research assignment 2

MLL409 - Competition Law Research Assignment

“Creeping Acquisitions – Section 50 Amendment”

Wendy McKay

700088184

13 September 2010

Competition Law Assignment Wendy Susan McKayMLL409 70008818413 September 2010 Word Count: 2,828___________________________________________________________________________

Introduction

As stated by Terry McCrann of the Herald Sun, creeping acquisitions are:

“a little bit like chopping down trees: if you chop them down one at a time you think you are just chopping down one tree, but before you know it you have actually chopped down a forest.”

What is a creeping acquisition? The term is one used to describe the gradual acquisition, over a period of time, by a corporation on an acquisition by acquisition basis until it acquires a substantial share of the market. This does not only apply to the acquisition of businesses, but also assets and greenfields sites.

Recently, the issue of ‘creeping acquisitions’ has been a hot topic in the media, most

commonly in regard to major supermarket chains1. However, this is not a new issue, nor is it confined to the retail grocery sector; although it is this sector which has generated most debate, both recently and in the past2. Submissions generated by these inquiries have, for the most part, resulted in support for a need for change in regard to the control of creeping acquisitions3. In our current economic climate, it is clear Australia needs to protect competition in all commercial sectors, both for domestic purposes and to remain strong within the global market. Irrespective of any perceived required change, other relevant factors come into play which will also need to be addressed; such as the removal of an exit path for independent operators wishing to sell their business4 and the possibility that any legislative reform would not account for any increase in market share through ‘organic growth’5.

The Australian Competition and Consumer Commission (‘ACCC’) has indicated that, although not an issue at the moment, creeping acquisitions may be an issue in the retail grocery sector in the future6 and as such, the problem will need to be addressed. The ACCC considers it improbable that Section 50 of the Trade Practices Act 1974 (Cth) (Section 50) is able to adequately address creeping acquisition issues thus providing a loophole through which competition may be at significant risk of damage.7

Of the acquisitions that the Commission has considered, none have been found to breach the Act. Under the previous dominance test that applied to mergers, the

1 Competition and Consumer Legislation Amendment Bill Explanatory Memoranda, Ch1.2: ‘The Grocery Inquiry’, Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries.

2 ‘The Baird Report’, Joint Select Committee on the Retailing Sector’s 1999 report Fair Market or Market Failure?

3 (For example) Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries submissions by the National Association of Retail Grocers of Australia (NARGA) and Master Grocers Australia (MGA)

4 Coles, submission no. 226, p 26 - ‘The Grocery Inquiry’, Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries.

5 Ibid6 Grocery Inquiry7 Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008:

Australian Competition and Consumer Commission (ACCC) – submission to the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs regarding creeping acquisitions – October 2008


Commission would face a similar problem in that an accretion of such a small market share would be unlikely to create a dominant position.8

As at the date of this paper, the ACCC does not have adequate power under Section 50 nor for that matter, under any other Australian Act or Regulation, to assess the accumulative impact on competition of a series of acquisitions over time. Nor, is there any current regulatory mechanism outside the ACCC for the control or monitoring of creeping acquisitions. This may however change with the introduction of the 2010 Competition and Consumer Legislation Amendment Bill9.

Much debate has occurred over the most appropriate approach to control and prevent creeping acquisitions that undermine the objectives of the Trade Practices Act. The more prevalent voices advocate a need to amend the Trade Practices Act allowing the ACCC to regulate and prevent such acquisitions10. Others have suggested a non-legislative framework would be more appropriate.11 Although these submissions and recommendations have been varied, it seems there is consensus for reform in this area.

As a result of the Grocery Inquiry, two discussion papers were released by the Hon Chris Bowen MP, Assistant Treasurer and Minister for Competition Policy and Consumer Affairs entitled ‘Creeping Acquisitions’ and ‘Creeping Acquisitions – The Way Forward’ outlining proposed methods to deal with creeping acquisitions and asking for submissions.

