Eli Fisher, co-editor of Communications Law Bulletin, sits down with partner Peter Leonard to discuss recent developments in privacy and data protection law.

Data, Content and Privacy

Welcome to the latest edition of the WA Energy + Resources Update.


Africa holds salutary lessons for Australian Governments and Corporates

By Phil Edmands

As delegates at the Africa Down Under Conference in Perth discuss how to successfully invest in Africa, many themes resonate more broadly. Africa’s emergence as tomorrow’s giant rather than yesterday’s supplicant also underlines why Australia must get its own house in order if it is to be a beneficiary.
 
Like most things in life, success is in large measure about relationships. Australian companies investing in Africa need stabilised investment frameworks, but without strong supporting relationships no project will be fully secure, realise its true potential, or perform in the most cost effective manner.
 
Building those strong relationships is partly a function of attitude. Having a healthy respect for African governments as sovereigns, and for communities as vital, is a good starting point. Africa as a continent is not poor – it has abundant resources. Its people are poor. But that does not make them any different to or less than anyone else. They want the things we have, and as they gain them so Africa’s power will grow.
 
Good relationships also rely on good communication, and in our social media age you need to publicly prosecute your case and get your story out. Otherwise others may well fill the void with mistruths that destroy the trust at the core of good relationships.
 
Australian and Western Australian Governments are implementing many initiatives to improve the competitiveness, administration and governance of mining in Africa – by working directly with African Governments and through the Australian Government’s policy of “economic diplomacy”.
 
These initiatives are not only laudable, but economically rational - both for Africa and for Australia. The pie will grow for both of them.
 
But there is a catch. As Africa develops, its sovereign and operating risk will diminish, and its infrastructure will improve. Australia has to this point enjoyed a distinct advantage in these areas. But the playing field will be much more level going forward.
 
Africa has been strongly impacted by the end of the commodities “super-cycle”. KPMG estimates that whilst FDI inflows to the continent increased 22% between 2010 and 2014 they plunged 31% in 2015. But the longer term trend is for Africa to mature as a destination for investment.
 
As it does, it will be more of a huge future market than a competitor for Australia. Resource sector growth will help propel development of that market. But already two thirds of Africa’s growth comes from increased domestic demand, and the World Bank estimates that addressing Africa’s infrastructure deficit will require investment of more than US$90 billion per annum.
 
By facilitating African resource growth Australia facilitates the success of Australian companies investing in it and facilitates growth of a massive broader market for Australian goods and services.But to be part of this win-win, Australia needs to remain competitive.
 
As stability and certainty increase in Africa, so risk premiums will reduce. Africa has abundant resources. The Africa Development Bank suggests that Africa has about 30% of the world’s known reserves of minerals, with upside because of comparably low levels of exploration.
 
Australia received a disproportionate share of investment during the last boom. The Grattan Institute estimates that in the 8 years to 2013 A$480 billion was invested in Australian mining projects – more than any other country in the world. But Africa is going to increasingly attract its share of international investment – according to the Export-Import Bank of China cumulative Chinese investment alone in Africa will amount to at least US$1 trillion over the next decade.

While other jurisdictions remained unstable and carried greater sovereign risk, Australia enjoyed a competitive buffer. It has been a very stable commodity producer, benefiting from strong rule of law, and has been able to price those benefits through a relatively high fiscal take. That shield will however dissipate as Africa’s stability and governance improve.
 
Current indications are that Australia’s competitiveness will go backwards. There is great opposition  to allowing corporate tax rates to move down and so be less out of step with international  comparators, and there is a suggested increase (for two companies) in per tonne rent for iron ore from 25 cents to $5 – a measure that is the very definition of sovereign risk.
 
Yes currently there are significant funds in the world system looking for a home with any sort of reasonable return, which with the stickiness of incumbent investment, and the sheer cost of bringing on supply in emerging markets when commodity prices are low, mean that changes may not have an immediate effect on investment in Australia.
 
But longer term, moves that damage Australia’s sovereign risk profile – one of its great competitive advantages – and put it out of step with the tax settings of other countries, will degrade Australia’s performance and reduce its living standards. The irony of this is that it need not be so. Australia can both improve its competitiveness and benefit from the strengthening economies of the commodity producers of Africa.


