Legal News & Analysis – Asia Pacific – Australia – Competition & Antitrust

 

WHAT YOU NEED TO KNOW

 

• With the Coalition widely tipped to win the election in September 2013, it seems likely that the issue ofbreaking up Australia's oligopolies will be looked at, yet again.
• Currently in Australia, it is only in the special case of anticompetitive mergers or acquisitions that theFederal Court may order that an acquirer divest an illegally acquired target or assets. There is currently no general divestiture power.
• We examine the position elsewhere around the world, and the issues in introducing a general divestiturepower in Australia. In summary, while much political sabre-rattling may yet occur on this front, the legal,policy and practical hurdles to doing anything effective mean that there may be some time before there isany action.

 

Introduction

In Australia, the Federal Court may impose a wide range of sanctions on companies which contravene Australia's competition laws – fines and penalties, imprisonment for their employees and agents involved in cartels, injunctions, community service orders, banning orders and, importantly, damages for affected
consumers. 

 

However, the regulatory arsenal in Australia does not generally extend to breaking up a large company's operations. It is only in the special case of
anticompetitive mergers or acquisitions that the Federal Court may order that an acquirer divest an illegally acquired target or assets.

Every few years, for some decades now, commentators, legislators, consumer advocates and/or partisan industry participants call for the courts (or indeed the ACCC itself) to be given the power to break up Australia's oligopolies (See submissions made in the Hilmer Inquiry in 1994/5, Dawson Review of the Trade Practices Act in 2002, 2011 Dairy prices inquiry etc.). Earlier this year, Senator Xenophon (re)joined this long line, reportedly stating
that he will:

"renew his push for … giving the ACCC the power to break-up companies that abuse market power, including predatory pricing tactics". (See Press Release Senator Xenophon, "German Giants will squeeze independents", 12 February 2013). 

 

In January 2013, the Coalition in Australia announced that:

"We will improve competition laws so competitive forces drive productivity growth.

 

• We will review competition policy and deliver more competitive markets because there will be, for the first time in two decades, a root and branch review of competition laws.
• We will ensure that big and small businesses get a 'fair go' and do the right thing by each other in their respective market places."

 

With the Coalition widely tipped to win the election in September 2013, it seems likely that the issue of breaking up Australia's oligopolies will be looked at, yet again. 

In these brief notes, we examine how Australia might look again at splitting up dominant firms. 

 

Australia

Current law, principle and policy The Federal Court of Australia may stop an acquisition of shares or assets which is likely to have the effect of substantially lessening competition in an Australian market (See ss 50 and 80 of the CCA.). The Court may also "undo" such an acquisition by requiring the shares or assets to be divested, if it or the ACCC has not stopped the acquisition in time. (See s81 of the CCA.)

However, this is the only "divestiture" power currently available under Australia's competition law and it has only very rarely been used. In 1988, Australian Meat Holdings was required to divest the shares it had acquired in a competitor.

The power to require divestiture of anti-competitively acquired shares or assets is also found in other jurisdictions – most prominently in the US, where the Supreme Court considers its divestiture remedy under the Clayton Act to be:

"simple, relatively easy to administer, and sure. It should always be in the forefront of a court's mind when a violation of [the US anticompetitive merger prohibition in s7 of the Clayton Act] has been found." (US v EI Dupont Nemours & Co [1961] 366 US 316.).

The question now is whether a wider power – the power to order divestiture as a response to a misuse of market power by a dominant firm, or even simply to break up a clearly dominant firm no matter what it may have done – is justified. The potential advantages of such a divestiture order over other sanctions are that:

 

• a well-targeted divestiture order to break up a dominant firm will eliminate or reduce market power with one "cut", and can quickly create several competitor firms in a previously "monopolised" or oligopoly market; and
• a clean, one-off divestiture may involve far less ongoing supervision/monitoring by the regulator or court than "behavioural" undertakings or remedies imposed on a dominant firm. 

 

On the other hand, however:

 

• in most cases, a divestiture order is likely to be accompanied by ongoing behavioural undertakings (for example, not to re-acquire the divested business, dictating how the split businesses may deal with each other, etc) – thus, the second advantage noted above may be illusory;
• divestiture may not create successful and efficient stand-alone competing businesses, as they may lack some of the advantages of the previous whole firm; and 
• (as an extension of the previous point) divestiture may introduce substantial inefficiencies, in disintegrating efficiently linked business units, undermining economies of scale, innovation and investment capability, and a myriad of other possible detrimental outcomes.

