Griffiths Report 1989
Mergers, Takeovers and Monopolies: Profiting from Competition?
Report of the House of Representatives Standing Committee on Legal and Constitutional Affairs
1989
Reporting body: House of Representatives Standing Committee on Legal and Constitutional Affairs
Length: 136 pages
Focus: Mergers and monopolies
Status
Complete (May 1989)
Tabled (1 June 1989)
Parl Paper No 141/89
Parl No: 35th
Govt response: 22 August 1991
Government in power: Labor (Hawke)
Term of reference:
'To examine and inquire into the adequacy of existing legislative controls over mergers, takeovers and monopolisation with particular reference to:
(1) the extent of control of mergers, takeovers and monopolisation necessary to safeguard the public interest;
(2) adequacy of existing legislation
(3) the role and effectiveness of the Trade Practices Commission in its implementation of Sections 46 and 50 of the Trade Practices Act 1974.
Key recommendations
(1) Improved economic data - that the TPC and Aust Bureau of Statistics establish 'a minimal set of line-of-business data' for use by the TPC and private researchers. ABS should also use information to update and publish industry concentration statistics.
(2) Misuse of market power - section 46 should be retained in current form - TPC should issue guidelines on the operation of s 46 'having regard to the High Court decision' in Qld Wire.
(3) Mergers - Notification - recommend against the introduction of pre-merger notification (noting this would have significant resource implications for the TPC)
(4) Mergers - Dominance test - dominance test should be retained: '... the existing provisions of section 50 ... prohibiting acquisitions which result in or substantially strengthen a position of dominance in a substantial market be retained.'
(5) Mergers - Private injunctive relief - '... the private right to injunctive relief in relation to mergers [should] be re-introduced ... but that takeover targets and associated persons should be excluded from this right.' (this would allow resources other than the TPC's to be directed toward enforcing existing provisions)
(6) Mergers - Modified approach - AG should give a direction that the TPC 'continue its policy of giving emphasis to the authorisation process in mergers with the potential for market dominance, to ensure that the process of assessing net public benefit is exposed to public scrutiny'.
(7) Mergers - Legislative recognition of consultation process - TPA 'should be amended to provide legislative recognition of the informal consultative process currently utilised by the [TPC] in relation to mergers.
(8) Mergers - Authorisation - existing procedure for merger authorisation should be retained (there is sufficient opportunity for public scrutiny)
(9) Mergers - Undertakings - TPA should be amended to provide remedies for breaches of undertakings in connection with merger authorisations and in relation to 'the recommended legislatively recognised merger consultative process'.
(10) Mergers - Disclosure of information - TPC should 'extend the use of its public register for merger authorisations to cover all merger matters' considered by the TPC (subject to appropriate confidentiality restrictions) and should be made within 12 months unless excluded for sensitivity reasons.
(11) Mergers - Liaison with other agencies - AG should develop 'appropriate procedures to improve co-ordination between the TPC and other regulatory agencies' in relation to mergers.
(12) TPC - Pro-activity - TPC should 'maintain a pro-active approach to the regulation of the merger and misuse of market power provisions' of the TPA.
(13) TPC Resources - cost recovery measures should be 'introduced in relation to the costs incurred in the administration and enforcement of the merger provisions'.
(14) TPC Resources - TPC should be provided with sufficient resources to enable maintenance of pro-active approach
(15) Forum for resolution - Role of Federal Court re: Part IV should be retained, but AG should adopt procedures to enhance effectiveness; options suggested included (a) enabling Court to refer economic issues to the Tribunal with 'associated streamlining of Tribunal's procedures' (b) 'relaxation of the rules of evidence in relation to economic issues considered by the Court' and (b) 'use of assessors by the Court'.
(16) Remedies - There should be a 'substantial increase in the existing maximum pecuniary penalty in relation to breaches of the merger and misuse of market power provisions' and a 'range of other appropriate remedies' should be introduced for Part IV contraventions and the Court should be 'provided with broader discretionary powers in relation to the range and level of penalties which may be imposed for Part IV contraventions'.
(17) Future Review - AG should initiate further review of merger and misuse of market power provisions within 5 years.
