Chapter 2
The section 50 provisions
2.1
This chapter examines the bill's provisions in relation to its
amendments to section 50 of the Trade Practices Act 1974 (TPA).
Currently, section 50(1) of the TPA states that:
A corporation must not directly or indirectly:
a) acquire
shares in the capital of a body corporate; or
b) acquire
any asset of a person;
if the acquisition would have the effect, or be likely to
have the effect, of substantially lessening competition in a market.
2.2
Section 50(6) of the Act clarifies the meaning of 'a market':
In
this section:
market means a substantial market for goods and
services in:
(a)
Australia; or
(b)
a State; or
(c)
a Territory; or
(d)
a region of Australia.
2.3
Section 50 is the key provision relating to mergers and acquisitions. Creeping
acquisitions are a series of small-scale acquisitions that, individually, do
not substantially lessen competition in a market, but collectively may do so
over time.[1]
Each of these small acquisitions is not in breach of section 50, and the series
of acquisitions are therefore permissible by law.
2.4
There are currently no provisions in the TPA to prevent or limit
'creeping acquisitions'. This has been an area of recurring concern for this
committee. It recommended in a 2004 inquiry that 'provisions should be introduced
into the Act to ensure that the Australian Competition and Consumer Commission
(ACCC) has powers to prevent creeping acquisitions which substantially lessen
competition in a market'.[2]
The bill's provisions on section 50
2.5
The bill deletes the word 'substantial' from section 50(6). The
Minister for Competition Policy and Consumer Affairs, the Hon. Dr Craig Emerson
MP, explained that this would remove the risk that a court could adopt the view
that acquisitions in geographically confined markets may not be considered
substantial and therefore not fall within the scope of section 50.[3]
It is important to note, however, that this amendment does not oblige the ACCC
to examine the competitive impact of an acquisition on small markets. It is
simply a clarification that it can, and that it is a relevant factor where
there are issues.[4]
2.6
The bill also amends section 50 to replace references to 'a market' with
references to 'any market'. The amendment will clarify the ability of the ACCC
or a court to consider multiple markets when assessing mergers. In other words,
a business cannot challenge a decision to block a proposed acquisition on the
grounds that the substantial lessening of competition would be in a market
other than the primary market in which the acquisition would occur.[5]
The ACCC will be able to examine the effects of a proposed merger in both
upstream and downstream markets.
2.7
The Minister explained that together, these amendments will clarify the
operation of section 50 as it is currently interpreted by the ACCC, as set out
in its November 2008 publication, Merger Guidelines.[6]
Acquisition of greenfield sites
2.8
In addition, the government proposes to ensure that the ACCC can examine
the acquisition of greenfield sites and not just existing businesses. There
have been some queries as to whether the ACCC has the power to review
acquisitions of greenfield sites. In particular, the government's intent is to
ensure that the ACCC can review acquisitions by the major supermarket chains of
interests in new sites to investigate whether such acquisitions could
substantially lessen competition.[7]
Senate Economics Committee's inquiries
2.9
This committee has examined the issue of creeping acquisitions in the
context of section 50 on two previous occasions during this parliamentary term.
In August 2008, the committee reported on the provisions of the Trade Practices
(Creeping Acquisitions) Amendment Bill 2007.[8]
The bill was introduced into the parliament by Family First Senator Steve
Fielding in September 2007. In May 2010, the committee reported on the
provisions of the Trade Practices Amendment (Material Lessening of
Competition—Richmond Amendment) Bill 2009. This bill was introduced into the
parliament by independent Senator Nick Xenophon on 26 November 2009.[9]
2.10
Senator Fielding's bill advocated a timeframe within which the courts
and the ACCC would be directed to determine whether an acquisition had the
effect of substantially lessening competition. It proposed that an acquisition
could be prohibited if it and any one or more other acquisitions by the company
in the previous six years together have the effect, or are likely to have the
effect, of substantially lessening competition.
2.11
The committee report on Senator Fielding's bill recommended that the
Senate defer its consideration until the Government's legislation on creeping
acquisitions is presented.[10]
2.12
Senator Xenophon's bill proposed that a corporation that already has a
substantial share of a market would be prohibited from acquiring shares or an
asset which would have the effect of lessening competition in a market. The
bill also proposed a lower threshold for the section 50(1) prohibition,
replacing a 'substantial' lessening of competition with a 'material' lessening
of competition.