These mixed policy implications suggest some caution is required. However, it may be the case that divestiture is to be properly preferred in the right case and context, where the disadvantages are minimised. On this basis, there may be an argument to include a divestiture order in the Australian competition law arsenal – but to be used only in the (probably) rare case to which it is most suited.

Previous reviews

In the Dawson Committee report of January 2003, there was a clear recommendation not to introduce a divestiture remedy (beyond the existing merger remedy mentioned above). The report stated:

 
"A corporation with substantial market power does nothing illegal through the simple possession of shares and other assets. The prohibited conduct is the taking advantage, for a proscribed purpose, of that market power. Conceptually, divestiture is inappropriate in this context because there is no clear nexus between the assets to be divested and the contravening conduct. For example, identifying the specific assets to be divested to preclude a corporation from taking advantage of its market power for a proscribed purpose would be difficult at best and arbitrary at worst."

Before the Dawson Committee, the Hilmer, Cooney and Griffiths Committees all came to the same recommendation. Particularly, the Hilmer Committee stated in its report of 1993:

"The Committee … is not persuaded that the many disadvantages of providing a general divestiture power are outweighed by the possible advantages. … There have been no cases in Australia of persistent misuse of market power and there is no demonstrated need for such a remedy. … The Griffiths and Cooney Committees both considered allowing divestiture as a remedy in cases of
persistent misuse of market power, but recommended against such a proposal. A significant factor influencing these recommendations was that, in contrast to most other remedies, structurally separating a corporation will not have a predictable result."

 

Query however, whether the finding of the Hilmer Committee in 1993, that there "is no demonstrated need for such a remedy", is equally applicable today. Practice internationally Internationally, divestiture orders (other than in relation to anticompetitive mergers) have rarely been used, and are largely seen as the most drastic of remedies for misuse of market power. 

 

United States

 

There has been no contested divestiture order by a US court in a monopolization case (rather than a merger case) since 1966. (United States v Grinnell Corp 384 U.S. 563 (1966).).

 

However, in the early 1900's, the Standard Oil case stands out as a model for divestiture remedies. In 1911, the US Supreme Court found that Standard Oil had engaged in various discriminatory and predatory practices to acquire a dominant position in the oil refining industry, controlling over 60% of US production in 1909. The Court confirmed that the company should be broken up into 34 independent businesses, each a local geographic monopoly. Some of these went on to become the oil industry behemoths of today: Jersey Standard became Exxon, Standard Oil Company of New York became Mobil and Standard Oil Company of California became Chevron. Counsel for Standard Oil contended that a divestiture remedy would create great inefficiency, raise prices, see hundreds unemployed, negatively impact the US economy and foreign trade, and simply create minimonopolies in the regions in which they would operate (rather than competing firms). However, the divested businesses grew rapidly (collectively fourfold over the following 6 years), began to compete directly, and (with his remaining minority interests in the businesses) doubled Rockerfeller's wealth to become the richest man in the world.

 

In 1966, the Supreme Court in US v Grinnell reviewed divestiture orders on the encouraging basis that: 

 

"we start from the premise that adequate relief in a monopolization case should … break up or render impotent the monopoly power found to be in violation of the Act".

The Court went on to confirm the divestiture of business assets by the defendant, with details to be determined by the Federal Circuit Court.

 

Since 1966 however, notwithstanding the Supreme Court's tough "premise" above, there has been no other significant instance in which a divestiture has
been ordered by a US Court in a contested monopolization case.

The AT&T case in the 1980's came close – there, AT&T was broken up into the "baby Bells" (the 7 regional monopoly local carriers) by consent decree settled between AT&T and the Government to end longrunning litigation in 1982. However, the disputes continued. In the subsequent years there were over 900 petitions filed with the DC District Court in relation to the "line of business" restrictions in the consent decree.

Nevertheless, the break-up of AT&T was followed by a surge of competition in long-distance calls – again, suggesting itself as a model case for divestiture remedies. However, this growth was arguably, at least, unrelated to the new industry structure and much more to do with changing consumer behaviour and demand. Since the 1980's, the "baby Bells" have re-aggregated and now lie largely within Verizon Communications, AT&T Inc. and Qwest Corporation.

