A Practical Approach to Australian Competition Issues
FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORTA Practical Approach to Competition Issues TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCESDr Martyn TaylorPartner, Norton RoseMarch 2013
Overview A. What are the most common issues? 1. Acquisitions of assets and shares 2. Restraints and exclusivity 3. Joint ventures and co-ordinated conduct Dr Martyn Taylor 4. Misuse of market power Partner +61 2 9330 8056 email@example.com B. Interacting with the ACCC 1. The role of the ACCC 2. Responding to ACCC approaches 3. Proactive approaches to the ACCC2 17752725.ppt
Competition law – what is it ? • Australian competition law is principally contained in the Competition and Consumer Act 2010 (Cth). • The Competition and Consumer Act: • relevantly, has the objective of enhancing the welfare of Australians through the promotion of competition; • applies on a generic basis to all markets in Australia; • gives effect to National Competition Policy; and • is administered and enforced by the Australian Competition and Consumer Commission (ACCC). • Competition law is underpinned by economic theory: competition is a necessary condition for the efficient operation of markets so that markets can allocate society’s resources optimally to their most valued uses.4 17752725.ppt
Structure of competition law… Single party • Misuse of market power conduct • National access regime • Restraints of trade Vertical • Exclusive dealing Competition Multi-party • Exclusionary provisions (boycotts) regulation conduct Horizontal • Anti-competitive agreements • Cartel conduct Mergers and • Anti-competitive acquisitions acquisitions ‘Per se’ prohibition ‘Rule of reason’ prohibition Conduct is considered so harmful it is Conduct is considered harmful only if it deemed to be anti-competitive has an anti-competitive effect Example: price fixing by cartel Example: acquisition of an asset5 17752725.ppt
Example – resources sector Single party Multi-party Mergers and conduct conduct acquisitions• Long-running litigation over rail • ACCC authorisation of joint gas • ACCC clearance of APA’s access in the Pilbara region marketing by North West Shelf acquisition of Hastings Fund between Fortescue Mining, Gas Project producers. (gas transmission pipelines). BHP Billiton and Rio Tinto. • Collective bargaining approval for • ACCC clearance for Arrow• 15 year ‘no coverage’ Surat coal producers for Surat Energy acquisition of Bow application for Australia Pacific Basin rail links. (wholesale gas for LNG). LNG Gladstone Pipeline. • Collective bargaining approval for • Caltex acquisition of Mobile• Access regulation of Roma to Bowen/Galilee coal producers for assets at Port of Gladstone Brisbane gas pipeline. Hay and Abbot Point rail links. (fuel terminal infrastructure).• Access regulation for Amadeus • Authorisation of Hunter Valley rail • Proposed iron ore joint venture gas pipeline. network and export coal chain. between BHP Billiton and Rio Tinto in Western Australia.• Certification of Dalrymple Bay • Collective bargaining approval for Coal Terminal access regime. Wiggin Island coal producers for • Chinalco acquisition of various Gladstone Port rail links. assets of Rio Tinto.• Investigation of Santos regarding access to oil storage • ACCC authorisation of joint gas • ACCC opposition to Santos’ facility at Port of Brisbane. marketing by Gorgon Gas Project proposed acquisition of QGC. producers.
…and the most common practical issues 1. Acquisitions of assets and shares • merger clearances 2. Exclusionary and exclusive conduct • exclusive dealing • restraints of trade • third line forcing 3. Joint ventures and co-ordinated conduct • cartel and exclusionary provisions • joint venture defence 4. Misuse of market power • refusals to supply7 17752725.ppt
The prohibition in section 50Policy mischief:• Firms with substantial market power (SMP) can raise prices and reduce output to extract value from consumers.• Firms can achieve SMP by acquiring their competitors (or by vertically integrating across markets).Section 50 of the Competition & Consumer Act 2010 (Cth): Statutory elements:• A corporation/person must not directly or indirectly acquire: 1. Acquisition of shares or • shares in the capital of a body corporate/corporation; or: assets • any assets of any corporation/person, 2. Actual or likely effect on• if the acquisition would: an Australian market • have the effect; or 3. Substantial lessening of • be likely to have the effect, competition in market• of substantially lessening competition in a market.
