Part 2: Authorizations
In the last edition of LegalTalk, we examined the provisions of section 50 of the Trade Practices Act (the TPA), and the procedures for obtaining informal or confidential merger clearance from the Australian Competition and Consumer Commission (ACCC).
In this article, we examine the process for obtaining authorization of a merger or acquisition which may breach section 50 of the TPA.
Section 50: A Reminder
Section 50 of the TPA prohibits a corporation from acquiring shares in the capital of a body corporate or acquiring any assets of a person if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in the relevant market. Penalties for breaching section 50 can include fines of up to $10 million for a corporation or $500,000 for an individual.
Despite the prohibitions of section 50, the ACCC has the power to authorize a merger or acquisition which would have the effect, or be likely to have the effect, of substantially lessening competition in a market.
Sections 88 and 90
Section 88(9) of the TPA provides:
“Subject to this Part, the Commission may, upon application by or on behalf of a person:
(a) grant authorization to the person to acquire shares in the capital of a body corporate or to acquire assets of a person…..
and while such authorization remains in force:
(b) in the case of an authorization under paragraph (a) - section 50 does not prevent the person from acquiring shares or assets in accordance with the authorization."
In other words, the ACCC can authorize a company or a person to acquire shares in the capital of a body corporate or to acquire the assets of a person, even if the acquisition would result in a substantial lessening of competition in the market.
In deciding whether to grant an authorization, the ACCC must have regard to sections 90(9) and 90 (9A) of the TPA, which state:
(9) “The Commission shall not make a determination granting an authorization under subsection 88(9) in respect of a proposed acquisition of shares in the capital of a body corporate or of assets of a person…. unless it is satisfied in all the circumstances that the proposed acquisition would result, or be likely to result, in such a benefit to the public that the acquisition should be allowed to take place.
(9A) In determining what amounts to a benefit to the public for the purposes of subsection (9):
(a) the Commission must regard the following as benefits to the public (in addition to any other benefits to the public that may exist apart from this paragraph):
(i) a significant increase in the real value of exports;
(ii) a significant substitution of domestic products for imported goods; and
(b) without limiting the matters that may be taken into account, the Commission must take into account all other relevant matters that relate to the international competitiveness of any Australian industry."
What is a Public Benefit?
Sections 90 (9) and (9A) require the ACCC to identify the public benefits which will flow from the proposed acquisition.
The ACCC takes a wide view of what constitutes a ‘public benefit’. In addition to the two issues set out in section 9A(a) (a significant increase in the real value of exports and a significant substitution of domestic products for imported goods), the ACCC has stated that a public benefit is “anything of value to the community generally, any contribution to the aims pursued by society, including as one of its principal element…. The achievement of the economic goals of efficiency and progress" [In Re 7-Eleven Stores Pty Ltd (1994) ATPR 41-357].
In Re ACI Operations Pty Ltd (1991) ATPF (Com 50-108), the ACCC listed a number of matters which could constitute public benefits, including:
- the achievement of efficiency and progress, including providing consumers with a wider choice of products and prices
- rationalisation of Australian industry to promote economies of scale, lower unit costs and improved export competitiveness
- economic development such as encouragement of research and capital investment
- expansion of employment or prevention of unemployment in efficient industries
- industrial harmony
- assistance to efficient small businesses, such as guidance on costing and pricing or marketing initiatives which promote competitiveness
- improvement in the quality and safety of goods and services and expansion of consumer choice
- growth in export markets, and
- steps to protect the environment.
The Future With and Without Test
In determining whether to authorize an acquisition, the ACCC looks at both the public benefits and the public detriment which may flow from the acquisition, and then uses a “future with and without" test. That is, it compares the position which would be likely to exist in the future if the authorization was granted, with the position which would be likely to exist in the future if the authorization was not granted. If the public benefit from the anti competitive acquisition outweighs the likely public detriment, it will authorize the anti-competitive acquisition.
A public detriment is anything which will impair the community generally, or which will harm or damage the aims pursued by society, including the aim of achieving the goal of economic efficiency. Anti-competitive behaviour is not necessarily a public detriment as, in some circumstances, anti-competitive behaviour may bring public benefits.
