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Competition and Consumer Legislation Amendment Act 2011

Note: this bill was previously introduced as the Competition and Consumer Legislation Amendment Bill 2010. It passed through the House of Representatives but lapsed at the end of Parliament on 29 September 2010 before it passed through the Senate. A Senate Inquiry into Competition and Consumer Legislation Amendment Bill 2010 recommended its passage. The bill received Royal Assent on 6 December 2011 and came into operation on 7 February 2012.

Overview

This Act includes the following key amendment to the competition law provisions:

(1) replacing the words 'a market' in section 50(1) with 'any market'

(2) Removing the requirement that a market, for purposes of the merger provision, be a 'substantial' market, by removing the word substantial from subsection 50(6)

The Government claimed that this would address some of the concerns raised about creeping acquisitions and followed two inquiries into creeping acquisitions.

Note, the bill also introduced amendments to the unconscionable conduct provisions of the Act.

 

Key provisions

Subsection 50(1)

Prior to passage of this Act s 50(1) provided:

A corporation must not directly or indirectly:

(a) acquire shares in the capital of a body corporate; or

(b) acquire any assets of a person;

if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a market.

The Act amended the last two words from 'a market' to 'any market'. This, the EM explained (at para 1.18), was to 'clarify the ability of the ACCC or a court to consider multiple markets when assessing mergers' and 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.'

Subsection 50(6)

Prior to passage of this Act s 50(1) provided:

market means a substantial market for goods or services in:

(a) Australia; or

(b) a State; or

(c) a Territory; or

(d) a region of Australia.

The Act removed the word 'substantial'. The government claimed that the existing provision was unclear about whether or not the market definition extends to 'local' markets and is also unclear on just how 'substantial' a market must be to be caught. In particular, they claimed (at para 1.30 of the EM) that removing the word substantial will 'remove the risk ... 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 EM goes on to state that the 'amendment will also remove doubts regarding the ACCC's ability to examine markets where creeping acquisitions concerns may arise in the future'.

The concern about the potential for the word 'substantial' to be limited by reference to the market in Australia as a whole, arose in part out of the following comments (obiter) made by Justice French (as he then was) in AGL v ACCC (at 353):

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). [emphasis added]

 

Explanatory Memoranda

The following extrates relate only to the changes to the merger provision of the Act

Chapter 1 Mergers and acquisitions

Outline of chapter

1.1 Schedule 1 to the Competition and Consumer Legislation Amendment Bill 2011 (‘the Bill’) contains amendments to the prohibition on anti-competitive mergers and acquisitions in the Competition and Consumer Act 2010 (the ‘CC Act’).

Context of amendments

1.2 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 a series of small-scale acquisitions that individually do not substantially lessen competition in a market in breach of section 50 of the CC Act, 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.

1.3 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 Australian Competition and Consumer Commission (‘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.

1.4 As section 50 of the CC 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.

1.5 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.

1.6 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 ‘any market’

1.7 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 and acquisitions.

1.8 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.

1.9 This amendment will 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.

Amendments in relation to local markets

1.10 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.

1.11 Subsection 50(6) of the CC 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.

1.12 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.

1.13 The key uncertainty 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.

1.14 Removing the word ‘substantial’ from subsection 50(6) will 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.

Comparison of key features of new law and current law

New Law Current Law
Section 50 prohibits mergers or acquisitions that would, or would be likely to substantially lessen competition in any market. Section 50 prohibits mergers or acquisitions that would, or would be likely to substantially lessen competition in a market.
Restricts the application of section 50 to markets in Australia, or a State, or Territory, or Region of Australia. Restricts the application of section 50 to substantial markets in Australia, or a State, or Territory, or Region, of Australia.
Contains provisions corresponding to those outlined above in the Schedule version of section 50. Contains provisions corresponding to those outlined above in the Schedule version of section 50.

Detailed explanation of new law

Amendments in relation to ‘any market’

1.15 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.

1.16 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.

1.17 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.

1.18 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.

1.19 The Bill, therefore, amends subsections 50(1) and (2) to change the reference to ‘any’ market. [Schedule 1, item 1, subsections 50(1) and (2)]

1.20 This amendment will 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.

1.21 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).

Amendments in relation to local markets

1.22 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 report Fair Market or Market Failure? (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.

1.23 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.

1.24 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).

1.25 The key uncertainty is 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.

1.26 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.

1.27 In section 4E, ‘market’ is defined (for the purposes of the CC 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 CC 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.

1.28 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.

1.29 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, as per French J’s observations, can add significant uncertainty.

1.30 Removing the word ‘substantial’ will 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.

1.31 The Bill amends subsection 50(6) contained in Part IV of the CC Act to delete the ‘substantiality’ criterion from the provision. [Schedule 1, item 2, subsection 50(6)]

Corresponding amendments to the Competition Code

1.32 The Bill also makes corresponding amendments to the Schedule version of Part IV (Schedule 1 of the CC Act) which contains the Competition Code, which applies to all persons in the States and Territories by virtue of application legislation in those jurisdictions. [Schedule 1, items 4 and 5, subsections 50(1) and (6) of Schedule 1]

Application and transitional provisions

1.33 The amendments to section 50 apply to acquisitions occurring after the commencement of these provisions. [Schedule 1, item 3, section 179]

Consequential amendments

1.34 Nil.

...

Chapter 4 Regulation impact statement - Creeping acquisitions

Background

4.1 Over the last decade, concerns have been raised in a number of forums within the community that section 50 of the Competition and Consumer Act 2010 (‘CC 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.

4.2 Recognising this concern, the Government committed in 2007 to introduce a law in relation to creeping acquisitions.

4.3 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

4.4 The object of the CC Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.

4.5 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.

4.6 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 CC Act promote competition by prohibiting anti-competitive conduct.

Mergers and acquisitions

4.7 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.

4.8 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 CC Act to hold market power or to seek to gain market power through superior economic performance. However, while there is nothing inherently anti-competitive 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 anti-competitive 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.

4.9 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 anti-competitive 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 CC 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 CC Act

4.10 Section 50 of the CC 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.

4.11 When applying the test in section 50, the ACCC must also bear in mind the overarching object of the CC Act, which is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.

4.12 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.

4.13 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.

4.14 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.

4.15 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.

4.16 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.

4.17 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.

4.18 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

4.19 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

4.20 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.

4.21 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.

4.22 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

4.23 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

4.24 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.

4.25 The Dawson Review concluded that concentrated markets can be highly competitive and that there was no need to amend section 50 of the CC 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

4.26 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 CC Act to ensure the ACCC has the powers to prevent creeping acquisitions that substantially lessen competition in a market.

4.27 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.

4.28 The then government did not support the Committee’s recommended amendments, noting the Dawson Review’s findings that the CC 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

4.29 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

4.30 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.

4.31 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]

4.32 In September 2007, Senator Fielding introduced a Bill into the Parliament to regulate creeping acquisitions. The Bill proposed to amend the CC 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

4.33 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

4.34 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.

4.35 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

4.36 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

4.37 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

4.38 This Regulation Impact Statement (RIS) relates to proposed amendments to the provisions of the CC Act that prohibit acquisitions that would have the effect or likely effect of substantially lessening competition in a market (section 50).

4.39 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 CC 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

4.40 There is broad agreement in the community that section 50 of the CC 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.

4.41 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.

4.42 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.

4.43 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

4.44 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 CC Act. The ACCC applies a rigorous economic test to determine whether an acquisition substantially lessens competition. In enforcing the CC Act, the ACCC must act in accordance with the object of the CC 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 CC 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 CC Act’s broader object. This will also increase certainty for businesses.

4.45 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

4.46 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

4.47 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.

4.48 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 CC 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 …’

4.49 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

4.50 Paragraph 4(4)(b) provides that acquisitions made in 'the ordinary course of business' are exempted from section 50. The CC 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).

