Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008-2009-2010
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
competition and consumer legislation amendment bill 2010
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Minister for Competition Policy and Consumer Affairs,
Dr Craig Emerson MP)
Table of contents
Glossary 1
General outline and financial impact 3
Chapter 1 Mergers and acquisitions 7
Chapter 2 Unconscionable conduct 17
Chapter 3 Regulation impact statement - Creeping acquisitions 27
Index 57
Do not remove section break.
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|ACCC |Australian Competition and |
| |Consumer Commission |
|ACL |Australian Consumer Law |
|ASIC |Australian Securities and |
| |Investments Commission |
|ASIC Act |Australian Securities and |
| |Investments Commission Act |
| |2001 |
|Baird Committee |Joint Select Committee on the|
|Report |Retailing Sector's 1999 |
| |report Fair Market or Market |
| |Failure? |
|Bill |Competition and Consumer |
| |Legislation Amendment Bill |
| |2010 |
|CPR Act |Competition Policy Reform Act|
| |1995 |
|Dawson Act |Trade Practices Legislation |
| |Amendment Act (No. 1) 2006 |
|Dawson Review |Review of the Competition |
| |Provisions of the Trade |
| |Practices Act |
|Grocery Inquiry |Report of the ACCC inquiry |
| |into the competitiveness of |
| |retail prices for standard |
| |groceries |
|IGA |Intergovernmental Agreement |
| |for the Australian Consumer |
| |Law |
|Senate Committee |Senate Standing Committee on |
| |Economics |
|Swanson Committee |Trade Practices Act Review |
| |Committee (1976) |
|TP Act |Trade Practices Act 1974 |
|Tribunal |Australian Competition |
| |Tribunal |
General outline and financial impact
Mergers and unconscionable conduct
The Competition and Consumer Legislation Amendment Bill 2010 ('the
Bill') amends the Trade Practices Act 1974 ('the TP Act') to
clarify the operation of various provisions relating to mergers and
acquisitions.
The Bill will also insert a statement of interpretative principles
into the unconscionable conduct provisions of the Australian
Consumer Law (ACL) and the Australian Securities and Investments
Act (ASIC Act) and unify sections 21 and 22 of the ACL (formerly
sections 51AB and 51AC of the TP Act). The changes to the
unconscionable conduct provisions will generally be reflected in
the ASIC Act.
Date of effect: The provisions relating to mergers and
acquisitions will commence on a single day to be fixed by
Proclamation. However, if any of the provision(s) do not commence
within the period of 2 months beginning on the day this Act
receives the Royal Assent, they commence on the day after the end
of that period. This will ensure that those who may be affected by
the new provisions will have time to consider the provisions prior
to their commencement.
The provisions related to unconscionable conduct will commence
immediately after the commencement of Schedules 1 to 5 of the Trade
Practices Amendment (Australian Consumer Law) Act (No. 2) 2010.
Proposal announced: On 22 January 2010, the Government announced
that it would amend the TP Act to ensure the Australian Competition
and Consumer Commission ('the ACCC') has the power to reject
acquisitions that would substantially lessen competition in any
local, regional, or national market.
In its announcement, the Government also confirmed its view that
site acquisitions - including entry into, or acquisition of, a
lease, acquisition of an option to acquire land or acquisition of
freehold land - are acquisitions of an asset for the purposes of
section 50 of the TP Act.
On 3 March 2010, the Government announced changes to the
unconscionable conduct provisions of the Australian Consumer Law.
These changes arose from the findings of an expert panel
established to consider whether a list of examples of
unconscionable or a statement of principles of what constitutes
unconscionable conduct should be incorporated into the legislation.
Financial impact: The Bill has no significant financial impact on
Commonwealth expenditure or revenue.
Compliance cost impact: Low. The provisions of the Bill dealing
with unconscionable conduct were assessed by the Office of Best
Practice Regulation as not requiring a Regulation Impact Statement.
Summary of regulation impact statement
Regulation impact on business
Impact: Low.
Main points:
. The proposed amendments to section 50 would not involve
additional costs to businesses or the ACCC as these
changes largely confirm the existing administration of
that section. Rather, by removing ambiguities around
particular elements of section 50, these amendments are
likely to have a net positive impact on competition and
consumers.
. These amendments are not likely to substantially broaden
the scope of operation of section 50 beyond its current
administration, but will seek to prevent a situation
arising that could potentially narrow the application of
merger law in Australia. Consequently, the administrative
burdens associated with section 50 will either remain
unchanged, or reduce as parties will no longer seek to
expend resources pursuing clarity around the matters
addressed by these amendments. That is, by clarifying
elements of section 50 to remove existing uncertainties
regarding its application, these amendments will not
change the primary merger test, but will rather enhance
certainty for businesses by: avoiding the costs associated
with challenging areas of uncertainty in the law; and
ensuring that a substantial lessening of competition is
prevented, whenever it arises with respect to a particular
acquisition. To the extent that these changes have a
material impact (given that the changes are directed
towards codifying existing practices), it is a materially
positive impact.
. These legislative proposals are expected to address
concerns regarding markets in which creeping acquisitions
have been cited as a potential issue.
. Further, the Government's policy announcement served to
reduce uncertainty surrounding the application of
section 50 of the TP Act to leases and acquisitions of
greenfield supermarket sites.
Chapter 1
Mergers and acquisitions
Outline of chapter
1. Schedule 1 to the Competition and Consumer Legislation Amendment
Bill 2010 ('the Bill') contains amendments for the reform of the
prohibition on anticompetitive mergers and acquisitions within the
Trade Practices Act 1974 (the 'TP Act').
Context of amendments
2. Reviews in the last decade, both by the Government and other
parties, have considered the issue of 'creeping acquisitions'.
Creeping acquisitions are generally defined to be series of small-
scale acquisitions that individually do not substantially lessen
competition in a market in breach of section 50 of the TP Act, but
collectively may have that affect over time. Concerns about
creeping acquisitions in practice have been raised primarily in
relation to the independent supermarket sector in Australia.
3. More recently, creeping acquisitions were raised as a concern in
the lead-up to, and following the release of, the Report of the
ACCC inquiry into the competitiveness of retail prices for standard
groceries ('the Grocery Inquiry'). While the ACCC concluded that
creeping acquisitions were not a significant current concern in the
supermarket retailing industry, it did express support for the
introduction of a general creeping acquisitions law.
4. As the TP Act applies to all industries, and creeping acquisitions
could affect small and large businesses in a range of sectors, the
Government undertook public consultations in 2008 and 2009.
Through its public consultations, the Government sought views on
the need to give effect to its commitment to implement a 'general
creeping acquisitions law', and on possible reform options.
5. The Government proposed four broad models for reform in its two
discussion papers. Submissions made in response to the discussion
papers indicated that there was no clear consensus of support for
any individual model, and views varied as to whether, in practice,
there was a substantive problem to be addressed. However, as a
result of this public consultation, the Government identified two
areas in the law where clarification would be helpful and which
could assist to address creeping acquisitions concerns. In doing
so, the Government is therefore responding to specific problems
with specific remedies, rather than responding with general
remedies that could have unintended consequences for overall
economic activity and employment.
6. Through these amendments the Government seeks to ensure that
section 50 applies to acquisitions in local markets, and that the
impact on competition can be considered in any market, including
upstream and downstream markets. These amendments are intended to
clarify uncertainties in section 50, and confirm the ACCC's ability
to consider acquisitions in markets where creeping acquisitions
have been raised as a concern.
Summary of new law
Amendments in relation to local markets
7. This amendment is intended to provide greater certainty regarding
the ACCC's current practice of considering acquisitions in local
markets, including those where creeping acquisitions concerns have
been raised within the community.
8. Subsection 50(6) of the TP Act has the effect of limiting the scope
of section 50 to mergers in markets that are 'substantial' and in a
State, Territory, or region of Australia. The ACCC's 2008 Merger
Guidelines (paragraphs 4.28-4.31) provide that this substantiality
criterion can be satisfied in many ways including by reference to
the size of the market in terms of the number of customers, total
sales or geographic size. However, the ACCC Merger Guidelines do
not have the force of law, and the ACCC's interpretation of the law
in this regard has not been tested by the courts.
9. In Australian Gas Light Company v Australian Competition and
Consumer Commission (No 3) [2003] FCA 1525 ('AGL v ACCC'), French J
of the Federal Court of Australia, while not expressing a
conclusive view, left open the possibility that the substantiality
of a market under subsection 50(6) may be determined with reference
to Australia as a whole. If successfully established in law, this
interpretation may preclude the possibility of acquisitions in
local markets (for example a three to five kilometre radius around
a retail petrol site) from being considered under section 50.
10. The key uncertainty therefore appears to be with the word
'substantial', not the lack of an explicit reference to a 'local
market' in subsection 50(6). While it is possible that an
amendment explicitly enabling a court to consider acquisitions in
substantial local markets may enable the ACCC to consider
acquisitions in markets where creeping acquisitions concerns have
been raised, there is a risk that it may not. This is particularly
the case if, as French J has indicated, the substantiality of 'a
market' is determined with reference to Australia as a whole.
11. Removing the word 'substantial' from subsection 50(6) will
therefore remove the risk highlighted by French J that a court may
in the future adopt the view that the substantiality of a market
should be determined with reference to Australia as a whole. The
amendment is also intended to remove doubts regarding the ACCC's or
a court's ability to examine markets, including local markets,
which may be relatively small in a geographic sense, where creeping
acquisitions concerns may arise in the future.
Amendments in relation to 'any market'
12. The test contained in section 50 refers to a substantial lessening
of competition in 'a market'. Amending section 50 so that
references to 'a market' are replaced with references to 'any
market' is intended to clarify the ability of the ACCC or a court
to consider multiple markets when assessing mergers.
13. Consequently, this amendment is intended to prevent businesses from
being able to challenge a decision that their proposed merger or
acquisition would, or would be likely to, substantially lessen
competition in a market in breach of section 50, on the grounds
that the lessening of competition identified was in one or more
markets other than the primary market in which the merger or
acquisition would occur.
14. This amendment will therefore demonstrate more explicitly the
importance of ensuring that the ACCC and the courts are able to
consider the totality of the competitive effects resulting from the
acquisition.
Comparison of key features of new law and current law
|New law |Current law |
|Section 50 prohibits |Section 50 prohibits |
|mergers or acquisitions |mergers or acquisitions |
|that would, or would be |that would, or would be |
|likely to substantially |likely to substantially |
|lessen competition in any|lessen competition in a |
|market. |market. |
|Restricts the application|Restricts the application|
|of section 50 to markets |of section 50 to |
|in Australia, or a State,|substantial markets in |
|or Territory, or Region |Australia, or a State, or|
|of Australia. |Territory, or Region, of |
| |Australia. |
|Makes corresponding |Contains provisions |
|amendments to those |corresponding to those |
|outlined above to the |outlined above in the |
|Schedule version of |Schedule version of |
|section 50. |section 50. |
Detailed explanation of new law
General overview of the mergers and acquisitions amendments
15. Over the past decade, various reviews and inquiries have considered
the issue of creeping acquisitions. Creeping acquisitions are
broadly considered to be a series of small-scale acquisitions that
individually do not substantially lessen competition in a market in
breach of current section 50, but collectively may have that effect
over time. Concerns about creeping acquisitions in practice have
been raised primarily in relation to the independent supermarket
sector in Australia.
16. More recently, creeping acquisitions were raised as a concern in
the lead-up to, and following the release of, the Grocery Inquiry.
