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Mergers Notes

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Mergers (s 50) SLC


Note: the old test for mergers was dominance (more of a structural test). Now the test is SLC (focuses on the state of competition in the market - a dynamic test). So there is only one case dealing with SLC - the AGL case.


1) What is a corporation? S 4 'corporation': "corporation" means a body corporate that: (a) is a foreign corporation; (b) is a trading corporation formed within the limits of Australia or is a financial corporation so formed; (c) is incorporated in a Territory; or (d) is the holding company of a body corporate of a kind referred to in paragraph (a), (b) or (c). 2) S 50(1): The merger prohibition for 'corporations.' 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 any market. 3) S 50(2): The prohibition for 'persons.' A person must not directly or indirectly: (a) acquire shares in the capital of a corporation; or (b) acquire any assets of a corporation; if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in any market. 4) What is the market?
o S 50(6) defines market as a 'market' in Australia, State or Territory or region of Australia. It is no longer a substantial market. o ACCC Merger Guidelines (Nov 2008) state that S 50 requires a forward looking analysis into the effects or likely effects of a merger. The ACCC therefore focuses on the foreseeable future (generally within 2 or 3 years). 5) Will the merger have the effect of or be likely to have the effect of substantially lessening competition in the market?
6) S 50(3): These non exhaustive matters must be taken into account for the purposes of subsections (1) and (2) in determining whether the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a market: 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 margins; f) the extent to which substitutes are available in the market or are likely to be available in the market; 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. 7) What do the merger guidelines say?
8) Authorisation or formal or informal clearance? Informal clearance is the most common. The corporation/person will not be prevented from making the acquisition if the corporation is granted a clearance or an authorisation for the acquisition under Division 3 of Part VII: see subsections 95AC(2) (clearance) and 95AT(2) (authorisation).

What is an acquisition of shares?


S 4(4) requires that the acquisition of shares in the capital or assets of a body corporate involve obtaining or gaining ownership of some legal or equitable interest in shares in the capital or assets of a body corporate, whether the acquisition is by a person alone or jointly with another person.



The interest must be of a proprietary kind, not a possessory kind. TPC v Arnotts (1990): it was held that the granting of an option over shares was an acquisition for the purposes of s 50 since it created an equitable interest in those shares.

S 4(4) In this Act: a) a reference to the acquisition of shares in the capital of a body corporate shall be construed as a reference to an acquisition, whether alone or jointly with another person, of any legal or equitable interest in such shares; and b) a reference to the acquisition of assets of a person shall be construed as a reference to an acquisition, whether alone or jointly with another person, 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.

What is the market?



S 50(6) defines market as a 'market' in Australia, State or Territory or region of Australia. See above for defining the market.

The market definition is decided based on practicality: Australian Meat Holdings:

* The market will be determined by practical considerations, rather than purely economic considerations. In this case the judge relied on a farmer's evidence that cattle would not be transported far away to get slaughtered. Metcash

* French J said that there was no attempt to connect economic theories to the real world market to show they were even likely. Qantas/Air New Zealand

* An economist had excellent knowledge about European aviation but not much knowledge about aviation in the Asia Pacific region. AGL Case

* The ACCC's 'bandwagon effect scenario' was found not to be realistic and thus not to have the effect of SLC. ACCC market definition: ACCC Merger Guidelines- approach to the merger definition when assessing applications for merger clearance.

* Market definition: 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. The market definition establishes the relevant field of inquiry for merger analysis to identify those sellers and buyers that may potentially constrain the commercial decisions of the merger parties and the merged firm, and those participants, particularly customers, that may be affected if the merger lessens competition.

* The concept of a market: A market is the product and geographic space in which rivalry and competition take place. S 4E provides that a market includes goods and services that are substitutable for, or otherwise competitive, with the goods or services under analysis. Thus substitution is key for the definition. The ACCC focuses on product dimension and geographic dimension to characterise markets (and the key dimensions of substitutability). In some cases the definition requires close attention to the functional levels of the supply chain or the particular timeframe over which substitution possibilities should be assessed but this forms part of the geographic