Objectives of s50

The objective of the Trade Practices Act in general is to promote competition and fair trading and thus protect consumers. These objectives are achieved by, inter alia, by prohibiting anti-competitive trading practices. Section 50 supports these objectives by prohibiting acquisitions resulting in a substantial lessening of competition. The ultimate objective of s50 is to prevent mergers or takeovers that would have this effect. However, it can be said that these objectives have only been partially realised, as creeping acquisitions fall through the legislative cracks and are in fact both detrimental to competition and ultimately the consumer.

The court or the ACCC must take into account, when determining whether an acquisition is in breach of Section 50, the overarching objectives of the Act – ‘to enhance the welfare of Australians through the promotion of competition’12.

Historical Perspective - Section 50 Reform

8 Australian Competition and Consumer Commission, Submission 191, p 32.9 Competition and Consumer Legislation Amendment Bill 201010 11 12 Competition and Consumer Legislation Amendment Bill 2010 Explanatory Memoranda, 80


Historically, the issue of adequate control and prohibition of mergers and acquisitions, in particular creeping acquisitions, has remained largely unsettlednot been addressed by Australia’s legislative competition law reforms. As a result, Section 50 has been in a constant state of instability and review, with reforms providing some relief against anti-competitive practices, but falling short of providing much needed protection for consumers from competition issues arising from creeping acquisitions.

From its inception in 197413, Section 50 provided that only those mergers or acquisitions which ‘substantially lessened competition in the market for goods and services’ were prohibited. In 1977, the threshold was raised to provide a prohibition on those mergers and acquisitions culminating in a ‘position of control or dominance in a substantial market’. This amendment reflected Australia’s eagerness to improve international commercial competitiveness14 It was clear that the intention was to limit the categories of merger captured by the Act, thus providing corporations with the ability to capture greater portions of the market.

Further changes to Section 50 in 198615, followed the decision in TPC v Ansett Transport Industries (Operations) Pty Ltd & Ors16 (which found that the accepted ‘control or dominance’ test was inadequate) and the 1984 Green Paper’s17 recommendations,. In TPC18, it was held that the word ‘control’ was a more encompassing word than ‘dominance’ and therefore redundant; thus rendering the test one of ‘dominance’. The Griffiths Committee19, after hearing submissions, suggested a return to the ‘substantial lessening of competition’ test to be unjustified20. Therefore the 1984 Green Paper’s21 recommendation for a return to the ‘substantial lessening of competition’ test as stood in 1974, was not adopted in the 1986 amendments. A reluctance to return to this test was, in part, driven by a motivation to improve international commercial competitiveness22. Although the majority of the Committee held that a return to the ‘substantial lessening of competition’ test was unwarranted, two members of the Committee dissented on the basis that Australia’s dominance test was uncommon in a free market approach to competition control23. However a further amendment in 199324, saw a return to the ‘substantial lessening of competition’ test.

The Dawson review25 recommendations culminated in the 2006 amendment26 to the Trade Practices Act 1974 (Cth) (‘the Act’). Although these amendments addressed mergers and

13 Ibid14 Hansard, House of Representatives, 3 May 1977, p 147815 Trade Practices (Transfer of Market Dominance) Amendment Act 198616 TPC v Ansett Transport Industries (Operations) Pty Ltd & Ors (1978) 32 FLR at 32517 The Trade Practices Act – Proposal for Change (1984 Green Paper)18 ibid19 Mergers, Takeovers and Monopolies: Profiting from Competition? Report of the House of Representatives

Standing Committee on Legal and Constitutional Affairs, May 1989, para 5.4.2220 Ibid p 11821 Ibid22 Trade Practices Revision Bill 1986 – Second Reading Speech, Attorney General23 Attorney-General, Hansard, House of Representatives, 19 March 1986, p 162724 25 Review of the competition provisions of the Trade Practices Act26 Trade Practices Legislation Amendment Act (No. 1) 2006

Wendy, 09/11/10,

This doesn't seem to quite fit. I know what you're saying but, it just seem like the wong word


acquisitions generally, it did not directly deal with the issue of creeping acquisitions. The amendment retained the ‘substantial lessening of competition test’ and also provided a voluntary a voluntary system whereby a corporation could, if it was apparent the proposed merger was likely to breach Section 50, apply for protection against legal action.

