the merger;
- an alternative purchaser is not likely to acquire the entity (this may well be easier to prove with the current withdrawal of private equity); and
- permitting the acquisition would not be any more anti-competitive than allowing the target to fail.
“Flailing versus “failing” firms
Firms that have healthy long term prospects, but due to market or other circumstances have become less competitive than previously, are likely to constitute ‘flailing’ rather than ‘failing’ firms.
The ACCC addressed the topic of ‘failing’ versus ‘flailing’ firms to a degree in its assessment of the acquisition of BankWest and St Andrew’s Bank by Commonwealth Bank of Australia (CBA). Prior to its acquisition, BankWest was a wholly owned subsidiary of HBOS plc (HBOS), a major United Kingdom bank that faced imminent collapse in September 2008 as a result of its exposure to bad debts and inability to obtain short term funding on the global markets.
In assessing the proposed acquisition, the ACCC indicated that BankWest was unlikely to be a strong competitor absent the acquisition because of the impact of the global financial crisis on HBOS.
In particular, the ACCC accepted that BankWest's historically aggressive price competition had been underpinned by cheap wholesale funds from global debt markets accessed through HBOS. As a result of the global economic crisis, the ACCC formed the view that the financial condition of HBOS had deteriorated, such that, if the acquisition did not proceed, BankWest would not be supported in its continued growth, nor would its aggressive pricing strategies continue.
Consequently, although the failing firm argument was not of central importance in the CBA/BankWest merger, the ACCC assessed the future state of competition in the market absent the merger and concluded, in essence, that BankWest would certainly be a ‘flailing’ firm, and may become a ‘failing’ firm absent the merger, due to the financial difficulties of its parent.
What does this mean for future Australian bank mergers?
ACCC Chairman, Graeme Samuel, recently stated that the ACCC is “becoming increasingly concerned that the banking system is becoming less and less competitive…We would be looking at further mergers very, very closely We would not accept at first or second blush the proposition that to not allow this merger would lead to instability in the market”. In other words, as with the ACCC’s review of the Primo/Hans transaction, parties should expect a very vigorous ACCC merger analysis in future banking mergers and heavy reliance on the views of APRA and the RBA.
The ACCC’s unwillingness to clear bank mergers which may raise material competition issues, in order to underpin market instability, indicates a regulatory toughness which is likely to be supported in other jurisdictions, particularly by the United Kingdom, given the Government’s role in ensuring that Lloyds TSB plc’s acquisition of HBOS in late 2008 was not blocked on competition grounds. However, given the global scale of the financial crisis and the example set in comparable jurisdictions, the question remains whether the political realities would require further bank mergers to proceed irrespective of competition concerns, should Australia’s situation worsen.
Conclusion
Given the current economic climate, there is greater potential for the failing firm argument to be invoked in the context of merger reviews, though the relevant circumstances in which it will succeed would appear to be quite limited.
Acknowledgment
This article is derived from a paper presented at the Competition Law Conference, Sydney, May 2009, prepared by Dave Poddar with the assistance of James Marshall and Leisha Marasinghe. A full version of this paper will be published later in the year in the Trade Practices Law Journal.
Authors
Dave Poddar, Partner
Leisha Marasinghe, Solicitor
James Marshall, Legal Adviser (Not Australian Qualified)
SACC continues aggressive stance on food prices
Responding to soaring food prices and widespread allegations of collusion and price fixing, the South African Competition Commission (SACC) has commenced a large scale investigation involving over 30 companies involved with food production and supply.
Commissioner Shan Ramburuth said that the SACC had spent over two years researching food price fluctuations spanning a number of industries, and was now ready to launch formal investigations into companies suspected of artificially manipulating prices.
Commenting on an ongoing investigation into the bread industry, Deputy Commissioner Tembekile Bonakele said that three bread manufacturing companies had already settled with the SACC, with a fourth due to face court in June 2009. The latest investigation includes various grain silo storage companies and grain mills, accused of colluding to increase prices over their respective parts of the supply chain.
South Africa is in the process of finalising amendments to the Competition Act including the introduction of prison sentences for those found guilty of price fixing.
Supermarkets: UKCC to consult on new Suppliers’ Ombudsman and tenancy rules
The United Kingdom’s Competition Commission has begun consultations on two proposed remedies arising from its recent investigation of the UK’s supermarket and grocery sector. The investigation did not find evidence of illegal conduct, but identified multiple factors contributing to high grocery prices.
