14 August, 2016
In brief
On 1 July 2016, the Australian Competition Tribunal (Tribunal) granted authorisation to Sea Swift Pty Limited (Sea Swift) to acquire Toll Holdings Limited (Toll) marine freight entities and associated assets, subject to various conditions. The reasons for the Tribunal’s determination were published on 28 July 2016.1
The determination has significant implications for parties seeking merger clearance in Australia and reinforces the effectiveness of the Tribunal authorisation process in clearing competition issues as an alternative to applying to the Australian Competition and Consumer Commission (ACCC) for informal merger clearance. This previously untried process was first used by Murray Goulburn in 2013 during the ‘cheese wars’ battle for Warrnambool Cheese & Butter.2
This Sea Swift decision is now the second Tribunal determination of an application for merger authorisation, both of which were successful following decisions by the ACCC to oppose the transactions. The first successful use of the process was in 2014 when AGL Energy Limited secured authorisation to acquire Macquarie Generation assets in NSW.3
As with the AGL Energy decision, the Tribunal disagreed with the ACCC’s assessment of the competition impacts of the proposed acquisition.
Once again this decision highlights how effective merger authorisation can be in a contentious merger.
Background
Sea Swift proposed to acquire shares in two Toll companies and most of the assets associated with the general marine freight business of Toll Marine Logistics (TML) in Far North Queensland (FNQ) and the Northern Territory (NT) from subsidiaries of Toll (Proposed Acquisition).
In December 2014, Sea Swift applied to the ACCC for informal merger clearance of the Proposed Acquisition on the basis that it would not result in a substantial lessening of competition contrary to section 50 of the Competition and Consumer Act 2010 (Cth) (the Act).
Both Sea Swift and Toll provide ‘full service’ scheduled marine freight services and marine freight charter services to islands and remote coastal communities in the NT and FNQ. Sea Swift and Toll are each other’s nearest competitors in those areas. Relevantly, Toll maintained that if the Proposed Acquisition did not proceed, it would wind up its marine logistics business in the NT and FNQ.
In July 2015, the ACCC announced its decision to oppose the Proposed Acquisition on the basis that it would be likely to substantially lessen competition in the markets for the supply of marine freight services and scheduled freight services in the NT and FNQ.
Subsequently, on 4 April 2016 Sea Swift applied to the Tribunal for merger authorisation. The matter was heard by the Tribunal across two weeks in June 2016.4Toll and the Maritime Union of Australia (MUA) were granted leave to intervene.
The parties called over 40 witnesses, including competitors, customers and others that represent or provide services to remote communities. Additionally, seven expert witnesses were engaged by the ACCC or Sea Swift and each provided a report.
The Tribunal authorisation process
As an alternative to applying to the ACCC for informal or formal merger clearance, a party may apply to the Tribunal for merger authorisation under section 95AU of the Act. The effect of authorisation is immunity from legal challenge by the ACCC or any other third party alleging a contravention of section 50 of the Act.5
The Tribunal may authorise a proposed acquisition6 if the Tribunal is satisfied that in all the circumstances the proposed acquisition would, or would be likely to, result in such a public benefit that the acquisition should be allowed to occur.
This ‘net public benefit’ test involves the Tribunal weighing the likely anti‑competitive effects against public benefits of the proposed acquisition.7 In assessing the net public benefits, the Tribunal applies the ‘with or without’ test – comparing the future with and without the proposed acquisition.
The Tribunal is required to issue a determination on the application within three months of receiving a valid application. It may, however, because of complexity or other special circumstances, extend the period by a further three months.8 If no decision is made within this time frame, the Tribunal is deemed to have refused to grant the authorisation.9
While the application for authorisation is made to the Tribunal and not to the ACCC, the ACCC is required to assist the Tribunal and in making its assessment the Tribunal must seek a report from the ACCC.
The Tribunal’s authorisation imposes conditions on Sea Swift. If Sea Swift fails to comply with these conditions, the acquisition is not protected from the operation of section 50. In that event, the ACCC can apply to the Tribunal to have the authorisation revoked10 and can also apply to the Federal Court to seek remedies for a contravention of section 50.