4.51 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. 4.52 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.

4.53 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.

4.54 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

4.55 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.

4.56 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

4.57 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.

4.58 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.

4.59 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

4.60 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.

4.61 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.

4.62 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 anti-competitive 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

4.63 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.

4.64 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

4.65 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.

4.66 The objective of the proposed options is to enhance the protections against anti-competitive acquisitions, to limit or prevent potential harm to competition and, consequently, consumer welfare.

Options

4.67 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.

4.68 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. 4.69 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

4.70 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.

4.71 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

4.72 Option 1 proposes no change to the law.

4.73 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.

4.74 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.

4.75 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.

4.76 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.

4.77 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

4.78 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

4.79 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).

4.80 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.

4.81 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.

4.82 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.

4.83 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.

4.84 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.

4.85 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.

4.86 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

4.87 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.

4.88 However, this would be inconsistent with the underlying policy principle of the CC 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.

4.89 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.

4.90 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.

4.91 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.

4.92 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.

4.93 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

4.94 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.

4.95 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.

4.96 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.

4.97 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

4.98 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.

4.99 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.

4.100 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.

4.101 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

4.102 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.

4.103 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.

4.104 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.

4.105 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

4.106 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’.

4.107 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.

4.108 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

4.109 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.

4.110 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.

4.111 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.

4.112 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

4.113 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.

4.114 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.

4.115 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.

4.116 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.

4.117 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

4.118 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.

4.119 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.

4.120 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.

4.121 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.

4.122 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.

4.123 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

4.124 As the CC 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.

4.125 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.

4.126 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.

4.127 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

4.128 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.

4.129 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.

4.130 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 Competition and Consumer Act 2010

4.131 The changes to the CC Act will need to be implemented by passing amending legislation through the Commonwealth Parliament.

4.132 The quasi regulatory approach would be implemented by way of a media statement.

Changes to the ACCC’s Merger Guidelines 2008

4.133 The ACCC would need to update its Merger Guidelines to reflect the changes to the relevant parts of the CC Act.

 

Second reading speeches and committee debate

House

The Hon David Bradbury MP

Link to full speech (15 June 2011)
Source: Hansard, 15 June 2011 page 6052

SECOND REEADING SPEECH

Introduction
The Competition and Consumer Legislation Amendment Bill 2011 will give effect to two important reforms to strengthen and clarify our competition and consumer laws.

First, the Bill will enact laws to deal with creeping acquisitions by amending section 50 of the Competition and Consumer Act 2010 (CCA).

The amendments will give greater clarity to the provisions regulating mergers and acquisitions. They will ensure the Australian Competition and Consumer Commission (ACCC) and the courts have the power to reject mergers and acquisitions that would substantially lessen competition in any local, regional or national market.

The Bill also enhances and simplifies the unconscionable conduct provisions of the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001.

The unconscionable conduct amendments are central to the implementation of uniform consumer laws throughout Australia. They were agreed by the Ministerial Council on Consumer Affairs (now the COAG Legislative and Governance Forum on Consumer Affairs) at its meeting in Perth on 30 April 2010.

These amendments clarify the Parliament's intention as to how the unconscionable conduct law should apply. They will place the ACCC and the Australian Securities and Investments Commission (ASIC) in a better position to take more effective enforcement action.

I would like to recognise the valuable work of my predecessor, the former Minister for Competition and Consumer Affairs, the Hon Dr Craig Emerson MP, in developing this Bill prior to its previous introduction.

The Government previously introduced this Bill into the Parliament on 27 May 2010. The Bill was referred to the Senate Economics Committee, which recommended that the Bill be passed.

The Bill passed the House of Representatives on 24 June 2010 and was awaiting introduction into the Senate when the 2010 Election was called, causing the Bill to lapse.

Creeping Acquisitions
Creeping acquisitions are a series of small-scale acquisitions that, individually, do not substantially lessen competition in a market, but collectively may do so over time.

Concerns about creeping acquisitions were raised in the context of the ACCC's report arising out of the inquiry into the competitiveness of retail prices for standard groceries. In its report, while noting that such acquisitions do not appear to be a significant current concern in the supermarket retail sector, the ACCC expressed its support for the introduction of a general creeping acquisitions law.

Subsequently the Government undertook extensive public consultations in 2008 and 2009 to seek the community's views on possible reform options. Through its consultations, the government identified two amendments which would clarify the operation of section 50 to confirm that the ACCC's current interpretation, as set out in its November 2008 publication, Merger Guidelines, is correct.

The first amendment in the Bill will amend subsections 50(1) and (2) of the Competition and Consumer Act to replace references to 'a market' with references to 'any market'. This amendment will clarify the ability of the ACCC or a court to consider multiple markets when assessing mergers and acquisitions.

The amendment will clarify that businesses cannot challenge a decision to block a proposed acquisition on the grounds that the substantial lessening of competition identified was in one or more markets other than the primary market relevant to the merger or acquisition.

The ACCC and the courts will be able to consider the totality of the competitive effects resulting from an acquisition, including impacts in upstream and downstream markets, not just impacts in 'a market'.

The Bill also amends subsection 50(6) of the Competition and Consumer Act. That subsection has the effect of limiting the scope of section 50 to acquisitions in markets that are 'substantial' in a state or territory or region of Australia.

The amendment to this subsection will provide greater certainty regarding the current practice of the ACCC of considering acquisitions in local markets. The Merger Guidelines state that the 'substantiality criterion' can be satisfied in many ways, including by the number of customers, total sales or the geographical size of the market.

The Merger Guidelines do not have the force of law. While the interpretation of the ACCC of subsection 50(6) has not been tested in the courts, it was considered by Justice French in his 2003 decision in the Federal Court in the case of Australian Gas Lighting Company v ACCC.

While expressing no conclusive view, his Honour left open the possibility that whether a market is considered 'substantial' under subsection 50(6) may be determined with reference to Australia as a whole. If this view were to become established in law through legal precedent, then it could well preclude acquisitions in geographically confined markets from being considered under section 50. This would prevent the application of section 50 to local markets where creeping acquisitions have been identified as a concern.

The Bill deletes the word 'substantial' from subsection 50(6). This removes the risk highlighted by Justice French that a court could in the future adopt the view that acquisitions in geographically confined markets may not be considered substantial and therefore not fall within the scope of section 50.

The government's amendment to section 50 will remove that possibility, allowing the ACCC or a court to continue to examine acquisitions in all markets, including in relatively small, local markets.

Together, these amendments will strengthen the acquisitions provisions of the Competition and Consumer Act under section 50 by clarifying the scope of the law and increasing certainty around its application to markets where creeping acquisitions have been a concern.

In addition to these amendments, when announcing the way it would respond to concerns about creeping acquisitions, the government also confirmed the power of the ACCC to act in relation to the acquisition of greenfield sites. The ACCC already considers it has the power to review acquisitions of greenfield sites whether through purchase or lease. However, if the ACCC is challenged on this in the future, the government has stated it will not hesitate to confirm this power.

These amendments were agreed with the States and Territories under the intergovernmental Conduct Code Agreement 1995.

Unconscionable conduct
[The Bill also brought about changes to the unconscionable conduct provisions, including introducing interpretative principles]

Other amendments
The Bill will also remove the distinction in the existing provisions between unconscionable conduct that affects businesses and that which affects consumers. ....

Conclusion
Together the amendments contained in this Bill will bring greater clarity and certainty to the application of key provisions of our competition and consumer laws.

The amendments to section 50 will ensure that the ACCC and the courts can assess the totality of the competitive effects associated with acquisitions which occur in geographically confined, local markets.