Composition
Alan Griffiths MP (Chairman)
Philip Ruddock MP (Deputy Chairman)
Hon A E Adermann MP
Mr D E Charles MP
Mr P R Cleeland MP
Mr D J Kerr MP
Mr P J McGauran MP
Hon J C Moore MP
Mr P K Reith
Hon G G D Scholes MP
Mr W L Smith MP
Mr R E Tickner MP
Mr K W Wright MP
Submissions and meetings
76 written submissions were received and additional evidence was taken.
Committee evidence (select)
The following extracts are taken from the official Hansard Report of the House of Representatives Standing Committee on Legal and Constitutional Affairs (Reference: Mergers, takeovers and monopolies) Canberra 24-25 October 1988
Session 2 - Section 46 of the Trade Practices Act (25 October 1988)
Chairman (Griffiths) p 129 on 25 October 1988
‘It puts a great limitation on the operation of section 46 by insisting that the proscribed purpose alone is not sufficient; the nature of the activity also has to fall within the terms of section 46 … a corporation which has a statutory monopoly, such as Telecom … would all be capable of characterising activities as the exercise of a right given to it by statute, rather than taking advantage of the market power which it has by virtue of its position … [130] … The real problem with the drafting which has let to decisions such as Warman … is that it enables a corporation to engage in anti-competitive conduct which breaches the proscribed purposes provision of section 46 but the conduct itself does not fall within the narrow definition of taking advantage of the market power. Often it will be the case that the extraneous legal right or matter which is taken advantage of will be that matter which is largely responsible for the corporation holding the substantial market power, generally by creating barriers to entry. Examples are industrial or intellectual property rights, contractual rights, statutory monopolies. Section 46 as it is currently drafted enables a corporation to take advantage of the very element which gives it its market power in order to eliminate competition, et cetera, without being in contravention of the section.
... I strongly support a proposal to amend section 46. One of the real difficulties in drafting a provision such as46 is to ensure that it does not prohibit ordinary competitive conduct. The cases appear to have interpreted taking advantage as requiring an element of unfairness or predatoriness. There is a drawing of a distinction between predatory conduct and ordinary competition conduct. It is not questionable that section 46 is not intended to prohibit ordinary competitive conduct but the issue is where [131] and how the line between conduct which is competitive, and conduct which is a misuse of power, really is to be drawn ... The proposed amendment in proposal E widens the scope of the activity which may be caught to any conduct which has the purpose of substantially lessening competition in that or any other market. Perhaps consideration could be given to whether or not it should read 'purpose or [132] effect' but the result would be that the conduct which is engaged in for legitimate competitive purposes or commercial or business reasons would not come within the section. ...’.
Mr McCulloch (Business Council of Australia) p 132 on 25 October 1988
'... the Business Council considers that there should be no amendment to section 46. ... What is predatory is a value judgment to be made in the circumstances of particular cases. The legislators have taken the view ... that the language of taking advantage of market power for the purpose of damaging competitors will enable that judgment to be made.
That the courts have had difficulty in interpreting the section is not surprising. ... one would surely need to be careful about prohibiting the exercise of rights simply because the party concerned had market share. ... The inherent difficulty s, of course, to distinguish between normal competitive conduct which the Act and industry policies are designed to promote, and misuse of power. [133] It needs also to be acknowledged that the competition process itself is exclusionary ...
... [134] Most of us are agreed that what we are trying to do is prohibit predatory conduct but not interfere with legitimate competitive behaviour ...
Proposal E ... may catch legitimate business conduct test unless it is interpreted as implying a pejorative element. The proposed test represents a change from the effect on a competitor to the effect on a market and in so doing removes the protection the section provides to small market players. By [135] changing the emphasis from the purpose of substantially damaging a competitor ... to that of substantially lessening competition in a market, the proposal would impose a potentially higher threshold and thus may be less effective. For example, section 46 would currently operate in relation to predatory conduct directed against small competitors ... However, under the proposal, the purpose of the eliminating or substantially damaging such a competitor may not constitute a substantial lessening of competition in a market.'