Although, as stated earlier, it is quite apparent that the issue of creeping acquisitions is one previously requiring addressing, the historical amendments to Section 50 have not hit the mark in this regard. There have been attempts, most recently with the introduction of two Bills, in February 2007 and November 2009, designed to address the issue directly; both failed to reach assent.27 Although it was clear that the issue still needed to be addressed:

‘This will have consequences not only for groceries but for petrol refining, banking, gas and electricity. This is not just an economic issue, nor is it simply about power and competition. It is also about the kind of Australia that we want to shape for the next generation. Two players—in this case Coles and Woolworths—owning, controlling and selling everything from petrol to potatoes is, in my opinion, not a better future for the next or subsequent generations.‘,28

Dr Brendan Nelson, MP

This however may be about to change, but whether this change will be adequate is still open to debate. The most recent and certainly the most interesting amendment to Section 50 to date, is the introduction in May 2010 of the Competition and Consumer Legislation Amendment Bill29 which directly addresses the issue of creeping acquisitions. This Bill is specifically aimed at providing a means by which the ACCC, under Section 50, may deal with creeping acquisitions. But does it go far enough?

Is S50 Applicable to Creeping Acquisitions?

As stated above, Section 50 currently falls short of allowing the ACCC to adequately address and prevent creeping acquisitions. This discrepancy arises because Section 50 operates to prevent ‘an acquisition’ that will have or is likely to have the effect of substantially lessening competition. The fact that Section 50 is drafted to only apply in respect to a single acquisition, places the ACCC in a position where it can only address each individual acquisition in respect to a ‘creeping acquisition’ on the basis of the effect or likely effect that particular acquisition would have on substantially lessening competition. Only where there is a major acquisition, will Section 50 come into play thus allowing the ACCC to prevent such an obviously detrimental acquisition from occurring. In the case of creeping acquisitions, it is clear that Section 50, as it currently stands, would encompass any minor dealing and therefore corporations are essentially given a ‘green light’ to acquire various small holdings gradually over a period of time.

27 Trade Practices (Creeping Acquisitions) Amendment 2007:Trade Practices Amendment (Material Lessening of Competition—Richmond Amendment) Bill 2009

28 ADJOURNMENT, Creeping Acquisition Legislation, SPEECH, Wednesday, 24 June 200929 Competition and Consumer Legislation Amendment Bill 2010


The Government’s intention, by the implementation of changes to Section 50 in the 2010 Bill30, is to directly address the specific problems associated with creeping acquisitions, rather than implementing general remedies that could have a negative impact on economic activity and employment31. The amendments to Section 50 will provide a means for achieving this goal, namely the consideration by the ACCC of the impact on competition in any market, including upstream and downstream markets32.

Opinions on Change - Section 50

There are many and varied advocates for legislative reforms in respect to limiting corporations from taking advantage of this loophole. There are also those, albeit perhaps those with a vested interest in the status quo, who are against any change to Section 50, citing it adequately deals with competition issues as it stands.

There were two models seeking to address creeping acquisitions put forward in Chris Bowen’s discussion paper33. The first is an aggregation model, the second a revised ‘substantial market power model’. The aggregation model was generally considered to be complex and generally unworkable.34 The ACCC considers the ‘substantial market power’ model to be the best option for dealing with creeping acquisitions as it specifically addresses the ramifications when an acquiring corporation already has substantial market power.

Proponents of amending Section 50 to include a restriction against creeping acquisitions, such as the ACCC, National Association of Retail Grocers of Australia (NARGA), Consumer Law Centre, Competition Commission (UK), Koundouris Group and Master Grocers Australia, to name but a few, have largely addressed the issue from the perspective of the grocery retail sector. For instance, NARGA has suggested that amendments would provide greater scrutiny of mergers and acquisitions.35 The Koundouris Group36 and Master Grocers Australia37 have suggested limitations be placed on acquisitions in areas where the acquiring corporation already has a presence.38 Master Grocers Australia did however temper this statement by pointing out that increased legislative controls on creeping acquisitions can have a limited negative impact; reducing exit pathways and prevent the stimulation of independent store growth.39

There have been suggestions that having smaller retailers in communities directly benefits the community in general, for example fundraising.