The amendments to the unconscionable conduct provisions will ensure there is a much clearer understanding of the conduct that these provisions have always been intended to address. The amendments will protect Australian small businesses, but without creating market distortions which would only reduce their competitiveness and their resilience.

The amendments will protect consumers by ensuring that competition is protected and fostered. They will strengthen the prohibition against conduct that is designed to stifle competition through the imperceptible development of market dominance or through unconscionable business conduct.

 

Mr Billson (Dunley) (Liberal Party) (6 July 2011)

I rise today to speak on the Competition and Consumer Legislation Amendment Bill 2011 and do so having risen, I think, in this very room in the same place, to discuss this legislation before parliament was prorogued for the last election. The bill is very much exactly as it was the last time we discussed it in this chamber. ...

It is important to open the batting by saying that we do not oppose this legislative change. In fact we made it clear that we find this bill quite unobjectionable in that what it seeks to achieve is extraordinarily modest, and it manages to achieve such modesty. There is no harm from this legislation, but it would be false and quite wrong-to use the consumer law language, false representations would be made-if the government were to claim that some enormous shift will be achieved by this legislation. It will not. And that is one of the reasons the opposition has no objection to this legislation. However, we will be highlighting how it fails to achieve a number of the things that the government has described as being the ambition of the legislation.

Essentially, the bill has two main aims. One is to clarify the operation of existing provisions, not new provisions, relating to mergers and acquisitions by attacking a potential uncertainty or a potential ambiguity that may arise-it has not yet-in defining what a market is for the purposes of section 50 of the Competition and Consumer Act. Its second aim is to insert interpretive principles [for the unconscionable conduct provisions] ...

... Some of the rounding-out comments in the second reading speech are not met. They try to create the impression that there is some miraculous change and some enormous renovation to the competition and consumer laws in Australia. That is not correct.

Over the past decade or so there have been concerns raised within the community about market concentration in a number of key sectors - we have seen it in banking, retail fuel, groceries and some other areas - and the ability of section 50 of the competition and consumer law to deal effectively with creeping acquisitions. These creeping acquisitions are acquisitions which may, of themselves, not be terribly significant. They may, of themselves, not represent a substantial or wholesale change in market conditions, but when accumulated over time they bring about quite a different complexion in the conditions in the market place.

To some extent you can look at the supermarket area to see this. When Professor Hilmer was doing his landmark work looking at our competition and consumer framework, and recommending reforms that earned a wide degree of support, I think the two major supermarket chains had less than half of the total grocery market. Changes were foreshadowed that would supposedly nurture competition and consumer interests. We now know those two major chains have nearly three-quarters of the market. Nothing enormous or transformational may have happened overnight, but a system and a series of acquisitions, new presence and purchasing of other properties has seen the majors in the supermarket area really enhance their positions. That is called creeping acquisition.

The Baird committee considered creeping acquisitions in 1999 in its report, Fair market or market failure?

The committee recommended a code of conduct be established requiring the mandatory notification of supermarket acquisitions by publicly listed companies. The Baird committee also considered whether subsection 50(6) should be amended to specifically allow consideration of a regional market in order to address creeping acquisition concerns at a regional, rural or more localised level. The interpretation of that subsection by the ACCC has not been tested by the courts. In response to the Baird review and in commentary that followed, the ACCC felt that specifically allowing for consideration of a regional or more localised market was not needed - because the law already provided that utility by the description of the commission being able to consider the impacts on the market. In Justice French's decision in 2003 in the Federal Court of AGL v the ACC, while not offering a concluded view on it, he left open the possibility that a market needed to be considered substantial and may be determined with reference to Australia as a whole. That opinion has not been tested and there is no jurisprudence to validate that view, but it was a risk and a potential avenue of action for those concerned with merger and acquisitions proposals and perhaps aggrieved by the ACCC's conclusion.

It was conveyed to the ACCC that one major supermarket chain may possibly press that interpretation to resist any objection to acquisitions in geographically confined markets from being considered under section 50. Prior to the last parliament and in this parliament, given the threat of a legal challenge being mounted on that basis, the government thought that the law should be clarified. Given that lack of jurisprudence, the bill seeks to redefine 'market' as 'any market' and to remove the term 'substantial' to define the market to be any market in Australia - which might otherwise prevent the application of section 50.

A related area which arises when talking about distinctions in the supermarket sector is that one of the major supermarket chains has routinely informed the ACCC about vacant site acquisitions plans. Another has not been so enthusiastic about that in communicating intentions in regard to greenfield sites, to be purchased or leased, claiming that such an acquisition is undertaken in 'the ordinary course of business' and therefore would be exempt from the creeping acquisitions provisions. While the bill contains no express provisions to deal with this issue, in bringing this bill forward the government has made it clear that, if the government believes the ACCC's interpretation is valid but this proves not to be the case, and if the ACCC's powers do not extend to considering the acquisition of greenfield sites, the government will act to clarify the law.

So we have clarification about a possible risk through a potential ambiguity on the basis of a threat about how someone might attack a legal argument - that is the justification for one of the provisions. There is an announcement that the government is telling supermarket chains or any others that, if it thinks acquisition of greenfield sites is not an acquisition for the purposes of section 50, it will argue that that is wrong but, if challenged on that, it will change the law.

I hope you can see from that description that there is really no great joy. There is no sense that the toolkit available to nurture durable consumer benefits and a competitive market place will be enhanced by these changes because effectively they do not change much. They are just window dressing and aimed at dealing with a potential risk. On the basis that it is risk management, the coalition supports the bill. So, on the basis of the argument that it is risk management, the coalition support the bill, but we do not support it on the basis of the government's argument that this is somehow strengthening the competition and consumer protection framework - on that, we beg to differ. That is nonsense and hyperbole, and the government should desist from over-egging the pudding in that regard.

The other part relates to the unconscionable conduct provisions. ...

The government has attracted some criticism that this bill amounts to nothing more than window-dressing. I think that is fair and well-justified criticism. It also does not do much to deal with what inspired Senator Xenophon with his Richmond amendment, which was designed to improve what he considered were unresponsive and ineffective provisions dealing with creeping acquisitions. Interestingly, neither the government nor the opposition supported Senator Xenophon's legislative proposal. It was very well intended, I am sure, and I certainly understand the motive behind addressing the unresponsiveness and ineffectiveness of the current provisions, but the particular provisions in the Richmond amendment did not achieve that. So it was understandable why neither the government nor the opposition backed it.

What is also undeniable in my view is that there is a need to have a very close examination of creeping acquisitions and some of those legal concepts that shape the regulatory process for considering merger and acquisitions proposals. What would be wrong would be for people to point to Senator Xenophon's amendment, the Richmond amendment, and say that, just because it was poor and did not achieve what it set out to achieve, there is somehow no problem. I think that is a mistake. There is so much debate about market concentration, about creeping acquisitions and their impact not only on consumers but also on those participating in the supply chain.

The ACCC is in a position to consider whatever it feels it needs to consider when assessing merger and acquisition proposals and in the way creeping acquisition provisions apply. I think the ACCC should be obliged to consider implications for the supply chain, those selling into businesses that are acquiring or already have an extraordinarily substantial market share. I think that would be a more worthwhile discussion to have. It would reflect the kind of sentiment that inspired Senator Xenophon, but it would also recognise that just because Senator Xenophon's response was not all that it could have been that does not mean that somehow the problem is not there. I think there is a good case to have a look at the impact on the supply chain.

There are a range of areas the coalition has identified and put to the Australian parliament that would improve and enhance our competition and consumer framework. Prior to the last election the then government minister who had responsibility for this area, Craig Emerson, was quick and quite shrill in announcing to the Australian public and the business community that there was nothing more that needed to be done to the competition and consumer protection framework in Australia. It was a bizarre statement that he made when he was attacking the coalition's election commitment to have a root and branch review of that framework, the toolkit that is available and the way in which it is implemented.