Following the release of the Grocery Inquiry, the Government sought
views from the public via two public consultation papers in 2008
and 2009 on the need to give effect to its commitment to implement
a 'general creeping acquisitions law', and on possible reform
options.
17. To stimulate discussion from interested parties, the Government
proposed four broad models for reform in its two discussion papers.
Responses to both discussion papers were mixed, and there was no
clear consensus on the best way forward. As a result of this
public consultation, the Government identified two areas in the law
where clarification would be helpful, and which could assist to
address creeping acquisitions concerns.
18. In doing so, the Government is therefore responding to specific
problems with specific remedies, rather than responding with
general remedies that could have unintended consequences for
overall economic activity and employment.
19. The Government has sought to ensure that section 50 applies to
acquisitions in local markets, and that the impact on competition
can be considered in any market, including upstream and downstream
markets. These amendments will clarify uncertainties in section
50, and confirm the ACCC's ability to consider acquisitions in
markets where creeping acquisitions have been raised as a concern.
Amendments in relation to local markets
20. The current subsection 50(6) has the effect of limiting the scope
of the current section 50 to mergers or acquisitions in markets
that are 'substantial' and in a State, Territory, or region of
Australia.
. The geographical scope of the term 'region' is undefined
in the legislation, but when its inclusion was recommended
by the Joint Select Committee on the Retailing Sector in
its 1999 Fair Market or Market Failure? report (the 'Baird
Committee Report'), the region provided as an example was
'South East Queensland'. As it has not been tested by a
court, it is unclear whether it extends to the kinds of
'local markets' the ACCC has used in considering mergers
involving creeping acquisitions concerns.
. It is also unclear the extent to which the word
'substantial' in subsection 50(6) limits the scope of
section 50. Even if 'local' markets are able to be
considered under subsection 50(6), it remains unclear the
extent to which a market defined in quite narrow
geographical terms (such as 3-5 kilometres) may be deemed
'substantial', and therefore subject to section 50.
21. The ACCC's 2008 Merger Guidelines (at paragraphs 4.28-4.31) provide
that the substantiality criteria could be satisfied in many ways,
including by reference to the size of the market in terms of the
number of customers, total sales or geographic size. A market that
is 'small' in some sense may still be substantial. Further,
substantiality of a market is not necessarily related to geographic
size. A market may be small geographically (for example, a local
market defined using a 3-5 kilometre radius) but may also be
substantial within the region in which it is located. However, the
ACCC Merger Guidelines do not have the force of law, and in this
matter the ACCC's interpretation of the law has not been considered
by the courts.
22. Relevantly, in AGL v ACCC, French J stated (at [353]) that:
The competitive process under scrutiny with and without
the acquisition is competition in a market. That means a
substantial market for goods or services in Australia or a
State or a Territory or a region of Australia (s 50(6)).
The definition in s 50(6) does not exclude the operation
of the definition in s 4E which will pick up, in a product
market, goods and services substitutable for or otherwise
competitive with each other. However the definition in
s 50(6) introduces the qualifying term 'substantial'
before 'market'. It is suggested in Heydon, Trade
Practices Law (LBC) at [9.570] that the aim of the
qualification is to exclude from the Act cases where a
merger occurs in a very small market. The learned author
there observes:
'Section 50(6) involves sacrificing the interests of those
in small markets to the interests of the parties to the
merger. If a small merger in a small market were to be
unlawful on the ground that it led to the acquiring
corporation obtaining market control, though this result
may be harsh for the acquiring corporation, the merger
would be likely to cause as much damage to competition in
that market as would be caused to competition by like
events in a much larger market.'
It does not seem likely that the relativity implied by the
term 'substantial' in s 50(6) relates to the size of other
markets in whichever of the geographical areas mentioned
in the definition the market is to be found. For there is
no lower bound on the size of 'a region of Australia'. It
may be that having regard to s 4E the substantiality of
the market in question, even if it be geographically
limited to a State or a Territory or a region, is to be
judged by reference to Australia as a whole. I express no
concluded view on that difficult constructional issue
because the present case does not appear to throw up any
dispute between the parties that, whichever of their
propounded markets is in issue, it is a 'substantial
market' for the purposes of s 50(6).
23. The key uncertainty is therefore the word 'substantial', not the
lack of an explicit reference to a 'local market' in
subsection 50(6). While enabling a court to consider acquisitions
in substantial local markets may enable the ACCC to consider
acquisitions in markets where creeping acquisitions concerns have
been raised, it may not if, as French J has indicated, the
substantiality of 'a market' is determined with reference to
Australia as a whole.
24. In addition, while the term 'market' is defined in subsection 50(6)
for the purposes of section 50, a more general definition of
'market' appears in section 4E.
25. In section 4E, 'market' is defined (for the purposes of the TP Act
and unless the contrary intention appears) to mean 'a market in
Australia and, when used in relation to any goods or services,
includes a market for those goods or services and other goods or
services that are substitutable for, or otherwise competitive with,
the first-mentioned goods or services'. The section 4E definition
of 'market' was included in the TP Act following recommendations of
the 1976 Trade Practices Act Review Committee (Swanson Committee),
which emphasised the flexibility of product and geographic market
boundaries (at paragraph 4.20), and added:
The Committee considered that no advantage would be gained
by attempting to define exhaustively the term 'market'.
No definition could produce a formula capable of
certainty.
26. In light of these views, a legislative change to insert into
subsection 50(6) the term 'local market' or 'a part of a region'
(as an alternative to removing the term 'substantial') would appear
to be undesirable, when neither the term 'region' or 'part'
currently has a substantive legislative definition.
27. Further, courts have interpreted the term 'substantial' to mean
many things, including meaning 'real or of substance', 'not merely
discernible but material in a relative sense' and 'meaningful'.
Arguably, these interpretations of 'substantial' suggest that that
the task of defining the market for the purposes of an analysis of
competition within a market is left to section 4E, while the term
'substantial' in subsection 50(6) merely operates to limit the
scope of section 50, and in fact can add significant uncertainty as
per French J's observations.
28. Removing the word 'substantial' will therefore remove the risk
identified by French J that a court may in the future adopt the
view that the substantiality of a market should be determined with
reference to Australia as a whole. The amendment will also remove
doubts regarding the ACCC's ability to examine markets where
creeping acquisitions concerns may arise in the future.
29. As a result, the Bill amends subsection 50(6) contained in Part IV
of the TP Act, and in the Schedule version of Part IV to delete the
'substantiality' criterion from the definition of a market.
[Schedule 1, item 2, subsection 50(6), item 5, subsection 50(6) of
the Schedule]
Amendments in relation to 'any market'
30. The test contained in the current section 50 refers to a
substantial lessening of competition in 'a market'.
Paragraph 23(b) of the Acts Interpretation Act 1901 provides that,
unless the contrary intention appears, words in the legislation in
the singular also include the plural; and words in the plural also
include the singular.
31. The ACCC's 2008 Merger Guidelines indicate that in assessing
whether a merger substantially lessens competition, the ACCC will
examine the competitive impact of the transaction in the context of
the markets relevant to the merger (see paragraph 4.1); and that
'It is rarely possible to draw a clear line around fields of
rivalry, and indeed, is often possible to determine a merger's
likely impact on competition without precisely defining the
boundaries of the relevant market' (paragraph 4.4). That is, the
Merger Guidelines suggest that the ACCC may examine the impact of a
transaction in multiple markets.
32. Mergers may occur in circumstances involving vertical integration
and conglomerates, which can clearly involve multiple markets.
. Vertical mergers involve combining firms that operate at
different stages of a single vertical supply chain - that
is, a merger between an 'upstream' firm and a 'downstream'
firm (for example, an upstream manufacturer and a
downstream distributor) where the upstream firm is an
actual or potential supplier of an input into the
production process of the downstream firm.
. Conglomerate mergers involve firms that interact across
several separate markets and supply products that are
typically in some way related to each other - for example,
products that are in neighbouring markets or products that
are complementary in either demand or supply, such as
staples and staplers.
33. However, the ACCC's Merger Guidelines do not have the force of law.
The relevant provision in the Acts Interpretation Act is
predicated on the words 'unless the contrary intention appears'.
Amending section 50 such that references to 'a market' are replaced
with references to 'any market' is intended to clarify the ability
of the ACCC or a court to consider multiple markets when assessing
mergers. Consequently, this amendment is intended to prevent
businesses from being able to challenge a decision that a proposed
merger or acquisition would, or would be likely to, substantially
lessen competition in a market in breach of section 50, on the
grounds that the lessening of competition identified was in one or
more markets other than the primary market in which the merger or
acquisition would occur. [Schedule 1, item 1, subsections 50(1)
and (2), item 4, subsections 50(1) and (2) of the Schedule]
34. This amendment will therefore demonstrate more explicitly the
importance of ensuring that the ACCC and the courts are able to
consider the totality of the competitive effects resulting from the
acquisition.
35. The reference to 'a market' in subsection 50(3) has intentionally
been left unchanged, since that subsection follows the narrative of
subsections 50(1) and (2), so that 'a market' is to be read as 'a
market' of those markets referred to in subsections 50(1) or (2).
Application and transitional provisions
36. The amendments to section 50 apply to acquisitions occurring after
the commencement of these provisions. [Schedule 1, item 3, section
179]
Consequential amendments
37. Nil.
Do not remove section break.
Outline of chapter
38. The Competition and Consumer Legislation Amendment Bill 2010 (the
Bill) will insert a statement of interpretative principles into the
unconscionable conduct provisions of the ACL (which is set out in
the Trade Practices (Australian Consumer Law) Bill (No. 2) 2010
(Bill No. 2), now before the Parliament) and the ASIC Act. It will
also unify sections 21 and 22 of the Australian Consumer Law (ACL)
(formerly sections 51AB and 51AC of the TP Act), and sections 12CB
and 12CC of the Australian Securities and Investments Commissions
Act 2001 (ASIC Act).
Context of amendments
39. Part 2-2 of the ACL includes provisions prohibiting persons from
engaging in unconscionable conduct towards business and consumers.
These are explained in the Explanatory Memorandum for Bill No. 2.
40. There are three substantive prohibitions currently in the ACL:
. section 20 prohibits a person from engaging in
unconscionable conduct within the meaning of the unwritten
law, from time to time, in the course of trade or
commerce;
. section 21 prohibits a person from engaging in
unconscionable conduct towards another person in
connection with the supply or possible supply of goods or
services to a consumer; and
. section 22 prohibits unconscionable conduct in connection
with:
- the supply or possible supply of goods or services in
trade or commerce to a person being a 'business
consumer'; or
- the acquisition of or possible acquisition of goods or
services in trade or commerce from a person being a
'small business supplier'.
41. In accordance with the Intergovernmental Agreement for the
Australian Consumer Law (IGA), the TP Act's unconscionable conduct
provisions were included in the ACL.
42. In December 2008, the Senate Standing Committee on Economics
(Senate Committee) released an inquiry report into the need, scope
and content of a definition of unconscionable conduct for the
purposes of Part IVA of the TP Act. The Senate Committee
recommended:
. a clarifying amendment stating that section 51AC applies
to the behaviour of parties under a contract, in addition
to their behaviour during the process of agreeing the
terms of the contract;
. that the Government engage in an inquiry process to
consider the merits of introducing a list of examples or a
statement of principles into the law, with particular
regard to the retail tenancy leasing and franchising
industries; and
. that the Australian Competition and Consumer Commission
(ACCC) undertake targeted investigation and funding of
unconscionable conduct test cases.
