Competition Law

Australian Competition Law and Policy Discussion

Creeping towards creepy ‘creeping acquisition’ laws

Posted by Julie Clarke on 6 May 2009

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 …

5 Responses to “Creeping towards creepy ‘creeping acquisition’ laws”

  1. James said

    Well said. It is disappointing but I’m sceptical about anything significant ever being done to stop corporate dominance.

    One thing that has really bothered me that I think is an example of creeping acquisition is the retail liquor market. Coles and Woolworths have systematically taken over. In the past four years Woolworths and Coles have increased their market share in liquor retailing from 32 per cent to 52 per cent.

    They also trade under different names, eg. Dan Murphy’s, BWS, Mac’s, Quaffers, Vintage Cellars, in addition to the instore Liquorland brand. Perhaps if they didn’t operate under so many trading names it would be more evident to the consumer that they have very little choice now about who to purchase their alcohol from and how little competition there is left in this market.

    According to Alan Jones in his 2GB column, “prices generally have increased by 32 per cent, but in liquor, where Woolworths and Coles have supposedly increased competition, since the year 2000 the price of spirits has jumped by 50 per cent and beer prices have gone up by 53 per cent.

    Why was such a massive consolidation allowed to take place? It seems prices are driven up when these companies are allowed into a market. I sincerely hope they are not allowed into the pharmacy market. They’ve been lobbying for this for many years.

  2. Well it’s the grocery report that triggered the push for creeping acquisition laws (which were largely ignored by the Dawson Review) – but I don’t think effectively preventing any corporation with market share acquiring another company in the same market (the proposed law doesn’t depend on a previous series of acquisitions which cumulatively have an anti-competitive effect – ie an acquisition ‘creep’) is the answer; esp as a firm with market power need not necessarily be the ‘dominant’ form in the market so a small increase in that firm’s market power might not have a significant detrimental effect (if any) on competition – it would create tremendous ambiguity given there’s still a lack of clarity about what ‘market power’ is for purposes of the TPA.

    And don’t get me started on the pharmaceutical industry …

  3. Apostille said

    HI.. your post has good content

  4. Yang said

    Great discussions.

    I still find it hard to understand why the creeping acquisition law – even if it is based on a model taking into account the pervious series of acquisitions within a reasonable time fram – would be necessary for merger control in general. In particular when a grocery merger is assessed, we often see that the SLC test is applied to a very narrow local market e.g. 10/15/20mins isochrones to the questioned store. It seems to me that the ACCC should refine its local analysis, rather than relying on a creepy creeping acquisition law, which potentially contradicts the SLC approach in my view.

    At the end of the day, how do we differentiate the merger that is to enhance market power and substantially lessen the competition in a market, from one that is to enhance market power but NOT likely to substantially lessent he competition?

    • Yang, thanks for your comment

      I think there are two separate issues. The first is market definition and, while the ACCC have been prepared to narrowly define the market in certain grocery cases, the Act itself requires a ‘substantial’ market – so it would be interesting to see whether the courts would accept the ACCC’s definition of market in all cases. Similarly, the definition is restricted to an Australian market, so for truly global markets the ACCC is not permitted to define the market any more broadly than Australia – again, they tend to get around this in their internal analysis, but the outcome might be different if challenged in court.

      In any event, even a narrowly defined market might not capture creeping acquisitions. That is, if there is a dominant player and several smaller players in the market, the dominant player could grab each of them one by one and in most cases this might not have any significant impact on competition – but if you add them up (over 3 or 4 small acquisitions) it might have that result. The Act currently does not allow that to be taken into consideration – the single merger involved must SLC. I think (if practical) this aggregate model would be quite consistent with a SLC approach. However, if that model is unworkable in practice I would prefer them to abandon creeping acquisition laws altogether rather than pursue the market dominance approach they are currently proposing – that approach is genuinely inconsistent with the existing SLC test for mergers.

      I agree that there is no easy way to differentiate mergers which enhance market power and those that lessen competition; one generally follows from the other – however, the test proposed talks about ‘any’ increase in market power – which might lead to a ‘lessening’ of competition but would not necessarily require a ‘substantial lessening’ of competition. It is certainly conceivable that a small acquisition might enhance – marginally – the market power of a dominant firm without substantially lessening competition in the relevant market and consequently it would capture more mergers than the current law.

      The government is also looking (it appears) solely at Australian markets – what if a foreign firm, which does not have substantial market power in an ‘Australian’ market (as the market must be defined) wants to acquire a small firm? Would they be excluded from the creeping acquisition laws? Would this be a fair result? Does this raise concerns about consistency in merger regulations around the world – which are largely converging (at least in a substantive sense) – and does that matter? There are lots of issues that should be fully worked through but it seems unlikely they will be as the Government has indicated a desire to introduce these laws quickly.

      Interesting issues though – and I’m concerned that the Government seems very keen to adopt the ACCC’s recommendations without pursuing these issues in much detail (the second discussion paper didn’t really address these concerns at all)

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