European Union

The European Commission has never applied a divestiture order to a firm abusing its dominance (although it is empowered to do so). 

The relevant EU regulation expressly states that changes to the structure of a dominant firm are only to be applied where "there is a substantial risk of a lasting or repeated infringement that derives from the very structure of the undertaking" (see paragraph 12 of Council Regulation 1/2003). This requirement consigns the divestiture power to only the rare case indeed.

Canada

Section 79 of the Competition Act prohibits a firm in a position to "control … a class or species of business" from engaging in "anti-competitive acts" which "have the effect of preventing or lessening competition substantially in a market". Where an order prohibiting illegal conduct is "not likely to restore competition", the same provision empowers the Competition Tribunal to make an order "to take such actions, including the divestiture of assets or shares, as are reasonable and as are necessary to overcome the effects of the practice in that market".

As in Europe however, there has been no divestiture order for an abuse of dominance under section 79.

 

United Kingdom

In the UK, in addition to the European law on prohibition of abuses of dominance, the Enterprise Act includes special provisions for "market investigations" in concentrated industries to be conducted by the Competition Commission, at the request of the Office of Fair Trading or the relevant Minister. Once referred, the Commission must conduct its market investigation and decide (within 2 years) "whether any feature, or combination of features, of each relevant market, prevents, restricts or distorts competition in connection with the supply or acquisition of goods or services in the United Kingdom" – that being, an "adverse effect on competition".

On finding any "adverse effect on competition" in the market(s) referred to it for investigation, the Competition Commission must also decide on what action should be taken by it, or by others, "for the purpose of remedying, mitigating or preventing the adverse effect on competition", having regard to "the need to achieve as comprehensive a solution as is reasonable and practicable to the adverse effect on competition". 

 

Ultimately, to remedy an adverse effect on competition in this context, the Competition Commission may make orders:

 

• prohibiting conduct such as withholding supply, discriminating between customers, or acquiring shares or assets (among other conduct);
• regulating prices;
• to supply goods or services; and/or
• (most relevantly here) the "division of any business" and the transfer of property, rights, liabilities or obligations.

The most recently concluded market investigation of BAA airports (from March 2007 to March 2009) resulted in the Competition Commission making orders for the divestiture by BAA of Gatwick, Stansted and either of Glasgow or Edinburgh airports, within specified periods determined by the Commission. These orders were based upon the Commission's findings that there were "a number of features" of the relevant markets which gave rise to "adverse effects
on competition", including that:

 

"… common ownership of the three BAA London airports is a feature of the market which prevents competition between them."

 

Currently, the UK Competition Commission is conducting a market investigation into "aggregates, cement and ready-mixed concrete". It has recently published a "provisional findings report", some 16 months after the referral, which includes consideration of orders for divestiture of cement production capacity and ready-mixed concrete plants, from the hands of their private owners.

The Competition Commission's power to order divestiture of businesses or business assets is unusual. Two factors set it apart from the US, EU and Canadian law: 

 

• first, the divestiture sanction is being used by the regulator – as is clearly not the case elsewhere; and
• secondly, and more fundamentally, there is no requirement under the UK law that the business in question has engaged in anti-competitive conduct (whereas there must be a finding of illegal conduct – monopolization (US) or abuse of dominance (EU and Canada) – before the sanction is applied elsewhere). It is enough that a market structure being examined by the UK Competition Commission has "features" which give rise to "adverse effects on competition".

 

In conclusion from this brief whip around the world, orders for the divestiture of business assets by a dominant firm have a mixed record across other major jurisdictions – there have been some very significant, and arguably successful cases, but in most jurisdictions, other than the UK, the sanction has fallen into disuse. 

With this mixed international record, what approach should we take in Australia?

Practical issues Whatever the broad policy "need" for a wide-ranging divestiture remedy may be, there are several very important practical issues to be dealt with if it is to be Taken up. These include:

 

• What is the primary objective to be achieved? Where a misuse of market power has occurred, a divestiture remedy may be intended to achieve two things: 
  • first, to impose a sanction or penalty on the infringing firm, and by doing so, deter others from infringement; and
  • secondly, to achieve a more competitive market structure.

