Chapter 2
Creeping acquisitions and the bill's response
Creeping acquisitions
2.1
The Trade Practices Act 1974 (TPA) currently has
provisions designed to limit the scope for firms to reduce competition in a
market through acquiring other firms. Section 50(1) is designed to prevent
corporations from acquiring 'shares in the capital of a body corporate' or 'any
assets of a person' if the acquisition 'would have the effect, or be likely to
have the effect, of substantially lessening competition in a market'.[1]
Section 50(2) makes the same prohibition against an individual.
2.2
Section 50(3) of the TPA lists a number of non-exhaustive factors
to which the Australian Competition and Consumer Commission (ACCC) must have
regard in determining whether a merger or acquisition is likely to
substantially lessen competition. These factors are principally designed to
instruct the courts and the ACCC on the possible effect on competition of a
given merger. However, there is some dispute as to whether these factors, as
currently drafted, are adequate to prevent a corporation from acquiring
businesses over a period of time, each of which has little impact but which has
the cumulative effect of substantially lessening competition in a market. This
incremental strategy towards market dominance is known as 'creeping
acquisitions' or 'acquisition by stealth'.
2.3
Supermarkets, liquor stores and childcare centres are often cited
as examples of industries where dominant players have emerged from a series of
small acquisitions. There were a number of submissions to the 2004 Senate
Economics Committee inquiry into the effectiveness of the TPA which raised
concerns about creeping acquisitions. The committee judged that there was
sufficient substance to these concerns that it recommended:
The Committee considers that provisions should be introduced
into the Act to ensure that the ACCC has powers to prevent creeping
acquisitions which substantially lessen competition in a market.[2]
2.4
After recognising community unease about creeping acquisitions in
the supermarket business in a 2004 report, the ACCC introduced the voluntary Charter
for the Acquisition of Independent Supermarkets in July 2005. Under the
charter, Metcash, Woolworths and Coles are not able to limit the ability of
independent supermarket retailers to seek alternative purchasers for their
stores. In addition, these chains have to provide independent supermarket
owners with written notice of this fact when making an offer to purchase a
store. At the time, the ACCC Chairman, Mr Graeme Samuel, argued that the
Charter would benefit consumers by promoting competition in the supermarket
sector:
...particularly by helping to address concerns about creeping
acquisitions. It will ensure that independent supermarket owners are able to
achieve the highest possible price for their stores via an open bidding
process.[3]
2.5
The ACCC's recent report on grocery prices noted that concerns
about creeping acquisitions persisted. It conceded that its powers to prevent them
may be limited:
While s. 50 of the Act applies to individual acquisitions, the
application to potential ‘creeping acquisition’ issues is more problematic. The
ACCC takes the view that, while it can assess under s. 50 the competitive
issues associated with an individual acquisition, s. 50 is unlikely to allow it
to examine the cumulative impact of a series of acquisitions of smaller
competitors over time that individually do not raise competition issues.[4]
2.6
Surprisingly to some, the ACCC did not feel this lack of power to
deal with creeping acquisitions had been a problem in the supermarket industry,
commenting:
The ACCC has not been able to identify any supermarket
acquisitions in the last five years where the result would have been different
had the ACCC been able to take into account other acquisitions in the same
market. This suggests that the cumulative effect of a series of acquisitions of
independent supermarkets ... has not been a significant contributor to any
competition problems in the supermarket sector in recent years.[5]
2.7
Nonetheless, the ACCC concluded that it:
maintains its support for the introduction of a general creeping
acquisition law. The ACCC considers that the supermarket industry is one where
creeping acquisitions could potentially become a concern...[6]
2.8
In his preliminary response to the ACCC report, the Minister for
Competition Policy and Consumer Affairs announced:
The Government will implement a creeping acquisition law,
releasing a discussion paper by the end of August to gauge the best way
forward.[7]
2.9
He had earlier suggested a need to balance competing
considerations:
...we want the ACCC to be given the ability to stop the
incremental gathering of unhealthy market power, but at the same time we do not
want to stop small business people who have built up goodwill in their business
over a substantial period of time, from gaining a good price for their
business.[8]
The measure proposed in the bill
2.10
The bill's response to the challenge of creeping acquisitions is
to permit a court or the ACCC to examine the effect of a merger or acquisition
on competition in a market based on acquisitions occurring in the previous 6
years. To this end, it adds a subsection 50(7) relating to corporations and an analogous
subsection 50(8) relating to an individual:
For the purposes of the application of subsection (1) in
relation to a particular corporation, an acquisition shall be deemed to have
the effect, or likely to have the effect, of substantially lessening
competition in a market if the acquisition and any one or more other
acquisitions by the corporation of a body corporate related to the corporation
in the period of 6 years ending on the date of the first mentioned acquisition
together have the effect, or are likely to have the effect.