Voluntary pre-notification to the ACCC• Notifying a merger to the ACCC is voluntary in Australia, although most countries operate mandatory pre-notification regimes.• ACCC expects to be notified in any of the following circumstances: • merger would result in the Acquirer achieving an Australian An Australian market market share, by any measure, of 20% or more; share of 20% is the ‘notification • merger would result in a substantial conglomerate effect; threshold’. • merger would result in significant increase in vertical integration; • complaints to the ACCC by third parties are likely; or • ACCC has previously notified the parties, or the industry generally, that the ACCC expects to be notified.• All Foreign Investment Review Board (FIRB) submissions are automatically notified to the ACCC by FIRB.• The ACCC may also self-initiate a review if it becomes aware of a merger that is likely to raise concerns.
Informal clearance by the ACCCIf clearance is granted, the Acquirer obtains a non-binding “letter of Three types of reviews:comfort” from the ACCC that it will not oppose the acquisition butreserves the right to do so should new information come to light Confidential review takes 2-4 weeks, resultsInformal clearance provides significant procedural flexibility: in a highly qualified view. Becomes a basic review • The procedure is documented in the ACCC’s Merger Review once the merger enters the public domain. Process Guidelines but has no formal statutory basis Basic review • Application involves Acquirer providing the ACCC with a takes 2-6 weeks, results detailed written submission. Vendor normally comments on in a letter of comfort or a the draft. statement of issues. • For more difficult submissions, executives of Acquirer and Vendor Comprehensive review and their lawyers may meet with the ACCC to answer questions. takes as long as is necessary and may involve negotiation of • If ACCC has concerns, greater scope for parties to make undertakings, but results submissions and negotiate undertakings to resolve concerns. in a letter of comfort or an expression of ACCC • No appeal rights from ACCC’s decision, so a decision is opposition to merger. normally swift (compared to other jurisdictions) and is final.
How many acquisitions raise concerns?Of the 377 acquisitions considered for compliance by the ACCC in 2010-11, only 3 were publicly opposed.
Restraint of trade• The common law doctrine of restraint of trade continues to apply to contracts in Australia, notwithstanding the existence of the CCA.• The doctrine requires that any restraint on trade must be justifiable, reasonable and proportionate to the commercial interests to be protected. The key issues are therefore: – What commercial interests are protected ? – Is the scope and duration of the restraint reasonable and proportionate to those interests ?• Severance clauses are important where a restraint of trade is included, including ‘ladder clauses’ that cover different permutations.• Restraints are commonly encountered in the following circumstances: – restraining vendors in a business sale and purchase contract; – restraining key employees or consultants, particularly where they have contributed critical knowledge or intellectual property.
Example… restraints in Sale & Purchase contracts • Two issues with restraints in Sale and Purchase contracts: 1. must fall within exemption in Act; and 2. must comply with doctrine of restraint of trade. • CCA, s51(2)(e) - “regard shall not be had…in the case of a contract for the sale of a business or of shares…to any provision of that contract that is solely for the protection of the Example of restraint: purchaser in respect of the goodwill of the business”. Vendor agrees not to • Common law doctrine requires restraints to be reasonable and compete with proportionate to their purpose. Requires some thought as to the Purchaser for a appropriate breadth of the restraint to protect the goodwill of the period of 3 years business (e.g., what is area of competition, geographic extent, throughout Australia and appropriate duration). in markets X, Y, Z. Is this reasonable to • Ladder and severability clauses are used frequently to mitigate protect the goodwill the risk that the breadth of the restraint could be unreasonable. of the business being acquired ?15 17752725.ppt
Exclusive dealing (vertical restraints)• Section 47 regulates vertical exclusivity under various supply and acquisition permutations. Exclusive dealing occurs in a supplier-customer (vertical)• Practical solutions: relationship when one entity • Most permutations are only anti-competitive if they imposes some restrictions on substantially lessen competition (SLC). the other’s freedom to choose with whom, in what, or where • Concerns arise if the exclusion is for a significant they deal. time period (>2 years) and the competition affected is material to the market. Supplier TERRITORIAL EXCLUSIVITY: PRODUCT EXCLUSIVITY: CUSTOMER EXCLUSIVITY: Supplier restricted from Supplier restricted from supplying in certain territories. Customer restricted from supplying to another customer. resupplying to its customers. Customer restricted from Customer restricted from to supplying in certain territories. acquiring from another supplier. Customer16 17752725.ppt