I would characterise that as Hilmer 2.0. Hilmer did that work and made sure that the competition and consumer affairs concepts, frameworks and regulatory arrangements were relevant at the time that review was conducted. Much has happened since. Many of the assertions, conclusions or, dare I say, misguided assumptions that influenced the conclusions of Hilmer's work have proven not to be true. They have not been borne out by the facts, and the market today looks very different than it did in that time.

We on this side of the chamber think that the work is far from done and we completely reject the government's assertion that it has done all it can to the competition and consumer law framework in Australia. It was a ridiculous statement that the minister made then, which was inspired by political opportunism and to have a go at the opposition. You do not have to take my word for it. We are here today talking about amending the bill. Those very laws were claimed to be so perfect that they would not benefit from refreshing, renovating or rethinking, so precise were they in the eyes of the Labor government, but we are here talking about changes, albeit changes that are immaterial and window dressing.

Later today in the chamber we will also be talking about a bill relating to price signalling. Again, that is another area where the coalition has led the debate on the need to improve the competition and consumer protection framework. Belatedly, the government has now come to that task. The government's own actions clearly prove that the claim by Dr Emerson, the then minister at the time, that everything was sweet and hunky-dory was just not right.

This extends into other areas, such as the assumptions about the reach of section 46, how the provision dealing with the abuse of market power operates and how in the eyes of many, including some of the regulators, there is a whole lot of effort required to demonstrate the abuse of market power. These are very difficult provisions. If the case is proven only a fine is applied. Where so much weight is being put on one provision of the law that has proven itself to be extraordinarily difficult to implement and where someone who has been found to have offended that law faces relatively modest consequences, it undermines the utility of that very provision.

I think that section 46 needs to be revisited. So much weight has been placed on that provision in order to achieve all sorts of things, including the claim by the Hilmer review and embraced by the Hawke-Keating government that it would deal with price discrimination better than the old section 49 because it was a more comprehensive approach to anticompetitive market behaviour. If that is the ambition behind that provision it has not lived up to it and it needs to be examined. If it was said to have been able to cover all sorts of circumstances and it has been proven to be deficient in that task then it needs to be revisited. That is just one area.

There are also issues around the way in which the effects test applies. For the life of me, I cannot understand why our competition laws are not more interested in effect and purpose. So much of our law relates to the motive of particular participants. Where a purpose to lessen competition at varying degrees is proven then an offence has been committed and an option for some remedies is to be implemented. But most countries base their abusive market power test on an effects test because people are interested in the consequences, the outcomes, the actual diminishment of consumer interest and detrimental impacts on competition. They are interested in the effects.

I would think there is a very strong argument for adding purpose and effect. I think there is a very strong argument in competition law and in an economic policy sense to make sure that we capture those outcomes that are detrimental to consumers and are anti-competitive, regardless of the motive, so that we can attack the harm not just go to people's motives as we make those assessments. There are even opportunities to strengthen areas of the retail code from the models that you see overseas on aspects of unacceptable behaviour. There is a very strong argument to revisit that case.

We have touched on mergers and acquisitions. I pointed out that I think there are some opportunities to look at impacts on the supply chain. Some of the tests for market power are so incredibly complex to prove, yet in other jurisdictions the way in which market power, and therefore the abuse of it, is substantiated introduces a range of concepts ours do not really focus on. Market power in our context looks at the impact of the almost impunity with which a business can raise prices with no detriment to their market position. That is a consumer focus. What if the market power is so profound that the suppliers to that company or business with a strong market position can virtually name their price and the suppliers are left saying they are price takers? Surely where there is an abundance of evidence that suppliers into particularly dominant companies in certain markets are price takers there is some unhealthy imbalance in market power.

I think these concepts should be teased out. They should be teased out because the ambitions that were set through the reforms that emanated out of the Hilmer review and are captured in the current law in many cases have not been met. Therefore that would be a worthwhile exercise. That would be the clear justification for the coalition's policy position that we need a root-and-branch review of our competition law, the framework within which it operates, the tools available to the regulator and the way in which they are implemented. It is the implementation of appropriate tools that we should be looking at not an ongoing defence of the law as it currently stands.

For those operating in a highly competitive marketplace it comes as little comfort when they know what is being done to them is hardly in the spirit of competitive markets and durable consumer interest when the answer they get is, 'Ah yes, but that conduct has not offended the law.' In our country it does not come down to an argument about whether the conduct is pro-competitive or even neutral, whether a consumer benefits or not, it comes down to an argument over whether black-letter law has been offended. If the law has not been offended, it is assumed to be okay. The market has changed since Hilmer. The pressure on those in the supply chain is getting greater and greater.

The weight of market concentration is playing out in so many different areas of our economy and that is why we need to make sure that our competition framework, the tools within it and the way in which it is implemented are fit for purpose. That is not what this bill does. This bill is window-dressing. It is ornamental at best. It achieves no new outcomes for small business. It is a false and misleading for the government to claim so. There is a job that needs to be done. The coalition has said we are prepared to do that work. It is work that needs the government's resources. It also needs a clear mind about what a competitive marketplace and durable consumer benefits mean in Australia for the long run. That is the work that needs to be done because the law is far from perfect, as the government would try and tell people. Its own evidence is on bills being discussed in the House. I hope we get to have that more substantive discussion about what really is needed for the framework of competition and consumer protection in Australia because there is much work to be done here. (Time expired)

 

Ms Brodtmann (Canberra) (Australian Labor Party) (7 July 2011)

I rise today to speak in favour of the Competition and Consumer Legislation Amendment Bill 2011. In doing so, I wish to speak primarily about the issue of creeping acquisitions. The free market system in which Australia operates may not be perfect, but it has proven over the course of history to be the best method of ensuring that consumers get the services and products they need to live their lives at a price and quality that represents good value.

At the heart of this system lies competition - competition based on the ability of people to freely trade with each other; competition to ensure that larger actors in the market do not seek to unduly use their influence to shut out better deals and competitors; and competition to ensure the right of the consumer to freely choose the products and services that suit their needs and ensure a system that is fundamentally based on a fair go, where the crucial freedom is that the community has the opportunity to engage in the marketplace. This is a fundamentally Australian value and it is a core value of the Labor Party and this government. Competition ensures that Australians are given meaningful and fulfilling jobs. It keeps the cost of living down by keeping the economy efficient and it improves the standard of living by driving innovation and change.

To ensure that fair competition happens, government must from time to time act to ensure that the regulatory framework is such that it drives adequate competition in any marketplace in Australia. Governments have an obligation to monitor and constantly improve competition policy, for one of the characteristics of a free market economy is dynamism and change. When problems are identified, governments must act. This imperative is simply a specific case of the need to always stay on the reforming path.

We have seen through the global financial crisis what can happen when governments fail to implement appropriate regulatory processes and consumer protections. In fact, Australia was spared from the full effect of the global financial crisis entirely because of its robust regulatory frameworks and swift, decisive and effective government action. However, because of the very nature of the dynamic market, the need for reform never truly ends. Labor governments of the past knew it; this government knows it and is committed to it. Reforms can be large and small but must always be measured and appropriate and aimed at improving the fundamentals of the Australian economy. These reforms are not designed to fix problems associated with the political whims of the day. In fact, to act in such a manner would be counterproductive in the long term. The reforms of Labor governments are designed to fix problems over the long term to ensure that every Australian benefits from the nation's wealth. This has been our history and it remains core to this government's values.

So we arrive at the legislation before us today. It is apparent that there is uncertainty or lack of clarity around the powers of a competition policy body - in Australia's case, the Australian Competition and Consumer Commission - so it is necessary to take careful steps to remedy the problem while avoiding the creation of new problems through unintended consequences. The issue of mergers and acquisitions illustrates the fact that, in a market economy characterised by competition, some firms will falter and others prosper, there will be changes in ownership and some firms will become larger. Of itself, this is nothing but a consequence of competition. However, mergers and acquisitions can create the risk that competition will be lessened.