Some recent examples of the way in which the ACCC has used the test are:
- The ACCC authorized a joint venture arrangement to develop thoroughbred horse racing facilities in Queensland, finding that any anti-competitive detriment from a reduction in racing services would be outweighed by a public benefit in the form of cost savings to the clubs.
- The ACCC refused to authorize the second largest paint company in Australia to acquire the third largest. It accepted that there would be some public benefits from the acquisition, but was concerned that the result may be a higher concentration in an industry where there were high barriers to entry and little import competition.
Procedures for obtaining Authorization
If a party to a proposed merger or acquisition believes that the transaction may breach section 50, it should apply to the ACCC for authorization of the transaction. The application process, and the process which the ACCC goes through when deciding whether to grant the authorization, are set out in the ACCC’s Merger Guidelines.
Parties cannot seek authorization for a merger or acquisition which has already occurred. However, sub-sections 50(4) and (5) of the TPA provide that where a contract has been entered into, with a provision that the contract is subject to an authorization being granted and the person applies for the granting of the authorization within 14 days after the contract was entered into, the acquisition will not be regarded as having taken place until the application for authorization has been disposed of.
To apply for authorization, a party must lodge an application accompanied by a submission setting out the benefit to the public which it expects to flow from the acquisition, and commenting on any detriments which may result from it.
Once a party has applied for authorization, the ACCC will review the proposed transaction by assessing the likely public benefits and detriments using the future with and without test within 30 days, or 60 days if it requires further information.
The authorization process is a public one. The ACCC maintains a public register on its website of all applications for authorization and places a copy of the applicant’s submissions on the register. In certain circumstances, the parties may ask the ACCC to keep particular documents confidential and not place them on the public register.
The ACCC will seek the views of other parties such as suppliers, customers, importers and competitors and any interested party can make a submission to the ACCC regarding a proposed authorization. The ACCC may bring these submissions to the attention of the applicants and leave them to decide whether they wish to reply to those submissions. The ACCC may also undertake market inquiries to get a better understanding of the relevant markets.
Once it has made a decision, the ACCC will issue a draft determination setting out whether it proposes to grant the authorization. If parties oppose the proposed decision, the ACCC may call a pre-decision conference at which interested parties can discuss the application, and assist the ACCC in interpreting and weighing the information given to it. Records of the conference will be placed on the public register.
After any further submissions have been received, the ACCC makes a final determination. The ACCC can grant authorisation subject to conditions - for example, a condition that the applicant provide certain undertakings. An applicant for authorization, or any other interested third party, can apply to have the decision of the ACCC reviewed within 21 days of the determination by the ACCC. The application is to the Tribunal which has 60 days to conduct the review.
The 2003 Dawson Committee recommended changes to the authorization process, saying that the current authorization process was commercially unrealistic because of the time frames involved in applying for an authorization. The Committee recommended that applications for authorization be made directly to the Tribunal, which would have a time limit of 3 months to determine an application. There would be no review on the merits from a decision of the Tribunal. The Government agreed with this and the Trade Practices Legislation Amendment Bill (No1) 2005 (which has yet to be passed) proposes to insert a new Division 3 into Part VII of the TPA, which would allow for authorizations to be granted only by the Tribunal.
The effect of Authorization
Once the ACCC has the proposed transaction, no parties (including the ACCC) can take action to overturn it. However, immunity from such action only runs once authorization is granted, and for the period for which the authorization has been granted. The authorization comes into effect on a date specified by the ACCC.
Conclusion
Given the potential penalties for breaching section 50 of the TPA, any company which is proposing to acquire or enter into a merger with another company should examine whether the acquisition or merger is likely to lead to a substantial lessening of competition in the relevant market and, if necessary, seek a view from the ACCC. If it seems that the acquisition or merger will breach section 50, the company should then apply for authorization to proceed with the transaction, ensuring that it does not enter into the transaction before obtaining that authorization. If the company does enter into the transaction, it should ensure that it is conditional upon authorization being granted, and that the application for authorization is made within 14 days of the date of the transaction.