43. On 5 November 2009, the Australian Government released its response
to the Senate Committee. The Government agreed to all the Senate
Committee's recommendations, and included the clarifying amendment
in Bill No. 2. The Government also established an expert panel to
consider:
. whether a list of examples of unconscionable conduct, or a
statement of principles concerning unconscionable conduct,
should be incorporated into the TP Act; and
. the case for amendments to strengthen the
Franchising Code of Conduct.
44. The expert panel reported to the Government in February 2010. On 3
March 2010, the Government released the expert panel's report and
announced its response. The changes to the statutory
unconscionable conduct provisions announced by the Government are
reflected in the amendments made by this Bill. Changes relating to
the regulation of franchising are being progressed through
amendments to the Trade Practices (Industry Codes - Franchising)
Regulations 1998.
Summary of new law
45. The Bill amends the unconscionable conduct provisions of the ACL
and the ASIC Act to include a list of interpretative principles and
to unify the consumer and business-related provisions prohibiting
unconscionable conduct.
46. The inclusion of a statement of interpretative principles in the
unconscionable conduct provisions of the ACL and the ASIC Act will
assist the Courts in applying the prohibition of statutory
unconscionable conduct, as well as improve stakeholder
understanding of the meaning and scope of the provisions.
47. The Bill also unifies what were sections 51AB and 51AC of the TP
Act and sections 12CB and 12CC of the ASIC Act. Sections 51AB and
51AC of the TP Act were drafted in almost identical terms, as were
sections 12CB and 12CC of the ASIC Act, and the meaning of
unconscionable conduct under each provision was intended to be the
same. The new provisions are sections 21 and 22 of the ACL and
sections 12CB and 12CC of the ASIC Act. The unification will avoid
the risk that courts will accord different meanings to the two sets
of provisions.
Comparison of key features of new law and current law
|New law |Current law |
|It is the intention of |There are currently no |
|the Parliament that: |interpretative principles|
|(a) this section is not |in the unconscionable |
|limited by the unwritten |conduct provisions of the|
|law relating to |ACL, or the ASIC Act. |
|unconscionable conduct; | |
|and | |
|(b) this section is | |
|capable of applying to a | |
|system of conduct or | |
|pattern of behaviour, | |
|whether or not a | |
|particular individual is | |
|identified as having been| |
|disadvantaged by the | |
|conduct or behaviour; and| |
| | |
|(c) in considering | |
|whether conduct to which | |
|a contract relates is | |
|unconscionable, a court's| |
|consideration of the | |
|contract may include | |
|consideration of: | |
|(i) the terms of the | |
|contract and | |
|(ii) the manner in which | |
|and the extent to which | |
|the contract is carried | |
|out; | |
|and is not limited to | |
|consideration of the | |
|circumstances relating to| |
|formation of the | |
|contract. | |
|A person must not, in |Subsection 21(1) of the |
|trade or commerce, in |ACL and subsection |
|connection with: |12CB(1) of the ASIC Act |
|(a) the supply or |provide that a person |
|possible supply of goods |must not, in trade or |
|or services to a person |commerce, in connection |
|(other than a listed |with the supply or |
|company); or |possible of goods or |
|(b) the acquisition or |services to another |
|possible acquisition of |person, engage in conduct|
|goods or services from a |which is in all the |
|person (other than a |circumstances |
|listed company); |unconscionable. |
|engage in conduct that |Paragraph 22(1)(a) of the|
|is, in all the |ACL and subsection |
|circumstances, |12CC(1)(a) of the ASIC |
|unconscionable. |Act provide that a person|
| |must not, in trade or |
| |commerce, in connection |
| |with the supply or |
| |possible supply of goods |
| |or services to another |
| |person, other than a |
| |listed public company, |
| |engage in conduct that is|
| |in all the circumstances |
| |unconscionable. |
| |Section 22(1)(b) of the |
| |ACL and subsection |
| |12CC(1)(b) of the ASIC |
| |Act provide that a |
| |person must not, in trade|
| |or commerce, in |
| |connection with the |
| |acquisition or possible |
| |acquisition of goods or |
| |services from another |
| |person, other than a |
| |listed public company, |
| |engage in conduct that |
| |is, in all the |
| |circumstances, |
| |unconscionable. |
|Without limiting the |Subsection 21(2) of the |
|matters to which a court |ACL and subsection |
|may have regard, the Bill|12CB(2) of the ASIC Act |
|provides two |provide a non-exhaustive |
|non-exhaustive lists of |list of conduct which may|
|types of conduct that may|be unconscionable. |
|be unconscionable in the |Subsections 22(2) and (3)|
|context of a person's |of the ACL and |
|dealings with another |subsections 12CC(2) and |
|person, either as a |(3) of the ASIC Act |
|customer of or a supplier|provide non-exhaustive |
|to those persons. |lists of types of conduct|
|This list of factors |that may be |
|replicates the longer |unconscionable in the |
|list of factors which |context of a business's |
|previously applied to the|dealings with other |
|business-related |businesses, either as a |
|provisions of the ACL and|customer or a supplier to|
|the ASIC Act. |those businesses. |
| |Currently, subsection |
| |22(2) and (3) of the ACL |
| |and subsections 12CC(2) |
| |and (3) are longer lists |
| |of factors that the court|
| |may consider. It is this|
| |longer list of factors |
| |which will be replicated |
| |in the new law. |
Detailed explanation of new law
Unconscionable conduct in connection with goods or services
48. Section 21 of the ACL prohibits a person from engaging in
unconscionable towards another person in connection with:
. the supply or possible supply of goods or services to a
person (other than a listed public company); or
. the acquisition or possible acquisition of goods or
services from a person (other than a listed public
company).
[Schedule 2, item 4: section 21]
49. This section does not define 'unconscionable conduct', but it also
does not limit it to the concept as understood under the 'unwritten
law, from time to time'.
50. The 'unwritten law, from time to time' is the array of common law
and equitable principles that have developed in the Australian
courts over many years as they apply and relate to the concept of
unconscionable conduct. Previous jurisprudence developed in the
courts of England and Wales prior to the independence of the
Australian judicial system, which occurred with the reception of
the laws and statutes of England and Wales and the establishment of
the colonial Supreme Courts in the nineteenth century, is also
relevant, as are the decisions of the Privy Council exercising its
now ended appellate jurisdiction over State courts.
51. Section 21 does not apply to conduct relating to the supply or
possible supply of goods or services to or from a listed public
company. [Schedule 2, item 4: paragraphs 21(1)(a) and 21(1)(b)] A
listed public company is defined in section 2 of the ACL. Such
companies do not require the protection of the unconscionable
conduct provisions of the ACL.
52. Section 21 does not apply to conduct that is engaged in only
because the person engaging in conduct institutes legal proceedings
in relation to the supply or possible supply, or in relation to the
acquisition or possible acquisition. It also does not apply if a
person engages in conduct by referring a dispute or claim to
arbitration. This ensures that it is not possible to assert that
the action of instituting formal dispute resolution processes
amounts to unconscionable conduct. [Schedule 2, item 4: paragraphs
21(2)(a) and 21(2)(b)]
53. When determining whether a person has engaged in conduct that is
unconscionable, the court must not have regard to any circumstances
that were not reasonably foreseeable at the time of the alleged
contravention. This ensures that persons engaging in conduct are
not held to an absolute standard if circumstances that they could
not have reasonably foreseen occur which, had they been foreseen,
would suggest that the conduct could not in good conscience have
been engaged in. [Schedule 2, item 4: paragraph 21(3)(a)]
54. When determining whether a person has engaged in conduct that is
unconscionable, the court may have regard to conduct engaged in, or
circumstances existing, before the commencement of the section.
The unconscionable conduct provisions of the TP Act have been in
place since 1986 (section 51AB) and 1988 (section 51AC). Paragraph
21(3)(b), whilst providing for retrospective effect of the ACL
provisions, ensures that a gap does not occur whereby conduct that
would have been unconscionable under the TP Act escapes
consideration upon commencement of the ACL provisions. [Schedule
2, item 4, paragraph 21(3)(b)]
Interpretative principles
55. Subsection 21(4) of the ACL sets out the intention of Parliament in
relation to the interpretation of section 21 of the ACL. Each of
the principles has been drawn from existing case law. The
principles clarify, rather than alter, the effect of the statutory
prohibition of unconscionable conduct.
Unconscionable conduct is not limited by the unwritten law
56. Paragraph 21(4)(a) of the ACL provides that it is the intention of
Parliament that the section is not limited by the unwritten law of
the States and Territories relating to unconscionable conduct.
Section 21 is otherwise silent on the relationship between the
equitable and common law doctrines of unconscionable conduct and
the statutory prohibition, and existing case law on the statutory
prohibition continues to be instructive about this relationship.
Paragraph 21(4)(a) of the ACL makes it clear, on the face of the
statute, that statutory unconscionable conduct may, where
appropriate, continue to develop independently from the equitable
and common law doctrines. [Schedule 2, item 4, paragraph 21(4)(a)]
The section may apply to systems of conduct or patterns of
behaviour
57. Paragraph 21(4)(b) of the ACL provides that it is the intention of
Parliament that the section is capable of applying to a system of
conduct or a pattern of behaviour, whether or not a particular
individual is identified as having been disadvantaged by the
conduct or behaviour. The unconscionable conduct provisions of the
ACL are not limited to individual transactions. Rather, the focus
of the provisions is on conduct that may be said to offend against
good conscience; it is not specifically on the characteristics of
any possible 'victim' of the conduct (though these may be relevant
to the assessment of the conduct).
58. It follows, then, and it is established in recent case law, that
conduct may be unconscionable even where there is no 'victim'
identified. In ASIC v National Exchange, the Full Federal Court
held that the statutory unconscionable conduct provisions of the TP
Act and the ASIC Act are not confined by '... limitations from
unwritten law, such as the need to identify a specific or
particular person.' [1]
59. The concept of unconscionable conduct as encapsulated by the High
Court's decision in Commercial Bank of Australia v Amadio draws on
the concept of a person who is '... by reason of some condition
[or] circumstance is placed at a special disadvantage vis a vis
another'.[2] Whether the notion of a 'special disadvantage' is
relevant to a finding of unconscionable conduct - either under the
unwritten law or under the statutory prohibitions - remains a
matter for the court to decide having regard to the particular
matter before it. However, it follows from the principle that a
specific person need not be identified that a special disadvantage
is not a necessary component of the prohibition.
60. To emphasise this point, paragraph 21(4)(b) of the ACL indicates
Parliament's intention that the provision may apply whether or not
there is an identified person disadvantaged by the conduct or
behaviour. This ensures that focus is on the conduct in question,
as opposed to the characteristics of a particular person, or the
effect of the impugned conduct on that person. [Schedule 2, item
4, paragraph 21(4)(b)]
The court may consider the terms and progress of a contract
61. Paragraph 21(4)(c) of the ACL provides that it is the intention of
the Parliament that the Court may consider the terms of the
contract and the manner in which and the extent to which the
contract is carried out in considering whether conduct to which the
contract relates is unconscionable. The prohibition of
unconscionable conduct is not restricted to situations where there
is a contract between two or more parties. However, where there is
a contract, this provision clarifies that unconscionable conduct
can extend beyond the formation of the contract to both its terms
and the way in which it is carried out. [Schedule 2, item 4,
paragraph 21(4)(c)]
ASIC Act changes
62. Section 12CB of the ASIC Act is amended to reflect section 21 of
the ACL. [Schedule 2, item 1, section 12CB]
Matters to which the courts may have regard
63. A court must consider allegations of unconscionable conduct in the
context of all of the circumstances surrounding the relevant
parties' conduct towards each other. [Schedule 2, item 4, section
22]
64. In considering whether there has been unconscionable conduct in
connection with the supply or possible supply of goods and services
to a person, the court may have regard to a list of matters
specified in subsection 22(1) of the ACL, but may also consider any
other matter that it thinks relevant. Similarly, in considering
whether there has been unconscionable conduct in connection with
the acquisition or possible acquisition of goods and services from
a person, the court may have regard to a list of matters specified
in subsection 22(2) of the ACL, but may also consider any other
matter that it thinks relevant. [Schedule 2, item 4, subsections
22(1) and 22(2)].