 

In our view, the second of these is the more important objective to be held in mind. Penalising the infringing firm (and deterring others) can be dealt with directly by other remedies targeted specifically at it – such as penalties, injunctions etc. Divestiture however, impacts everyone in the market, and competition between them. Thus it is important that regulator have clear regard to likely wider competitive outcomes as its first concern in considering a divestiture remedy. 

 

A divestiture order ought not to be made where it will be unlikely to make relevant markets more competitive, even if forced divestiture of business assets would negatively impact on the infringing firm so as to prevent recurrence or deter others. 

 

• What is an appropriate threshold for the exercise of a divestiture power?

 

Is it simply "market features" with an "adverse effect on competition" – or must there have been an abuse of market power by the firm to be split up?

 

The UK Competition Commission has the power to require divestiture simply where there are market "features" (such as common ownership, barriers to entry or market concentration – none of which may be attributable to an individual market participant) which have an "adverse effect on competition". No anticompetitive conduct by the firm to be split up is required.

Future Australian governments may be tempted to look closely at the UK model. It is a process by which governments may directly target particular
Australian oligopoly industries, and, through an independent regulator, impose upon them a structural "solution" to address their perceived deficiencies. In relation to some Australian concentrated industries, at least, such a direct
assault may be popular. 

 

However, despite the potential political attractions of the UK model, in our view, a divestiture remedy should be imposed only where a company has abused its monopoly or market power – that is, in the Australian context, contravened s46 of the CCA, by taking advantage of its substantial market power. This is for two main reasons: 

 

First, the UK approach, which does not require a contravention, potentially runs contrary to one of the fundamental tenets of antitrust policy: that competition will be fostered by rewarding the winner with (usually a transient) monopoly, provided that the monopoly (or market power) is then not separately abused – as articulated by Learned Hand J in Alcoa:

 

"A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry. In such cases a strong argument can be made that, although the result may expose the public to the evils of monopoly, the Act does not mean to condemn the resultant of those very forces which it is its prime object to foster: finis opus coronat. The successful competitor, having been urged to compete, must not be turned upon when he wins." 

In our view, this alone is reason enough not to follow the UK example – to dull the competitive urge in Australian markets with the threat of breaking up the business(es) which succeed is likely to reduce the competitiveness of those markets.

 

Secondly,whether or not this approach is desirable from a policy perspective, the Australian Commonwealth government may be constitutionally constrained in replicating the UK legislation. A compulsory divestiture of business assets may infringe the requirement under s51(xxxi) of the Commonwealth Constitution that property only be acquired (or divested to others) under Commonwealth legislation on "just terms" (Placitum 51(xxxi) of the Constitution provides that the
Commonwealth Parliament has power "to make laws for the peace, order and good government of the Commonwealth with respect to … the acquisition of property on just terms from any State or person). Particularly if the UK model were adopted: 

 

• a compulsory divestiture of business assets, in effectively "fire sale", time limited circumstances, is unlikely to deliver "just terms" to the vendor for the assets sold – even more so where the divestiture results in additional costs or inefficiencies being imposed on the remaining business of the vendor; and
• the divestiture would not fall within an exception to the constitutional requirement: that is where divestiture is required "as a penalty for proscribed conduct" by the firm required to divest (in sharp contrast to the position where a divestiture is ordered after it has undertaken an illegal, anticompetitive merger (See WSGAL v TPC [1994] FCA 1079) or having been found to misuse its substantial market power).

 

For these reasons, if a divestiture power is to be fostered in Australia, it is preferable that it should only follow on from, and as a remedy for, a
contravention of existing Australian competition law: be it undertaking an illegal merger or acquisition (as is already the case), or taking advantage of substantial market power.  

 

•  How should a divestiture power be administered?

Bearing in mind the points above, to be effective, a divestiture remedy for taking advantage of substantial market power should only be invoked where:

 

 

• the impugned firm's market power, and the contravening conduct, are clearly derived from the structure of the business operations of the firm;
• the divestiture of a particular identified part of the firm will address directly the prospect of contravening conduct recurring; and
• the resulting market structure is likely to be appreciably more competitive (and hence more likely to constrain any remaining market power) than the position pre-divestiture. 