The proposed remedies are:
- the establishment of a new Ombudsman to oversee the Groceries Supply Code of Practice (GSCOP). The GSCOP sets out rules applying to the conduct of large retailers in their negotiation with grocery suppliers, particularly when the retailer has significant power to negotiate prices and terms; and
- a draft order to limit the ability of major retailers to dictate the terms upon which they will occupy a tenancy. Subject to requirements regarding retailer size, market concentration and market power, retailers would be required to release any restrictive covenants. The order would also see existing and future exclusivity arrangements deemed unenforceable.
Intel receives record EU fine for abuse of market power
The European Union (EU) has fined computer chip manufacturer Intel 1.06 billion Euros (A$1.89 billion) for engaging in repeated abuse of its dominant market position between October 2002 and December 2008.
The EU found that Intel illegally leveraged its 70% market share, offering hidden rebates to computer manufacturers NEC, Dell, Lenovo and Acer in exchange for undertakings that they sourced their x86 CPU chips exclusively or predominantly from Intel. In discussing the rebates, the EU stated that Intel’s conduct forced equally-efficient competing manufacturers to sell their chips below cost in order to compete.
Intel also directly targeted major competitor AMD, granting substantial payments to computer manufacturers on condition that they limited their sales of AMD products to certain market segments and postponed AMD product launch dates.
In separate conduct, Intel made direct payments to Media Saturn Holding, a major international retailer, on condition that it only sell Intel-equipped computers in its 770 stores across 16 European countries.
Intel intends to appeal the decision, with CEO Paul Ottelini stating “We believe the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace…There has been zero harm to consumers. Intel will appeal.”
The world market for x86 CPUs is valued by the EU at 22 billion Euros ($A39 billion) per year.
Chinese regulators buzzing with activity
China's anti-monopoly enforcement regulators, the Ministry of Commerce (MOFCOM) and the State Administration of Industry and Commerce (SAIC), have kept active in April 2009.
A month after rejecting Coca-Cola's China juice deal, China's Ministry of Commerce (MOFCOM) announced its decision on 24 April 2009 to clear Mitsubishi Rayon Co. Ltd's acquisition of Lucite International Group Limited subject to various conditions. Limits placed on Mitsubishi Rayon included divesting production capacity upfront, maintaining operational independence until divestiture is complete and obtaining consent for future expansion in investment capacity, whether by acquisitions or investment in new plants.
On 27 April 2009, SAIC officially published two draft regulations concerning monopoly agreements and the abuse of dominant market position, respectively, for public comment on or before 31 May 2009. A preliminary version of these draft provisions, together with a third regarding the investigation and sanction of the mentioned anti-competitive behaviours, were previously disseminated to a small circle of competition professionals in China for consultation.
U.S. DOJ continues to pursue prison sentences for LCD screen cartel executives
A high-level executive from Korean company LG has entered a guilty plea to conspiring to fix the price of Thin Film Transistor Liquid Crystal Display (TFT-LCD) screens. The executive will serve one year in prison for his part in the cartel, joining a fellow LG executive as well as 3 executives from Taiwanese manufacturer Chungwa, each serving between six and nine months.
In late December 2008, the United States Department of Justice (DOJ) successfully obtained guilty pleas from cartel members LG, Chungwa, Sharp and Hitachi. As of late April 2009, over US$616 million (A$784 million) in fines had been handed down in relation to the cartel and charges brought against 9 individuals.
The worldwide market for TFT-LCD panels is estimated to be worth US$70 billion (A$89 billion) a year. The panels are used in a wide variety of consumer devices, such as computers, televisions, mobile phones and MP3 players.
A separate class action against the cartel companies remains on foot.
US set to take tougher line on competition enforcement
The Obama administration is showing signs of a more aggressive approach to antitrust investigation and enforcement, appointing Christine Varney as Assistant Attorney General for Antitrust at the DOJ, and selecting Jon Leibowitz as new head of the Federal Trade Commission (FTC).
An FTC Commissioner since 2004, Leibowitz was appointed as Chairman on 3 March 2009. Leibowitz has been an outspoken advocate of expanded FTC powers, arguing that the FTC’s legislated power to prohibit “unfair methods of competition” goes beyond the strict interpretation that the prohibition extends only to conduct that otherwise falls under the Sherman and Clayton Antitrust Acts.
