1 May 2009
The General Manager
Competition & Consumer Policy Division
The Treasury
Langton Crescent
PARKES ACT 2600
creepingacquisitions@treasury.gov.au
Dear Sir/Madam
Creeping Acquisitions
The Group of 100 (G100) is an organisation of Chief Financial Officers from
Australia’s largest business enterprises with the purpose of advancing
Australia’s financial competitiveness. The G100 is pleased to respond to the
second discussion paper relating to proposed creeping acquisitions reforms.
Our principle concern is that the proposed changes would create significant
and real uncertainty for businesses contemplating acquisitions and expansion in
Australia. In particular, as the reform proposals would apply to the acquisition
of assets as well as shares, the G100 considers that normal commercial
investment, for example, in new technology and expansion sites, could be
seriously inhibited. This would detrimentally affect both jobs and the
Australian economy as a whole.
We regard Australia’s merger control regime as well administered,
sophisticated and efficient. The G100 believes that, if either creeping
acquisitions reform proposal is adopted, Australian businesses would face a
substantial negative impact in the form of increased regulatory uncertainty,
contraction in investment and reduced commercial confidence. Moreover, the G100
considers that the reform would significantly increase the cost of compliance
through the imposition of additional regulatory barriers to investment by
successful companies. We are of the opinion that no compelling case has been
made to support the need for substantial amendment to Australia’s merger control
legislation in a manner which would undermine efficient investment in the
country.
Additionally, the G100 notes that a creeping acquisitions regime would leave
Australian merger control laws significantly out of step with international best
practice and the merger regimes in other leading jurisdictions, including the
United States and European Union. This outcome should be avoided, especially in
the current global economic climate.
Principal Concerns with the Proposed Reform
The G100 does not consider that convincing proof has been offered to qualify
the flexibility of the existing “substantial lessening of competition” test in
the manner of either option contemplated by the Discussion Paper. In the G100’s
view, the existing merger legislation is not deficient in the face of creeping
acquisitions, such that it requires fundamental amendment to account for
small-scale acquisitions by corporations with “substantial market power”.
Additionally, the G100 considers that both the proposed options for reform
raise a number of significant legal and practical issues, which will result in
potentially damaging unintended consequences. In particular, the proposed
reforms raise the following concerns:
- A larger number of corporations than envisaged may be affected.
Market power has been held by the courts to exist in relation to market
shares of approximately 20% (ACCC v Safeway Stores). Prohibiting
corporations with a “substantial degree of market power in a market” from
making acquisitions or expanding existing operations by additional
investment would have, or be likely to have, the effect of “enhancing” that
market power is likely to create a two stage merger test in many sectors of
the economy and a substantial number of corporations operating in those
sectors. This would necessarily add to the regulatory burden and costs for
all parties, and would be likely to deter vigorous economic activity and
acquisitions across the Australian economy.
- The meaning of the term “enhancing” is unclear. Arguably, any
acquisition (of shares or assets) within the relevant market by a corporation
with a substantial degree of market power may ‘enhance’ that corporation’s
market power. As there is no qualitative element to the competition test
proposed, there is considerable risk that “enhancing” may be interpreted to mean
a simple increase regardless of the materiality of degree or effect. Such an
approach would undermine the ability of corporations to compete actively and
effectively in a market, as the possibility of undertaking any investment by way
of acquisition may be removed.
- The reforms are likely to introduce a de facto market share cap.
The apparent absence of any qualitative element to the concept of
“enhancing” may prevent an acquirer with a substantial degree of market
power from making any further acquisitions within the relevant market. A de
facto market share cap would constitute a retrograde step, as affected
corporations would be unable to make acquisitions or investments in new
assets and, in circumstances where potential investors are scarce (for
example in the current financial climate), the G100 is concerned that merger
and expansion activity may, in practice, cease in certain industry sectors.
Imposing a market share cap runs a significant risk of undermining effective
competition.
- Vertical and unrelated acquisitions and business expansions would be
negatively affected. The Discussion Paper does not address how the proposed
reforms would apply to acquisitions or investments by corporations with a
substantial degree of market power in one market (Market A), in wholly unrelated
markets, or in markets upstream or downstream of Market A.
The G100 is concerned that a corporation may face additional regulatory barriers
and be prevented from completing an acquisition, even if the acquisition did not
directly impact the corporation’s market power in Market A. In particular,
because the proposals apply to acquisitions of assets as well as shares, they do
not appear to consider the possibility of a corporation with a substantial
degree of market power in a market acquiring new plant and equipment, or new
investment sites. Such acquisitions, which are normal commercial investments
intended to increase a corporation’s efficiency, may arguably ‘enhance’ that
corporation’s market power in Market A and thereby be blocked.
- The proposals would inhibit innovation and investment. Despite
the Government’s intention that the reforms “should not stop the legitimate
and organic growth of businesses”, there is a very real risk that innovation
and investment will be discouraged. The uncertainty created by the reform,
and its application to acquisitions of assets as well as shares, may be
expected to hinder investment, including investment in new technology and
through acquisitions of expansion sites. As businesses contemplate the
impact of these changes, it is likely that investment in marginal and rural
sites in particular will be deterred, thereby undermining economic activity
in those areas and limiting job creation. Additionally, by inhibiting
investment by large corporations, the creeping acquisition reform will
likely result in job losses. Moreover, in the case of G100 corporations
affected, the reform may lead to potentially damaging fluctuations in share
prices as investors react to the regulatory restraints on those
corporations’ ordinary commercial activities.
- Option 2 raises serious concerns as to transparency of application and
the impact on a declared corporation. The introduction of a unilateral power
for the Minister to declare a corporation or industry sector should be avoided.
The G100 is concerned that the Minister’s decision may not be transparent, could
not be properly challenged and could critically damage the normal commercial
operations of a declared entity by preventing any acquisitions by a corporate
group. Declaring a corporation or corporate group would be a blunt regulatory
instrument which would seriously undermine the normal commercial conduct of the
entity.
Conclusion
The G100 strongly urges the Government to review its proposals and to
acknowledge that Australia’s existing merger legislation is sufficient to deal
with creeping acquisitions. Introducing creeping acquisitions reforms of the
type set out in the Discussion Paper would seriously undermine the
competitiveness of the Australian economy and disadvantage Australian consumers.
Yours sincerely
Tony Reeves
National President