ACCC v Pioneer International Limited and Pioneer Building Products (Qld) Pty Ltd
Federal Court of Australia
Unreported (Fed Ct, 20 December 1996)
Trial Judge
Justice Lockhart (unreported)
In brief
$4.8m plus costs ordered for contravention of s 50. No defence filed. Penalties agreed. No written Court decision was produced.
These were the first proceedings resulting in a pecuniary penalty under s 50 of the Trade Practices Act 1974.
Details
The matter was not reported, but commentary was provided by Alan Ducret in the ACCC Journal Alan Ducret, ‘ACCC v Pioneer International Limited and Pioneer Building Products (Qld) Pty Ltd’ (ACCC Journal No 1, 1997, 1-3). Content of the commentary is reproduced below:
ACCC v Pioneer International Limited and Pioneer Building Products (Qld) Pty Ltd
Federal Court
Lockhart J
20 December 1996
On 20 December 1996, Lockhart J of the Federal Court ordered Pioneer International Limited (Pioneer) and a subsidiary company, Pioneer Building Products (Qld) Pty Ltd (Besser), to pay $4.8 million in pecuniary penalties for a contravention of s. 50 of the Trade Practices Act. The decision was the result of proceedings brought by the Commission which, for the first time, obtained pecuniary penalties as part of the relief sought.
Section 50(1) states:
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 a market.
Background
The Pioneer case arose from the acquisition by Pioneer and Besser of the assets of A Class Blocks Pty Ltd (A Class) and Q Blox Concrete a competitive supplier of concrete masonry blocks in the south-east Queensland area.
Pioneer controlled a number of companies within the Pioneer Group that produced and supplied concrete masonry products, including Besser. Pioneer, Boral Resources (Qld) Pty Limited (Boral) and A Class were the main producers of concrete masonry blocks in south-east Queensland, although two smaller producers did exist.
Concrete masonry blocks are used extensively in Queensland and in the south-east Queensland area by the building industry, particularly for use in walling for housing units, industrial buildings such as warehouses and factories and also commercial construction including multi-level buildings. Between 1990 and 1995, at least $15 million to $20 million worth of blocks were sold in the south-east Queensland area each year.
The prices of blocks were largely based on the extent to which discounts were given by the producer of the blocks to purchasers. Immediately prior to A Class producing blocks in the south-east Queensland area the discounts offered on blocks usually did not exceed 15 per cent. From mid-1991, A Class began producing and supplying substantial numbers of blocks in the south-east Queensland market.
From about this time on until 1994, prices for blocks in the market were highly competitive, with discounts on blocks regularly reaching 45-55 per cent off the trade price.
A Class offered substantially greater discounts than both Boral and Besser, and this, combined with the extra capacity that A Class brought into the market, led to Besser suffering significant losses in the market. From the time that A Class entered the market, Pioneer regarded A Class as a vigorous competitor and the substantial cause of the losses Pioneer was incurring in the market.
In late 1992, Pioneer and Besser considered that a way of improving their results in the south-east Queensland market would be to acquire the A Class business, thereby eliminating A Class as a competitor and allowing Besser to increase its prices and profit sustainably. By December 1992, Pioneer obtained legal advice from its solicitors that an acquisition of the A Class business would not contravene s. 50 of the Act as it then was. The legal advice also advised that impending changes to s. 50 of the Act, which would take effect on 21 January 1993, would make it much harder for Besser or Pioneer to acquire A Class after that date. At that time s. 50 of the Trade Practices Act was being amended by the Parliament. The section only prohibited mergers or acquisitions that resulted in market dominance, but was being amended to prohibit mergers or acquisitions that substantially lessened competition in a market.
Following that advice, in late December 1992, a director of Besser who was also a senior manager of Pioneer, (the director), acting on behalf of both Besser and Pioneer, offered A Class $4 million for the A Class business. The principal of A Class (Mr Cooke) rejected Pioneer’s offer and said that he wanted $7.2 million.
When this offer was made, the only relevant valuation available to Pioneer and Besser was an assessment made by a Besser employee based upon an inspection of the A Class premises and equipment which was conducted in August 1992. This assessment valued the land, stock and equipment at $2.75 million. In addition to this valuation, the director received two memoranda from a senior Besser manager which expressed a view as to the reduction in discounts of the price of masonry blocks which could be achieved after the elimination of A Class from the market, and the prices that were thereby justifiable for the A Class assets.
After December 1992 discounting increased in the market, and Pioneer and Besser suffered further losses throughout 1993. By December 1993, Pioneer received further legal advice from a solicitor that it may be able to acquire the A Class business without contravening s. 50 of the Act. This advice was based on the view that concrete masonry blocks were not a self-contained market, but part of a much wider market definition of building materials. On the basis of this advice, in around early December 1993, Pioneer approached Mr Cooke and offered to buy the A Class business for $6 million. Mr Cooke agreed to this figure.
