The government today released a second discussion paper relating to the introduction of creeping acquisition laws in Australia. It is disappointing to say the least. In the first discussion paper the government put forward two possible models; the ‘aggregation model’ (which would be consistent with the policy underlying our current merger prohibition) and the ’substantial market power model’ (SMP) which, in prohibiting mergers by firms having substantial market power which would have ANY effect on competition, would represent a serious departure from existing merger policy.
Unfortunately, the second discussion paper retains an emphasis on a market power model. It suggests abandoning the reference to ‘any lessening of competition’ (although not because this is inconsistent with current economic or competition theory, but rather because it might result in ‘ambiguity and risk reinterpretation by the Courts of the “substantial lessening of competition” test in the existing prohibtion in section 50′ – why this would be the case remains a mystery) and replacing it with a model built around increases in market power (are we to return to a partial dominance test for mergers in Australia?). The suggested format of the prohibition is set out in para 12 as follows:
(1) A corporation that has a substantial degree of power in a market must not directly or indirectly:
(a) acquire share in the capital of a body corporate; or
(b) 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.’
In effect, this is not significantly different from the first flawed proposal to ban all mergers by corporations having substantial market power where the merger would have any effect on competition. At least where the merger is horizontal, any firm with market power that mergers is likely to enhance their market power (and simultaneously lessen competition) even if only to an insignificant level. I have previously outlined the problems with this approach.
Another approach suggested was to allow the Minister to unilaterally ‘declare’ a corporation or product/service sector where he/she has concerns about potental harm from creeping acquisitions and to give the Minister power to require notification of certain acquisitions by declared corporations etc (there is currently no mandatory notification regime for mergers in Australia). The test set out above would then apply to those notified transaction.
The discussion paper at least acknowledges there is a ‘fine balance to be struck’ when regulating creeping acquisitions and seeks views on:
1. The potential unintended consequences of a creeping acquisitions law that targets enhancements to a corporation’s substantial market power …
2. The potential unintended consequences of a creeping acquisitions law that targets ‘declared’ corporations or product/service markets.
3. how many potential unintended consequences may be addressed or minimised, particularly in the design of the law
4. the costs and benefits associated with the option of including a mandatory notification requirement, using thresholds unique to each particular declaration, determined by the Minister.
Two questions are asked (each of which contain multiple questions … who wrote this thing?): (1) What are your views on the two regulatory options mentioned above? What potential unintended consequences need to be considered? How might these unintended consequences be addressed? (2) Are there alternative regulatory or non-regulatory options …? How might these work in practice? what are the costs and benefits?
The models suggested are seriously flawed; both are simply adaptations of the SMP model. The more appropriate (though not perfect) aggregation model appears to have been dismissed without much serious consideration – the discussion paper says only that the ‘aggregation model was deemed impractical by many’ without further explanation – although the focus seems to have been on the ACCC’s submission which claimed this approach might prove unworkable in practice.
In releasing this discussion paper (which comes 7 months after submissions for the first discussion paper closed), Chris Bowen stated ‘The release of this discussion paper reflects the Government’s election commitment to implement sensible reform in relation to creeping acquisitions.’ Unfortunately there is little that is ’sensible’ about this discussion paper. Chris Bowen’s Press Release also defines creeping acquisitions as: ‘the acquisition of a number of individual assets or businesses over time that may collectively raise competition concerns, but when considered in isolation, are unlikely to be captured by the existing mergers and acquisitions test under section 50 …’. I can only suggest the Government reflect on their own definition when formulating an appropriate test – the SMP test is far broader than the conduct referred to in this definition.
Submissions on this discussion paper are due by 12 June. It seems I have some writing to do …