Overview of Tribunal reasons
The Tribunal’s reasons for its decision make clear that it took a very different view to the ACCC on the likely impacts on competition of the Proposed Acquisition.
In contrast to the ACCC’s concerns, the Tribunal found that there is no competitive detriment or public detriment associated with the Proposed Acquisition which would not exist without it (save for competitive detriment addressed by the Gove Lease Undertaking, for which it imposed a condition).11
The Tribunal’s findings gave significant weight to the counterfactual of TML’s exit from the NT and FNQ in a short timeframe and the Tribunal’s view that Sea Swift would become the provider to base load customers, contrary to the ACCC’s proposition that in the absence of the Proposed Acquisition there is a ‘real chance’ that TML would remain in the NT market for profit maximising or reputational risk management reasons.12
The Tribunal found that “these factual findings [in relation to the counterfactual] fatally undermine much of the ACCC’s theory of harm”.13 The Tribunal’s findings echo those it made in AGL & Macquarie Generation, where it held in relation to the core theory of harm advanced by the ACCC, “while this is tenable as a theory, the facts speak otherwise”.14
This determination represents the fourth failure in a row for the ACCC to persuade the Federal Court or the Tribunal of the theory of harm it has applied in an informal merger clearance process, following its defeats in AGL v ACCC,15 ACCC v Metcash Trading Ltd16 and AGL & Macquarie Generation17.
In ACCC v Metcash, Justice Buchanan in the Full Federal Court made the following observations in respect of the ACCC’s theory of harm:18
"However useful assumptions of this kind (and the economic theories on which they are based) may be as the foundation for an economic model from which to begin examination of a particular factual situation (or hypothesis) as a matter of theory, great care must be taken that such assumptions do not become embedded in the application of statutory or other legal tests as a substitute for the fact finding and analysis required by a proper application of the judicial method.
These judgements highlight the importance of ‘real world’ evidence over reliance on economic theory in assessing merger cases.
Despite this, the Sea Swift case suggests that the ACCC has continued to rely primarily on economic theoretical analyses of the static and structural aspects of a market. A central theme of the Tribunal’s reasons is that it made several key findings of fact based on sworn testimony of witnesses with direct knowledge of relevant facts. For example, the Tribunal preferred the evidence of Toll’s executives to the “theoretically based speculation by the ACCC as to what Toll or some other person might or should do in the circumstances”.19
Further, the Tribunal provided useful guidance on the nature of evidence required to provide a foundation for merger decisions. The Tribunal gave little weight to hearsay evidence and observed:20
"… It is puzzling why so much hearsay was relied on [by the ACCC]. The Tribunal is not satisfied that the ACCC made out its allegations of strategic conduct for the reasons given by Sea Swift in its closing submissions."
The Tribunal ultimately commented that it “has concerns that the ACCC’s role of assisting the Tribunal was, in this case, impeded by its advocacy of a position in relation to whether or not authorisation should be granted”.21
The Tribunal experience in Sea Swift again shows the value the merger authorisation process can deliver to allow greater scrutiny of the ACCC’s theory of harm and the underlying facts on which it seeks to rely. The Tribunal’s decision also exemplifies the effectiveness and timeliness of the merger authorisation process as compared with the ACCC informal merger clearance process. In this matter, the ACCC informal merger clearance process took seven months whilst the Tribunal authorisation process was completed within the three month statutory period.22 The Tribunal took only two weeks after the hearing to decide to grant authorisation. Similarly, in respect of the AGL & Macquarie Generation determination in 2014, the ACCC informal merger clearance process took over three months, while the Tribunal process took three months from the date of application for authorisation – this included only two weeks from the Tribunal hearing to the Tribunal decision to grant authorisation.