65. The lists of matters in section 22 of the ACL are drawn from the
lists in the current statutory prohibitions of unconscionable
conduct towards businesses. The lists apply equally to business
and consumer transactions. The matters may or may not be relevant
to a finding of unconscionable conduct, depending on the specific
circumstances in which the conduct takes place.
ASIC Act changes
66. Section 12CC of the ASIC Act is amended to reflect the drafting of
section 22 of the ACL. [Schedule 2, item 1, section 12CC]
Misleading representations with respect to future matters
67. Section 4 of the ACL, concerning the treatment of misleading
representations as to future matters, applies in the same way to
sections 21 and 22 of the ACL as it does to Chapter 3, Part 3-1,
Division 1 of the ACL. [Schedule 2, item 4, section 22A]
Application and transitional provisions
68. The amendments made by Schedule 2 of the Bill commence immediately
upon commencement of Schedules 1 to 5 of the Trade Practices
Amendment (Australian Consumer Law) Act (No. 2) 2010.
Consequential amendments
69. Items 2 and 3 of Schedule 2 of the Bill make minor consequential
amendments to the ACL to substitute a reference to section 22 with
a reference to section 21 in paragraph 131(2)(a) of the TP Act and
to omit a reference from subsection 20(2) from Schedule 2 of the
ACL, respectively. [Schedule 2, items 2 and 3, paragraph 131(2)(a)
and subsection 20(2)]
Do not remove section break.
Background
70. Over the last decade, concerns have been raised in a number of
forums within the community that section 50 of the TP Act may not
be able to address creeping acquisitions. The term 'creeping
acquisitions' is commonly used to refer to a series of small
acquisitions that individually do not substantially lessen
competition in a market so as to breach section 50, but
collectively may have that effect. Such activity may lead to
competitive harm and consumer detriment in certain circumstances.
71. Recognising this concern, the Government committed in 2007 to
introduce a law in relation to creeping acquisitions.
72. Creeping acquisitions were most recently raised as a concern in the
lead-up to, and following the release of, the Grocery Inquiry in
July 2008. On 5 August 2008, the Government announced its
preliminary action plan in response to the Grocery Inquiry. As
part of this plan, the Government released a discussion paper on
1 September 2008, seeking views on a range of options aimed at
formulating the best way forward in relation to creeping
acquisitions. A second discussion paper was released on
6 May 2009, continuing the consultation process. The Government's
current proposal to address creeping acquisitions reflects the
extensive community consultation it has undertaken and fulfils its
commitment to address community concerns in relation to this issue.
Promoting competition and fair trading
73. The object of the TP Act is to enhance the welfare of Australians
through the promotion of competition and fair trading and provision
for consumer protection.
74. Competitive markets are an important mechanism for achieving the
advances in efficiency and productivity that enhance economic
welfare. Maximising the competitiveness of a market will usually
maximise efficiency and lead to the greatest enhancement in
economic welfare.
75. Effective competition can be reduced through changes to market
structure or by firms behaving, either independently or with other
firms, in ways that reduce rivalry in the market, or prevent or
deter the entry of new firms. The competition provisions in Part
IV of the TP Act promote competition by prohibiting anticompetitive
conduct.
Mergers and acquisitions
76. Mergers and acquisitions ('acquisitions') are important for the
efficient functioning of the Australian economy. They can allow
firms to achieve efficiencies, such as economies of scale or scope
and diversify risk across a range of activities. Acquisitions can
promote the efficient allocation of resources where the control of
a company's assets is transferred, the resources of two companies
are integrated, or new management facilitates dynamic efficiencies,
allowing the assets to be put to a more productive use. The threat
of being acquired can also be important in fostering competition
and facilitating efficiencies.
77. Acquisitions can also be driven by a firm's desire to increase its
market power. This is perfectly legitimate: it is not a
contravention of the TP Act to hold market power or to seek to gain
market power through superior economic performance. However, while
there is nothing inherently anticompetitive about possessing market
power, a firm with substantial market power has a greater ability
to act in a manner unconstrained by competitive tension - for
example, by raising prices. Certain market conditions can also
exacerbate anticompetitive behaviour, particularly by firms that
have substantial market power. For example, if a market is
characterised by high barriers to entry or expansion, and a firm
possesses significant market power, the likelihood of rival firms
entering the market is reduced. This lack of competitive tension
increases the risk that the merged firm could raise prices, to the
detriment of consumers.
78. In many markets, sufficient competitive tension remains after an
acquisition to ensure that consumers and suppliers are no worse
off. In many cases, consumers or suppliers benefit from
acquisitions. However, in some cases acquisitions can have
anticompetitive effects. By altering the structure of markets and
the incentives for firms to behave competitively, some mergers can
result in significant consumer detriment. This gives rise to the
key purpose of section 50 of the TP Act - to ensure that
acquisitions do not significantly reduce competitive tension in the
market. If there are loopholes that allow acquisitions that reduce
competition to proceed, it is important to assess whether those
gaps should be addressed to retain the integrity of section 50.
Section 50 of the Act
79. Section 50 of the TP Act contains provisions designed to limit the
scope for firms to reduce competition in a market through acquiring
other firms. In particular, section 50 prohibits acquisitions that
would or would be likely to have the effect of substantially
lessening competition in a market. This test focuses on the state
of competition in a market and whether a merger or acquisition is
likely to substantially reduce that competition. The provision
applies to economy-wide activity. Courts have determined, through
a process of statutory construction, that section 50 is a provision
of broad application.
80. When applying the test in section 50, the ACCC must also bear in
mind the overarching object of the TP Act, which is to enhance the
welfare of Australians through the promotion of competition and
fair trading and provision for consumer protection.
81. When assessing an acquisition, a court or the ACCC has broad
discretion in deciding whether a substantial lessening of
competition is likely to occur. The ACCC defines the market in
question, identifies the level of existing competition and assesses
the likely impact of the acquisition on that competition.
82. Consideration of whether or not a merger or proposed merger would
breach section 50 is not the sole domain of the ACCC and courts.
Acquiring firms closely consider the application of section 50 to a
possible merger, because this determines the strategy employed to
gain some certainty about a proposed merger. Generally, there are
four options open to a firm.
83. First, acquiring firms may seek informal clearance of the merger
from the ACCC, under which parties approach the ACCC, providing
details of the proposed merger, and obtain written advice from the
ACCC as to whether or not it intends to oppose the merger in court
if it proceeds.
84. Second, a party to the merger may apply to the ACCC for a binding
formal clearance on the basis that the proposed merger does not
breach section 50. The ACCC may grant a clearance, but if it does
not do so (or does so on conditions), then this decision may be
reviewed by the Australian Competition Tribunal at the request of
the person who applied for the clearance.
85. Third, an acquirer may seek authorisation of a merger from the
Australian Competition Tribunal, on the basis that the merger or
acquisition would be likely to result in such a benefit to the
public that it ought to proceed.
86. Finally, a party may seek to proceed with a merger on the basis
that they do not consider that it would breach section 50. This
runs the risk that the ACCC could investigate and may decide to
intervene, which could result in the application of penalties or a
divestiture order by a court if it finds that the merger has
breached section 50.
87. As a result, a limited number of merger proposals are considered by
the Federal Court (and consequently the jurisprudence in this area
is similarly limited). However, both private sector lawyers and
the ACCC have developed significant expertise over time in this
area. Their expertise, developed through interactions between the
ACCC and the private sector, frames the environment in which merger
and acquisition activity currently takes place in Australia.
Previous consideration of creeping acquisitions
88. Creeping acquisitions have been considered in a number of forums
over the last ten years, resulting in the introduction of various
regulatory responses over time. The details of a number of these
consultations, inquiries and regulatory responses are considered
below.
Baird Committee
89. The Baird Committee considered creeping acquisitions in its 1999
Fair Market or Market Failure report. While noting a 'degree of
equivocation' amongst those giving evidence as to whether
legislative amendments were required in relation to creeping
acquisitions, it also noted its concerns that section 50 was
unlikely to be breached by small but repeated acquisitions of
independent grocery retailers. Concerns were also raised that in
some instances the ACCC is unaware until after the fact that an
acquisition has even taken place due to the lack of notification
requirements.
90. The Committee recommended a code of conduct be established
requiring the mandatory notification of supermarket acquisitions by
publicly listed corporations. This recommendation was not
implemented.
91. The Baird Committee also recommended that subsection 50(6) be
amended to specifically allow consideration of a 'regional' market
(a term which is not defined), in order to address creeping
acquisitions concerns at the regional/rural level (see
Recommendation 2). The Report cited as an example the heavily
concentrated regional markets in South East Queensland.
Previously, subsection 50(6) had only referred to a market in
Australia, a State or Territory. However, the ACCC's Merger
Guidelines had noted that while a market may be small relative to
the national economy, it may be substantial in the context of a
State or regional economy. The previous government supported the
Committee's recommendation, noting that the Merger Guidelines
already explicitly stated that the relevant substantial market
could be a regional market and that amending subsection 50(6) 'will
clarify the Government's policy intent and confirm current
practice'. Subsection 50(6) was subsequently amended in 2001. At
the time of those amendments, the explanatory material noted that
these amendments did not change the substantive legal rights and
obligations of any person.
Produce and Grocery Industry Code of Conduct
92. In 2000, in response to the Baird Committee's Fair Market or Market
Failure report, the Government established an industry committee to
develop a voluntary industry code of conduct, the Produce and
Grocery Industry Code of Conduct. The code requires signatories to
notify the ACCC of acquisitions of a controlling interest in a
grocery retailer. Despite broad compliance with the code, the ACCC
noted in its 2008 Grocery Inquiry that it is aware of a small
number of acquisitions where it was not notified.
Dawson Review
93. The Review of the Competition Provisions of the Trade Practices Act
(the Dawson Review) reported to Government in January 2003. The
Dawson Review examined a range of measures to deal with creeping
acquisitions:
. market share caps - these were rejected on the basis that
caps would restrict competition, would be unworkable in
the retail sector and would adversely affect rural
consumers in particular;
. a declaration process, whereby industries declared by the
Government to be highly concentrated would have to notify
the ACCC of intended acquisitions. This was rejected as
it was thought to lead to large market participants
establishing new facilities rather than buying existing
stores from smaller rivals willing to sell;
. amendments to section 50 to include a reference to
creeping acquisitions as a relevant concern in assessments
of mergers and acquisitions under section 50. This
recommendation was rejected.
94. The Dawson Review concluded that concentrated markets can be highly
competitive and that there was no need to amend section 50 of the
TP Act to address creeping acquisitions. It further noted that in
a competitive environment, the number of players in a market is a
matter for industry policy, not competition policy.
Senate Inquiry into the Effectiveness of the Trade Practices Act
1974 in Protecting Small Business
95. Submissions to the 2004 Senate Inquiry (The Effectiveness of the
Trade Practices Act 1974 in Protecting Small Business) highlighted
particular concerns about creeping acquisitions in the retail
grocery and the retail liquor sectors. In its report, the
Committee considered that creeping acquisitions must at some point
result in a very concentrated market and that section 50 does not
effectively address this issue. It recommended that provisions be
introduced into the TP Act to ensure the ACCC has the powers to
prevent creeping acquisitions that substantially lessen competition
in a market.