Mr Corones (Senior Lecturer, Qld Institute of Technology) p 138 on 25 October 1988
'I believe that the concept of taking advantage as construed by the courts is like a thick layer of ice which is restricting the process of competition in this country. ... One thing the Committee can usefully do is to recommend that the test of taking advantage be defined so as to gauge the effect of the conduct on actual or potential competition in the market and not by reference to ordinary commercial principles or usual business practices ... '
Mr Shavin (Legal Adviser, Coles Myer) p 139 on 25 October 1988
'... The object, as I understand it, of section 46 at the moment is to have a high level of incipiency. In other words, if you have a company with a high degree of power that decides to knock off competitors one by one by one, you do not have to wait until it has knocked off sufficient competitors to in fact lessen competition in the market; you can start the first time it hits an individual competitor even though that competitor may not be of such significance in the market that his [140] demise will affect competition. ... If proposal E was to be adopted by the Committee, the effect would be ... to narrow the section.
Dr Norman (Business Council of Australia) p 141 on 25 October 1988
'... it is important to see the motivation for having a section like this. ... The motivation behind this is that it came from a committee that was set up with the explicit aim of looking at the relationship between the Trade Practices Act and small business. ... [142] ... I believe that section 46 has as part of its motives something in addition to what the strict objective of competition policy would be and thus any attempt to use terms like "substantial lessening of competition" as in proposal E, seemed to me to misunderstand the motive and the origins.'
Mr Clarke p 143 (Monash University) on 25 October 1988
'... the goal of that Act [as I see it] is ... the preservation and enhancement of competition in a market, understood in this context as a process of rivalry in a market ... [Section 46] should be structured so as to prohibit anti-competitive conduct, whilst not impeding pro-competitive conduct or conduct which does not adversely affect competition. With that goal and aim in mind, how does the current section 46 measure up? In my opinion, not very well. Indeed, it fails on both sides of the coin. On one side, it is potentially, at least, too severe in so far as ... it is capable of outlawing conduct which has no adverse effect on competition [144] in a market, but would have the effect of eliminating firms participating in that market. ... To the extent that section 46 could prohibit such conduct, it may be seen, bearing in mind the goal I have indicated, as being too severe.
On the other side, and from my point of view far more importantly, it is a defective prohibition of unilateral anti-competitive conduct. Indeed, in my view, as presently worded it is fatally flawed, and for that reason I would advocate that it be repealed and replaced by a provision along the lines of the famous, or infamous, proposal E ... The principal reason why I think it is fatally flawed is the presence of the taking advantage of market power requirement. That requirement of taking advantage of market power has this effect of flawing section 46 for I think at least three reasons. The first of them I have described as the market power-non-market power distinction. Section 46 allows firms to engage in anti-competitive conduct such as eliminating competitors and so on if they can do so without using market power. Thus if a firm can characterise its conduct as something involving other than the use of market power - ... then liability can be avoided. I have a fear that indeed capable lawyers ... would be able to characterise almost all forms of conduct as something other than market power. Indeed, the only exception I can think of would be predatory pricing. This distinction between market power and non-market power has certainly been blurred in some cases ... But in my opinion it is still there as a matter of statutory construction and is at the moment a very real and practical inhibition on the proper operation of section 46.
[145] The second effect that taking advantage of market power causes is what I have described as the 'take advantage-use' distinction. ... the words 'take advantage' have been interpreted by some courts ... as requiring some pejorative behaviour. [note, this pre-dated the High Court decision in Qld Wire which rejected this view] ...
Thirdly, and perhaps most important, I think the requirement of taking advantage of market power is wrong in principle. It seems to me that there is no merit in requiring firms to have used their market power; if a firm engages in anti-competitive conduct, then harm is done regardless of the means employed to engage in that conduct. If we want to preserve and enhance competition then we should prohibit anti-competitive conduct, irrespective of the means used to engage in that conduct. With those defects in mind the reform which I have proposed is that set out in proposal E ... which would, in my opinion, prohibit firms from engaging in conduct which has an anti-competitive purpose.
The advantages of this proposal, in my opinion, are as follows: firstly, it replaces the troublesome concept of taking advantage of market power with the broad concept, the concept already in use in the Act, of engaging in conduct and the precise width of that phrase 'engaging in conduct' is indicated by the definition of it in section 4(2); secondly, it clearly and directly accords with t goal of preserving and enhancing competition; thirdly, it uses concepts already used in the Act. ... [146] ... substantially lessening competition ... is in sections 45, 47, and 49 and is in use in the Clayton Act in the US. The phrase 'purpose' is used in section 45 already and in 46 and in 47. 'Engaging in conduct' is used in section 52 and is similar to phrases used in sections 47 and 48. ...
Copyright in extracts: Commonwealth of Australia