Put it on the JV tab: Increased scope for Operator to pursue plans and charge costs back to the JV 

Santos (BOL) Pty Ltd v Apache Northwest Pty Ltd [2016] WASC 225

By Emily Tsokos and Marshall McKenna

On 27 July 2016 Chaney J handed down his decision in the case of Santos (BOL) Pty Ltd v Apache Northwest Pty Ltd1.  This case is the latest decision in a series of disputes between Apache and Santos in respect of their various petroleum joint venture arrangements in Western Australia2.  Outside this stream of disputes, there is very little existing Australian case law on petroleum joint operating agreements, as it is unusual for petroleum joint venturers (especially in production) to pursue litigation.

Summary

This decision concerns approval for works and costs incurred by Apache Northwest Pty Ltd (Apache Northwest) and its parent entity, Apache Energy Ltd (together the Apache Group) in undertaking a gas compression project pursuant to the John Brookes joint operating agreement in respect of petroleum production licence WA-29-L, under which Santos (BOL) Pty Ltd (Santos) was also a participant (JOA). Chaney J accepted Apache Northwest’s arguments as to the interpretation of the JOA, the key points of which were:

  • even though a gas compression project may ordinarily be categorised as a development project, it was capable of being the subject of a production programme and budget under the JOA and therefore could be approved under that provision;
  • the Apache Group had undertaken the gas compression project on its own account – the project was not “Joint Operations” under the JOA as it did not fall within the scope of section 161(1) of theOffshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (and was not undertaken on a sole risk basis) and therefore initial Operating Committee approval was not required; and
  • even though the Apache Group had initially incurred the costs on its own account and then Apache Northwest charged it back to the joint venture, the JOA did not preclude past expenditure from inclusion in a production work programme and budget.

Chaney J also placed emphasis on the fact that when Santos and Apache Northwest approved the initial development programme and budget, inherent in that approval was a decision to undertake liability to contribute their percentage interest in future costs (subject to the approval of the Operating Committee) of future programmes and budgets within the regime for that approval.

Implications

Joint venture participants in both mining and oil and gas joint ventures should be wary of:

  • being bound by unquantified “possibilities” in development decisions that are not adequately costed or outlined in the initial development plan whereby it is important to scrutinise initial development plans and request clarification on any items that may be referred to as possibilities, but not necessarily quantified; and
  • operators undertaking (or procuring a related party to undertake) works and incurring costs outside the operation of a joint operating agreement which are then capable of being charged back to the joint venture if there is a perceived “benefit” to the joint venture, even if such works and costs were not authorised.

Santos is appealing the decision.

Footnotes

1 [2016] WASC 225

2 In 2015 the decision of Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd [2015] WASC 242 related to validity of   pre-emptive rights notices under the Spar JOA.  Also in 2015 in Apache Oil Australia Pty Ltd v Santos Offshore Pty Ltd [2015] WASC 318, Santos successfully argued that Apache was in material breach of the joint operating agreement in question and obtained an order to remove Apache as operator for material breach


Native Title Compensation: An Answer?

By Lauren Shave, Marshall McKenna and Arabella Tolé

On 24 August 2016, the Federal Court handed down the first compensation determination for the extinguishment of native title in Griffiths v Northern Territory of Australia (No 3) [2016] FCA 900 (Mansfield J) (Griffiths). Griffiths resulted in the claimants being awarded $3.3 million in compensation for the extinguishment of their native title, including $1.3 million for ‘solatium’ (i.e. hurt feelings evoked by extinguishment of native title). Gilbert + Tobin’s detailed summary of the decision can be found here.

The provisions of the Mining Act 1978 (WA) provide that the State will seek to pass on any native title compensation claims to mining companies. Similar provisions appear in State and Federal petroleum legislation and in a number of leases and other land tenure agreements with the Crown in right of various States and the Commonwealth.

In this update, we reflect on when compensation may be payable, how much compensation may be payable (in light of Griffiths) and by whom.

How is compensation calculated?

Compensation for the extinguishment of native title addresses both ‘economic loss’ and ‘solatium’. The compensation for ‘solatium’ is significant and, in Griffiths, was more than the value attributed to the ‘economic’ component. As solatium is dependent on the importance of the native title rights and interests impaired, it appears that assessment of solatium and assessment of economic loss are separate and unrelated exercises.

Compensation is payable by the relevant grantor (i.e. the Crown in right of the State, Territory or Commonwealth as applicable). To the extent that there are indemnities or other mechanisms to pass compensation obligations to tenure holders, there are likely to be difficulties in attributing compensation arising for solatium to any particular parcel of land, and provisions purporting to do so may not be effective.

In what circumstances is compensation payable?