It is therefore the responsibility of government to ensure that the ACCC is in the best position possible to assess and deal with this possibility. In particular, this bill seeks to provide greater clarification as to what the definition of a market is. The legislation as it currently stands prohibits mergers or acquisitions that would, or would be likely to, substantially lessen competition in 'a market'. While the ACCC has always held the interpretation that this includes the lessening of competition in any market, this cannot be guaranteed.

Further, there is also a concern around the issue of the interpretation of 'substantially'. Again, while it has generally been interpreted that this includes Australia as a whole or a state or territory, or indeed a region, statements by Justice French have highlighted a concern. In particular, Justice French noted:

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 …

[Debate interrupted]

 

Ms Brodtmann (Canberra) (Australian Labor Party) (17 August 2011) (resumed from 7 July)

While this comment from Justice French was not binding, and he did not express a view at the time as to his opinion on the outcome, it certainly highlights the possibility that, at some point in the future, the ACCC or a court could take this definition. In doing so, it would be very difficult to show that any one merger or acquisition had limited sustainability competition. This could potentially have a number of grave consequences, particularly in relation to creeping acquisitions.

Creeping acquisitions are those acquisitions which in and of themselves do not lessen competition but, taken as a collective, may have a greater effect over time. One area in particular that has been noted is grocery prices. Indeed, this bill is a direct result of the ACCC's inquiry into grocery prices and the government's subsequent public consultation on the matter. In the ACCC's report it stated that it considered that:

… the supermarket industry, because of the particular structural features of the market, is one where creeping acquisitions are a potential area of concern.

Further, I imagine that most Australians buy their groceries from local supermarkets, in most cases only a few kilometres from their home. Given that, the issues raised by Justice French in his comments over the definition of the market are problematic to say the least. It is important to note that, while these issues have not impacted on grocery prices, this is not an excuse for inaction.

We have identified two areas where action is needed and the imperative now is to take adequate action to address these concerns. In doing so, the government is responding with specific remedies to specific problems, rather than with general remedies that could well have unforeseen and detrimental consequences on competition and on the economy as a whole. The government action today is one of the measures I highlighted earlier. It is a measured and appropriate response to the long-term interests of competition, economic growth and the country. In this light, I commend the bill to the House.

 

Mr Craig Kelly (Hughes) (Liberal Part of Australia) (17 August 2011)

... sadly, in totality this bill is nothing other than window-dressing - a meaningless nothing. It demonstrates that Labor, after all the sound bites when in opposition, have given up on competition policy. They have simply hoisted the white flag.

Competition policy is arguably one of the most crucial portfolios for any government ...

Let us be clear: when two firms merge, what happens is that firms that have previously been in competition with each other get together to coordinate and fix prices and divide markets. What mergers actually do is take conduct that we find so detrimental to competition and consumers - and our laws make such conduct illegal, with penalties including jail - and make that same conduct legal. The first change proposed by this bill in affecting mergers is purely academic. It changes the words 'substantially lessening competition in a market for goods or services' to the words 'substantially lessening competition in any market for goods or services'. It simply replaces the words 'a market' for the words 'any market' - a change that creates the impression of doing something without doing anything.

The second change is to remove the word 'substantial' as it applies to restrict the application for section 50 to substantial markets. The problem with this bill is that it takes out the wrong 'substantial'. The 'substantial' that should be deleted from the act is in respect of the word 'substantial' as it relates to 'substantially lessening of competition'. Under our current laws we have the absurdity that a merger that results in a mere lessening of competition to the detriment of consumers and to the detriment of our national interest is acceptable provided that such lessening of competition is not deemed as 'substantial'. We are productivity-growth stalled, with problems throughout our economy and hyper-concentration in many of our markets. How can we permit any further concentration occurring through mergers that result in further lessening of competition? If we have the proviso, we can only prevent it if that lessening of competition is 'substantial'.

Considering why this bill proposes to take out the wrong 'substantial' it is important to consider the historical context of the current wording of the bill. The text of Australia's merger laws were inherited from America's antitrust laws - the Clayton Act of 1914, a law written almost a century ago. America's Clayton Act makes various anticompetitive practices illegal when they might 'substantially lessen competition or tend to create a monopoly in any line of commerce'. The problem with the word 'substantial' is that it is capable of meaning many different things and is open to wide interpretation...

Further, for the majority of the last century during America's golden years America's antitrust laws were interpreted as meaning that competition was a process that required numerous participants and a deconcentration of market power and that any lessening of competition was equated with a decrease in the number of participants. However, in the 1970s and 1980s the long-held view that increased concentration means less competition was challenged by a group known as the Chicago school. If you want to mark the time when America started its decline you can circle the time when a small minority who theorised that a lessening of competition is not equated with a decrease in the number of participants in a market took control of the economic leaders of American policy.

One of the greatest supporters of the theories of the Chicago school was Alan Greenspan. But, in 2008, following the collapse of the US economy, Greenspan gave the mea culpa when he said of this theory:

I have found a flaw … I don‘t know how significant or permanent it is. But I‘ve been very distressed by that fact.

Pressed to clarify his words, Greenspan was asked, 'In other words, you have found that your view of the world - your ideology - was not right; it was not working'. 'Absolutely, precisely,' Greenspan replied.

If anyone wants an example of how these misguided theories of market concentration mean less competition and higher prices for consumers, they only need to study what has happened in the Australian supermarket sector. Over the last 30 years we have seen an ever-increasing concentration in the Australian supermarket sector, where the market share of our two largest retailers has increased from around 30 per cent of the market to where it stands today at around 80 per cent, leaving Australia with one of the most concentrated markets in world economic history outside that of former Eastern Bloc countries.

The so-called experts have theorised that this period of ever-increasing market concentration would lead to efficiencies and greater synergies to the benefit of consumers. But if you look at the empirical evidence and not the computer generated models you will see the exact opposite has happened. The evidence, as clearly demonstrated by OECD figures, shows that during this period of increasing market concentration Australia consumers have been punished with the fastest accelerating supermarket prices in the developed world. Therefore, what we need to look at is removing the other 'substantial' in our merger laws and returning our laws to the original intent that a merger that results in a lessening of competition should not be permitted.

...

The fourth part of the bill involves so-called creeping acquisitions. The theory behind the need for this legislation is that in a series of small acquisitions each individual acquisition when looked at separately may not result in a substantial lessening of competition. But when these single acquisitions are looked at together as a group they may lead to a substantial lessening of competition. This law would be an illusion. It would not have any effect. .... this is a meaningless nothing.

The fourth part of the bill involves so-called creeping acquisitions. The theory behind the need for this legislation is that in a series of small acquisitions each individual acquisition when looked at separately may not result in a substantial lessening of competition. But when these single acquisitions are looked at together as a group they may lead to a substantial lessening of competition. This law would be an illusion. It would not have any effect. Just look at the Westpac takeover of St George Bank. St George has over 400 branches. If the ACCC considered that Westpac taking over more than 400 St George Bank branches in one single hit did not substantially reduce competition, how would changing the law to enable Westpac taking over a few at a time through creeping acquisitions make any difference? Again, this is a meaningless nothing.

 

Dr Leigh (Fraser) (Australian Labor Party) (17 August 2011)

The philosophy of those of us on this side of the House is that free markets are the mechanism best developed to generate wealth in society, to raise living standards and to ensure that Australians have the opportunity of work and leisure that is part of a fulfilling life. We on this side of the House recognise that free markets work best when accompanied by appropriate regulation - such as the Trade Practices Act 1974 originally brought in under the Whitlam government in 1975. ...