2.13
The Committee's report rejected the 'Richmond Amendment'. It argued that
setting a percentage market share threshold would be both arbitrary and
contentious. If the threshold is set too low, it may prevent relatively small
firms with a sizeable share of a local market from merging to increase efficiency
and competitiveness.[11]
The government's inquiry process
2.14
The Australian Labor Party pledged prior to the 2007 federal election
that in office, it would enact laws to deal with creeping acquisitions by amending
section 50 of the TPA.
2.15
In July 2008, the ACCC released its report into the competitiveness of
retail prices for standard groceries. Although it noted that creeping
acquisitions do not appear to be a significant current concern in the
supermarket retail sector, the ACCC supported the introduction of a general
creeping acquisition law. It noted that given 'particular structural features'
of the retail supermarket industry, 'creeping acquisitions are a potential area
of concern'.[12]
2.16
The Second Reading Speech to this bill notes that following the ACCC's report,
the government subsequently undertook 'extensive public consultations in 2008
and 2009 to seek the community's view on possible reform options'.[13]
These consultations were initiated through two government discussion papers.
The first, released in September 2008, noted two possible approaches to
addressing concerns about creeping acquisitions:
- to prohibit a corporation from making an acquisition if, when
combined with acquisitions made by the corporation within a specified period,
the acquisition would be likely to substantially lessen competition in a
market; or
- to add a new prohibition to section 50 whereby a corporation must
not make an acquisition if it already has a substantial degree of power in a
market, and the acquisition would result in any lessening (as opposed to
substantial lessening) of competition in the market.[14]
2.17
The committee notes the strong similarities between these proposals and Senators
Fielding and Xenophon's private members bills (see above).
2.18
The government released a second discussion paper in May 2009. This
paper invited comment on two further options to implement a creeping
acquisitions law:
- to prohibit mergers and acquisitions that enhance a corporation's
existing substantial market power where a direct or indirect acquisition of
shares or assets 'would have the effect, or be likely to have the effect, of
enhancing that corporation's substantial power in that market' (thereby
avoiding the phrase 'substantial lessening of competition'); or
- to give the Minister the power to unilaterally 'declare' a
corporation where s/he has concerns about potential and/or actual competitive
harm from creeping acquisitions.[15]
2.19
On 22 January 2010, the Minister for Competition Policy and Consumer
Affairs, the Hon. Dr Craig Emerson MP, announced that the government will move
to ensure that the ACCC has the power to reject acquisitions that would
substantially lessen competition in any local regional or national market. As
chapter 1 noted, the bill was introduced into the parliament on 27 May 2010.
Views on the 'creeping acquisitions' provisions
2.20
This section canvasses the comment the committee received on the
creeping acquisitions provisions in the bill. The majority of this comment
related to the amendment to section 50(6) and the implications of removing the
word 'substantial' for the ACCC's analysis of mergers and acquisitions.
A minor clarification
2.21
Several submitters to both this inquiry and the committee's inquiry into
the Richmond Amendment in April this year expressed the view that the section
50 amendments are merely a clarification of existing understanding and
practice.
2.22
The ACCC have stated they already consider the competitive effects of an
acquisition on a local market when assessing section 50(1) cases. Mr Tim
Grimwade told the committee:
We act on the basis, and have acted on the basis, that we
have jurisdiction to deal with local markets. In fact, it is an incredibly
important part of merger review, because there are so many retail acquisitions
of import that occur in local markets, and we have blocked transactions where
mergers occur in local markets on the basis of local markets. There has been
some legal doubt expressed to us whether a substantial market encompasses a
local market. The government’s announcement to ensure that it is clear that a
local market can be a substantial market does shore up our ability to deal with
mergers in local markets.[16]
2.23
The Law Council argued that of all the options raised over the past few
years to reform section 50, this bill's proposals are 'least objectionable'
because they largely clarify existing merger law and practice.[17]
Mr Dave Poddar, the Chair of the Law Council's Trade Practices Committee, elaborated:
...our committee notes that the proposed amendments are largely
pragmatic responses to the government’s desire to implement legislative change
to account specifically for the possibility of harmful creeping acquisitions
not caught by the current legislation. As such, and taking into account the
governmental commitment to amending section 50 of the TPA, our committee
believes the proposed amendments are the least objectionable because they
largely clarify the existing merger law and practice without making substantial
and unnecessary amendments to the operation of section 50 of the act, retain
the economic rationality of the current merger test and are consistent with the
existing architecture of the substantial lessening of competition test in
section 50 and other provisions in part IV of the TPA.[18]
2.24
The Law Council argued that in its opinion, that ACCC already considers
the effects on a local market when considering the provisions of section 50(1).