As new DOJ Assistant Attorney General for Antitrust, Christine Varney has promised to bring the DOJ’s enforcement strategy closer to that shown by the EU, with stricter merger controls and an uncompromising approach to any attempt by dominant companies to abuse their market power. In her first public comments since her appointment on 4 May 2009, Varney said that the previous administration’s policy of “standing aside” had resulted in significant harm to the economy. She went on to signal that the administration was working towards repealing antitrust guidelines which restricted DOJ action.
Marine hose cartel member to settle claims without court action
Italian marine hose manufacturer Parker ITR has announced that it is willing to settle with any non-U.S. based direct purchaser of its hoses. The company was one of five companies to be fined after DOJ and EU investigations concluded late last year.
Any customer who agrees to the offer will be entitled to 16 percent of the amount spent on Parker’s marine hose between 31 January 2002 and 2 May 2007. The firm administering the settlement claims that it represents “the first private resolution of a company’s global cartel liability without any arbitration, mediation or litigation.”
Parker has already settled claims against U.S. direct purchasers, and intends to sign non-U.S. claimants onto standard agreements including releases from any future court action. No such court claims had been filed at the time Parker made the offer.
Author
Jeremy Davey, Solicitor
India’s new competition laws: regulating anti - competitive conduct- 22 May 2009
On 20 May 2009, the Indian Government formally notified provisions in the Competition Act of India relating to anti - competitive agreements and abuse of dominance. The Indian Government has also establisheda Competition Commission of India, set up to oversee the operation of the Competition Act.
Exposure Draft on unfair terms released - 12 May 2009
On 11 May 2009, Minister for Consumer Affairs, Chris Bowen released the Trade Practices Amendments (Australian Consumer Law) Bill 2009 (Exposure Draft) on unfair terms. The Exposure Draft will amend both the Trade Practices Act 1974 (Cth) and Australian Securities Investment Commission Act 2001 (Cth). The proposed unfair terms will apply nationally across all sectors of the economy and to both consumers and small and large businesses.
ACCC issues guidelines on new component pricing laws - 7 May 2009
On 6 May 2009, the ACCC released guidelines to the new changes to component pricing legislation. The changes affect the way in which businesses can advertise “part prices” under section 53C of the Trade Practices Act 1974 and will come into effect on 25 May 2009.
Creeping acquisitions - Government releases second discussion paper - 6 May 2009
On 6 May 2009, the Government released a second discussion paper calling for public comment on the best way to address the issue of creeping acquisitions.
Chinese regulators nearly battle ready - 30 April 2009
This publications features the latest merger clearance decision by the Ministry of Commerce (MOFCOM) and new draft rules on monopoly agreements and abuse of dominance, published on 27 April 2009, that look set to create a raft of regulatory investigations in China and will require firms to reassess their China regulatory strategy.
Government flags speedier resolution to infrastructure access disputes - 8 April 2009
This publication provides a summary of the reforms to streamline the National Access Regime in Part IIIA of the Trade Practices Act (TPA). A package of legislation to amend the National Access Regime is expected to be introduced to Parliament in mid-2009.
Coca-Cola’s China juice deal goes sour - 19 March 2009
China’s Ministry of Commerce (MOFCOM) announced in March that it had rejected Coca-Cola’s US$ 2.4 billion bid to buy China Huiyuan Juice Group Limited. This is MOFCOM’s first publicly announced decision to reject a merger since the Anti-Monopoly Law came into effect on 1 August 2008. This publication canvasses some of the important policy and regulatory guidance raised by the decision.
Author
Peter Yeldham, Solicitor
A ‘dawn raid’ is a well-recognised, often public example of the ACCC’s formal enforcement powers. However the ACCC may also conduct investigations on a more informal, voluntary basis. This informal approach is sometimes preferred by the ACCC for being less intrusive, faster and more flexible. For this reason, many businesses may experience a voluntary request for information rather than a compulsory notice and should be aware of the parameters when co-operating with the ACCC on this basis.
In all dealings with the ACCC, any decision to co-operate with the regulator’s investigations needs to be balanced with the desire to protect the business’ interests, particularly the preservation of confidentiality in privileged or commercially sensitive information.
What are your rights and obligations?
Unlike a section 155 notice or a search and seizure warrant, which are governed by the relevant sections of the TPA, the obligations and rights of each party during ACCC informal information requests are less clear cut. The ACCC’s website contains an Information Policy (Information Policy) which provides some guidelines as to the collection, use and disclosure of information by the ACCC.