Overall attitudes of submitters
2.11
Unsurprisingly the bill found more support from potential prey
than from potential predators.
2.12
The National Association of Retail Grocers of Australia supports
the bill. It had proposed amending the TPA to include a reference to the impact
of previous acquisitions on the level of competition in its submission to the
2004 Senate inquiry. At this inquiry it commented:
the way that the creeping acquisitions legislation has worked in
the past has been inadequate. There is a very great need to strengthen these
provisions.[9]
2.13
Metcash was also broadly supportive of the bill. Its submission
to the 2004 inquiry had argued that creeping acquisitions were anticompetitive,
as they crowded out independent retailers and also threatened the competitive
ability of wholesalers supplying these independent retailers.[10]
2.14
On the other hand, the Australian National Retailers Association,
representing the large retail chains, argued that existing controls in the TPA
are adequate to deal with creeping acquisitions and that the ACCC already
considers the effect of past acquisitions. They contend that the bill would not
require the ACCC to assess any new factors. As to the threat that the major
retailers pose by creeping acquisitions:
...in a market with literally
thousands of supermarkets, the sale of a handful of sites each year has
virtually no impact on the level of competition in the market.[11]
2.15
Similarly, the Business Council of Australia contends that the
list of factors that the ACCC and the court must have regard to in section
50(3) are adequate to consider creeping acquisitions.
2.16
The Fair Trading Coalition echoed the Minister's concern that any
reform to section 50 must be mindful of the effect on families selling their
business to the highest bidder.
2.17
Professor Zumbo felt the bill was addressing a lacuna in section
50:
Dealing effectively with the issue of creeping acquisitions is
essential to having a world’s best competition law. Failure to deal effectively
with creeping acquisitions undermines competition to the detriment of
consumers. Unless the Trade Practices Act effectively prevents creeping
acquisitions, there will be a considerable gap in the act allowing large
businesses to acquire competitors in a piecemeal manner that gets around the
existing prohibition against mergers found in section 50.[12]
2.18
Consumer representatives also see creeping acquisitions as an
important issue:
It simply seems to us to be unsatisfactory in the extreme that
you can do it [build market share] by little bites and get to the same result,
and yet that does not throw up the flags that would be thrown up if that were
done in toto as a bundle.[13]
The 'six years' provision
2.19
There were mixed views about the six year period in the bill
which the ACCC and courts are required to look back in assessing the cumulative
impact on competition. The Business Council of Australia criticised it as
'arbitrary'.[14]
2.20
The Council also claimed that it would be burdensome for firms to
provide information going back that far, especially as market boundaries may
have changed over time. It argued the provision may impose 'substantial uncertainty'
and high costs for businesses by requiring them to provide information to the
ACCC for merger proposals. Investment may potentially be discouraged and the
ACCC's resources will be strained from investigating previous acquisitions.[15]
2.21
The Council also opined that it is it is 'unclear how a forward
looking test should also be applied to “look back”'. [16]
Although the Council did not elaborate, this presumably means that it is
difficult to assess the likely future impact of a merger based on previous acquisitions.
2.22
Metcash doubted whether six years was adequate in the context of
the supermarket industry given the major acquisitions made by the major chains
in the period 2001 to 2003 would soon fall outside the six-year window.
Applicability of the bill
2.23
The Fair Trading Coalition broadly supports the bill but argues
that it should refer only to highly concentrated markets. Professor Zumbo
rejects this view:
Because they happen through stealth, they could turn up in any
industry at any time. Ideally, you would like the expert regulator, the ACCC,
to have the ability to make a judgement call on whether there is a danger that
some stealth activity is occurring in an industry and to enforce that law
across the economy where it is relevant and appropriate. [17]
2.24
NARGA also rejected this argument with respect to the grocery
market:
The independents cannot defend any further erosion of their
market share and therefore it is important to stop creeping acquisitions
wherever it occurs, not just in locally concentrated markets.[18]
The charter as an alternative in the grocery market
2.25
As noted above, the ACCC has a specific charter aimed at limiting
creeping acquisitions in the grocery sector. NARGA are sceptical of the
charter:
It does not help much at all. I should say at the beginning that
it is a voluntary code. In relation to the purchase of the store in Jindabyne,
the ACCC were unaware of it until I rang them and told them that it was
happening. Woolworths had not bothered to notify the ACCC that they were in any
sort of negotiation with that independent. The idea of that charter was that
the independent should be able to get the best price available for his business
if he wished to sell, but that the independent sector as a whole ought to be
able to have an opportunity to match that best price and retain that store and
that business within the independent sector to avoid the creeping acquisitions.[19]
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