Firstly, most impacts on native title are not going to be the subject of compensation. Native title compensation is applicable only to acts that impacted native title rights and interests where those acts occurred on or after 31 October 1975.  The significance of this date is that it is the date the Racial Discrimination Act 1975 came into effect.  Absent the Racial Discrimination Act and the statutory protection against discrimination it contains, it was within the legislative power of the States to acquire native title without compensation.  The vast majority of improved (and thus more valuable) land in Australia was alienated by the Crown prior to 1 January 1975.

Secondly, quite a lot of compensation has been paid under native title agreements that have been entered into already.  The circumstances giving rise to the highest exposure to compensation are likely to be where native title rights were affected by acts that were allowed after compulsory processes (for example, where the ‘right to negotiate’ or the ‘infrastructure’ process under s24MD(6B) resulted in a grant without an agreement being in force). This is partly due to the likelihood that solatium will be higher where there was resistance to a grant that was overridden through statutory processes.

There are no reliable statistics in relation to what proportion of future acts have been resolved on the basis of native title agreements.   Anecdotally, however, it would appear that more than half and probably in excess of three quarters of future acts (i.e. grants made after 1 January 1994) have been compensated by miners and other proponents already.  There are comparatively few agreements dealing with the period from 31 October 1975 to 1 January 1994 (the commencement of the Native Title Act 1993), and so the bulk of the ‘uncompensated’ acquisitions of native title rights are those that attach to grant of rights between 1975 and 1994.  It remains to be seen how many compensable acts occurred in that timeframe.

How much compensation is payable?

Griffiths sets out a guide for determining how much compensation may be payable. Mansfield J held that compensation for the extinguishment of native title comprises both economic loss and solatium (being the damages for the pain and suffering of loss of connection to country as a result of the extinguishment).
 
Economic loss

His Honour determined that the economic loss component is calculated by reference to the freehold value of the land. If a claimant group holds exclusive native title rights they are entitled to the full freehold value of the land. In the case of a claimant group that holds non-exclusive native title rights, Mansfield J determined that the appropriate amount for economic loss should be 80% of the land’s freehold value. His reasoning for selecting such a relatively high figure was that the existence of native title rights would significantly impair the use to which land could otherwise be put.  Since the applicants enjoyed non-exclusive native title rights, his Honour awarded $512,000 for economic loss, being 80% of the freehold land value.

Solatium (loss of connection to country)

The applicants in Griffiths were able to lead strong evidence of their traditional connection to the land and the effects of that loss of country and were awarded $1.3 million for solatium.  Where evidence of connection to land is weaker, or the importance of the land or the sites on it are less significant, the solatium component will be lower.

In regards to the calculation of the solatium component, his Honour acknowledged that the process required is complex but is essentially intuitive, and that it must reflect the loss or diminution of traditional attachment or connection to land arising from the extinguishment. Evidence about the relationship with country and the effects of acts on that relationship were said to be ‘paramount’. His Honour also held that the loss is to be assessed with respect to the entire native title claim area rather than by reference to loss caused in relation to specific blocks of land

Who is liable to pay compensation?

The States’ ‘recovery’ legislation seeks to flow through compensation payable in relation to the particular tenure held. Unfortunately (or fortunately for the tenure holder) the assessment of native tile compensation was not undertaken on a ‘lot by lot’ approach.  The assessment of compensation in Griffiths was undertaken on an ‘in globo’ approach (that is, with respect to the entire area).  Put another way, the basis of the proposed government ‘flow through’ approach is incompatible with the Court approach.

That is not to say that the Government will not seek to levy a recovery for any compensation to which it is liable.  However, it is more likely that the State will take the approach of recovering native title compensation though increased rents and fees applicable to relevant tenure.  This may therefore be reflected across industry rather than specifically against miners or other tenure holders whose interests have affected native title rights and interests, but who have not made a contribution to compensation. Griffiths simply provides a base level of compensation payable by the States for the extinguishment of native title.


ASIC focus areas for 2016 financial reports

By David Naoum

Background

ASIC has released Media Release 16-174MR ASIC calls on directors to apply realism and clarity to financial reports, which outlines ASIC’s areas of focus for 30 June 2016 financial reports of listed entities and other entities of public interest with many stakeholders.

For 30 June 2016 financial reports, ASIC will focus on 3 key areas (discussed further below):

  • asset values;
  • accounting policy choices; and
  • material disclosures in accounts.

