Maintaining the right balance in competition law between allowing businesses to grow and ensuring that no commercial entity becomes large enough to act anti-competitively is a delicate task. In the wake of the Chairman of the Australian Competition and Consumer Commission’s (ACCC) speech at the Australian Financial Review Retail Summit (AFR Summit), some feel that the regulator does not currently have the right balance in the retail sector. This article discusses the remarks of ACCC Chairman Rod Sims in the context of online retailers and the current regulations on mergers.
Caution over Mergers and Acquisitions
On 28 September 2016, Mr Rod Sims indicated that a key focus of the ACCC at present is ensuring that new entrants to the retail market are not prevented from competing on their merits. In this context, he noted that the regulator would ‘be alert to the consequences of large firms acquiring promising startups.’ These remarks received a swift response from online retailers. Such retailers are concerned that the ACCC’s stance would hinder not only their plans for commercial growth and expansion, but also their exit strategies.
Kate Morris, the founder of online retailer AdoreBeauty, described the ACCC’s position as ‘heavy-handed’. She perceives that it will ‘punish’ those online retailers who ultimately aim to sell their business or expand it. She also feels that it works against those large retailers who are seeking ‘external partners’ for the purpose of innovation. Ms Morris even believes that the ACCC’s stance will hinder competition. This stance is because it blocks off a logical path open to the founders of retail startups to exit their business.
Paul Greenberg who co-founded DealsDirect and serves as Chairman of the Online Retailers Association described Mr Sims’ remarks as ‘surprising’ and ‘disappointing’. He noted that many online retailers are struggling and that for them to remain in business, they will likely need to discuss ‘consolidation or convergence’ with other, more established retailers.
Importantly, the ACCC Chairman did not suggest that the regulator will block all acquisitions of an online retailer by a more established company. Nor must competition itself remain wholly unaffected by any such merger. Mr Sims only suggested that the ACCC would carefully scrutinise this kind of merger to ensure that it did not substantially lessen competition overall.
In cases of acquisition, it is also open to the parties to either restructure their agreement or offer the ACCC certain undertakings if the regulator has concerns. In his speech, Mr Sims gave the example of Coles’ acquisition of Supabarn in Canberra and NSW. Coles and Supabarn restructured their agreement so that the final deal was less anti-competitive.
Of course, acquisitions are a commercial decision. However, they are also a legal problem to the extent that they can result in an over aggregation of market power in one business entity. Such a situation could damage competition and be deemed unfair.
A company with a significant amount of market power can more easily engage in anti-competitive practices if it chooses to do so. These practices are detrimental to consumers, other businesses and thus the market overall.
Certainly, most acquisitions will not aggregate market power or threaten competition. On the other hand, some have the potential to damage competition seriously. When this is so, the merger is likely to be of interest to regulators.
Regulators can affect potential acquisitions through section 50 of the Competition and Consumer Act 2010 (Cth) (the Act). The section prohibits a corporation or person, either directly or indirectly, from acquiring shares in the capital of a body corporate or from acquiring the assets of a person in circumstances where the acquisition could potentially affect competition in the market.
Regulators will evaluate the future of the market with and without the merger. If a party makes an assumption about what is likely to happen in the future, it has the responsibility of proving its assertion.
Section 50 allows a party to apply for clearance or authorisation for an acquisition. However, it is not compulsory to notify regulators of an acquisition or seek approval of one beforehand.
In practice, most commercial entities choose to get approval for an acquisition before they proceed with a merger. Approval entails either informal or formal clearance from the ACCC or authorisation from the Australian Competition Tribunal. Any review of a proposed acquisition must consider the:
- Actual and potential level of import competition in the market;
- Barriers to entry to the market;
- Level of concentration in the market;
- Degree of countervailing power in the market;
- Likelihood that the acquisition would enable the acquirer to significantly and substantially increase its prices or profit margins;
- The availability of substitutes in the market;
- Dynamic characteristics of the market including its growth, innovation and product differentiation;
- Likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor; and
- Nature and extent of vertical integration in the market.
Of course, the reviewing body can take into account any other matter it perceives is relevant in the circumstances when it reviews an acquisition.
Acquisitions have also been a legal issue recently because of concerns about so-called ‘creeping acquisitions’. The term refers to when a commercial entity with substantial market power purchases numerous smaller competitors over a period. While the individual purchases may raise no concerns regarding competition, when they are viewed cumulatively, over a period, they could suggest a negative impact on competition.
Currently, the Act contains makes no provision for creeping acquisitions. While section 50 prohibits acquisitions that substantially lessen competition, it may not prevent numerous acquisitions of smaller commercial concerns on the part of a larger entity over time.
For this reason, various submissions to the recently completed Competition Policy Review (the Harper Review) advocated amendments to the Act to allow it to address creeping acquisitions. These submissions were primarily concerned about the size and expansion of Coles and Woolworths.
In its 2008 report into the competitiveness of retail prices for groceries, the ACCC described possible amendments to the Act to encompass creeping acquisitions as desirable. The regulator did not consider them essential because it asserted that creeping acquisitions were not a significant current concern. Rather, the supermarket giants had grown organically rather than acquisitively.
Suggested amendments to the Act would allow the regulator to assess the anti-competitive implications of merger aggregation. Such amendments are necessarily complex. For example, what would constitute the appropriate period for measurement? Further, such a change would increase the cost and time needed to review requests.
However, the Harper Review did not ultimately recommend a change to section 50 to allow for merger aggregation. The panel cited as its reason the lack of evidence that harmful acquisitions were occurring because of a gap in the Act.
- ACCC Chairman Rod Sims recently remarked that the regulator would be alert to the consequences of large retailers acquiring retail startups;
- This position is proving unpopular with online retailers; and
- An important issue is a potential for ‘creeping acquisitions’. This occurs when large entities make many small acquisitions which are likely permissible under section 50. However, in total these acquisitions could lessen competition.
Are you considering an acquisition or are you in the process of getting acquired? Get in touch with our consumer lawyers today. Call us on 1300 544 755.