Third line forcing (bundling across companies)• “Third line forcing” (3LF) is frequently 3LF occurs whenever a supplier encountered and can be problematic. requires a customer to acquire another good or service from an• Occurs whenever a customer is forced to unrelated third party supplier. acquire a good or service from a third party (including conditional discounts and prices).• 3LF is prohibited regardless of the effect on competition. This is unique to Australia. Third party Supplier• supplier Example: You buy a new TV from Myer at a discount. A condition of the discount is that you must pay using a VISA card. Supply (or Forced to discount) on acquire• Practical solutions: condition • Redraft the arrangement to remove the forcing (i.e., customer retains choice). Customer • Submit a notification to the ACCC. Immunity arises if the ACCC does not reject the notification within 14 days.17 17752725.ppt
Cartel provisions • Can result in imprisonment for up to 10 years for individuals. Contract, • Issues arise for: arrangement or understanding • any interactions or sharing (CAU) between of information with Competitor competitors Competitor competitors; • joint venture and shareholder agreements.Does any provision in the CAU have… • Practical solutions: Fixing prices Reducing supply …the purpose or effect of …the purpose of • compliance training for fixing or controlling preventing, restricting or anyone interacting with a prices, discounts, rebates limiting production, competitor; and credits ? capacity or supply ? • joint venture defence; Rigging bids Dividing markets • restructure as a vertical …the purpose of …the purpose of restraint if possible affecting bids by either allocating customers, (exclusive dealing); party in a competitive suppliers or territories bidding scenario ? between the parties ? • whistle-blowing (immunity).
Exclusionary provisions • Not a criminal offence, but overlaps with cartel provisions Contract, arrangement or • Issues (again) arise for: understanding (CAU) between • any interactions or sharing Competitor competitors Competitor of information with competitors; • joint venture andDoes any provision in the CAU have… shareholder agreements. Supplier boycott Customer boycott • Practical solutions: …the purpose of …the purpose of • compliance training for preventing, restricting or preventing, restricting or limiting acquisition by one limiting supply by one of anyone interacting with a of the competitors? the competitors? competitor; • joint venture defence; …in the same market …in the same market where they are competing where they are competing • restructure as a vertical to acquire the goods or to supply the goods or restraint if possible services services (exclusive dealing).
What are the potential areas of risk ? Potential high risk activity: Examples: • Competitors agreeing to ‘black list’ a • A pricing manager at an airline is common supplier unless better prices concerned by increases in the price of are offered. aviation fuel, so sends an email to his counterparts at other airlines • Competitors agreeing not to poach each proposing an interim fuel surcharge. other’s customers or not to supply to a particular customer. • A sales manager is concerned he • Competitors meeting in any can’t meet his sales targets and circumstances (including over lunch or suggests to his friend at another in industry associations) and discussing company that they target different aspects of pricing or discount structures. customers. • Giving pricing information to • Two competing construction competitors. companies form a joint venture to bid • Arrangements to determine prices or for construction projects. supply in the context of joint ventures and shareholder agreements.21 17752725.ppt
Practical solution - joint venture defence Has the corporation Is the provision in a contract? Yes made or given effect to Yes a cartel provision? Is the provision for the purposes of the relevant JV? YesEven if the JV defence Is the relevant JV for theapplies, the conduct must production and/or supply ofstill not substantially lessen the goods or services? Yescompetition. This can beproblematic if supply by the Is the relevant JV carried onJV constitutes a substantial jointly, either by the parties The joint venture defenceproportion of the market. or the incorporated JV Yes applies entity? • Whether the same volume/timing/price of product would beOften a conceptually tricky economically and technically feasible in the absence of the JV;issue for marketing JVs: isthe provision “for the • Whether the provision is reasonably necessary andpurposes of” the relevant proportionate to the needs of the relevant JV;production and/or supply JV? • Whether less restrictive alternatives could realise the volume/timing/price of the product in order to meet demand.