Issues addressed in the Tribunal decision
Market definition
The Tribunal assessed the Proposed Acquisition in terms of the supply of scheduled services in the NT and/or FNQ.23
Consideration of public detriments
Withdrawal of TML from the NT and FNQ markets Sea Swift and Toll contended that there are no public detriments because TML will withdraw from the NT and FNQ, with or without the Proposed Acquisition. The Tribunal accepted that without the Proposed Acquisition there is a real chance, and it is the most realistic prospect, that Sea Swift would be the provider to TML’s largest customers.24
To the contrary, the ACCC submitted that TML’s exit in the absence of the Proposed Acquisition is the most pro-competitive outcome because it presents a unique opportunity to lower barriers to entry or expansion for Sea Swift’s competitors by making TML’s major customer contracts contestable. However, the Tribunal held that the evidence established that this is not a realistic proposition.25 The Tribunal did not accept the ACCC’s proposition that in the absence of the Proposed Acquisition there is a ‘real chance’ that TML would remain in the NT market for profit maximising or reputational risk management reasons.26 Having regard to the evidence presented to the Tribunal, the Tribunal also rejected the ACCC’s contention that there is a ‘real chance’ that Sea Swift’s competitors will be able or willing to compete on terms acceptable to TML’s largest customers at least in the short term.
Low barriers to entry
Despite the ACCC’s contentions concerning barriers to entry and/or mobility, the Tribunal concluded that the basic logistical requirements for the supply of marine freight services can be easily met with the necessary funds.27 In respect of entry and exit from the NT and FNQ markets, the Tribunal concluded that it is to be expected that each of these markets will be characterised by a single full service provider with peripheral competition on certain routes from time to time, and that this is likely to be the case absent the Proposed Acquisition.28
Gove Lease Undertaking
Sea Swift had offered to give an enforceable undertaking relating to terms of access to the Gove wharf to address any detriments. Despite the ACCC’s submission that the proposed undertaking is insufficient to address its concerns, the Tribunal concluded that there is no evidence that any other operator of the facilities at the Gove Lease would be able to charge less than the rates Sea Swift now says it will charge under the undertaking. Again, the Tribunal’s findings emphasise the importance of real world evidence over theoretical propositions.
Consideration of public benefits
Sea Swift and Toll claimed that several public benefits would result from the Proposed Acquisition, including that Sea Swift will honour the Transferred Contracts for their term (including the prices negotiated under those contracts) and will not rely on exclusivity or minimum volume clauses in those contracts.
The Tribunal dismissed many of the ACCC’s concerns about the public benefits claimed by Sea Swift and Toll, primarily on the basis of the public benefits conferred by the conditions. The Tribunal was satisfied that the assignment of the Transferred Contracts will minimise disruption to the remote communities and, for many of those communities, it will also preserve costs for scheduled services at a level which they can manage. The Tribunal considered that communities value this substantial benefit highly, having regard to the need to ensure that remote communities obtain regular and timely supplies of essential commodities at the best price available.29
Conditions
The Tribunal was satisfied that authorisation of the Proposed Acquisition was justified having regard to the particular facts, and granted authorisation subject to conditions including:
- Transferred Contracts Condition: In respect of the TML customer contracts that are transferred to Sea Swift, Sea Swift must not enforce any provision in these contracts that requires the customer to:
- use Sea Swift’s services exclusively;
- allow Sea Swift a right of first refusal; or
- ship a minimum volume of freight with Sea Swift.
Remote Community Service Condition and Remote Community Price Condition: For a period of five years following the Proposed Acquisition, Sea Swift must maintain a minimum level of scheduled services to remote communities in the NT and FNQ. Sea Swift must also observe pricing conditions for certain freight categories and may not charge more than particular prices for that freight.
Gove Lease Undertaking: Sea Swift must give a court-enforceable undertaking to the ACCC in relation to the Gove Wharf in Nhulunbuy specifying the terms and conditions upon which it will give other marine freight operators access to the Gove Wharf, and allowing other marine freight operators access to the Gove heavy lift wharf and the roll-on / roll-off facilities.
Implications of the Tribunal’s decision
The successful application for merger authorisation illustrates the effectiveness of the Tribunal merger authorisation process as an alternative to the ACCC informal clearance process, particularly in complex and contentious mergers. Merger parties who consider that there are substantive public benefits associated with a proposed merger may seek authorisation to bypass both the ACCC and the ‘substantial lessening of competition’ test.