 

Criteria of this sort are important to avoid (or minimise) the potential for arbitrary outcomes which concerned the Hilmer Committee and others. Further, these criteria reflect the EU regulatory requirement that a divestiture remedy be available only in cases where the misuse of market power "derives from the very structure of the [firm]". However, notwithstanding the common sense underpinning them, these further criteria may be deceptively complex in application. How does one assess precisely which assets or business operations are the source from which the contravening conduct is derived? For example, where there are regulatory barriers to entry, established customer relationships or high switching costs for those customers, it is less likely that divestiture of any of the company's assets will address concerns as to market power and the contravening conduct derived from it. Perhaps though, divestiture will be more clearly appropriate where unutilised production capacity (from an idle plant, for example) is an important source of the market power which underpins the contravening conduct.

In our view, there should be very few short cuts around these criteria – they are necessary to ensure that courts impose a divestiture upon a firm only where it will have a beneficial effect (so far as the public interest is concerned) on both the firm and the market in which it operates.

 

• How should a court view the trade-off between potential increased competition and the potential for inefficiencies and other negative impacts?

In addition to the criteria set out above, a court considering a divestiture remedy should also consider whether there will be such inefficiencies and other costs from the divestiture imposed on the firm, that (due to its redjced ability to compete effectively post-divestiture) competition in the market will not be improved.

Additionally, the courts and regulators must be alive to, and check against, the possibility that they are really being implored by competitor plaintiffs or industry complainants to inhibit the competitiveness of a more efficient firm – with divestiture then having potentially serious anticompetitive effects.

Breaking up the business operations of major companies will rarely be simple, and will always involve trade-offs. The Standard Oil divestitures were reputedly easier by virtue of the various businesses operating semi-independently prior to break up – but such conditions will be rare in today's world where integration synergies and cost efficiencies are universally sought and highly prized.

By way of example, in a modern grocery supermarket business, key assets may include amajor distribution centre servicing a wide network of stores in a region, and corporate relationshipswith major suppliers. These are not elements which can be readily "divested" without leaving the business far less able to function effectively. In banking, there are very significant scale efficiencies, not least in relation to the cost of funds.

Ultimately, the court must make a judgment on the likely effect of a divestiture order – will it achieve the ultimate objective of promoting competition (or at least preventing further anticompetitive outcomes, without serious tradeoffs) in the relevant market(s)?

 

• Does the need for court supervision on an ongoing basis play a role?

Finally, an order to divest should not create a thriving industry in monitoring compliance with the order. This is a key concern for courts requiring divestiture of business assets. The record following on from the consent decree in the AT&T case cited above, involving around 900 subsequent petitions for clarification and enforcement, is sufficient warning in this regard.

In structuring divestiture remedies in the merger context, the ACCC identifies the following issues for supervision by it, in its Merger Guidelines:

 

• the identity of the purchaser;
• timing of the sale;
• regulating ongoing commercial relationships between vendor and purchaser (eg supply of inputs etc);
• the preservation of the business assets to be divested;
• arrangements to apply if divestiture cannot be effected in time; and
• reporting to the regulator on progress and compliance with the orders made. 

 

In addition, the court may need to order, and then monitor, that the vendor not re-enter the industry for a period of time, or compete in certain products or areas.

As this list of issues for monitoring and supervision shows, it is highly likely that careful and detailed behavioural rules will have to be laid down in making a divestiture order, so that the divestiture order has real teeth. As it does so, of course, the court must consider and assess the wider issues of whether it is able practically to monitor and enforce compliance with all these details implicit in any effective separation of businesses – if it cannot, then a powerful argument arises that the order to divest should not be made in the first place.

 

Conclusion

While "breaking up dominant firms" may sound straightforward when promised on the campaign trail, there are complex issues involved – touching on Commonwealth constitutional limitations, fundamental microeconomic policy settings, potentially imposing significant inefficiencies on successful businesses and the search for workable ways in which to monitor and ensure compliance with any orders made.

Further, these complex issues arise in a context in which the target firm is likely to be highly motivated to contest the process, and have significant resources to employ in doing so. In short, while much political sabre-rattling may yet occur on this front, the legal, policy and practical hurdles to doing anything effective mean that there may be some time before there is any action.

 

 

For further information, please contact:

 

Liza Carver, Partner, Ashurst
[email protected]

 

Peter Armitage, Partner, Ashurst
[email protected]

Bill Reid, Partner, Ashust
[email protected]

Ross Zaurrini, Partner, Ashurst
[email protected]

Alice Muhlebach, Partner, Ashurst
[email protected]

Darren Grondal, Partner, Ashurst
[email protected]

 

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