In evidence during the committee's hearing into the Richmond Amendment in April
this year, the Law Council noted that:
The ACCC, when looking at the Woolworths acquisition of those
FAL stores in Perth, undoubtedly looked at each individual local area as a
separate market and considered the acquisition in each separate local market. I
was advising the ACCC.[19]
2.25
Mr Milton Cockburn, Executive Director of the Shopping Centre Council of
Australia was asked his opinion of the government's proposed change to section
50. He responded:
...my understanding of Minister Emerson’s media statement in
January was that it was a clarification. I think, if you look at a lot of the
mergers and acquisitions that have been examined by the ACCC, they have got
down to the nitty-gritty of local markets. I think someone has referred to the
Woolworths acquisition of FAL and its acquisition of some of the old Franklin sites,
the recent Caltex-Mobil examination and the Westfield acquisition of the AMP
Shopping Centre Trust. In all of these cases, my understanding is that the ACCC
looked at the impact upon local markets. My understanding is that a legal
opinion was floating around that said, by examining the impact on the local markets,
the ACCC was possibly in contravention of the Trade Practices Act simply
because the word ‘local’ is not mentioned; it refers to...national or state
regional markets but not local markets.[20]
The need for more action
2.26
Other witnesses and commentators have argued that the amendments to
section 50 are indeed minor and they needed to go further. For example, the
Motor Trades Association of Australia (MTAA) expressed doubt as to whether the
bill addresses its concerns about creeping acquisitions. It noted in its
submission that throughout the inquiry process, the MTAA has supported a more
significant change to the Act. Its preference is for a provision prohibiting a
corporation from making an acquisition if it already has a substantial degree
of power in a market and the acquisition would result in any lessening of
competition in that market (see paragraph 2.16).[21]
2.27
Choice was quoted in the Australian Financial Review as
saying that the bill simply reinforces the powers the ACCC already has. Mr
David Howarth, Choice's senior policy officer said that the bill
therefore does not address the issue of creeping acquisitions.[22]
In the same article, Minter Ellison partner Mr Richard Murphy was quoted
as saying:
It doesn't matter if it's a geographically large market or a
geographically small market, at the end of the day it has to be recognisable as
an economic concept as a separate market.[23]
2.28
Mr Ken Henrick, Chief Executive Officer of National Association of
Retail Grocers of Australia (NARGA), told the committee that the effectiveness
of the legislation will depend on the ACCC's response.[24]
On this score, however, he argued that the ACCC had failed in the past:
They have had laws like this. For example, the Baird
committee recommended including the word ‘regional’ so that a smaller market
could be looked at. They were trying to do in the context of 1999 what this
bill is trying to do now. It has had no effect on the way the ACCC has
operated.[25]
Micromarkets
2.29
The committee asked Treasury why it was necessary to remove the word
'substantial' from section 50(6). Treasury noted the comments of Justice French
in the Federal Court case of AGL v ACCC.[26]
Justice French observed that there were circumstances in which a substantial
lessening of competition (section 50(1)) could arise in a particular market,
but because it was not held to be substantial (section 50(6)) it might
fall outside of the ACCC's ability to block that acquisition.[27]
2.30
However, the Law Council expressed concern that the proposed amendments
will result in the ACCC undertaking greater analysis of 'very small submarkets
which are not economically distinct' and should not form part of the ACCC's section
50 assessment.[28]
Mr Poddar was asked his opinion on how to define the smallest market for which
section 50 concerns might arise. He responded:
It has to be something meaningful to the level of
competition. We do not have something which creates thresholds of turnover, as
some countries do. The commission has the ability to come in and look at markets
which may involve very small amounts of commerce if the products which are in
those markets are critical and relevant to products or sales of different
products. It is not possible to give you a definitive answer as to how small
that number could be. I am aware that the commission has looked into mergers
which are in a numeric matter of $4 million, over the years that I have been a
