Week Six: Competition Law, Anti-Competitive mergers

Week Six: Competition Law, Anti-Competitive mergers &

acquisitions

Competition Law Overview:

 Governed by the Consumer Competition Act 2010 (Cth) Part IV

 There are two types of prohibitions (Below, many of these are dealt with in other lectures in more depth)

1) Complete prohibitions (Act says they are illegal)

2) Prohibited only if “substantially lessening competition” (Only wrong if it

can be proved to SLC) Cartel Conduct (part 4 division 1) Anti-Competitive Agreements (s45) Primary boycotts (ss.4D/45) Anti-Competitive Covenants (s45B) Resale Price Maintenance (s.48) Vertical Non-Price Restraints (s.47)

Misuse of Market Power (s46) Dual Listed Company arrangements (s.49) Predatory Pricing (s.46 (1AA)) Mergers and acquisitions (s.50)

 Competitions law Exemptions (s.51) o Authorised and notified activities o Employment Contracts

o Sales of Business Agreements o Product standards

o Export cartels o Consumer Boycotts o Intellectual property

o Primary produce marketing arrangements

 Remedies (both Criminal and civil Penalties apply) Civil remedies include:

o Pecuniary Penalties (s.76) o Damages (s.82)

o Injunctions (s.80)

o Divestitures (in relation to mergers) (s.81)

o non-punitive orders (eg, community service) (s 86C) o Punitive orders - adverse publicity orders (86D) o Disqualification fro m directorship (86E)

o Other orders (s 87)

Criminal fines and imprisonment for up to 10 years is available for contraventions of the cartel conduct provisions in Divisions 1 of Part 1 of Part IV of the CCA.

 Penalties:

o Cartel Provisions – Criminal & Civil Penalties

 Individuals = 10 years in jail (s.79) or $220,000 Fine

 Corporation (the greater of the following) = $10 million or 3x benefit of the money made from the cartel conduct or 10% of the company’s annual turnover (s.76 (1A))

o Other Provisions (ss.45-50) – Civil Penalties Only

 Individuals - $500,000 max fine (s.76 (1B))

 Corporations - $ 10 million or 3x benefit or 10% annual turnover (s.76 (1A))

o No indemnity may be promised or provided to corporate officers against liability for civil penalties or costs orders (s.77A)

o Persons involved in contraventions of Part IV face possible disqualification from being a company director or officer(s.86E)

o Civil Penalties – Other ORDERS- Range of options given to the courts:

 Injunctions (s.80)

 Divestiture (s.81)

 Damages (s.82)

 Non-punitive orders (s.86C)

 Punitive order (s.86D)

 Disqualifying director (s.86E)

 Other Orders (s.87)

 Void or vary a contract

 Orders to refund or repair

 Enforceable undertakings (s.87B)

 eg. Implement compliance programs

 Defences: Authorisations & Notifications

o S.85 - Acted ‘honestly and reasonably and, having regard to all the circumstances of the case, ought fairly to be excused’

o Authorisations

 All Part IV conducts (except s.46 – misuse of market power) may be authorised (s.88)

 Public benefit must outweigh anti-competitiveness (s.90)

 ACCC holds public hearing to determine this

o Notifications

 Notification is available for small business collective bargaining, exclusive dealing and certain forms of price signalling.(s.93)

 Applicant must notify ACCC of its conduct and that it may contravene Part IV – once this is done the notified conduct is then protected until ACCC gives notice that it proposes to revoke that protection.

Basic Principles of Competition Law

What is Competition?

 A device for controlling the disposition of resources, a mechanism for discovery of market information and for enforcement of business decisions: Re QLD Co-op Milling Assoc and Defiance Holdings Ltd

 Competition: A process that works itself out over time

Substantially Lessening Competition (SLC) Principles

Refers to conduct that is likely going to lessen competition. You need to satisfy the following to SLC:

 Purpose – Can be one of a number as long as it is substantial

 Substantial – Meaningful, real, relevant: Rural Press v ACCC (‘not insubstantial’)

 Lessening – Includes prevention or hindering (s.4G)

 Likely – This means ‘prone to’ – the likelihood of this effect does not have to be more likely than not it is sufficient that there is a real chance of such an effect Australian Gas Light Company v ACCC (No. 3) (2003) FCA 1525.

 Purpose irrelevant – it only matters whether the acquisition will substantially lessen competition

SLC ‘With or without’ Test:

We use this test to figure out if competition has been substantially lessened:

1. Ascertain the Market (will often have to discuss definition of a market below) 2. Ascertain level of competition in the market without the conduct in question 3. Ascertain the likely level of competition in the market with the conduct in question 4. Determine whether the conduct caused or is likely to cause a meaningful or real or

not insubstantial decrease in competition Dandy Power Equip P/L v Mercury Marine P/L Stirling Harbour Services v Bunbury Port Authority Legal Definition of a market:

In determining the market Substitution is the key here.