The bill before the House today, the Competition and Consumer Legislation Amendment Bill 2011, began its life as a bill under the now Minister for Trade, Dr Emerson. It was a product of extensive consultations. The bill does three things: it provides greater clarity to the provisions of the CCA regarding mergers and acquisitions; it streamlines and clarifies the unconscionable conduct provisions; and it corrects some minor drafting errors.

Public consultations, conducted in 2008 and 2009 by the member for Rankin, identified the importance of getting the term 'market' appropriately defined. This bill will replace references to 'a market' with references to 'any market'. That will clarify that a court or the ACCC can consider the competitive effect of a merger or acquisition on multiple markets in any one investigation. This amending legislation will ensure that a court or the ACCC looks beyond the primary market in which the merger or acquisition would occur.

Public consultations, conducted in 2008 and 2009 by the member for Rankin, identified the importance of getting the term 'market' appropriately defined. This bill will replace references to 'a market' with references to 'any market'. That will clarify that a court or the ACCC can consider the competitive effect of a merger or acquisition on multiple markets in any one investigation. This amending legislation will ensure that a court or the ACCC looks beyond the primary market in which the merger or acquisition would occur.

... Overall, the measures in the bill will improve the operation of Australia's competition and consumer laws. They will clarify the breadth of matters to be examined by a court or the ACCC in considering whether a proposed merger or acquisition would substantially lessen competition in the market. They will unify the prohibition against unconscionable conduct and provide the courts with greater guidance in its application. Overall, this is legislation which is part of Labor's commitment to free and effective markets, but markets which are appropriately regulated.

 

More forthcoming

Senate (25 November 2011)

Senatory Ryan (Victoria) (11:25) (Liberal Party of Australia)

I rise today with some relief to speak upon the Competition and Consumer Legislation Amendment Bill 2011. Let me say upfront that the coalition does not oppose this package of legislative changes. Indeed, it is the role of the law to facilitate domestic market conditions that are good for business and the community, and competition policy plays a critical part in that role.

The amendments in this bill attempt to strengthen the competition policy regime, which in turn should facilitate a more conducive economic and business environment. That said, the coalition believes that this is an extremely modest bill with modest aims. While we see no damage being caused by this bill, we also see no great cause for celebration. The government's language of accomplishment and achievement does not suit this bill. It is misleading and overstates the impact these changes will make. Yet again we have the Labor Party seeking to create the illusion of reform. Desperate to claim some sort of policy success that assists businesses, and particularly smaller businesses, it makes claims where there are none and overstates the impact of minor changes.

Essentially, this bill has two aims. The first is to clarify the operation of existing provisions - and, I stress, not to create new ones - relating to mergers and acquisitions by addressing a potential uncertainty or ambiguity that may arise in defining what a market is for the purposes of section 50 of the Competition and Consumer Act. It does this by broadening the language of 'market' so that all markets can be included and so that creeping acquisitions can also be scrutinised. This will ensure that a court or the ACCC can examine mergers in a greater number of markets.

The second aim of the bill is to insert interpretive principles into the unconscionable conduct provisions to assist the courts in applying the law as well as to assist broader community and stakeholder understanding. What the bill does not achieve is that which was described in the government's speeches in the second reading debate, when it claimed great accomplishments for small business and groundbreaking shifts in competition and consumer law in Australia. It does not do anything of that sort. It is what it is, and we support it for the aims I have just outlined. It is a modest gain to clarify contested and often misunderstood aspects of competition law.

I first want to address the bill's provisions in relation to its amendments to the Competition and Consumer Act 2010 with respect to section 50, which is the key provision relating to mergers and acquisitions. It provides the ACCC with the legislative framework to analyse, consider and address potential competition policy concerns posed by mergers and acquisitions in Australia. Most of us agree that mergers and acquisitions are important for the efficient functioning of the Australian economy. They allow firms to achieve efficiency such as economies of scale and the diversification of risk across a range of activities. Absent some genuine and real concern for the greater community, there is no role for the state or the law in restricting these.

However, the current law does contain a weakness, and this bill addresses the issue of 'creeping acquisitions'. Creeping acquisitions are a series of small-scale acquisitions that individually may not substantially lessen competition in a market but collectively have the potential to do so over time. Each of these small acquisitions may not be in breach of section 50, and therefore the series of acquisitions are permissible by law. However, over a long period of time such transactions may have the cumulative effect of substantially lessening competition in a market. There are currently no provisions in the Competition and Consumer Act to prevent or limit creeping acquisitions.

Over the past decade or so there have been concerns raised about market concentration in a number of key sectors. We have seen it recently in banking, groceries, fuel and a few other areas. As a result, issues have arisen as to how section 50 of the Competition and Consumer Act is applied to these markets, particularly those affected by creeping acquisitions. One just has to look at the supermarket sector to see my point. Just over two decades ago, when Professor Hilmer was doing his work looking at our competition and consumer framework and recommending the reforms which earned a wide degree of support and which have been of significant and undoubted benefit to Australia and Australians, the two major supermarket chains had less than half of the total grocery market. Today, those same two chains have more than two-thirds - approaching three-quarters - of the market. Nothing enormous or transformational happened overnight. Indeed that change in market share may partly simply reflect changing consumer preferences. But we also know that, through a series of acquisitions, new presences and purchases of new properties, the supermarket majors have greatly enhanced their positions. It is only fair to concede that the degree of increase in market share of these two major chains has caused a level of concern in some areas of our community - amongst consumers, producers and businesses alike.

To start with, these changes to the act remove the word 'substantial' in relation to the ACCC's analysis of mergers and acquisitions, so now even those mergers not considered substantial can be scrutinised by the ACCC. The hope is that this will remove the risk that a court might adopt the view that an acquisition in a geographically confined market is not substantial and therefore does not fall within the scope of section 50.

The bill also amends section 50 to replace references to 'a market' with references to 'any market'. Together, these changes clarify the ability of the ACCC or a court to consider multiple markets when assessing mergers, including smaller mergers which over time may amount to potentially damaging creeping acquisitions. It is important to note, however, that the amendments to section 50 do not oblige the ACCC to examine the competitive impact of an acquisition in a small market. It is simply a clarification that it indeed may do so and that it is a relevant factor where a merger is being considered for other reasons.

So what do we have here? In short and put simply, this is a clarification of the law to reduce an ambiguity that might become a legal basis to challenge the work of the ACCC. On that basis, the coalition supports the bill. But I say again: we do not support the government's claim that this bill is somehow a profound strengthening of the Competition and Consumer Act.

The other aspect of this bill relates to the concept of unconscionable conduct. ...

The government claims that this bill before the Senate today implements a Labor election commitment to introduce a law in relation to creeping acquisitions - they claimed the then regulatory response did not adequately address the problem. They claim great reform. But that is little more than misplaced grandeur. In reality, what we have here is the government applying a dictionary and a thesaurus to the original bill - expanding some definitions and giving us some interpretive guidelines to better understand the sometimes complex language of competition law. That is an important objective. These are all good and necessary changes that the coalition supports. However, they must be understood and explained for what they are - this is a start and a step in the right direction, but many more steps are needed. That is why the coalition has called for a root and branch review of the competition and consumer law. Two decades on, such a review is only appropriate, but for some reason this government seems to think that a few tweaks and a few changes here and there will create the illusion that it is really listening when it is not.

Senator SHERRY (Tasmania—Minister Assisting on Deregulation and Public Sector Superannuation, Minister for Small Business and Minister Assisting the Minister for Tourism) (11:35)

In summing up and closing the second reading contributions on the Competition and Consumer Legislation Amendment Bill 2011, I firstly thank Senator Ryan.... This bill will strengthen and clarify Australia's competition and consumer laws, which are designed to improve the welfare of Australians. The bill makes two important changes. ...

