Creeping acquisitions … they won’t go away
Posted by Julie Clarke on 9 March 2010
The Government recently announced it would remove the reference to ‘substantial’ from the definition of markets for purposes of mergers (see previous post on this). In so doing Craig Emerson claimed that the change would fulfill the Government’s election promise to deal with creeping acquisitions. This, it was hoped, would end the crazy talk about substantial revisions to the merger laws and might result in the Government’s Discussion Paper 1 and Discussion Paper 2 on creeping acquisitions being swept under the carpet.
Not, however, if Assoc Prof Frank Zumbo has his way. I have previously noted Zumbo’s claims, reported in the Fin Review, that the ‘anti-merger’ law (as he calls it) has ‘dangerous gaps and needs a major overhaul.’ Those ‘gaps’ weren’t explained in the Fin Review piece, but Zumbo has just published an article in the Trade Practices Law Journal (Zumbo, Don’t bank on bank competition: The case for effective laws against anti-competitive mergers and creeping acquisitions’ (2010) 18 TPLJ 26) in which he sets out his concerns about Australia’s current merger law and makes some radical (but familiar if you have read the earlier discussion papers and proposed Richmond Amendment) recommendations for reform. I won’t address them all but will note a couple of the highlights:
Substantial lessening of competition test to be replaced with ‘material lessening of competition’
This recommendation is, of course, identical to that proposed in the Richmond Amendment and with essentially the same (brief) reasons given – the current test, it is argued, imposes an almost insurmountable threshold for the ACCC. No mention, of course, that the SLC test is what is adopted in most other countries and is consistent with other provisions in the Act, with the result that it provides greater certainty for business and their advisors. This is particularly important for mergers, given that there has only been one case before the courts dealing with the current substantive merger test – as merger determinations are almost (in practice if not in law) the exclusive domain of the regulator, parties and their advisors need to look to judicial interpretation of this phrase in other parts of the Act. ‘Material lessening of competition’ has no counterpart in the Act. It is also not clear, as Zumbo claims, that ‘material lessening of competition’ would provide a ‘lower threshold’ for assessing mergers.
The catalyst for the change, according to Zumbo, is the high clearance rate of mergers in Australia (he claims the ACCC approves around 97% of mergers – this is a point made at least four times in this brief article) and that, according to him, ‘substantial lessening of competition’ has come to be equated with the ‘substantial market power’ test in s 46. Nowhere is evidence provided for this and nowhere does he place this in context – this statistic is consistent with that produced by other merger regulators, including the US, and reflects the simple fact that most mergers are not anti-competitive. He also claims this high clearance rate is responsible for the high concentration rate of markets in Australia, without any reference made to other possible contributors, such as Australia’s small population and relative geographic isolation.
The Senate Economics Committee was due to report on the Richmond Amendment next week, but has had its deadline extended until 18 May.
Targeting creeping acquisitions
Zumbo also claims, again relying on the high clearance rate of mergers as ‘evidence’ that our merger laws are ‘far too permissive’, that targeting creeping acquisition laws is ‘essential to having a world’s best competition law framework’ (without providing any evidence of how worlds best practice requires this – there’s no mention of it in International Competition Network or OECD merger recommendations and it is not an obvious feature of most merger laws around the world. To address this concern, Zumbo recommends that corporations with substantial market share not be permitted to acquire shares or assets if it would lessen competition in a market. Essentially, if you have substantial market share (even if you have no power because of excess industry capacity, low barriers to entry or the threat of import competition) then you can’t merge because an ‘any lessening of competition’ threshold will almost always be met – at least for horizontal mergers. Despite Zumbo’s concern about Australia having a ‘worlds best practice competition law’, no mention is made of the fact that merger decisions made on the basis of market share are expressly inconsistent with international best practice which recognises that market share provides a poor proxy for market power (and it is market power, not market share alone, which poses a threat to consumers). In particular, the ICN Recommended Practices for Merger Analysis (developed in 2008 and revised in 2009) state clearly (Recommendation II(C)) that:
Jurisdictions that use market concentration and/or market shares to presume competitive harm should ensure that any such presumption may be overcome or confirmed by a detailed review of market conditions
Zumbo’s eagerness to substitute market share for market power contributed to the infamous Birdsville Amendment (see earlier post on this) to our misuse of ‘market power’ provisions. Let’s hope the Government thinks better of making such a drastic change on this occasion.