Co-operation
Co-operating with the ACCC’s enquiries can lead to a speedier and more cost effective resolution.
Failure to provide adequate information from the outset can be misleading and may result in the Commission exercising its formal powers under section 155 of the TPA, particularly if it believes a party is still capable of furnishing information, producing documents or giving evidence relating to a potential contravention of the TPA.
The ACCC may also revert to its statutory powers where a party seeks to attach conditions to the provision of information that would constrain the ACCC in the exercise of its functions.
Quick tips:
- Do not mislead the ACCC with false information or ‘part truths’ - paint the complete picture and provide full and frank disclosure of all relevant information you have at hand
- Do not provide the information subject to inflexible conditions which might hamper the ACCC’s investigations
Consider relevance of requested information
Businesses need to question the relevance of the information requested in the context of the ACCC’s investigation. They should consider what the ACCC is really looking for and what may be driving their requests. Target your information to the specific complaint contained in the information request.
Commercial confidentiality
Parties should be aware of how the ACCC deals with commercially sensitive or confidential information before voluntarily providing the regulator with any material. A lack of foresight into what may happen to commercially sensitive or confidential information may result in parties’ inadvertently disclosing information that may have a substantial adverse effect of the business.
The Information Policy sets out the ACCC’s policies in relation to the treatment of confidential information. Whilst the ACCC is committed to treating confidential information responsibly and in accordance with the law, the Commission may be legally required to produce confidential information down the track, including providing information to third parties without prior notification and consultation.
Quick tips for confidential information:
- clearly identify the part of the information that is confidential (a blanket claim over the whole document/ suit of information should not be made unless the entirety is truly believed to be confidential)
- the information must be genuinely confidential and not publically available
- mark each document ‘confidential’ on the relevant sections to reduce the risk of inadvertent disclosure
- provide reasons in support of all confidentiality claims.
Legal professional privilege
Parties should be mindful that information that would otherwise be privileged may be waived in circumstances where the parties voluntarily disclose the privileged communication to a third party, such as the ACCC, particularly where the privileged communication is voluntarily disclosed to the ACCC on a non-confidential basis. For further information on legal professional privilege can be found here.
Author
Leisha Marasinghe, Solicitor
Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 - amendments to the joint venture exception
Last minute amendments were made to the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill (Bill), before it was scheduled to be debated in the Senate on 14 May 2009.
The amendments are intended to address initial concerns that the joint venture exception would have disadvantaged certain types of legitimate joint ventures as the original wording of the Bill limited the exception to only those cartel provisions contained in a ‘contract’, rather than those contained within ‘arrangements or understandings’.
The latest amendments provide that the exception will also now apply to arrangements and understandings where the parties to the joint venture agreement can prove that, when the arrangement or understanding was made or arrived at, they intended the arrangement or understanding to be a contract and reasonably believed that the arrangement or understanding was a contract, notwithstanding that, as a matter of law, they had failed to make a contract. Additionally, the civil offence exception requires the parties to prove that, when the arrangement or understanding was given effect to, each party reasonably believed it was a contract.
The amendments also inserted explanatory notes into the Bill to clarify the inter-relationship between the joint venture exceptions and other provisions contained in the Bill.
Market, what market?
On 2 April 2009, Emirates and Singapore Airlines challenged the validity of several ACCC’s section 155 notices before the Federal Court.
The airlines argued that there was no market in Australia for the supply of inbound international air cargo services as the marketing, negotiation, setting of rates and contracting for inbound air cargo services occurs entirely outside of Australia.
The Federal Court held that as the business of an international airline included unloading cargo, booking flight services and dealing with complaints at the destination point, it could not be considered that all competitive activity between airlines offering air cargo services takes place at the point of origin of the cargo.
The Federal Court adopted a broad view of what might be considered "competitive activity in Australia". On the basis of the reasons provided by Justice Middleton, the only circumstances where the ACCC's compulsory information gathering powers may be curtailed would be when there is conclusive evidence that the relevant conduct only involves the supply and acquisition of services outside Australia.
In other airline news, the ACCC has instituted proceedings in the Federal Court against Cathay Pacific Airways. The ACCC alleges that between 2000 and 2006, Cathay Pacific entered into over 70 arrangements or understandings with other international air cargo carriers for the purpose of fixing the fuel surcharge price.