96. In its comments to the Inquiry, the ACCC noted that it had not yet
determined whether creeping acquisitions substantially lessen
competition and cause economic detriment, but expressed uncertainty
about whether section 50 would be adequate to deal with the issue.
97. The then government did not support the Committee's recommended
amendments, noting the Dawson Review's findings that the TP Act is
adequate to address creeping acquisitions. It also noted
uncertainty around whether creeping acquisitions actually
substantially lessen competition and cause economic harm in
practice.
ACCC inquiry into shopper dockets
98. In February 2004, the ACCC conducted an inquiry into petrol
discounting schemes run by the major supermarket chains, releasing
a report entitled 'Assessing shopper docket petrol discounts and
acquisitions in the petrol and grocery sectors'. The inquiry noted
that there is potential for creeping acquisitions to become a
problem in the supermarket sector in the future. It also noted
that while it is in the retail grocery (including liquor) sector
that this issue is most commonly raised, the issue is not limited
to this sector, with participants in the taxi, diagnostic health
services and optical dispensary industries all having referred to
the issue in their discussions with the ACCC.
Charter for the Acquisition of Independent Supermarkets
99. The ACCC introduced a voluntary Charter for the Acquisition of
Independent Supermarkets in July 2005, in response to community
unease about creeping acquisitions in the supermarket industry.
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
must provide independent supermarket owners with written notice of
this fact when making an offer to buy a store.
100. The ACCC Chairman, Graeme Samuel, noted that the Charter will
benefit consumers by promoting competition in the supermarket
sector, particularly by helping to address concerns about creeping
acquisitions.
Trade Practices (Creeping Acquisitions) Amendment Bill 2007 [2008]
101. In September 2007, Senator Fielding introduced a Bill into the
Parliament to regulate creeping acquisitions. The Bill proposed to
amend the TP Act so that an acquisition would be deemed to
substantially lessen competition if it and other acquisitions over
the previous six years would have that effect. A Senate Inquiry
into the Bill found that concerns about creeping acquisitions are
valid and the provisions in section 50 are insufficient to address
the problem adequately. However, the Senate Economics Committee
recommended in August 2008 that the Senate defer consideration of
the Bill until the Government introduced its creeping acquisitions
legislation (which at the time was expected to be within weeks).
Government's 2007 election commitment
102. In the context of ongoing community concerns about creeping
acquisitions, reflecting that the regulatory responses to date had
not adequately addressed the problem, the then-Opposition committed
in the lead-up to the 2007 election, to introduce a law in relation
to creeping acquisitions.
ACCC Grocery Inquiry
103. In its Grocery Inquiry, released in July 2008, the ACCC found that
because much of the growth of the major chains is through organic
expansion of their businesses, it did not consider creeping
acquisitions to be a major concern at that time. However, the ACCC
stated that section 50 is unlikely to address all concerns in
relation to creeping acquisitions and it maintained its support for
the introduction of a general creeping acquisitions law to address
potential shortcomings of section 50.
104. While noting that creeping acquisitions are not a current concern
in the grocery retailing industry, the Grocery Inquiry cited the
supermarket industry as one where creeping acquisitions could
potentially become a concern, due to particular structural features
of the market.
Government consultation
105. As part of its preliminary response to the Grocery Inquiry and in
line with its 2007 election commitment, the Government committed to
respond appropriately and carefully to concerns about creeping
acquisitions. In September 2008, the Government released a
discussion paper seeking views from interested parties in relation
to the best way to address creeping acquisitions. Twenty-three
submissions were received. The Government released a second
discussion paper in May 2009 which proposed amended approaches to
the issue, taking into account concerns raised in submissions to
the first paper. To ensure more fulsome consultation, the
Government extended the deadline for submissions by four weeks and
actively approached a range of business and consumer organisations
to encourage them to make a submission. The second discussion
paper received 32 submissions.
Trade Practices Amendment (Material Lessening of Competition -
Richmond Amendment) Bill 2009
106. On 26 November 2009, Senator Xenophon introduced a Bill into the
Parliament which was intended to 'strengthen Australia's anti-
merger laws and to address the issue of creeping acquisitions' (see
the explanatory memorandum). This Bill repeals current subsection
50(1) and replaces it with a requirement that a corporation must
not directly or indirectly acquire shares in the capital of a body
corporate or assets which would have the effect or be likely to
have the effect of materially lessening competition in a market.
It also requires that a corporation that already has a substantial
share of a market must not directly or indirectly merge with or
acquire assets which would have the effect or likely effect of
lessening competition in a market. On 30 November 2009, the Senate
referred the Bill to the Senate Economics Committee for inquiry and
reported on 13 May 2010.
Scope of the Regulation Impact Statement
107. This Regulation Impact Statement (RIS) relates to proposed
amendments to the provisions of the TP Act that prohibit
acquisitions that would have the effect or likely effect of
substantially lessening competition in a market (section 50).
108. During the course of examining the issues giving rise to this RIS,
concerns emerged regarding the appropriate scope of an exemption
from section 50 for acquisitions made 'in the ordinary course of
business' (as provided by paragraph 4(4)(b) of the TP Act). The
Government is satisfied that its examination of this matter, and
relevant case law, has confirmed that the broad existing policy
settings are appropriate and unambiguous in their application.
However, the Government is also aware that parties may seek to test
these settings in future and has expressed a clear intention to
legislate if required in future to remove this possibility for the
reasons set out in this RIS. If legislation is required in the
future, a further RIS will be prepared on the options for amendment
at the time at which a decision on implementation must be made.
Problem
109. There is broad agreement in the community that section 50 of the TP
Act operates appropriately for the majority of mergers and
acquisitions. Section 50 is viewed as being able to adequately
address the likely impacts on competition of individual mergers.
However, there is a perception amongst some businesses, consumers
and the ACCC that section 50 may not be able to effectively target
a series of small acquisitions ('creeping acquisitions') in certain
circumstances. Specifically, concerns relate to a potential
loophole in section 50 whereby a series of small acquisitions that
individually are not considered to substantially lessen competition
in a market, may collectively have that effect. These concerns
have been raised in numerous industries, including: supermarkets,
liquor, taxis, diagnostic health services and optical dispensary
industries.
110. Divergent views have been held over time as to whether creeping
acquisitions are a problem. Opinions both in favour of, and
against, the case for government action have been variously
articulated in a range of forums over the years, including
Parliamentary Committees, Government-initiated independent reviews
and ACCC inquiries. Numerous recommendations have flowed from
these reviews and inquiries, some of which have been accepted by
governments and others not. However, the current prevailing view
in the community, as borne out by the balance of opinions in
response to the Government's consultation process and by the recent
introduction in the Senate of two private member's Bills, is that
creeping acquisitions concerns should be addressed. In particular,
reviews have suggested that:
. to the extent that creeping acquisitions change the
structure of a particular market, they could further
concentrate market power, and where this occurs, it can
result in reduced incentives for organisations to compete
in that market; and
. such reduced competitive tension affects consumers by
limiting consumer choice and quality and putting upward
pressure on prices.
111. In addition to these specific concerns raised about creeping
acquisition behaviour, it has been suggested that certain elements
of section 50 currently lack clarity and are creating uncertainty
for the business community and the ACCC with regard to the
interpretation of section 50. These concerns are relevant to the
debate about creeping acquisitions, because while the issues do not
directly suggest prohibiting creeping acquisitions, possible
solutions could address those concerns.
112. On that basis, and reflecting both its 2007 pre election commitment
and its response to concerns raised in the Grocery Inquiry, the
Government is now seeking to put in place mechanisms to ensure that
there is no further weakening of competition in either the
supermarket sector or other concentrated industries.
Ambiguity in the interpretation of section 50
113. Some businesses - particularly in the supermarket sector - have
indicated to the ACCC that they will seek to challenge its
interpretation of certain elements of section 50 due to potentially
ambiguous wording in the TP Act. The ACCC applies a rigorous
economic test to determine whether an acquisition substantially
lessens competition. In enforcing the TP Act, the ACCC must act in
accordance with the object of the TP Act, which is to enhance the
welfare of Australians through the promotion of competition and
fair trading and provision for consumer protection. In challenging
the ACCC's interpretation of section 50, certain businesses may
seek to adopt a novel approach to merger and acquisition activity
that appears inconsistent with the ACCC's enforcement approach, the
limited jurisprudence in this area, and with the object of the TP
Act. Given the lack of jurisprudence in this area (there have been
only a handful of section 50 cases litigated in the last decade,
the most recent being in 2003), it is important that the
ambiguities are clarified and the ACCC can continue to enforce
section 50 consistent with its prior practice (generally, that
section 50 should have a broad application) and the TP Act's
broader object. This will also increase certainty for businesses.
114. Further detail on the particular elements is outlined below.
Subsection 50(1) refers to 'a market', while in practice the ACCC
may consider multiple markets
115. Subsection 50(1) is designed to prohibit 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
likely effect, of substantially lessening competition in a market.
Although subsection 50(1) refers to 'a market', nothing precludes
the ACCC from considering multiple markets when considering an
acquisition and it is not uncommon for more than one market to be
identified in a merger review. Nonetheless, some doubts have been
expressed about the scope for considering more than one market
under section 50.
Subsection 50(6) does not refer to sub-regional markets, but the
ACCC may consider such markets providing they are 'substantial'
markets
116. Subsection 50(6) defines a market as a 'substantial market for
goods or services in Australia, a State, Territory or region of
Australia'. Nothing in the wording of subsection 50(6) precludes
the courts or the ACCC from considering markets at the sub-regional
level, providing they are 'substantial' markets. Indeed, in
practice the ACCC typically reviews acquisitions on the basis of
local markets in a number of sectors (including grocery and liquor
sites, hardware stores, childcare facilities, book selling and
retail petrol sites) and considers that some local markets can be
substantial. Its 2008 Merger Guidelines provide that
substantiality of a market is not necessarily related to geographic
size and that this criteria can be demonstrated in many ways.
117. However, there have been doubts expressed to the ACCC about the
application of section 50 to markets in local areas due to
potentially ambiguous wording in the TP Act. Furthermore, comments
by French J in the case of AGL v ACCC demonstrate the real risk
that a court may in the future adopt the view that the
substantiality of a market should be determined by reference to
Australia as a whole, making it difficult to argue that a local
market would be found to be substantial:
'It does not seem likely that the relativity implied by
the term 'substantial' in s50(6) relates to the size of
other markets in whichever of the geographical areas
mentioned in the definition the market is to be found.
For there is no lower bound on the size of 'a region of
Australia'. It may be that having regard to section 4E
the substantiality of the market in question, even if it
be geographically limited to a State or a Territory or a
region, is to be judged by reference to Australia as a
whole. I express no concluded view on that difficult
constructional issue ...'
118. In light of this discussion around uncertainties in the
interpretation of this provision, there appears to be a case to
examine clarifying its application to ensure that local markets are
considered appropriately under section 50. In addition to
potentially impacting on transactions that may raise creeping
acquisitions concerns, this issue has relevance for transactions
involving very large firms that compete against each other in a
large number of local geographic markets.
