#7180 - Mergers - Competition Law

• 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?

• S 50(6) defines market as a ‘market’ in Australia, State or Territory or region of Australia. It is no longer a substantial market.

• 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).

  1. Will the merger have the effect of or be likely to have the effect of substantially lessening competition in the market?

  2. 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:

1. the actual and potential level of import competition in the market;

2. the height of barriers to entry to the market;

3. the level of concentration in the market;

4. the degree of countervailing power in the market;

5. the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins;

6. the extent to which substitutes are available in the market or are likely to be available in the market;

7. the dynamic characteristics of the market, including growth, innovation and product differentiation;

8. the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor;

9. the nature and extent of vertical integration in the market.

   1. What do the merger guidelines say?

   2. 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 Division3 of PartVII: see subsections 95AC(2) (clearance) and 95AT(2) (authorisation).

• 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.

In this Act:

1. 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

2. 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.

• 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.

• French J said that there was no attempt to connect economic theories to the real world market to show they were even likely.

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

• The ACCC’s ‘bandwagon effect scenario’ was found not to be realistic and thus not to have the effect of SLC.

ACCC market definition:

• 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...