Cathay Pacific is the eighth airline to be the subject of ACCC proceedings for fuel surcharge price fixing. The total pecuniary penalties to date ordered against respondent airlines in these related matters is $41 million.
Black and Decker “Made in Australia”
The ACCC reported in April that Black & Decker has supplied a sanding product incorrectly labelled as 'Made in Australia'. The packaging on some of its Powerfile sanding belts were labelled 'Made in Australia' when in fact the belts were made in Germany.
The material to make the belts was originally sourced from Australia but was later sourced from Germany. Despite quality control processes put in place to resolve previous concerns raised by the ACCC, Black & Decker failed to detect the change to the sourcing of the materials used in the manufacture of the sanding belts.
The TPA provides a two step test which allows goods to be represented as being made in a specified country:
- 1) the goods must have been substantially transformed in the country that is the subject of the claim; and
- 2) 50 per cent or more of the cost of production or manufacture of the goods must has occurred in that country.
As well as removing the belts from sale, Black & Decker will extend the court enforceable undertaking provided to the ACCC to resolve a similar matter in 2006. The 2006 undertaking followed concerns that Black & Decker been representing certain of its sanding sheets were 'Made in Australia' when in fact the sheets were made in India.
The ACCC’s Graeme Samuel said traders need to continually ensure statements made about their goods are true and correct. "This vigilance is not a one off process but requires traders to be pro-active and to monitor and scrutinise statements about their products”.
“Publisher’s defence” clarified by the High Court
In March 2009, the High Court handed down a decision clarifying the application of the “publisher’s defence” to a breach of section 52 of the TPA.
The case concerned two episodes of the television show, Today Tonight, depicting a property investment scheme called ‘Wildly Wealthy Women’. According to the broadcast, the business offered to train women to make money out of property investment and made several misleading representations including those relating to the success of the business’ principals. The segments were organised by a marketer, who had made an arrangement with Wildly Wealthy Women to receive a commission for every woman who signed up as a result of this broadcast.
Section 65A of the TPA, also known as the ‘publisher’s defence’, provides a general exemption to most of the media, as publishers of news and current affairs, for publishing misleading or deceptive material.
The High Court found that the exemption conferred by section 65A does not apply to situations in which a media outlet publishes material which is subject to an arrangement with a third party and which endorses the misleading representations of that third party into the publication.
Channel Seven, in breaching section 52 of the TPA, was not allowed to rely upon the publisher’s defence due to the ‘arrangement’ with the marketer in question, which meant the publication was not at arm’s length.
ACCC v Pratt - admissibility of evidence
In December 2005, the ACCC instituted civil proceedings against Visy and its senior executives, including Mr Richard Pratt, for Visy’s involvement in a cartel. The proceedings were concluded in November 2007 on the basis of a Statement of Agreed Facts in which Visy conceded that it had engaged in the alleged conduct.
On 19 June 2008, criminal proceedings were commenced against Mr Pratt for alleged contraventions of section 155(5) of the TPA. Section 155(5) prohibits giving false and misleading information under a section 155 notice.
One of the key arguments put forward Pratt’s defence team was that four crucial documents that had been the subject of the civil proceedings, including the Statement of Agreed Facts, were inadmissible in the criminal proceedings because they did not constitute an acceptance of truth, but were merely something for the civil court to act upon.
On 27 April 2009, Justice Ryan held that the admissibility of the documents depended on whether they contained representations by Mr Pratt of a fact “tending to establish” what the ACCC was seeking to prove in the criminal proceedings. His Honour concluded that none of the documents, including the Statement of Agreed Facts, contained representations in the sense necessary for them to constitute evidence of an admission. Following this decision, the DPP withdrew its criminal prosecution of Mr Pratt on the grounds that it was against public interest given Mr Pratt’s ill health.
First licence under the Water Industry Competition Act 2006
On 7 May 2009, the NSW Government issued the first licence under the Water Industry Competition Act 2006 (NSW) to Veolia Water, opening Sydney’s water network to private competition. The licence permits Veolia Water to construct, maintain and operate a new recycled water plant at Fairfield as part of the Rosehill Recycling Scheme that will initially provide 4.3 billion litres of recycled water a year to industrial and irrigation customers in Western Sydney.
A second licence has also been issued to Aquanet Sydney, a division of Jemena, to allow the high-quality recycled water to be transported to users through a network of retrofitted gas pipes.
Author
Peter Yeldham, Solicitor