Firstly, the bill will enact laws to deal with creeping acquisitions by amending the mergers and acquisitions provisions in section 50 of the Competition and Consumer Act 2010. The bill will remove the requirement that a market in which the competition effects of a merger or acquisition are assessed must be a substantial market. The amendments will also ensure that the courts and the Australian Competition and Consumer Commission, the ACCC, can consider the competitive effects of a merger or acquisition in any market.

...

I will make a couple of concluding remarks. Firstly, I do not agree with the level of Senator Ryan's critique. ...

Senator Ryan stated a number of concerns. One in particular was the presence in our marketplace of what are known as the 'big two' retailers and their growth in market share over a long period of time. I note that he expressed some concerns about the trend and also referred to the need to do more with respect to this issue. Senator Ryan, I look forward to a policy contribution from the opposition in this regard. ...

IN COMMITTEE (Senate, 25 November 2011)

Senator Xenophon (South Australia) (Independent) (11:44)

I will make a couple of short contributions that will lead into the amendments that I will be moving shortly.

I do not oppose this bill, but I believe that it could be improved. That is why I will be moving amendments to omit the word 'substantially' and substitute the word 'materially' when it comes to mergers. It is my view that the ACCC does not have the legislative firepower that it needs to deal with the issue of mergers. Having the word 'materially' rather than 'substantially' with regard to lessening competition would make a very real difference to the highly concentrated markets we have here in Australia. We have a situation where Woolworths and Coles control some 80 per cent of the dry grocery market. We have had too many mergers that have been approved by the ACCC under the current legislation. We have seen the difficulties in the grocery sector with petrol and we have a looming problem with the liquor market, and the word 'substantially' does not do the job that it should - it is too high a test. That is why I am grateful for the work that Associate Professor Frank Zumbo, from the University of New South Wales, has done in relation to this and other competition issues.

...

I move the amendments on sheet 7136 [to change the test from 'substantially lessens competition' to 'materially lessens competition']

These amendments are intended to lower the threshold by which mergers are considered by the ACCC. Under the current threshold a merger is only prohibited if it 'substantially' lessens competition. The use of the word 'substantially' makes the threshold a very high one requiring the merged entity to exercise market power after the merger. Proving the existence of market power requires proof of an ability to raise prices without losing business. Very few businesses would have market power under the definition as it is effectively only a monopolist that would have the power to raise prices without losing business.

Under the existing threshold relatively few mergers or acquisitions are stopped by the ACCC. Mergers and acquisitions reduce competition in the market and lead to higher levels of market concentration. A reduction in competition is detrimental to competition and consumers as it may lead to higher prices and reduced product choices. We need a stricter threshold for assessing mergers. Within this context the concept of materiality is adopted, as that is a commonly understood concept used in the accounting and business world to assess the impact of particular conduct or an event. In this context a merger will substantially lessen competition if it has or would have a noticeably adverse impact on competition by reducing in a material way the number of efficient independent competitors and the range of product choices available to consumers.

That is at the heart of this. We need to do a lot better. In recent years too many mergers have been approved by the ACCC. The ACCC does not have the legislative firepower to deal with these issues adequately. The threshold is simply too high under 'substantially'; 'materially' would remedy that.

Senator Sherry (Tasmania - Minister Assisting on Deregulation and Public Sector Superannuation, Minister for Small Business and Minister Assisting the Minister for Tourism) (12:01)

I acknowledge and appreciate the concern of Senator Xenophon and the attention he has paid to this issue - as has Senator Ryan. I recall a significant number of discussions about this at Senate estimates. We are dealing with substituting the word 'substantially' with 'materially'. The detailed and principled approach that Senator Xenophon is proposing reflects what is known as his trade practices Richmond amendment bill. I do note we are developing a trend to name amendments in this area after geographic locations based on where proposals are drafted or communicated. But that is by the by.... the proposal is to change the test to 'material' lessening of the competition, as reflected in Senator Xenophon's earlier bill. That bill was referred to the Senate Economics Legislation Committee for inquiry. The majority report - both government and opposition - recommended against the passage of the bill with this approach contained in it. The concept of substantially lessening competition has been part of section 50 since 1993. It is well established and understood by the courts, the ACCC, business and consumers.

The concept of 'substantially' is interpreted by the courts to mean 'that the effect of the acquisition be 'meaningful or relevant' to the competitive process'. Australia's SLC test for mergers is consistent with merger laws in many other OECD countries, including the US, Canada, the UK and New Zealand. What is proposed - effectively the Richmond amendment - could have the effect of moving Australia out of line with international practice. It would make significant changes to Australia's merger law that are likely to have substantial and unintended consequences. Consistent with our previous position, as enunciated in the Senate Economics Legislation Committee and the response to considering what is known as the Richmond bill, the government is unable to support the amendments that Senator Xenophon has presented.

Senator Milne (Tasmania - Deputy Leader of the Australian Greens) (12:04)

In the interests of time I did not choose to make a second reading contribution so I will quickly sum up where we are coming from with this legislation and Senator Xenophon's amendments. I note that the concluding comments of the Parliamentary Library's Bills Digest say: Given the history of reviews and the Rudd Government’s commitment to implement a ‘creeping acquisitions’ law ‘as a matter of urgency’, it might seem that the amendments to the merger provisions proposed by the Bill are an anti-climax. Descriptions of the amendments as ‘window dressing’ or ‘pragmatic’ would also appear to be apt. These minor amendments largely reflect the ACCC’s current interpretation of the existing law and are unlikely to have any substantial effect on merger analysis in the future.

... I think the reality is, as Senator Sherry has just outlined, that the word 'substantially' is understood in case law on this legislation. It is true that it is consistent with legislation in the UK, the US, Canada and New Zealand and it has been part of case history and case law in Australia since 1993. There is a concern that if the word were changed to 'materially' the government would be arguing that 'substantially' and 'materially' mean the same, because this is to be seen as only a clarification, not a change. So the government would argue that 'substantially' and 'materially' are the same. However, if 'substantially' were changed in the legislation, people would come back, in relation to all those cases since 1993, saying, 'Where does that leave us?' The difference between 'substantially' and 'materially' would need to be tested in the courts. We could end up with a bit of a process in the courts, in the making of that determination. Although Senator Xenophon says that 'materially' is understood to be a lesser threshold than 'substantially', there would be a legal argument as to whether that was the case and, if it was the case, at what point would 'materially' kick in as opposed to the stronger definition that is 'substantially'. It is for that reason that the Greens will not support Senator Xenophon's amendments: they lead to that unresolved question of the difference between 'materially' and 'substantially'. I do not want to bring into play at this time that which has already been dealt with. I also want the legislation to stay consistent with international law and with other countries' laws and experience. The other comment I will make, quickly, is that the ACCC is under different leadership. It is quite clear from that new leadership that the ACCC intends to take a more assertive position in relation to mergers and so on, and that it wants to become a little more proactive. I am concerned that making this change now might in some way complicate the opportunity that exists for a more aggressive and assertive role for the ACCC in this space. I support the ACCC's new leadership's stated position of taking a more assertive position in this area. I do not want to complicate those matters. That is why the Greens will not be supporting Senator Xenophon's amendments.

However, I say to the government that, while it is says this clarifies things, the Parliamentary Library's assessment suggests it is extremely minor and does not really make any substantial change. The Greens agree with Senator Xenophon that we need substantial change. If the ACCC's attempts to use the law as it currently stands in a more assertive and proactive way fail, because the law turns out to restrict the ACCC's ability to do so, I will be very happy to be back here supporting a much more substantial intervention. At this stage we support the minor amendment that the government is proposing but will not support Senator Xenophon's amendment. I will say that this is a space that we are all going to be watching with a very interested eye so as to see how the ACCC proceeds in the next 12 months.