and product dimension analysis. The ACCC focuses on the foreseeable future when considering likely product and geographic dimensions of a market. The ACCC approach to defining a market: The ACCC's starting point in delineating relevant markets to assess a merger under s 50 of the Act is identifying the products and geographic regions actually or potentially supplied by the merger parties. The ACCC then focuses on defining markets in areas of activity where competitive harm could occur. This must be assessed on a case by case basis. Generally the ACCC focuses on overlaps between the products or geographic regions supplied by the merger parties, or some other meaningful economic relationship - such as an actual or potential vertical relationship or where the products supplied by the merger parties are complementary in nature. The ACCC then considers what other products and geographic areas constitute relevant close substitutes in defining the market. The ACCC defines markets by reference to products and regions (not firms actually supplying those products or regions at the time of the merger). Substitution: Substitution involves switching from one product to another in response to a change in the relative price, service or quality of 2 products (holding unchanged all other relevant factors, such as income, advertising or prices of third products). Market definition begins by selecting a product supplied by one or both of the merger parties in a particular geographic area and incrementally broadening the market to include the next closest substitute until all close substitutes for the initial product are included. There is demand side substitution (customer switching is involved) and supply side substitution (supplier switching). Demand side substitution: Depends on likely switching behaviour in response to an increase in price or decrease in the service or quality of that product. The likelihood that a product (or group of products) will be a demand side substitute for a product of one of the merger parties will be assessed according to: the characteristics or functions of the product (demand side substitution depends on the willingness of customers to switch from one product to another in response to a price increase). The availability of the product for purchase and use (depends on the willingness of customers to switch from a product supplied at one location to the same product supplied in another location in response to a price increase). The Hypothetical monopolist test: The ACCC draws on the HMT to define relevant markets, particularly in relation to demand side substitution. It determines the smallest area in product and geographic space within which a hypothetical current and future profit maximising monopolist could effectively exercise market power. In general the exercise of market power by a hypothetical monopolist is characterised by the imposition of a small but significant and non transitory increase in price (SSNIP in chapter 5) above the price level that would prevail without the merger, assuming the terms of sale of all other products are held constant. If customers switch easily and so the firm could not conduct an increase in price, the next closest demand substitute is added. This collection of products is expanded until a hypothetical monopoly supplier of all those products could profitably instate a SSNIP. A SSNIP test usually involves a 5% rise over the price level that would prevail without the merger. Substantial market in Australia, a state, territory or region of Australia: The s 4E definition of a market in Australia, it thought by the ACCC to still allow it to consider mergers in the context of a geographically broader market provided that at least some part of it is located in Australia. The ACCC will define the market in Australia and take full account of any competitive constrain provided by suppliers located outside Australia when considering import competition.

What is SLC?


Tillmanns Butcheries Pty Ltd v Australian Meat Industry Employees Union: The term 'substantially lessening competition' means an effect on competition, which is real or of substance, not one which must be large or weighty.



Thus acquisitions of a small, effective competitor may be captured if it leaves two well matched competitors left in the market. S 50 does not require the firms involved in the merger to have the 'purpose' of SLC. Just that the merger will have the effect or likely effect of SLC.

The meaning of 'effect' and the future with and without test: Outboard Marine Australia Pty Ltd v Hecar Investments (No 6) (1982)

* TEST: the future with and without test.

* This test requires the relevant body to consider how, in the future, market forces will work 'with' (factual) and 'without' (counterfactual) the conduct at issue. In many cases the 'without' will be the status quo but if there are other developments imminent they will be considered.

* THIS IS NOT a 'before' and 'after' comparison.

* It is always important to look at barriers to entry. This is the most important thing!

* SEE METCASH. Stirling Harbour Services Pty Ltd v Bunbury Port Authority (2000)

* Stirling Harbour sought a declaration that the letting of the proposal tender would be contrary to


ss 45 and 47 and of the competition code. Stirling argued that the effect of granting an exclusive licence for towage services prevented new entry or lessened potential competition.

FCFCA: The test is not a before or after test but the existing state of competition in the market may throw some light on the likely future state of competition in the market absent the impugned conduct. Conduct has the effect of lessening competition in a market only if it involves a reduction in the level of competition which would otherwise have existed in that market but for the conduct in question. The mere fact that one can conceive of other less restrictive alternatives by which a commercial objective might be achieved is not sufficient of itself to lead to a conclusion that the conduct has the effect of lessening competition.

The meaning of 'likely effect'

* In determining the likely effect regard must be had to the circumstances existing at the time the conduct was engaged in. Thus if in a case, the conduct did not in fact produce that result, it is still possible that it may have contravened the relevant section. QMCA:

* 'Likely' refers to probable effects, rather than possible or speculative effects and that the probabilities are commercial or economic likelihoods which may not be susceptible of formal proof on the basis of evidence and argument. Monroe Topple & Associates Pty Ltd v The Institute of Chartered Accountants (2002):

* 'Likely' does not mean 'more likely than not.' It is sufficient that there is a real chance or possibility that a substantial lessening of competition will occur. The focus of the ACCC in determining SLC: ACCC Merger Guidelines - The focus of the SLC test in relation to mergers

* Mergers can result in unilateral effects (a main way they lessen competition): o That is they remove or weaken competitive constraints in such a way that the merged firm's unilateral market power is increased. o As a result of the merger, the merged firm finds it profitable to raise prices, reduce output or otherwise exercise the market power gained. It can do so even


given the expected response of other market participants to the resulting change in market conditions. o The ACCC will consider all the merger factors in s 50(3) and any other relevant factors to see if there has been a substantial lessening of competition. It also considers whether the broader actual/potential competitive constraints - such as new entrants, imports or countervailing power - will limit any increase in the unilateral market power of each remaining market participant. Mergers have coordinated effects when they assist firms in the market by reducing the number of firms by which to coordinate their pricing, output or related commercial decisions. o A merger may do so by simply reducing the number of firms among which to coordinate, by removing or weakening competitive constraints or by altering certain market conditions that make coordination more likely. o They may occur in addition to unilateral effects so that the merged firm is able to achieve even higher prices than it would on its' own. In some cases coordinated, either alone or in conjunction with unilateral effects may amount to a substantial lessening of competition.

