On 6 May the government released a second discussion paper relating to the introduction of creeping acquisition laws  in Australia. It is disappointing to say the least. A 'creeping acquistion' involves ‘the acquisition of a number of individual assets or businesses over time that may collectively raise competition concerns, but when considered in isolation, are unlikely to be captured by the existing mergers and acquisitions test under section 50 …’ (this is the definition adopted in Chris Bowen’s Press Release ) and the ALP have, for many years now, indicated they would like to introduce laws that would prevent anti-competitive creeping acquisitions.
In the first discussion paper on creeping acquisitions the government put forward two possible models; the ‘aggregation model’ (which would be consistent with the policy underlying our current merger prohibition) and the ’substantial market power model’ (SMP) which, in prohibiting mergers by firms having substantial market power where they have ANY effect on competition, would represent a serious departure from existing merger policy.
Unfortunately, the second discussion paper retains an emphasis on the SMP model. The discussion paper suggests abandoning the reference to ‘any lessening of competition’ (although not because this is inconsistent with current economic or competition theory, but rather because it might result in ‘ambiguity and risk reinterpretation by the Courts of the “substantial lessening of competition” test in the existing prohibtion in section 50′ – why this would be the case remains a mystery) and replacing it with a model built around increases in market power. The suggested format of the prohibition is set out in para 12 as follows:
(1) A corporation that has a substantial degree of power in a market must not directly or indirectly:
(a) acquire share 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 enhancing that corporation’s substantial market power in that market.’
In effect, this is not significantly different from the first flawed proposal to ban all mergers by corporations having substantial market power where the merger would have any effect on competition. At least where the merger is horizontal, any firm with market power is likely to enhance their market power as a result of the merger (and simultaneously lessen competition) even if only to an insignificant level.
Another approach suggested in the discussion paper is to allow the Minister to unilaterally ‘declare’ a corporation or product/service sector, where he/she has concerns about potental harm from creeping acquisitions, and to give the Minister power to require notification of certain acquisitions by declared corporations etc (this would represent a limited departure from the existing voluntary merger notification regime in Australia). The test set out above would then apply to those notified transaction.
The discussion paper does acknowledge that there is a ‘fine balance to be struck’ when regulating creeping acquisitions and seeks views on:
1. The potential unintended consequences of a creeping acquisitions law that targets enhancements to a corporation’s substantial market power …
2. The potential unintended consequences of a creeping acquisitions law that targets ‘declared’ corporations or product/service markets.
3. how many potential unintended consequences may be addressed or minimised, particularly in the design of the law
4. the costs and benefits associated with the option of including a mandatory notification requirement, using thresholds unique to each particular declaration, determined by the Minister.
The models suggested in the discussion paper are seriously flawed; both are simply adaptations of the SMP model. The more appropriate (though not perfect) aggregation model has been dismissed as impractical.
The SMP model Implementation of this model would ultimately prove anti‐competitive and harm small businesses in the following ways:
• Small business would be deprived of the opportunity to take advantage of their business goodwill through asset sales to larger businesses – this would deny small business access to its largest prospective buyer and thereby reduce competition for the purchase of the small business.
• It would effectively prevent a firm with substantial market power (however that was defined) merging at all. By definition a horizontal merger reduces the number of competitors in the market and thus has some (even if only slight) impact on competition in that market. Where a merger enhances
efficiencies in the market without significantly limiting competition, on any theory of competition law policy the merger should be permitted to proceed.
This model is similar to one suggested in a number of submissions to the Dawson Review , that a ‘cap’ should be placed on the market share of companies, beyond which acquisitions should not be permitted (or at least not permitted without approval). This suggestion was criticised by the Dawson Committee in its report, which considered that a cap would ‘stifle competition and protect the unsustainable position of inefficient competitors’. They also accepted that a cap would prove ‘unworkable’ and could deny consumers access ‘to the products or services offered by an efficient producer’.
The Government should either re-consider an acquisition-type model for creeping acquisitions that would be consistent with its own definition of creeping acquisitions, or abandon efforts to legislate creeping acquisitions altogether. The SMP model is not consistent with good competition policy and represents a serious departure from international best practice.
Submissions on this discussion paper were due by 12 June  (note that this date was extended until 10 July; the submissions have now been released)