The 'ordinary course of business' exemption from section 50,
contained in paragraph 4(4)(b), is intended to have a narrow
interpretation, but parties may test its scope
119. Paragraph 4(4)(b) provides that acquisitions made in 'the ordinary
course of business' are exempted from section 50. The TP Act does
not clarify the meaning of this phrase, but case law has found that
it:
. means 'that the transaction must fall into place as part
of the undistinguished common flow of business done, that
it should form part of the ordinary course of business as
carried on, calling for no remark and arising out of no
special or particular situation' (see Rich J in Downs
Distributing Co Pty Ltd v Associated Blue Star Stores Pty
Ltd (in liq) (1948) 76 CLR 463 at 477); and
. 'is meant to refer to transactions regularly taking place
in a sustained course of activity or some other usual
process naturally passing without examination' (see Dixon
CJ in Re E J Taylor & Son Pty Ltd (in liq) (1964) 110 CLR
129 and 136m [1964] ALR 595 at 598).
120. The courts have also found that the wording of section 50 indicates
that the legislature intended it to apply broadly, and that the
'ordinary course of business' exemption would operate narrowly.
121. The ACCC has advised that at least one corporation in the grocery
retailing sector has claimed that acquisitions of vacant land for
development as a supermarket are within the scope of the ordinary
course of business exemption, and unable to be examined under
section 50. The ACCC has taken a contrary view regarding the
application of section 50 to new site developments, where those
developments exhibit three characteristics:
. the development occurs in a built-up area, with limited
availability of alternative sites for potential
competitors in that local market;
. the proposed supermarket operator already has a
significant retailing presence in that local market; and
. if the proposed supermarket did not open on the site, then
an alternative competitive supermarket would be likely to
open on that site and operate a supermarket.
122. It is appropriate for section 50 to apply in these circumstances
because: it applies to acquisitions of legal or equitable interests
in real property, which are 'assets' within the scope of section
50; and because such an acquisition has the potential to
substantially lessen competition in the market.
123. Some have contended that acquisitions of new sites should fall
within the scope of the exemption as 'organic growth' on the basis
that organic growth results in the introduction of a new
competitor. However, it is difficult to see that organic growth is
suitable for exemption from section 50 since it would be unlikely
to provide a new source of competition in a market because any new
'competitor' would be unlikely to compete against its own existing
presence in that market. Taking the converse view, that the
'ordinary course of business' exemption is broad, could allow the
systematic aggressive acquisition of independent supermarkets to
occur as acquisitions 'within the ordinary course of business' and
hence exempt from consideration under section 50 altogether. It is
therefore inappropriate to give a wide reading to the exemption for
such acquisitions (that are already examinable under section 50)
based on the fallacy that organic growth automatically results in a
positive outcome for consumers. The counterfactual is more
persuasive, that consumers should not face the consequences of anti-
competitive effects simply because the asset being acquired is
considered exempt from the prohibition.
Evidence of harm
Impacts on competition
124. Creeping acquisitions may impact on competition in a number of
ways. Commonly, a creeping acquisition could occur when a firm at
one level of the supply chain makes one or more small acquisitions
in a number of downstream markets. The competitive implications of
the acquisition in the local market may appear insignificant.
However, if that market is characterised by high barriers to entry
or expansion, and if one or more firms already possesses
significant market power, the likelihood of rival firms entering
the market is reduced. This lack of competitive tension increases
the risk that the merged firm could raise prices, to the detriment
of consumers.
125. More generally, the ACCC is concerned about certain ambiguities in
section 50 (outlined above). These have recently become known as
businesses have indicated they will seek to challenge the ACCC's
interpretation of section 50, including to challenge the 'ordinary
course of business' exemption. Such ambiguities make it difficult
for businesses to have confidence in the ACCC's ability to
effectively enforce section 50. Consequently, businesses may
either be refraining from undertaking acquisitions that could
enhance competition, or anticompetitive acquisitions may be
proceeding unchecked.
Impacts on consumers
126. Over the past decade, creeping acquisitions have been raised in
relation to a number of industries, including supermarkets, liquor
stores and childcare. Other industries about which the ACCC has
noted potential creeping acquisitions concerns include taxis,
funerals and the healthcare industry.
127. The key concern is the potential effect of small incremental
acquisitions on consumers through the impact they have on
competition, consumer choice, prices and quality. The impact on
wholesale markets of creeping acquisitions in retail markets in
certain industries is also a concern for similar reasons. The
associated consumer detriment has the potential to be felt across a
range of products in all markets - local, regional, state and
national.
128. While evidence that creeping acquisitions have caused actual
consumer detriment to date is limited, the issue has been flagged
by numerous Senate Committees and inquiries, and most recently in
the Grocery Inquiry, as a real potential risk in the future, and
concerns have been raised about the ability of section 50 to
prevent such detriment. In these circumstances it is not
appropriate to wait until clear evidence of actual harm emerges,
when taking preventative policy action now could limit the prospect
of harm eventuating at all.
Example: the grocery industry
129. Concerns relate to the potential for creeping acquisitions to
inhibit competition in the retail grocery industry. Concerns have
also been raised about detrimental effects on the grocery
wholesaling sector, particularly independent grocery wholesalers,
or potential entrants into grocery wholesaling. These effects
include loss of economies of scale in wholesaling relative to the
major chains and reduced bargaining power in negotiations with
suppliers relative to the major chains. Importantly, effects in
both the retail and wholesale sectors can have flow-on effects for
the prices that consumers pay and the quality and choice of
products they face.
130. The ACCC noted in its Grocery Inquiry that while creeping
acquisitions did not currently appear to be a significant concern
and that grocery retailing is 'workably competitive', price
competition between the major chains is limited and creeping
acquisitions could over time become a concern due to particular
structural features of the market, including:
. the need to obtain good sites being a significant barrier
to entry, particularly given the financial resources of
the major supermarket chains and the leverage they wield
over lessors of suitable sites;
. the existence of broader barriers to entry and expansion
created through the need to obtain economies of scale and
efficient wholesaling operations;
. the existence of two major supermarket chains; and
. a situation where there are many small business units
(that is, retail stores or potential retail sites) that
could be acquired or leased one by one or in small groups.
131. The ACCC noted that section 50 may be capable of addressing some
(but not all) acquisitions that have a substantial impact on a
local retail market, but not necessarily those that have
anticompetitive effects in wholesale markets. One of the key
problems associated with creeping acquisitions is that substantial
market power may be enhanced in a broader upstream market (for
example, a wholesale market) through an individual acquisition in
local or regional downstream market even though there is no
substantial competitive impact within the local or regional market
itself.
Need to address the problem
132. Section 50 applies to the full range of mergers and acquisitions in
the Australian economy. If the concerns relating to the ability of
section 50 to effectively address creeping acquisitions remain
unresolved, competition could be adversely affected across a range
of markets (local, state and national), with the potential for
serious detriment to consumer welfare.
133. Furthermore, clarifying the ambiguities in section 50 will ensure
that businesses have confidence in the ACCC's ability to
effectively enforce the merger provisions. This will maximise the
ability of section 50 to ensure that acquisitions do not threaten a
competitive market environment.
Objective
134. Prior to the 2007 election, the Government committed to introduce a
law in relation to creeping acquisitions. This reflected a
persistent community view that, despite the implementation of
various regulatory responses over the past decade aimed at
addressing creeping acquisitions, the issue remains a concern.
Subsequent to the Government's election commitment, the ACCC's
Grocery Inquiry report provided further support for the case to
address creeping acquisitions. It found that although such
acquisitions do not appear to be a significant current concern in
the supermarket retail sector, particular structural features of
the supermarket industry mean that creeping acquisitions are a
potential concern. In its report, the ACCC noted that grocery
retailing is 'workably competitive', but that there are a number of
factors currently limiting the level of price competition,
including the limited competitive constraint imposed by the
independent sector on the pricing power of the major supermarket
chains. The Government is concerned to ensure that there are
appropriate mechanisms in place to preserve adequate competition in
this and other sectors where creeping acquisitions might be a
problem.
135. The objective of the proposed options is to enhance the protections
against anticompetitive acquisitions, to limit or prevent potential
harm to competition and, consequently, consumer welfare.
Options
136. The Government made its 2007 pre-election commitment in response to
a groundswell of community concern that previous regulatory
responses to address creeping acquisitions had been insufficient in
addressing the problem. The findings of the Grocery Inquiry - that
creeping acquisitions are a potential concern in the supermarket
sector - further lent support to the case for reform.
137. In considering possible creeping acquisitions reforms, the
Government has engaged in a consultation process in 2008 and 2009
to confirm the community's views that reform should indeed be
undertaken, and explore possible options for what shape such
reforms should take. As part of its consultation process, the
Government issued two discussion papers seeking the views of
business and the community on a range of options. The discussion
papers canvassed Options 2, 3, 4 and 5 (described below), but none
received a consensus of support, primarily because while it was
broadly accepted that some degree of reform is needed, all four
options were considered to be overly interventionist responses to
the problem. Given this, a further option (Option 6) was
developed, presenting a more proportionate response to the problem.
The Government undertook targeted consultation on this option with
the major supermarket chains and the Business Council of Australia
and reflecting those discussions, the proposals were further
refined.
138. The Options that are considered in this RIS include:
. Option 1: Status quo.
. Option 2: Amending section 50 so that it permits the
courts or the ACCC to treat a series of acquisitions as a
single acquisition for the purposes of establishing
whether a substantial lessening of competition has
occurred ('aggregation model').
. Option 3: Amending section 50 to add an additional
prohibition, so that section 50 also prohibits 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.
. Option 4: Amending section 50 to add an additional
prohibition, so that section 50 also prohibits a
corporation with existing substantial market power from
making an acquisition if the acquisition would result in
an enhancement of its market power in that market.
. Option 5: As per option 4, but to apply only to 'declared'
corporations or sectors for a set period of time, with
mandatory notification to the ACCC of acquisitions by
relevant corporations or in relevant sectors above a set
threshold.
. Option 6: Amending section 50 to clarify that any market
can be examined, and that markets can be defined in
accordance with economic principles, including local
markets where appropriate; and introducing a quasi
regulatory approach to address concerns regarding the
scope of an exemption from section 50 for certain
acquisitions made 'in the ordinary course of business'.
Impact analysis
139. As has been the case with various competition policy reforms over
recent decades, the degree of support for particular options is
influenced by the interests of respective parties in their position
under the various options. Parties for whom the current
arrangements are comparatively more favourable than the proposed
changes will support little or no change. Equally, parties for
whom current arrangements are considered to be unfavourable will
seek substantial change. Submissions from stakeholders are
therefore useful and informative and relied upon where possible,
but it is important that parties' views are considered in the
context in which they are provided.
140. Treasury has critically examined all submissions, carefully weighed
alternatives and undertaken its own analysis to inform its final
conclusions as reflected in this RIS.
Analysis of Option 1
141. Option 1 proposes no change to the law.
142. The benefits of retaining the status quo are that it would avoid
introducing uncertainties and costs that were raised as a concern
in relation to a number of the other options. In other words,
business and the community would retain the existing understanding
about the operation of section 50, backed by a body of prior ACCC
decisions and the (limited) case law to date.
143. Most of the submissions that did not support any change to the
current merger regime under section 50, argued that evidence had
not been provided to suggest that creeping acquisitions are
currently a problem. Organisations not in support of a change
included: the Business Council of Australia, the Group of 100,
Coles, the Australian National Retailers Association, the Law
Council of Australia, the National Farmers Federation and the
Shopping Centre Council of Australia.
144. However, without addressing the problems identified above it is
likely that industries where creeping acquisitions have been noted
as a concern may become increasingly concentrated. While noting
that there is no direct causal link between industry concentration
and a substantial lessening of competition (as such matters would
need to be determined under the test in section 50), creeping
acquisitions may arise in particular industries that the ACCC has
flagged, such as taxis, liquor, health care and hardware. It is
noted that increases in industry concentration do not necessarily
lead to a substantial lessening of competition.