 Definition of a market: Area of close competition between firms ... the field of rivalry between them...within the bounds of a market there is substitution ... so a market is the field of actual and potential transactions between buyers and sellers Re QLD Co- op Milling Assoc and Defiance Holdings Ltd

 In plain English, a market is defined as the field of close rivalry between firms that takes place over time.

Substitution idea

 E.g. Bob sells gadgets, matt sells widgets. They are substitutable for each other.

Thus, they’re in the same market.

 4 dimensions to consider on top of this when defining a market – important!!!

1. Product (must be closely substitutable)

 Market means 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, those goods or services.’ (CCA s4E)

2. Place

 TPC v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299

 The acquisition put AMH in a position of dominance in the North Queensland market. HELD: that the existence of a market, a concept of economics and commerce, ought not to be determined by reference to theoretical possibilities.

 Geographic market selection must, therefore, both correspond to the commercial realities of the industry and be economically significant.

 Plain English must be in a similar region.

3. Time

 Peak and off peak services. This can be a factor in transport services or utilities such as electricity supply

 seasonal variations, such as summer versus winter months, and

 Innovation/inter-generational products. Customers may defer expenditure on present products because they believe innovation will soon produce better products or because they own an earlier version of the product, which they consider to be a close substitute for the current generation.

4. Functional level:

 Firms operate at different levels in the distribution chain, sometimes performing one function in that chain and sometimes integrating vertically into a number of functions

 These distinctions have become blurred and while it is true to say that a firm operating at one level is in competition only with other firms also operating at that level, the difficulty is to determine who in reality operates at each level.

 On the question of whether conduct at one functional level can affect competition at others see: Pluteus (No 8) Pty Ltd v GJ Coles & Co Ltd [1983] ATPR 40-391

 The firms must be at the same functional level in order to be substitutable/ in the same market.

Once we have established all of these factors, we have a market. This then allows us to look at whether there has been SLC.

Mergers & Acquisitions:

Accumulation of market share through takeovers and acquisitions

 Where one business acquires another o Vertical – takeover of supplier or buyer o Horizontal - takeover of competitor

o Conglomerate – predator and target in different industries

Commonly companies will seek ACCC clearances or authorisations prior to a merger ( this is in the next blue title)

S.50 CCA Prohibits mergers which have the effect or are likely to have the effect of substantially lessening competition in a substantial market

 Has there been an acquisition?

 Will it substantially lessen competition?

S.4(4)(b) CCA Acquisition of assets of a person shall be construed as a reference to an acquisition ... of any legal or equitable interest in such assets but does not include a reference to an acquisition by way of charge only or an acquisition in the ordinary course of business.

Example: You can’t buy out of the shares or all of the assets of a company but keep them under two separate names.

The following matters must be taken into account in determining whether the merge of acquisition with SLC (S.50 (3)):

(a) The actual and potential level of import competition in the market;

(b) The height of barriers to entry to the market;

(c) The level of concentration in the market;

(d) The degree of countervailing power in the market;

(e) The likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit;

(f) The extent to which substitutes are available in the market or are likely to become available;

(g) The dynamic characteristics of the market, including growth, innovation and product differentiation;

(h) The likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor;

(i) The nature and extent of vertical integration in the market

Clearance & Authorisation:

 Formal Clearance from ACCC (s.95A)

o ACCC has 40 days to approve, reject or set conditions o Must supply detailed reasons

o Will reject if substantially lessen competition (s.95AN) o Clearance protects party from legal action under s.46 or s.50

 Authorisation by Australian Competition Tribunal (ACT) (s.95AZJ)

o Will only authorise if would result in benefit to the public (s.95AZH) o Balance public benefit against detriment of lessening competition o ACT takes into account (s.95AZH(2))

o Significant increase in real value of exports

o Significant substitution of domestic products for imported goods

o All other relevant matters relating to international competitiveness of an Australian industry

Remedies for breaches of merges and acquisitions:

 Injunctions (s.80)

 Divestiture (s.81)

 Pecuniary penalties (s.76)

 Damages (s.82)

 Declaration (s.163)

 Enforceable undertakings (s.87B)

Week Seven: Misuse of Market Power s.46

S.46 CCA prohibits misuse of market power protects the interests of the consumer S.46 prohibits a firm with a substantial degree of market power from taking advantage of that power for one of the following prohibited purposes. The object of this act is to protect the interests of the consumer.

 S.46(1) General prohibition

 S.46(1AA) Predatory Pricing

No definitive list of conduct but would include:

 Refusal to supply

 Exclusive dealing

 Product bundling

 Discriminatory pricing

 Resale constraints

 Refusal to provide access to facilities

 Refusal to licence intellectual property

 Attaching restrictive licence conditions

 Customer and geographic restraints

 Refusal to purchase

 Price discrimination

 Predatory pricing

Elements of s.46 (1) (general Prohibition)

(1) A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of:

(a) Eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

(b) Preventing the entry of a person into that or any other market; or

(c) Deterring or preventing a person from engaging in competitive conduct in that or any other market