Senator Ryan (Victoria) (12:10)

I rise to outline that the coalition will not be supporting Senator Xenophon's amendments. The consequences of moving from 'substantially' to 'materially' may be significant. It is our view that those issues should be considered as part of the root-and-branch review of the competition act that we have proposed. Senator Xenophon, I know that you have a very good productive relationship with the shadow minister, Mr Billson, as you do with me. I know that he is keen to continue these discussions with you. But at this stage, that slight change of words needs to come from an evidence based assessment. The coalition will not support the amendments.

Senator Sherry (Tasmania - Minister Assisting on Deregulation and Public Sector Superannuation, Minister for Small Business and Minister Assisting the Minister for Tourism) (12:11)

I thank Senator Milne for her contribution. She makes two very reasonable points. In noting that, I have been present on one occasion when the new head of the ACCC, Mr Sims - this was in the context of franchising law, on which there has been some recent improvement in dispute resolution and a range of other changes - indicated the ACCC's renewed interest in applying the upgraded franchising area of the legislation and devoting more attention to that. I will not go to other issues of franchising reform, but I do note that. I think it is an important consideration. I accept Senator Milne's caveat that, in supporting these amendments today, the Greens will be keeping a close eye on developments as they emerge from the focus of the ACCC.

Senator Xenophon (South Australia) (12:13)

I am grateful for the comments made by my colleagues. In relation to those of Senator Milne: it is fair enough for her to say, by referring to the Bills Digest - the objective analysis of legislation, if you like, that we receive here - that it is about clarification and could be seen to be window dressing. I am disappointed that the Australian Greens cannot support the amendment at this time, but at least they are keeping the door open. I do acknowledge that there has been a change of guard at the ACCC, and that Mr Rod Sims, the new chairman, has taken a different approach. The statements he has made to date have been encouraging. The way in which he has approached evidence at Senate estimates hearings is refreshing. I welcome that, but I still think we are not giving the ACCC the powers it needs to deal with this adequately.

When it comes to issues of mergers and acquisitions, let us put this in perspective. Senator John Williams is in the chamber. I thought his contribution and a question he put to Mr Sims during a Senate estimates hearing not so long ago were telling. Senator Williams basically asked - I am sure he will correct me if I misquote him - how is it that in the last 30 years, the last generation, we have had a situation where Coles and Woolworths have gone from a 40 per cent market share between the two of them to something like an 80 per cent market share? That is an exponential increase. How is that good for competition? How is that good for suppliers down the supply chain? How is that good for wholesalers? How is it good for consumers that they have so little choice in this country? And how is it good that we have two big gorillas in the room when it comes to our grocery sector? You even have multinationals, such as Heinz, saying: 'This is killing us in terms of food processing. This is actually squeezing us out of the marketplace because of the conduct of those two.'

Our current laws are not good enough and that is why we need a change from 'substantially' to 'materially'. I am grateful to the Minister for Small Business for mentioning the Richmond amendment because I was going to get to it. The Richmond amendment is named after the location of the United service station at 128 Marion Road Richmond West in South Australia - a service station run for many years by William and Samira Fares. This is a small family business - a business where they put in hard work, do great mechanical work and serve petrol, and they are salt of the earth people. They have worked their guts out to build up that business, and what happens? Woolworths decides to set up an outlet right next door to them - blocking the view of oncoming traffic to their service station - to compete with them in a way that is not fair; to compete with them with their huge buying power in a way that cannot allow a level playing field.

It is an issue that I raised directly with Michael Luscombe, the former CEO of Woolworths, and he was good enough to meet with me in Sydney last year about this. I put to him - I do not think he would mind me saying this - 'If you say that they can compete then why don't you let the Fares, in their United service station at 128 Marron Road Richmond West in South Australia, access petrol at the same price you can access petrol?' There are days when the wholesale price that William and Samira Fares pay for their petrol is higher than the price that Woolworths is retailing it for. How can that be fair? We need to remedy that. We need to give small businesses in this country are fighting chance.

I have small businesses - I am not going to do anything to identify them - come to my office, and they are even reluctant to be seen to walking into my office. They tell me, 'If we make a complaint to the ACCC about what Woolworths and Coles are doing to us, about the conditions they sometimes put on us, such as they suddenly want ten tonnes of a particular vegetable at a certain price' - which is below the cost of production for these businesses - 'and we do not do it, then that will be the end of their relationship with us.' You also have small businesses setting up a business model that is based on having Coles and Woolworths as their main buyer, and they say, 'There's no point going to the ACCC because if we make a complaint we're finished.' If these things are happening then we need to do something about mergers in this country, we need to do something about increasing competition, and we need to do something about small businesses having a fighting chance.

That is why I have moved this amendment.... We need to do something better. We need to have a situation where the laws of this nation work for the small business sector and, in turn, for consumers. As for the references that have been made to other countries not going to 'materially', in the United States - I am grateful for the work that Senator Williams has done on this - they have got the Robinson-Patman Act where you cannot have anyone having more than 20 per cent of the market. [ED: this is clearly not accurate - the RPA (sections 13(a)-(c) and 21a of the US Code Ch 15), deals with price discrimination, contains numerous exemptions, is heavily criticised (see eg, Hugh Hansen's 1983 paper) and has largely fallen into disuse] You do not have a situation there where two supermarket chains control 80 per cent of the dry grocery market as in this country. They have got legislative safeguards. They may not have the word 'materially' in some of those jurisdictions, but they have got other pieces of legislation that gives a semblance of protection to small business. That is what the key to this is.

I note that Senator Ryan, on behalf of the coalition, says that he is not supporting this. Senator Ryan and I have disagreements about the marketplace, but I have a genuinely good work relationship with Senator Ryan. I do respect that he has got some intellectual firepower. I do not agree with his position on the $1 milk and the like. I say that genuinely; at least we can have a discussion about it. My plea to Senator Ryan, to the coalition, to the Greens and to the government is: something has gone seriously wrong in this country when it comes to allowing the level of market concentration in so many industries. Associate Professor Frank Zumbo has assisted me with drafting the Richard [sic!] amendment. He met the Fares; he spoke to them and he spoke to the Minister for Small Business, the Hon. Tom Koutsantonis, their local member. One good thing that has come out of the meeting that we had at Richmond West a year and a half ago is that there is now a Small Business Commissioner of South Australia, which Associate Professor Zumbo had a key role in creating.

... There is something seriously wrong in this country in the way that we have dealt with the big end of town and small businesses.

Senator Madigan (Victoria) (Democratic Labour Party) (12:21)

The DLP strongly supports Senator Xenophon's amendments.

The Temporary Chairman (Senator Boyce) (Liberal Party of Australia)

The question is that amendments (1) to (3) on sheet 7136 be agreed to.

The Senate divided. [12:26]

(The Deputy President - Senator Parry)

Ayes - 2 [Senators Xenophon and Madigan]

Noes - 37

Majority - 35

...

 

Proposed Amendment

Independent Senator Nick Xenophon proposed an amendment [sheet 7136] on 25 November 2011 - proposal was negatived (35-2). The proposed amendment was:

(Amendments to be moved by Senator Xenophon in committee of the whole)

(1) Schedule 1, page 3 (after line 3), before item 1, insert:

1AA Subsection 50(1)

Omit “substantially”, substitute “materially”.

[materially lessening competition]

(2) Schedule 1, page 3 (after line 5), after item 1, insert:

1A Subsection 50(2)

Omit “substantially”, substitute “materially”.

[materially lessening competition]

(3) Schedule 1, page 3 (after line 17), after item 3, insert:

3A Subsection 50(1) of Schedule 1

Omit “substantially”, substitute “materially”.

[materially lessening competition]