Then there are those advocate that Section 50 is adequate in its current form. Coles, Woolworths and Metcash all suggest that there is adequate protection for competition under

30 Ibid31 Competition and Consumer Legislation Amendment Bill 2010, Explanatory Memoranda, 1832 Ibid, 1933 Creeping Acquisitions discussion paper34 ACCC submission p1035 NARGA, submission no. 129, p 6, 35-6, NARGA, submission no. 159, p1136 Koundouris Group, submission no 35, p 437 Master Grocers Australia, submission no 96, p 1038 39 Ibid.

Wendy, 09/11/10,

support this claim!!!!!!!


the current Section 50. Coles has suggested that Section 50 already provides the ACCC with the ability to assess acquisition by looking forward.40 Woolworths has espoused that any alteration to regulation would see an additional burden to development times and costs and may detrimentally affect the competitive process.41 All suggest that it would remove the exit path currently available to smaller retailers42, although this has been countered by an argument that some small retailers may be forced to exit whether they wish to or not in the case of an acquisition by a more powerful corporation.43

Conclusion

It is clear that the proponents of change far outweigh those who oppose it. Regardless of the overwhelming support for change, there has been little consensus about how this should be achieved. The models put forward in Chris Bowen’s discussion papers have merit in certain respects and fall short in others. The submissions received in response to both discussion papers seem to reflect these shortcomings and the varied opinions as to how change should be implemented.

Frank Zumbo’s44 proposition that it is essential that Australia’s anti-merger laws effectively prohibit the full range of mergers and creeping acquisitions’ is certainly agreed by the vast majority. However, the means by which we seek to achieve this goal is not agreed.

The Richmond Amendment 201045 appears to provide a solution to the issue, although it may be that it does not go far enough to protect completely against creeping acquisitions. The Richmond Amendment will provide that the ACCC can look at acquisitions with respect to ‘any market’ as opposed to ‘a market’46, nor will the market be required to be ‘substantial’47. As observed above, these changes will allow the ACCC to look at both upstream and downstream markets, thus capturing creeping acquisitions. It is still a problem that acquisitions may pass unnoticed until the damage is done, although the ACCC does have the ability to restore the parties to their original positions, this may be problematic if several transactions have occurred over a long period of time. The only remedy available to the ACCC in those cases may be the imposition of pecuniary penalties, which in itself will not change the status quo of the market power acquired by the creeping acquisition.

It is a fine balancing act between adhering to the goals of the Trade Practices Act48, protecting competition, the consumer and the economy in general. It is difficult to find a balance between these competing priorities, but the Richmond Amendment is at least a start in the right direction.

40 Coles, submission no. 225, pp 25-2641 Woolworths, submission no. 232, p 1: submission no. 232, p 442 Coles, submission no. 226, p 2643 Hansard, Adelaide, 8 April 1999, p 176.44 Frank Zumbo, ‘The Dangers of Anti-Competitive Mergers and Creeping Acquisitions: The Case for the Richmond Amendment (2010) 18 TPLJ 106 at 11345 Richmond Amendment46 Competition and Consumer Legislation Amendment Bill 2010 ss50(1) and (2)47 Ibid, s50(6)48 1974


Bibliography

Articles

Clarke, Julie --- "The Dawson Report and Merger Regulation" [ 2003] DeakinLawRw 13 ; (2003) 8(2) Deakin Law Review 245

Legislation

Trade Practices Act

Trade Practices Amendment (Material Lessening of Competition-Richmond Amendment) Bill 2009

Trade Practices Amendment (Material Lessening of Competition-Richmond Amendment) Bill 2009, Explanatory Memorandum

Competition and Consumer Legislation Amendment Bill 2010

Competition and Consumer Legislation Amendment Bill 2010, Explanatory Memorandum

Second Reading Speech, 27 May 2010 http://parlinfo.aph.gov.au/parlInfo/genpdf/chamber/hansardr/2010-05-27/0005/hansard_frag.pdf;fileType=application%2Fpdf

Reports

‘Mergers, Monopolies and Acquisitions Adequacy of Existing Legislative Controls’, Report by the Senate Standing Committee on Legal and Constitutional Affairs, December 1991

Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008

The Senate Economics Legislation Committee, Trade Practices Amendment (Material Lessening of Competition-Richmond Amendment) Bill 2009 [Provisions]: http://www.aph.gov.au/Senate/committee/economics_ctte/richmond_amendment_09/report/report.pdf; accessed 6 September 2010

The Parliament of the Commonwealth of Australia, FAIR MARKET OR MARKET FAILURE? A review of Australia’s retailing sector, Report by the Joint Select Committee on the Retailing Sector, August 1999 http://www.aph.gov.au/SENATE/committee/retail_ctte/report/report.pdf

Discussion Papers

http://www.aph.gov.au/Senate/committee/economics_ctte/richmond_amendment_09/report/report.pdf

http://www.aph.gov.au/Senate/committee/economics_ctte/richmond_amendment_09/report/report.pdf

http://www.austlii.edu.au/cgi-bin/sinodisp/au/journals/DeakinLawRw/2003/13.html?stem=0&synonyms=0&query=DeakinLawRw%202003%2013%20or%202003%20DeakinLawRw%2013#disp0

http://www.austlii.edu.au/cgi-bin/sinodisp/au/journals/DeakinLawRw/2003/13.html?stem=0&synonyms=0&query=DeakinLawRw%202003%2013%20or%202003%20DeakinLawRw%2013#disp2


Chris Bowen MP, Creeping Acquisitions, Released 1 September 2008

Submission To The Competition And Consumer Policy Division, The Treasury, On Discussion Paper: Creeping Acquisitions By Julie Clarke

Submission by the National Association of Retail Grocers of Australia, July 2002

Australian Competition and Consumer Commission (ACCC) – submission to the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs regarding creeping acquisitions – October 2008

Chris Bowen MP, Creeping Acquisitions – The Way Forward, Released *

Books

Philip Clarke and Stephen Corones, Competition Law and Policy: Cases and Materials, 2nd Ed, 2005

S G Corones, Competition Law in Australia, 5th Ed, Lawbook Co 2010***

Misc

‘Takeovers, Corporate control: a better environment for productive investment’, Corporate Law Economic Reform Program, Proposals for Reform: Paper No. 4

Senate Legal and Constitutional References Committee, Inquiry into s. 46 and s. 50 of the Trade Practices Act 1974, May 2002

Attorney General’s Department, Comlaw Website - http://www.comlaw.gov.au/comlaw/management.nsf/lookupindexpagesbyid/IP200401339?OpenDocument&VIEW=principal&COUNT=25&START=1

Trade Practices Act Review, Department of Treasury:

http://tpareview.treasury.gov.au/content/report/html/Chpt3.asp

Journal of Economic and Social Policy, Volume 8, Issue 1 2003 Article 2, Business and Mergers Law in Australia: Never the Twain Shall Meet, Alistair Davey - http://epubs.scu.edu.au/cgi/viewcontent.cgi?article=1054&context=jesp


Zumbo:

Essential that Aus anti-merger laws effectively prohibit the full range of mergers and creeping acquisitions with a materially adverse impact on competition.

S50 only prevents extreme negative impact on competition – very high threshold. Clear and urgent need to amend s50.

Background:

Labor promised legislation to deal with CA in 2007 federal election. 1 September 08 – discussion paper from Chris Bowen MP (Ass Trea, Min for Comp Pol

and Consumer Affairs) – inviting comment.

11 June 2009 – discussion paper from Chris Bowen MP – inviting comment re 2 key alt options for dealing with CA.

November 2009 – Bill introduced by Nick Xenophon proposing alteration to merger

provisions, addressing CA.o May 2010 – senate inquiry recommended against the Bill.

May 2010 – Bill introduced by Gov with proposed amendments to s50 TPA re CA.

Resources:

Conclude with:o view on CA. w

o whether existing leg requires amending with reasons.

o Discuss appropriate objectives of merger/CA laws.

Can assess in context of the discussion papers and Bills but not required to assess by reference to them.

Look for articles on issue. Peer reviewed/published. Hansard. Other jurisdictions – optional. Google Scholar?

research assignment 2

Documents