Other practical solutions…Restructuring arrangements: Authorisation: – If the commercial objective it not itself – If an arrangement has net public benefits problematic, it is often possible to and not possible to restructure, then an restructure the arrangements to comply authorisation application to the ACCC may with the Act. be a solution. – Example: restructuring a restraint as – Can be expensive, so generally reserved exclusive dealing to avoid creating an for important or exceptional scenarios. exclusionary provision Immunity or leniency:Compliance training: – The ACCC has a ‘whistle-blower’ policy – Can be bespoke and run informally as a where the first through the door can obtain workshop to discuss key issues immunity (and others can benefit from leniency). – If an employee contravenes the Act, the fact of compliance training may reduce – Where cartel conduct is uncovered, there the liability of their employer. may be a race for the door of the ACCC. – Contrary to popular belief, they can – Requires full disclosure and co-operation actually be fun… with the ACCC.23 17752725.ppt
What is a misuse of market power ? • A prohibition against the misuse of market power is contained in section 46: • a firm that has a substantial degree of market power • must not take advantage of that market power • for the purpose of harming competitors or deterring competitive conduct Example – pricing below cost Example – refusal to supply • A new entrant may enter the market and • A company is vertically-integrated. It may offer substantial discounts. be a manufacturer, distributor and retailer. • The existing firm may decide to undercut • A competing retailer wishes to acquire the prices of the new entrant to retain product from the company and the customers, even through that involves company refuses to supply the product. supplying below cost for a period of time.25 17752725.ppt
What are the areas of risk and practical solutions ? Potential high risk activity: Practical solutions: In markets where the firm has market • Where a ‘refusal to supply’ situation power (eg high market share): arises, consider whether the firm has • Refusing to supply to, or imposing substantial market power. unreasonable supply terms on, customers that are also competitors. • Maximise use of legal privilege by involving legal team in decision- • Price discriminating in a manner that making for risky areas. adversely affects customers that are also competitors. • Ensure that decisions are made for legitimate business reasons, not anti- • Price squeezing (i.e., overcharging at competitive reasons. wholesale where the customer is also competing at retail). • Ensure that external and internal • Pricing below cost for a sustained period correspondence does not evidence of time. any anti-competitive purpose.26 17752725.ppt
What is the ACCC’s role ?• The Australian Competition & Consumer Commission (ACCC) is responsible for administration of the Competition and Consumer Act (as well as other legislation containing competition obligations).• ACCC promotes competition to benefit consumers, business and the community. ACCC also regulates national infrastructure. • Specifically, its performance plan requires it to promote “lawful competition, consumer protection, and regulate national infrastructure markets and services through regulation” • The ACCC’s role includes investigation, enforcement, industry and consumer education, price monitoring and determining the terms of access to infrastructure services. • The ACCC also have an important role in screening and authorising certain conduct that may be anti-competitive.• The ACCC also provides advice and assistance to parliamentary inquiries and government agencies for the development of competition policy and legislation.
How does the ACCC operate ?• The ACCC comprises an independent statutory Commission of seven full-time Members and four Associate Members. • Budget of roughly $150 million, roughly half of which is spent on employee costs. The ACCC has a $25 million legal budget. • Within ‘Treasury’ portfolio in the Commonwealth Government. Commission• ACCC decisions are made through formal Commission meetings: Full Commission • Various Sub-Committees exist with delegated powers to make decisions on matters that are less significant. Sub- • Only the Full Commission itself can decide to start court action, Committee approve or oppose a major merger proposal, or authorise anti- competitive behaviour where there is sufficient public benefit. Staff• The Commission is supported by around 800 staff structured into a Relevant number of Divisions and Groups. Division within ACCC• The staff are responsible for investigating conduct and making recommendations to the Commission via a ‘staff paper’.
ACCC investigative powers• Possible breaches of competition law come to the ACCC’s attention through complaints and information from members of the public, the media, ACCC staff and other agencies.• ACCC’s Infocentre provides the initial response for all inquiries and complaints. In 2011, it received 145,000 calls, 42,000 emails and 2,200 letters. Most of these were retail and consumer oriented.• If a matter is sufficiently serious, the case is referred to the relevant ACCC staff for investigation.• The ACCC staff have formal powers under section 155 of the Act to: • require persons to answer written questions and provide documents (e.g., emails, board papers); and • require persons to appear and provide evidence.• The ACCC also has powers to raid premises and seize evidence pursuant to a search warrant.