On 14 December 1993 the director prepared a memorandum for Pioneer senior management which recommended that Pioneer acquire the A Class business for the sum of $6 million. Pioneer senior management refused to approve the acquisition unless they first received an opinion from a QC specialising in trade practices law that the acquisition of the A Class business would not contravene s. 50 of the Act. The QC gave an opinion that there was a ‘significant risk’ that such an acquisition would contravene s. 50.
Following receipt of that opinion, the director told Mr Cooke that Pioneer had received a negative opinion from its QC, and that the acquisition would not proceed. Pioneer and Mr Cooke rejected the possibility of then applying to the Trade Practices Commission (as it then was) to seek approval for the proposed acquisition of A Class.
In March 1994, Besser asked the QC to reconsider his opinion of December 1993, and in particular to consider whether a wider market definition than that considered earlier was relevant. The QC confirmed his earlier opinion, and offered an alternative method of acquisition, which Pioneer rejected.
In June 1994, Pioneer and Mr Cooke considered a proposal that Mr Cooke close his business and sell his assets to Pioneer. Pioneer obtained legal advice from its QC on that proposal. The effect of that advice was that the QC said ‘ ... for s. 50 not to apply, it will be critical that A Class have decided to close down on a specified date and to dispose of its assets and for that decision to have preceded any acquisition by Besser’ .
Subsequently, in June 1994, the director and Mr Cooke orally agreed that Besser and Pioneer would purchase the assets of the A Class business for $6.5 million. No valuations of the assets of A Class business were available to Besser and Pioneer prior to making this agreement other than the $2.75 million assessment referred to above.
In July 1994, Pioneer decided to reduce the maximum discount offered on blocks in the market to 40 per cent.
A Class was not willing to agree to close down its business until it was assured of receiving the purchase price of $6.5 million. Pioneer agreed to pay the entire purchase price upon execution of the contract and upon A Class’s public announcement of its intention to close its business. This contract was executed by Besser and A Class on 22 August 1994.
Had A Class not closed down its business, and sold its assets, it would have been likely to have continued to be a vigorous competitor in the market, and Pioneer would have been unlikely to have been able to implement the reduction in discounts referred to from July 1994. In September 1994, Pioneer reduced the maximum discount on blocks in the market to 30 per cent.
The acquisition was completed on 21 October 1994, when Pioneer and Besser obtained possession of the assets. By November 1994, Pioneer had reduced the maximum discount offered on blocks in the market to 20 per cent.
The reductions in the discounts from around July 1994 were made by Besser substantially as a result of the agreement to acquire the A Class assets. As a result of the reduction in the discounts offered on the price of blocks, in the 12 months from June 1994 to June 1995, Pioneer and Besser improved their profit in the market by $2.1 million.
The proceeding
Pioneer and Besser did not file defences to the statement of claim. By not filing defences they admitted for the purposes of these proceedings only the allegations made in the statement of claim. The matter came before the Court for the imposition of pecuniary penalties and the parties provided joint submissions to the Court as to suggested penalties for the Court’s consideration and approval. The Court declared the acquisition in contravention of s. 50 in that it had the effect or was likely to have the effect, of substantially lessening competition in the south-east Queensland market for the production and supply of concrete masonry blocks. In particular the acquisition of the assets by the first and second respondents had the effect, or was likely to have the effect, that:
the third largest producer and supplier of concrete masonry blocks in the market stopped competing in that market;
the second respondent increased its market share in the market;
the second respondent, and one other competitor, together supply all or almost all of the concrete masonry blocks required in the market;
the second respondent significantly and sustainably increased its prices for concrete masonry blocks in the market;
parties other than the second respondent were deprived of the opportunity of acquiring the assets for use in competing in the market; and
the barriers to entering the market were significantly raised thereby deterring or preventing potential competitors entering the market.
The Court noted that Pioneer and Besser by not filing defences had avoided lengthy and expensive litigation.
The Court ordered that Pioneer pay to the Commonwealth a pecuniary penalty in the sum of $3.9 million and Besser pay to the Commonwealth a pecuniary penalty in the sum of $900000.
The Court also ordered by consent that Pioneer and Besser pay the applicant’s costs of and incidental to these proceedings, agreed in the sum of $200 000.
The Court noted Pioneer and Besser undertakings to the Court that, until 20 December 2001, they would not acquire, or attempt to acquire, either directly or indirectly:
any shares in the capital;
any interest, legal or equitable, in any shares in the capital; or
any assets,
of a body corporate, or the assets of a person, (the total value of which in each case exceeds $5 million), that is a competitor or potential competitor of Pioneer or Besser in any market for the production and supply of concrete masonry blocks in Australia, without first providing 30 days prior written notice to the Commission of their intention to do so.
Conclusion
These proceedings were the first resulting in pecuniary penalties under s. 50 of the Trade Practices Act. As the facts placed before the Federal Court, and the penalties recommended to the Court, were the subject of agreement between the parties, no written Court decision was required or produced.
Alan Ducret, Regional Director, Brisbane office, ACCC
Further resources
ACCC, ‘$5m court award for illegal acquisition’ (ACCC media release, 20 December 1996)
Copyright in extracts from ACCC Journal: Commonwealth of Australia. Reproduction here is for educational purposes only and not for commercial usage.