practitioner on the other side of the commission. I have been in transactions
where the commission has looked into mergers involving $250,000. Hence some of
our comments about the fact that we need to be very mindful about just how far
regulators move down into commerce and what actually is a significant degree of
commerce.[29]
2.31
The Business Council of Australia (BCA) has also expressed concern that
the amendment to section 50(6) of the Act will have the effect of 'unnecessary
examination of less than economically meaningful markets that are not
substantial'. It argued that this would create unnecessary burdens and costs
for business which would in turn dampen economic activity and investment. The
BCA recommended that the bill should provide for a review of its effect after
two years.[30]
Spillover effects
2.32
The Law Council also expressed concern at the effect of the bill's
amendments on industry sectors other than supermarkets. Mr Poddar told the
committee that the amendments will apply across all industry sectors, including
to those sectors about which no concerns have been raised. He argued that while
the intention of the bill is a general amendment, there is a need for the ACCC
to minimise extra cost to industry by being mindful of how it administers
across sectors where there have not been concerns.[31]
2.33
Mr Gerard van Rijswijk, Senior Policy Advisor at NARGA, dismissed these
'spillover' concerns as largely irrelevant. He told the committee that:
...if other industries were not as concentrated, they would not
be as affected. The problem is concentration. Section 50 deals with the
competitive issues that result from overconcentration in relation to
acquisitions and mergers. If the other industries do not have that problem then
they will have nothing to worry about.[32]
Market size or market power?
2.34
In its evidence to the committee, the Law Council distinguished between
the use of the word 'substantial' in section 50(1) and in section 50(6). In
section 50(1), the word is used in the context of the effect of the acquisition
on competition. In section 50(6), 'a substantial market' relates to the scale
of the market in which the competition takes place. Mr Poddar expressed the Law
Council's concerns at the bill's amendment to section 50(6) through a sporting analogy:
Our concern that the football field, or the field in which
the dynamics of competition are assessed, does not become tiny—that it does not
in fact become the square in which the ball is bounced. The appropriate market
is the football field so you can see all the dynamics of competition.[33]
2.35
It was put to Mr Poddar that the key issue is not the size of the field (market
size) but the unequal number of players on the teams (market share). He
responded:
It is not the market share that it is important; it is the
conditions of competition. It is the entry barriers, the ability for people to
enter into that football field and compete vigorously. We think it is wrong to
look and focus too narrowly on concentration figures because concentration
figures do not show the real dynamics of competition. They do not show a vigorous
new entrant who comes in and competes vigorously whether it is a tall ruckman
or a fantastic rover. What you should be looking at is how that competition
actually occurs on the football field, not the shares of those football fields
because competition changes every day.[34]
2.36
Other submitters disagreed with this analysis and emphasised the
importance of market share in the context of assessing mergers. NARGA, notably,
told the committee that:
...the real nub of competition is having many competitors, each
having a small share of the market, competing with each other and improving the
market as a whole. That is competition, and nobody seems to think of that as
the model of competition on which the Trade Practices Act should be based or
should regulate. In fact, the act has no definition of competition. It just
assumes everybody knows what it is.[35]
The Herfindahl-Hirschman Index
2.37
NARGA referred in its submission to the Herfindahl-Hirschman Index (HHI).
The Index is a measure of the size of firms in relation to the industry and an
indicator of the amount of competition among them. It is defined as the sum of
the squares of the percentage market shares of each individual firm.[36]
2.38
The HHI can range from 0 to 10 000 moving from a very large amount
of very small firms to a single monopolistic producer. Where there are only two
firms of equal size, the HHI will be 5000. Where there are many firms of
different size and the HHI is around 1000, for example, the degree of
concentration is equivalent to ten firms of equal size.
