Australia: Creeping Acquisitions - The Way Forward?

The Commonwealth Government released its discussion paper on 'Creeping Acquisitions - The Way Forward' on 6 May 2009. The paper proposes adding a new limb to the merger test in section 50 of the Trade Practices Act 1974 (Cth) (TPA) that will prohibit corporations that have a substantial degree of power in a market making acquisitions that 'enhance' their market power. Submissions have been requested by 12 June 2009. This update outlines the proposals in the latest discussion paper and the potential implications for businesses if those proposals are adopted.

This latest discussion paper follows on from an initial discussion paper on creeping acquisitions that was released on 1 September 2008. The 2008 discussion paper and the reasons why creeping acquisitions are considered by the Government to be a concern are discussed in our December 2008 publication 'Creeping Acquisitions: Should you be concerned about proposed changes to merger restrictions?'.

What Is A 'Creeping Acquisition'?

The 2008 discussion paper described creeping acquisitions as 'conduct that comprises 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' of the TPA.

However, in its submission on the 2008 discussion paper, the ACCC redefined 'creeping acquisitions' in a much broader manner, stating:

The term 'creeping acquisition' encompasses a range of situations. While it can refer to a series of acquisitions over time that individually do not raise competitive concerns, but when taken together, the acquisitions have a significant competitive impact, the term creeping acquisition also refers to a firm with substantial market power enhancing its market power through one (or more) acquisitions which individually do not lessen competition.

The Government has endorsed this expanded definition of a creeping acquisition in the latest discussion paper. As we explain below, the proposed new test in that paper could prohibit a single acquisition by a corporation with substantial market power, even if the corporation has not made any other recent acquisitions. The discussion paper therefore partially moves the debate away from the narrow issue of the combined effects of a series of small acquisitions to the wider issue of the effects of a single acquisition by corporations with existing market power.

The Two Models Proposed In The Original 2008 Discussion Paper

The 2008 discussion paper proposed two potential models to address creeping acquisitions: the 'aggregation model' and the 'significant market power model'.

Under the aggregation model, an acquisition would be prohibited by the TPA if the combined effect of that acquisition and any other acquisitions by the corporation within a specified period would substantially lessen competition. Six years has been suggested as a potential 'specified period'. This model would use the existing section 50 test of 'substantially lessening competition', but would amend it so that previous acquisitions within the specified period were also considered when determining the effect on competition.

Under the significant market power model, a new merger prohibition would apply to corporations with substantial market power. Those corporations would be prohibited from making an acquisition that would result in any lessening of competition (ie not just a substantial lessening as under the current test).

The Government's Proposed 'Amended Significant Market Power Model'

In its latest discussion paper, the Government indicates that it no longer supports the aggregation model. Instead, it states that 'one option being carefully considered by the Government' is an amended version of the significant market power model. This model would only apply to a corporation with substantial power in a market and would prohibit an acquisition that has the effect or likely effect of 'enhancing' that corporation's market power.

The Government's proposed 'amended significant market power model':

A corporation that has a substantial degree of power in a market must not directly or indirectly:

  1. acquire shares in the capital of a body corporate; or
  2. 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.

'Substantial degree of power in a market' would presumably have the same meaning as in the current misuse of market power provision in section 46 of the TPA. The discussion paper gives no indication of the intended meaning of 'enhance' and there is no useful judicial or legislative guidance on the meaning of the term.

The Potential For A Ministerial Declaration Of The Corporations, Products Or Sectors To Which The New Test Will Apply

Although the discussion paper states that the amended significant market power model is just 'one option' that the Government is considering, the discussion paper does not propose any alternative models. The only other approaches that it discusses are modified versions of this significant market power model.

The discussion paper puts forward a potential modified version of the significant market power model where the new provision would only apply for a set period of time and in restricted circumstances. Under this approach, the Minister would have the power to declare that the new provision applies to a specified corporation or product/ service sector where the Minister has concerns about potential or actual competitive harm from creeping acquisition or acquisitions by corporations with substantial market power.

The discussion paper proposes that another possible twist on this model is that the legislation could provide that the Minster's declaration could only be made after receiving an application from the ACCC.

Another possibility that is raised in the discussion paper is that as part of the declaration process the Minister could set thresholds for the mandatory notification to the ACCC of acquisitions by corporations that are covered by any Ministerial declaration. At present, there is no legal obligation to notify acquisitions to the ACCC, unlike in several overseas jurisdictions such as the European Union. However, some sectors such as the grocery industry have voluntary Codes of Conduct that already require signatories to the Code to notify any acquisitions to the ACCC.

Implications For Businesses

The original call for legislative reform to address creeping acquisitions came from the ACCC's Groceries Inquiry. The ACCC has stated that the particular structural features of the supermarket industry means that acquisitions by Coles or Woolworths of small independent supermarkets are a potential competitive concern and those acquisitions are unlikely to be prohibited by the current TPA provisions.

However, the Government's proposals could potentially have much wider application and could affect any corporation that has substantial power in a market. The discussion paper notes that the Federal Court has previously held that a corporation had substantial market power when its market share was only 16-20% (ACCC v Australian Safeway Stores (No 4) [2006] FCA 21). Accordingly, the proposed new prohibition will not only apply to monopolies or near-monopolies and could cover a large number of corporations.

Examples of the sectors in which the proposed 'amended significant market power' test could potentially prohibit mergers that may currently be permitted by the TPA include banking, petrol and telecommunications. For example, it is likely that the proposed new test would have prohibited recent mergers such as Westpac/St George or Commonwealth Bank/Bank West, or the proposed Caltex acquisition of Mobil's retail business. The proposed changes could also affect any other sector where there are several large corporations and a number of smaller competitors that are potential targets for acquisition.

The Way Forward

The ACCC appears to firmly support the 'amended significant market power model' and the Government has referred to reform on creeping acquisitions as being an election commitment. It therefore appears likely that some form of legislation addressing creeping acquisitions will be introduced in the near future. However, the release of a second discussion paper demonstrates that the Government is still interested to hear from businesses on the effect of reform in this area and suggestions for improvements to the models proposed in the discussion paper.

Businesses that could be affected by the proposed changes should therefore consider making a submission. Submissions are due by 12 June 2009 and a copy of the discussion paper can be obtained from Treasury's website, for more information: click here.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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