145. If businesses lack confidence in the ability of section 50 to
address creeping acquisitions, this could deter the entry of new
businesses into industries where such acquisitions are a concern,
reducing the level of competition in those markets and potentially
also in related markets.
146. The broader economic impact of reduced competition is likely to
include higher prices and/or reduced quality or choice for
consumers and, to some degree, a reduction in Australia's export
competitiveness. It may also lead to fewer gains in efficiency and
productivity, reduced innovation and fewer employment
opportunities. This may result in reduced enhancements to economic
welfare which, in turn, may flow through to lower taxation revenue
for government. On balance, Option 1 would leave the problem
unaddressed, and therefore is not an appropriate option.
Analysis of Options 2, 3, 4 and 5
147. There was no clear consensus of support for any of the models
proposed in the discussion papers (Options 2, 3, 4 and 5 refer).
While these options presented a range of benefits, respectively,
the costs associated with each were considered to be relatively
high.
Option 2
148. Option 2 (canvassed in the Government's first discussion paper)
proposes to amend section 50 to allow a series of acquisitions to
be treated as a single acquisition in determining whether an
acquisition is likely to lead to a substantial lessening of
competition. This could be done by specifically listing this
aggregation element as one of the factors to be considered in
section 50(3).
149. This would address the core of the problem of creeping acquisitions
and allow section 50 to operate independently of the acquisition
strategy adopted by a firm. It would also retain the existing
substantial lessening of competition test. It would require
minimal upfront compliance costs for businesses in terms of
familiarising themselves with the new legislation.
150. However, it would be conceptually and practically difficult for the
courts or the ACCC to implement because it would require the
application of the forward-looking test in section 50 (that is,
assessing the state of the market if the acquisition proceeds) to
assess the impact on competition of past acquisitions. The ACCC
has noted that this would be particularly difficult if the activity
occurred in a related market. The question of the logistics of the
ACCC establishing a 'watchlist' of firms on an 'aggregation trail'
could also be problematic, in determining the point at which a
'series of acquisitions' had commenced. A further complication
would be that markets (in terms of their geographic boundaries,
structure and functioning) and consumer preferences change over
time.
151. Examining the effects of prior acquisitions could also increase
legal costs and resourcing requirements for businesses and the
ACCC, and firms may also have to provide substantially more
information to the ACCC as part of its informal clearance process
to enable it to determine whether there has been a substantial
lessening of competition. Businesses may also face higher costs if
they need to notify the ACCC of acquisitions that previously would
have been considered too minor to notify. This may deter otherwise
efficient mergers from proceeding.
152. To be workable, the period over which a series of acquisitions is
to be considered would need to be relatively short, which would
necessarily diminish this option's effectiveness as a solution to
the problem, as firms could choose to delay acquisitions to avoid
the statutory time limit for consideration by the ACCC. However,
this could be costly to firms, as timing is often crucial to the
success of acquisitions.
153. Firms would also need to consider how best to sequence acquisitions
over time. For example, proceeding with a merger now could
preclude a merger in the future or make it more costly in terms of
undertakings required by the ACCC. This could introduce an element
of complexity into business planning that currently does not exist.
154. This option could also have the perverse outcome of leading firms
to expand through greenfields development rather than potentially
more efficient acquisition of existing firms. This 'organic
growth' could increase firms' costs, pushing up prices for
consumers. Conversely, firms could be deterred from growing
organically due to uncertainty over whether the acquisition of
assets through organic growth would be considered to be one in a
series of acquisitions. This could prevent efficiency enhancing
acquisitions, limiting the consequent benefits to consumers.
155. Option 2 was supported by a number of peak industry bodies
representing the independent retail sector (the National
Association of Retail Grocers of Australia, The Retailers
Association) and small business representatives (the WA Small
Business Development Corporation). However, this option was widely
opposed by other organisations that made submissions to the
Government's first discussion paper on the basis that it would
introduce uncertainty into the working of section 50 and would be
practically difficult to implement.
Option 3
156. Option 3 (canvassed in the Government's first discussion paper)
would supplement the existing substantial lessening of competition
test in section 50 with a provision that would prohibit a firm with
substantial market power from making an acquisition that would
result in any lessening of competition in that market.
157. However, this would be inconsistent with the underlying policy
principle of the TP Act, which focuses on the state of competition
in a market, rather than market structure per se. Furthermore, it
would introduce a new merger regime, taking Australia out of step
with its international counterparts. No other comparable
jurisdiction has a merger law based on substantial market power.
158. It is possible for legitimate pro-competitive acquisitions to
result in some lessening of competition while still yielding net
benefits to consumers, and where a firm was declared to have
substantial market power, this model would prohibit those. For
example, firms with substantial market power would be prohibited
from acquiring small firms in unrelated markets, or expanding
organically through acquisition of assets, where this results in a
lessening of competition, even if the acquisition would be
efficiency enhancing and result in a net benefit to consumers. In
the extreme, this model could create a de facto market share cap,
leading to a perverse outcome in which firms with substantial
market power are prevented from innovating or achieving economies
of scale, or in some cases, merging at all. However, the ACCC's
authorisation process would still be available to allow pro-
competitive acquisitions, that would otherwise contravene this
prohibition, to proceed.
159. If firms with substantial market power were effectively prevented
from acquiring small firms, this would affect the ability of
smaller businesses to realise a reasonable price for their business
when seeking to exit the industry. This could inhibit small firms
from entering an industry in the first place.
160. A serious risk of adopting Option 3 is the uncertainty it would
create for businesses, as outlined above. This option also has the
potential to increase legal costs for firms in establishing whether
they possess substantial market power, as in the ordinary
commercial environment it may not be immediately obvious to a firm
whether it has such power in the first place, nor whether a
proposed acquisition would move that firm into such a position. It
is likely that notifications to the ACCC through its informal
clearance process would increase.
161. By introducing the term 'any lessening of competition', this option
has the potential to undermine the existing 'substantial lessening
of competition' descriptor in section 50. The difficulty of
defining a lessening of competition that is lower than
'substantial' but more than trivial could increase uncertainty for
businesses, potentially inhibiting efficiency-enhancing
acquisitions.
162. This option was generally supported by smaller retailers (such as
the Fair Trading Coalition, the Australian Food and Grocery
Council, Master Grocers Australia, Metcash) but opposed by large
businesses (such as Coles). IGA supported this option, but with a
number of modifications such as limiting its application to
concentrated industries and broadening the test to capture a
lessening of competition in any market. The Trade Practices
Committee of the Law Council of Australia was strongly opposed to
this option on the basis that it would have significant unintended
industry-wide consequences.
Option 4
163. Option 4 (canvassed in the Government's second discussion paper)
would amend Option 3 to prohibit acquisitions that enhance a firm's
existing substantial market power. As with Option 3, this model
would supplement the existing substantial lessening of competition
test in section 50.
164. One advantage of this model over Option 3 is that it would address
the potential ambiguity about the distinction between a 'lessening'
of competition and a 'substantial lessening' of competition.
165. However, this model has all the other drawbacks of Option 3,
including increased uncertainty and costs for business and a
departure from international best practice in merger law.
166. This option was received in similar terms to Option 3. In
addition, many submissions (including from the Law Council of
Australia) also criticised this model for the lack of clarity
around the term 'enhancing'. If any enhancement of a firm's
substantial market power would trigger a breach, then this model
could have a serious chilling effect on acquisitions. If the
threshold was set at a 'material' enhancement, this may be more
appropriate, but there was no consensus on what an appropriate
qualifier might be. As such, the proposed wording was broadly
viewed as being particularly damaging in terms of creating
uncertainty for businesses and opening the ACCC's decisions up to
challenge.
Option 5
167. Option 5 (canvassed in the Government's second discussion paper)
would adapt Option 4, only applying for a set period of time to
corporations or product/service sectors that are 'declared' by the
Minister, where the Minister has concerns about potential and/or
actual competitive harm from creeping acquisitions, or acquisitions
by corporations with substantial market power. The Minister could
unilaterally declare a corporation or sector, or do so on
application from the ACCC. As with Options 3 and 4, the existing
substantial lessening of competition test in section 50 would
continue to apply to all other acquisitions.
168. As part of the declaration, the Minister would clearly specify the
relevant corporation or product/service sector and could set
appropriate thresholds for the mandatory notification of
acquisitions to the ACCC, by declared corporations or by
corporations in declared sectors, as part of the declaration
process. Thresholds would be carefully established to ensure the
law is applied with minimal burden while still maximising
transparency and accountability.
169. While mandatory notification of acquisitions by declared
corporations or by corporations in declared sectors may help to
resolve information asymmetries and increase transparency regarding
the practical impact of creeping acquisitions through the use of a
public process by the ACCC, it would significantly increase
regulatory burdens and resourcing costs for businesses and the
ACCC. The extent of this additional burden and cost would depend
on whether the firm would have notified the ACCC of the acquisition
anyway (under its informal clearance process). Businesses have
expressed broad support for the ACCC's existing informal clearance
process, which involves voluntary notification of acquisitions, and
any departure from this successful model would not be welcomed by
businesses.
170. Option 5 was broadly supported by small business peak bodies (such
as the Council of Small Business of Australia, the Australian
Hotels Association, the Motor Trades Association of Australia and
small grocery retailers (such as IGA, Supabarn and NARGA)).
Option 6
171. Based on the lack of a clear consensus of support in the
submissions, and taking into consideration the majority view of
submissions that a less interventionist solution may be more
appropriate, an alternative option (Option 6) was considered. The
Government undertook targeted consultation in the process of
further refining elements of this option. Treasury is of the view
that Option 6 therefore achieves an appropriate balance between
addressing the concerns raised in submissions and the views
expressed in the subsequent targeted consultations.
172. Recognising the views presented in submissions that section 50 is
generally operating effectively; and that Options 2, 3, 4 and 5
would be likely to generate costs that exceed the expected
benefits, the Government has sought to develop a more proportionate
response to the problem. Option 6 is expected to have a
predominantly positive impact on competition and consumers, while
imposing minimal costs on the businesses concerned.
173. Option 6 proposes two amendments to section 50, and one quasi-
regulatory proposal (outlined below), to provide greater clarity
around the application of section 50. By clarifying elements of
section 50 to remove existing uncertainties regarding its
application, Option 6 will not change the way the mergers test in
section 50 is applied in practice, but rather will enhance
certainty for businesses, as they will be able to avoid the costs
of challenging areas of uncertainty in the law. Further, it will
ensure that a substantial lessening of competition is prevented,
whenever it arises with respect to a particular acquisition.
Therefore, to the extent that these changes have a material impact
(given that the changes are directed towards codifying existing
practice), it is a materially positive impact. In particular, the
amendments will provide additional clarity around current merger
practices, without imposing intrusive mechanisms for regulating
creeping acquisitions that conflict with the existing well
established merger test in section 50. Given that these amendments
do not alter the mergers test established under section 50 or
change the approach the ACCC takes to enforcing section 50, it is
not expected that they will significantly alter firms' current
behaviour with respect to acquisitions, other than to prevent
challenges to the appropriate application of section 50 to
individual acquisitions.
174. The amendments and quasi-regulatory proposal have been grouped
together under a single option as they are not intended to operate
in isolation, but rather would work jointly to address creeping
acquisitions concerns. The amendments are outlined below.
a. Ability to consider multiple markets
175. The test contained in section 50 refers to a substantial lessening
of competition in a market. Section 50 would be amended so that
references to 'a market' in subsections 50(1) and (2) are replaced
by reference to 'any market'. This would clarify the ACCC's
ability to consider multiple markets when assessing mergers under
section 50, which the ACCC acknowledges as common practice in its
2008 Merger Guidelines (which is a public document that has been
developed and refined in consultation with the community and
stakeholders over time). Amendments to refer to 'any market',
while reflecting current practice, would also reflect amendments
made to section 46 in 2007, which extended the application of that
provision (which applies to a misuse of market power) to the
specific market in question 'or any other market'.