2.39
NARGA noted that in other jurisdictions, notably the United States, the
quantification of market share is an important part in the merger approval
process. It observed that:
In the USA a post merger market with a HHI of less than 1000
is defined as ‘unconcentrated’, between 1000 and 1800 as ‘moderately
concentrated’ and above 1800 as ‘highly concentrated’. A merger potentially
raises ‘significantly competitive concerns’ if it produces an increase in the
HHI of more than 100 points in a moderately concentrated market or more than 50
points in a highly concentrated market. A merger is presumed ‘likely to create
or enhance market power or facilitate its exercise’ of it produces an increase
in the HHI of more than 100 in a highly concentrated market.[37]
2.40
Mr van Rijswijk contrasted the approaches of the Australian and
American regulators in their use of the HHI:
The US regulators look at a market of 1,000 or higher post
merger as being of concern. The ACCC, where our markets are much more
concentrated already, do not bother looking at the market until it is over
2,000. That is a much higher level of concentration. In fact 2,000 in terms of
the regulator in the USA is above their 1,800 threshold which they regard as
highly concentrated. That is significant in the USA context because at that
level of concentration antitrust laws kick in where they can actually require
the market to be split up. We do not have those provisions in the act. The US
regulators are quite active on the concentration issue. They see concentration
as being the major problem in the lack of competition within the market.[38]
2.41
Treasury was asked why the HHI was not a greater determinant in the
merger and acquisition approval process in Australia, as it is in the United
States. Mr Andrew Deitz responded:
One of the things I would point out is that the HHI is one of
many indicators used by the commission when considering the state of
competition in a particular market, as it is with the US. Market shares are
always a factor that everyone does consider, but I would not place it any
higher than it is—something which is a factor considered in a broader
competition analysis. So the reference to the USA merger guidelines and the
extent to which they talk about HHIs, yes, they do have a view about what the
numbers mean; but it is a rebuttable presumption.[39]
2.42
Treasury also noted that the merger guidelines published in the United
States this year diminished the importance of market shares as determinative in
looking at whether a merger is likely to substantially lessen competition.[40]
The committee notes the following observation in the guidelines:
The purpose of these thresholds is not to provide a rigid
screen to separate acceptable mergers from anticompetitive transactions,
although high levels of concentration do raise concerns. Rather, they provide
one way to identify those mergers for which it is particularly important to
examine whether other competitive factors confirm, reinforce, or would
counteract the potentially harmful effects of increased concentration. The
higher the post‑merger HHI and the increase in the HHI, the greater is
the likelihood that the Agencies will request additional information to conduct
their analysis.[41]
'Any market'—the section 50(1)
amendment
2.43
The committee received some comment on the bill's amendment to section
50(1), changing 'a market' to 'any market'. The MTAA welcomed the amendment
stating it should allow the ACCC to consider all markets in which the acquirer
is active in relation to any merger matter.[42]
2.44
While supporting the change, NARGA argued that the phrase 'any market'
needs to be clarified. It noted that the grocery market is composed of a number
of subsets from the full range of grocery products supplied through a large
supermarket, to packaged groceries, fruit and vegetables, meat, delicatessen goods,
milk and bread. Each of these markets could be differentially affected by an
acquisition in a local market. NARGA urged for guidelines to explain how the
ACCC will interpret the 'any market' definition.[43]
2.45
Master Grocers Australia and Liquor Retailers Australia supported
NARGA's proposal. They argued in their submission that:
The inclusion of the word “any” should enable the ACCC to
embrace the impact on all markets that are likely to be affected by an
acquisition rather than being limited to a single market. There is no doubt
that in order to ensure that the amendments are effective, they need to be tested
and MGA supports the views expressed by National Association of Retail Grocers
Australia (NARGA) in its submission, in particular, the call for Guidelines
which would provide a clear interpretation of the amended clauses.[44]
Committee view
2.46
The committee supports the government's proposed amendments to section
50 of the TPA. While the amendments may seem fairly minor points of
clarification, it is important that the regulator, the courts and the public at
large understand that the ACCC can consider a local market in their assessment
of section 50.
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