The quasi-judicial nature of the Tribunal process, with witnesses, cross examination and an exchange of evidence, also provides a greater opportunity for parties to interrogate and challenge the ACCC’s theory of harm. In such circumstances it may be that the Tribunal ultimately determines that any lessening of competition is less significant than posited by the ACCC. This makes it more likely that the Tribunal would find that the public benefits outweigh any lessening of competition, as illustrated by the Tribunal’s determination and criticisms of the ACCC’s case theory. The Tribunal’s reasons also reinforce the need for the ACCC to analyse the behaviour of firms and reconsider its heavy reliance on theoretical analyses of the static and structural aspects of a market.
Nonetheless, in a media release issued by the ACCC after the publication of the Tribunal’s determination, the ACCC stated that it was disappointed with the Tribunal’s determination and remains of the view that the acquisition is likely to have significant implications for future competition in the relevant markets, ultimately to the detriment of the communities reliant on those services. The ACCC added:30
"The ACCC will continue to oppose acquisitions which it considers are likely to substantially lessen competition. The Tribunal’s decision in this matter is unlikely to apply to many other transactions, as the matter involved the unique circumstance that the scheduled marine freight services in question are essential services for the remote communities that they service."
Relevantly, the Harper Review Panel has recently recommended that the formal merger clearance process and the merger authorisation process be collapsed into a single process where the ACCC would be the decision maker in the first instance. While the Government has indicated its support for these changes, the proposal is of limited benefit to applicants who consider that their application will be chiefly based on the existence of public benefits. The ACCC’s recent defeats and the Tribunal and Court’s criticism of the ACCC’s case theories emphasise that Tribunal authorisation should be maintained because it may be a viable and timely alternative to ACCC clearance.
Endnotes
- Application by Sea Swift Pty Limited [2016] ACompT 9.
- Application by Murray Goulburn Co-operative Co. Limited for Merger Authorisation, ACT 4 of 2013. The application was withdrawn in January 2014 due to a successful bid from a rival bidder.
- Application for Authorisation of Acquisition of Macquarie Generation by AGL Energy Ltd [2014] ACompT 1.
- Sea Swift had initially applied for merger authorisation on 21 September 2015 but this application was withdrawn on 16 November 2015, prior to filing the current application.
- Competition and Consumer Act 2010 (Cth), s 95AT(2).
- Competition and Consumer Act 2010 (Cth), s 95AT and s 95AZH.
- Above note 1 at [41], citing Application for Authorisation of Acquisition of Macquarie Generation by AGL Energy Limited [2014] ACompT 1 at [160].
- Competition and Consumer Act 2010 (Cth), s 95AZI(2).
- Competition and Consumer Act 2010 (Cth), s 95AZI(1).
- Competition and Consumer Act 2010 (Cth), s 95AZM(6).
- Above note 1 at [310].
- Above note 1 at [247].
- Above note 1 at [249].
- Application for Authorisation of Acquisition of Macquarie Generation by AGL Energy Limited [2014] ACompT 1 at [343].
- AGL v ACCC (No 3) [2003] FCA 1525.
- ACCC v Metcash Trading Limited [2011] FCAFC 151.
- Application for Authorisation of Acquisition of Macquarie Generation by AGL Energy Limited [2014] ACompT 1.
- ACCC v Metcash Trading Limited [2011] FCAFC 151 at [9].
- Above note 1 at [246].
- Above note 1 at [285].
- Above note 1 at [293].
- Acknowledging that the earlier application by Sea Swift was withdrawn after nearly two months.
- Above note 1 at [181]-[199].
- Above note 1 at [230].
- Above note 1 at [232].
- Above note 1 at [247].
- Save for landing facilities at Gove.
- Above note 1 at [179].
- Above note 1 at [328]-[329].
- ACCC, ‘Sea Swift’s acquisition of Toll Marine’s NT and FNQ marine freight assets authorised by the Australian Competition Tribunal’ Media Release, 1 July 2016, available here.
For further information, please contact:
Liza Carver, Partner, Herbert Smith Freehills
liza.carver@hsf.com
