Section 50 of the Trade Practices Act 1974 (TPA) prohibits mergers or acquisitions that are likely to result in a "substantial lessening of competition" in a market, a test that the Government believes needs amending to better address problems associated with so-called "creeping acquisitions". On 1 September 2008, the Minister for Competition and Consumer Affairs released a discussion paper (discussion paper), foreshadowing options for legislative changes to the merger provisions of the TPA.
"Creeping acquisitions" are described in the discussion paper as the "accumulated effect of a number of small individual transactions which, when considered in isolation at the time that each transaction occurred, would not breach section 50 ... [but] over a longer period a series of such transactions may have the cumulative effect of substantially lessening competition in a market".
Two proposals for creeping acquisition reform
The discussion paper outlines two specific options for legislative reform to prohibit creeping acquisitions. They are:
- The "aggregation model", and
- The "substantial market power" model.
The two models are true alternatives and neither is without difficulty.
The "aggregation model" would prohibit a firm making an acquisition if that acquisition, when combined with other acquisitions made within a specified time period, would be likely to substantially lessen competition in a market. For example, any fresh acquisition proposed by a firm would trigger a collective review of all acquisition made by that firm within, say, the previous three years (if that was the specified time period). If all the acquisitions taken together during the specified time period were found to "substantially lessen competition" then the most recent merger proposal would be barred.
The "aggregation model" will raise questions of retrospectivity if any change to the law is intended to capture acquisitions that have already occurred (but are nonetheless within the "specified" review period). The "aggregation model" might also raise complicated questions relating to the point in time at which the competitive effect of a series of creeping acquisitions should be assessed, particularly in circumstances where the dynamics of the market have changed significantly between the first and most recent acquisition. Nonetheless, the benefit of the "aggregation model" is that it will maintain the same legal test used in section 50 of the TPA, namely whether or not the acquisition will "substantially lessen competition" in a market.
The "substantial market power" model is very different and is likely to be much more controversial if the Government decides to proceed with it. Under this model, the TPA would prohibit a firm possessing a "substantial degree of power in a market" from making an acquisition if the acquisition would result in any lessening of competition in a market. This model would mark a significant departure from the existing legal test for merger clearance. The concept of a law applying specifically to firms possessing a substantial degree of power in a market appears to be drawn from section 46 of the TPA, which prohibits such firms from taking advantage of its market power for an anti-competitive purpose. The "substantial market power model" would not, by definition, capture a number of creeping acquisitions by firms without a substantial degree of market power from seeking to build market power through a series of creeping acquisitions, even though the net effect of those acquisitions might result in a substantial lessening of competition.
A finding by the ACCC that a firm possessed a "substantial degree of power" in a market will also raise significant issues beyond the approval or rejection of the merger in question. The possession of a "substantial degree of power in a market" by a firm raises the prospect that section 46 of the TPA might be triggered by such a firm. A public finding by the ACCC of such a conclusion – even though not legally binding - will inevitably cause the wider business conduct of such a firm to be more carefully scrutinised by its competitors, customers and even the ACCC through the prism of section 46 for possible contraventions of that section.
A final consideration of any reform to the existing merger laws is also likely to involve an assessment on the effect of such reforms on the likely 'targets' of creeping acquisitions. If amendments to the existing merger laws have the effect of deterring or preventing firms from acquiring small or medium businesses, this might significantly reduce the value of those businesses by eliminating key potential purchasers. While a firm might be preventing from acquiring a smaller target, creeping acquisition laws will not necessarily prevent the acquiring firm increasing its market share through other means, such as expansion through 'organic growth'.
Public comments sought
The discussion paper states that it is not intended to reflect the "settled position" on these issued by the Government but is intended to gauge the best way forward. The Government has sought submissions from any interested party by 10 October 2008. Submissions should be made to:
Competition & Consumer Policy Division
Parkes ACT 2600
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