Section 155 information gathering notices • ACCC may require any person who it reasonably believes is capable of providing documents, information or evidence in relation to a suspected contravention to provide such documents, information or evidence. • Compliance with a s155 notice is compulsory and it is an offence not to comply with a s155 notice. There is no right to remain silent. • Testimony of an employee can be used against that individual and their employer in civil proceedings but not in criminal proceedings. • ACCC cannot use section 155 to require production of legally privileged material • In the last financial year, the ACCC issued around 270 ‘s155’ notices. The compliance burden for recipients can be very substantial indeed, including identifying any privileged documents.31 Australian cartel regulation
How do you respond to a section 155 notice? 1. Is it actually a section 155 notice… it will say that it is. ACCC may make voluntary requests for information, before 2. Call external counsel – they often have relationships with the issuing a s155 notice. ACCC that may assist. Compliance may avoid a s155 notice, 3. Section 155 notices are normally difficult to challenge, so but confidentiality compliance is required in almost all circumstances. obligations to third parties may preclude 4. Identify the scope of the notice and whether there is scope to disclosure. informally negotiate any aspects with the ACCC: • Sometimes the ACCC may not appreciate the volume of information covered by its notice. • Notice may be ambiguous, leading to interpretation issues 5. Put in place a project plan to locate and review documentation: • Documents should be reviewed for relevance and privilege. • Identify how to deal with documents that are partially in scope or that contain privileged information.32 17752725.ppt
How do you respond to a ‘dawn raid’ ? 1. Ensure staff have clear instructions that if the ACCC does not have a Very rare in search warrant they are not authorised to give consent on behalf of the Australia. May be company for the ACCC to enter the premises. used for major 2. Check the officials’ search warrant and establish the subject matter and investigations, purpose (scope) of the investigation such as cartel conduct 3. Do co-operate with the investigators but ensure they do not exceed their authority, and do not volunteer information. 4. Notify senior management and immediately alert lawyers – the officials may delay their investigation – usually up to an hour – to allow lawyers to arrive; however there is no obligation to wait. 5. Keep a copy of documents that have been seized. 6. Be prepared to assert claims of legal privilege over documents. 1. Do not obstruct entry where a valid search warrant is held. 2. Do not under any circumstances destroy or tamper with any documents – including deleting emails, and the contents of any electronic devices such as Blackberries and PDAs. 3. Do not issue any press public statement about a dawn raid, which has not been discussed with Head Office and settled by legal advisers.33 17752725.ppt
ACCC enforcement powers• ACCC may take enforcement action in the Federal Court seeking injunctions, court orders and pecuniary penalties: – The ACCC applies its compliance and enforcement policy. – Criminal prosecutions are undertaken by the Director of Public Prosecutions• Statutory remedies: – Imprisonment for up to 10 years for individuals engaging in cartel conduct – Substantial pecuniary penalties (firms and individuals) per contravention – Disqualification orders against officers and directors – Provisions of contracts may be unenforceable and must be severed from the contract (which may affect the application of remainder of the contract)• Other concerns – Distraction of senior management – Damage to reputation – Private and class actions by injured parties for damages or other remedies – Forfeiture of proceeds from criminal conduct under Proceeds of Crime Act34 17752725.ppt
Proactive approaches to the ACCC…• If a firm is subjected to anti-competitive conduct, it may wish to make a formal complaint to the ACCC.• The ACCC has priority areas for enforcement, so is more likely to be interested in conduct that falls within those priority areas.• Generally, the more evidence that can be provided, the greater the likelihood of the ACCC commencing an investigation. Steps may include: – Providing presentations and briefings to ACCC investigators – Providing documents to the ACCC, including pursuant to ‘friendly’ section 155 notices where confidentiality issues arise. – Providing written submissions and potentially affidavits. – Offering support in any enforcement activity undertaken.35 17752725.ppt
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