176. The ACCC has indicated that as this is a clarifying amendment that
would not alter existing policy, it does not consider that it will
change the scope of section 50. However, the effect should be to
clarify to the business community that section 50 can apply to
multiple markets. Consequently, this amendment will prevent
businesses from seeking to proceed with acquisitions that may be
deemed to breach section 50 on the grounds that they lessen
competition in markets other than the primary market in which the
acquisition would occur. Although the ACCC would have opposed such
acquisitions anyway, this clarification will save businesses the
costs associated with applying to the ACCC through the voluntary
clearance process or otherwise proceeding with the merger without
seeking clearance and subsequently having it blocked by the ACCC.
177. Relevant examples include industries where an acquisition in a
local retail market may not have a substantial competitive impact
in the local market, but may substantially lessen competition in a
related upstream market (for example, a wholesale market). In
these circumstances, it is important to enable the ACCC to consider
the totality of effects resulting from the acquisition. Indeed, to
take the alternative view, that use of the term 'a market' means
one market only would probably seriously weaken the merger
framework that operates in Australia.
b. Enable courts or ACCC to consider 'local' markets when
assessing acquisitions under section 50
178. Under Option 6, subsection 50(6) would also be amended to specify
that the courts or the ACCC can consider more confined geographic
markets than what may be considered 'regional' markets when
assessing acquisitions. Again, this is current practice by the
ACCC in its administration of section 50, as evidenced by the
ACCC's opposition to Woolworths' acquisition of an independent
supermarket in Queanbeyan in a local retail market in 2008.
However, the potential ambiguity in the existing wording,
identified but not conclusively determined in recent jurisprudence
in this area, has created a risk that parties will seek to
challenge the ACCC's ability to do so. That is, in Australian Gas
Light Company v Australian Competition and Consumer Commission (No
3) [2003] FCA 1525, French J of the Federal Court of Australia
refused to express a concluded view that the substantiality of a
market is to be judged by reference to Australia as a whole.
Should such a view be successfully established, this would diminish
the chances of successfully establishing that there was a
substantial lessening of competition in markets deemed to be not
substantial with respect to Australia as a whole.
179. This amendment will provide clarification about the scope of
subsection 50(6). Section 50 focuses on preventing acquisitions
which have the effect or likely effect of substantially lessening
competition. It would be undesirable, therefore, for the ACCC or
the courts to be unable to prevent an acquisition which has such an
effect but where interpretations of subsection 50(6) would operate
to remove their capacity to intervene.
180. This amendment will ensure that there will be no undue narrowing of
the application of merger law in Australia to the detriment of
consumers. Increased clarity would benefit businesses as they will
have greater certainty about how the ACCC will seek to enforce
section 50. This amendment also ensures that individual small
acquisitions that are most appropriately considered in the context
of a local market can be captured by section 50, thereby assisting
the ACCC's examination of acquisitions in industries where creeping
acquisitions concerns have been raised. Further, in contrast to
Options 2 to 5 above, it does not unduly expand the application of
the primary test in section 50 to mergers which do not give rise to
a substantial lessening of competition.
181. This amendment has the additional advantage of reinforcing the
approach taken in amendments made to this provision in the Trade
Practices Amendment Act (No. 1) 2001 (which amended subsection
50(6) to recognise more geographically confined markets than
Australia, a State or Territory).
c. Quasi regulatory proposal
182. While legislative amendments to section 50, or to the exemption
from section 50, could address concerns regarding reliance on the
'ordinary course of business' exemption to avoid examination of an
acquisition of vacant land under section 50, to date this issue has
been confined to untested contentions in the retail grocery sector.
183. It appears premature, therefore, to undertake legislative
amendments to the general remedy in section 50 or the exemption in
paragraph 4(4)(b), when any such potential issues appear currently
confined to specific markets. The policy option chosen by the
Government is to clearly state the Government's expectations about
how it will view attempts to expand the interpretation of this
narrow exemption from section 50.
184. Maintenance of the status quo does not impose any additional
compliance costs on businesses, although it may remove
opportunities for the business community to seek to challenge this
view.
185. In light of court findings that: section 50 is a provision of broad
application; and that the exemption is one of narrow application,
stating the Government's expectations about future reliance on the
ordinary course of business exemption from section 50 arguably does
no more than to retain the status quo. The Government's intention
to legislate if required to address this policy concern, therefore,
should result in no or low additional business costs, or other
impacts at this point in time.
186. While this quasi regulatory proposal will foreclose opportunities
for businesses to seek to expand the application of this exemption
in future, it will provide greater certainty to businesses on the
future legislative framework, and its maintenance consistent with
current policy settings.
Summary of Option 6
187. The amendments to subsection 50(6) would not involve additional
costs to businesses or the ACCC as these changes largely confirm
the existing administration of section 50 in this respect (that a
market that can be considered under section 50 may be more
geographically confined than a 'regional' market). Rather, by
removing ambiguities around particular elements of section 50,
these amendments are likely to have a net positive impact on
competition and consumers.
188. The ACCC has indicated that these amendments are not likely to
substantially broaden the scope of operation of section 50 beyond
its current administration, but will seek to prevent a situation
arising that could potentially narrow the application of merger law
in Australia. Consequently, the administrative burdens associated
with section 50 will either remain unchanged, or reduce as parties
will no longer seek to expend resources pursuing clarity around the
matters addressed by these amendments. That is, as noted above, by
clarifying elements of section 50 to remove existing uncertainties
regarding its application, Option 6 will not change the primary
merger test, but will rather enhance certainty for businesses by:
avoiding the costs associated with challenging areas of uncertainty
in the law; and ensuring that a substantial lessening of
competition is prevented, whenever it arises with respect to a
particular acquisition. To the extent that these changes have a
material impact (given that the changes are directed towards
codifying existing practices), it is a materially positive impact.
189. Option 6 would clarify that section 50 prohibits acquisitions
resulting in a substantial lessening of competition, regardless of
the form and circumstances in which they take place. Consequently,
this option will give businesses greater confidence in the efficacy
of section 50 (and particularly with respect to its application to
smaller acquisitions), thereby facilitating pro-competitive
acquisitions that may not otherwise have occurred by decreasing
uncertainty.
190. Given the sound theoretical argument, that section 50 already
applies to acquisitions of interests in real property, there is a
strong argument that the Government's quasi-regulatory approach to
address concerns about the scope of the 'ordinary course of
business' exemption will not impose any additional compliance costs
on businesses or other impacts.
191. These legislative and quasi-legislative proposals are expected to
address concerns regarding market concentration in markets in which
creeping acquisitions have been cited as a potential issue.
192. Option 6 has been canvassed with the key stakeholders most likely
to be affected by the changes and responses were broadly supportive
of the policy direction proposed under Option 6.
Consultation
193. As the TP Act applies to all industries and creeping acquisitions
could affect small and large businesses in a range of sectors, and
the community more broadly, the Government sought comments from a
wide range of businesses and consumer groups in its consultation
process. The Government issued two public discussion papers (in
September 2008 and May 2009) which canvassed four possible
alternatives for addressing creeping acquisitions (Options 2, 3, 4
and 5 refer) and sought alternative options from businesses and the
community.
194. The public consultation spanned a period of 10 months. Twenty-
three submissions were received to the first discussion paper and
32 submissions to the second discussion paper, from small and large
businesses from a range of industries including the retail,
supermarket and childcare sectors, as well as peak industry bodies.
Submissions were also received from individual consumers, legal
practitioners experienced in Trade Practices matters and the ACCC.
195. The views expressed throughout the consultation process informed
the Government's further proposal (Option 6), which was then the
subject of targeted consultation with key stakeholders most likely
to be affected by the policy direction proposed under Option 6.
196. Treasury consulted with relevant Commonwealth departments and
agencies, as well as with the State and Territory governments to
seek their approval on the draft amendments in accordance with the
1995 intergovernmental Conduct Code Agreement prior to introduction
of a Bill into the Parliament. Legislation will only be introduced
if the Government obtains the required support from State and
Territory governments for the proposed amendments.
Conclusion and recommended option
197. While there is not a prevailing view that creeping acquisitions are
currently causing serious actual harm to competition and consumers,
there is a widely-held view that they are a potential problem that
could develop into a genuine concern in the future. Ambiguities in
relation to certain elements of section 50 are also posing a real
risk to the ACCC's ability to effectively enforce section 50
consistent with the policy objectives referred to elsewhere in this
Regulation Impact Statement and to the confidence of businesses in
its ability to do so. As such, Option 1 would not be an
appropriate course of action as it would leave the problem
unaddressed.
198. There was no consensus of support for Options 2, 3, 4 and 5 and
these options are not a proportionate response to the problem, with
the costs or likely costs clearly outweighing the benefits or
likely benefits.
199. On balance, Option 6 would appear to present a more balanced and
targeted option because it:
. addresses the perceived problem regarding creeping
acquisitions in respect of specific markets;
. is not overly intrusive in terms of regulatory impact on
business;
. addresses stakeholder concerns as expressed in the
submissions to the Government's discussion papers; and
. meets the Government's 2007 pre-election commitment.
Implementation and review
Changes to the Trade Practices Act
200. The changes to the TP Act will need to be implemented by passing
amending legislation through the Commonwealth Parliament.
201. The quasi regulatory approach would be implemented by way of a
media statement.
Changes to the ACCC's Merger Guidelines 2008
202. The ACCC would need to update its Merger Guidelines to reflect the
changes to the relevant parts of the TP Act.
Enforcement
203. The ACCC would have responsibility for enforcing the amended Act.
Review
204. The effectiveness of the proposed amendments would be informally
monitored by the Treasury, and reviewed after a sufficient period
of time had elapsed.
Index
Schedule 1: Mergers and acquisitions
|Bill reference |Paragraph |
| |number |
|Item 1, subsections 50(1) and (2), item 4, |1.33 |
|subsections 50(1) and (2) of the Schedule | |
|Item 2, subsection 50(6), item 5, |1.29 |
|subsection 50(6) of the Schedule | |
|Item 3, section 179 |1.36 |
Schedule 2: Unconscionable conduct
|Bill reference |Paragraph |
| |number |
|Item 1, section 12CB |2.25 |
|Item 1, section 12CC |2.29 |
|Items 2 and 3, paragraph 131(2)(a) and |2.32 |
|subsection 20(2) | |
|Item 4: paragraph 21(3)(a) |2.16 |
|Item 4, paragraph 21(3)(b) |2.17 |
|Item 4, paragraph 21(4)(a) |2.19 |
|Item 4, paragraph 21(4)(b) |2.23 |
|Item 4, paragraph 21(4)(c) |2.24 |
|Item 4: section 21 |2.11 |
|Item 4, section 22 |2.26 |
|Item 4, subsections 22(1) and 22(2) |2.27 |
|Item 4: paragraphs 21(1)(a) and 21(1)(b) |2.14 |
|Item 4, section 22A |2.30 |
|Item 4: paragraphs 21(2)(a) and 21(2)(b) |2.15 |
-----------------------
[1] Australian Securities & Investments Commission v National Exchange
Pty Ltd (2005) 148 FCR 132 at 140, per Tamberlin, Finn and Conti JJ.
[2] Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 462,
per Mason J.