Substantial lessening of competition s 50(3) criteria



The court takes into account the s 50(3) factors and other factors. It also applies a 'with and without' test to test whether the effect of the merger on competition is a lessening of competition that is real or of substance. That is the state of competition is compared with the merger and without. The without, is now known at the counterfactual. The state without competition will often be the status quo but need not be if some other change in market structure is likely to occur.

Australian Gas Lighting Company v ACCC (No 3) [2003]

* AGL was the first corporation to challenge the ACCC's informal ruling in the Federal Court. AGL



wanted to make an indirect acquisition of LYP by buying shares of another company that owned shares in LYP. They attempted to get clearance from the ACCC in February. The negotiations broke down and the ACCC informed AGL in September they did not support the merger as the merger would increase the electricity spot price by creating a natural hedge and leading to less insurance contracts, creating a bandwagon effect leading to other companies to merger and thus causing a SLC effect. AGL sought a declaration that its acquisition of a 35% interest in Loy Yang Power (LYP), a major electricity generator in Victoria, was not likely to have the effect of substantially lessening competition, contrary to the informal ruling by the ACCC. It was found that the ACCC's scenario was unlikely to happen as the merger did not lead to vertical integration but was an AGL investment (even though now AGL took over all of LYP). AGL was allowed to purchase 35% of LYP. What was relevant was that French J found the market was a national market, not a Victorian market (due to the national power grid). French J was very critical that the ACCC objected to the proposed acquisition but refused to take formal injunction proceedings - instead threatening post acquisition divestiture - this uncertainty was found not to serve the public interest.

French J looked at the s 50 elements. 1) AGL is a corporation under s4 - it is a trading corporation formed within the limits of Australia. S 50(1) applies. 2) A corporation shall not directly or indirectly acquire shares. o Acquisitions of shares are defined by a deeming provision in s 4(4)(a) and a reference to an acquisition 'shall be construed as a reference to acquisition, whether alone or jointly with another person, of any legal or equitable interest in such shares.' On that definition one transaction may give rise to a successive acquisitions for the purposes of s 50.

Thus a corporation that enters into a contract to purchase shares of a body corporate may acquire an equitable interest prior to settlement and thereby acquire the shares pursuant to s 4(4). o This will not necessarily attract the prohibition in s 50 where the acquisition of the legal interest has not been completed and no right subsists in the acquirer as a shareholder in the target body corporate then forging any link to a substantial lessening of competition would be problematic. o In this case there is a condition precedent and so no interest is conveyed until satisfaction of the condition. BHP v TPT concerned an acquisition of shares conditional upon Trade Practices Tribunal authorisation. Prior to the condition being satisfied, the purchaser could seek an order to require the vendor to do what it must under the contract to secure fulfilment of the condition - this was before the new test but is still relevant. 'Likely to have the effect'?
o It is capable of two meanings. French J found that 'likely' in s 50 means a significant finite probability or a 'real chance' rather than 'more probable than not.' The court is concerned with 'commercial likelihoods relevant to the proposed merger.' The word 'likely' must be applied at a level which is commercially relevant or meaningful. What is competition?
o It is a process rather than a situation. It requires both that prices should be flexible, reflecting the forces of demand and supply, and that there should be independent rivalry in all dimensions of the price-product-service packages offered to consumers and customers. It is not assessed by a snapshot view of participant behaviour at a particular time. o The theatre of competition has real and shadow actors - those shadow actors create potential for new entry. It is rivalry and potential rivalry of potential participants. (This is important. You need to have a practical approach to define the market). What is substantial?
o Rural Press: Means that the effect of the acquisition is 'meaningful or relevant to the competitive process'. The court will give little or no weight to short term effects on the market in determining a substantial lessening of competition. It will be necessary to consider the future state of the relevant market with and without the proposed acquisition to assess 'substantial effect.' Size of market? S 50(6) does not have a lower bound to a region under Australia. This is not an issue in this case. Matters to be taken into account to determine whether the acquisition would be likely to have the effect of substantially lessening competition in the market? S 50(3): French J emphasises the importance of real life industry evidence. The theory must be tethered to the market you are talking about. a) The actual and potential level of import competition in the market: this matter refers o




6) 7)

to import competition from outside Australia.

b) The height of barriers to entry to the market: Any feature of a market that places an efficient prospective entrant at a significant disadvantage compared with incumbent firms, including, for example, the presence of economies of scale or scope, control over essential inputs or government regulations which restrict entry into the market. The term encompasses barriers to exit, such as high 'sunk' costs. It represents the ease with which new firms can enter or leave the market now or into the future. It is the economic disincentives for new entrants into an existing market. c) The level of concentration in the market: In assessing whether or not a proposed acquisition is likely to substantially lessen competition in the market, its existing concentration and any increase in that concentration, by reducing of the number of competitors or the accrual of significant additional market share to one of them, will be relevant.

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