ASIC provides some commentary on the role of directors and notes that even though directors do not need to be accounting experts, they should seek explanations and professional advice supporting the accounting treatments chosen if needed and, where appropriate, challenge the accounting estimates and treatments applied in financial reports. Directors should particularly seek advice where a treatment does not reflect their understanding of the substance of an arrangement.

ASIC also proposes to review financial reports looking at risk-based criteria and also from a random selection.

Asset values

ASIC encourages preparers of financial reports and their auditors to carefully consider the need to impair goodwill, inventories and other assets. ASIC notes that it continues to find impairment calculations based on unrealistic cash flows and assumptions, as well as material mismatches between the cash flows used and the assets being tested for impairment. The recoverability of the carrying amounts of assets such as goodwill, other intangibles and property, plant and equipment continues to be an important area of focus for ASIC.

Focus should also be given to the pricing, valuation and accounting for inventories, including the net realisable value of inventories, possible technical or commercial obsolescence, and the substance of pricing and rebate arrangements.

ASIC notes that fair values attributed to financial assets should also be based on appropriate models, assumptions and inputs and that directors and auditors should focus on the valuation of financial instruments, particularly where values are not based on quoted prices or observable market data. This includes the valuation of financial instruments by financial institutions.

ASIC will also focus on assets of companies in the extractive industries or providing support services to extractive industries, as well as values of assets that may be affected by the risk of digital disruption.

Accounting policy choices

Directors and auditors should consider how the choice of accounting policy can affect reported results. These include the treatment of off-balance sheet arrangements, revenue recognition, expensing of costs that should not be included in asset values, tax accounting, and inventory pricing and rebates.
 
Material disclosures

ASIC’s surveillance continues to focus on material disclosures of information useful to investors and others using financial reports, such as assumptions supporting accounting estimates, significant accounting policy choices, and the impact of new reporting requirements.


Working on your signature move...

By Julie Cavoli and Claire Boyd

"Electronic signature” is a term used to describe various methods of electronically replicating or replacing a paper signature in a document.

Affixing electronic signatures and relying on them has been a growing and evolving business practice, allowing individuals and companies to conduct business faster and more efficiently, and facilitating the conduct of business across borders.

Contract negotiations are now almost exclusively conducted via electronic means, and it is only fitting that electronic execution would also be developing at the same rate.

Although there is ordinarily nothing legally wrong with executing a contract by electronic signatures, such practice, must be conducted with care in certain situations.  When considering the use of electronic signatures, two useful questions are:

  • Is this a document I can execute electronically?
  • If I can, is this execution method reliable in the circumstances?

When not to use electronic signatures 

Statutory requirements have not evolved as fast as technology.  As a result, longstanding statutory requirements apply to these new circumstances and this has created certain situations where electronic signatures may not be used.  For example:

  • Deeds – Electronic signatures cannot be used to legally execute deeds, as under common law, deeds are made on paper or parchment, and this requirement has remained unchanged even after the introduction of the Electronic Transactions Act1.
  • Witnessed signatures for individuals – Nearly all Australian jurisdictions require the signature of an individual executing a deed to be attested in person by at least one witness who is not a party to the deed, and this requirement is unlikely to be satisfied if the signatory and the witness are not in the same place at the same time.  In general, electronic signatures should be avoided for any document that requires a witness for execution.
  • Section 127 and 129 of the Corporations Act2 –  Section 129 entitles a person to assume that a document has been duly executed by a company, if the document has been signed in accordance with section 127.  It isn’t clear if that protection will be available if a company executes a document electronically.
  • Signatures affixed by third parties – These days specific software and online services, through the use of identification and authentication barriers, allow signatories to affix electronic signatures and notify the user prior to a document being signed and after such document has been signed.  The New South Wales Supreme Court’s decision of Williams Group Australia Pty Ltd v Crocker(Williams v Crocker)3, although not binding on Western Australia Courts, is a substantial indication that the safeguards commonly offered by such programs or services may not be sufficient, particularly in proving an intention to be bound by the terms of a contract.

Better safe than sorry 

Two common issues that arise are proving the identity of the person affixing an electronic signature to a contract and whether that person had an intention to be bound by such contract.

The nature and the importance of the document, the reliability of the party signing, the authentication mechanism and protection features of the technology used to affix the electronic signature should all therefore be considered before accepting an electronic signature.

Generally, if electronic signatures are used as a common business practice in an organisation, the organisation must put in place a reliable execution method in order to prove the intent of the signatory and, have a specific execution system for more important documents. 

Included below is a non-exhaustive list of items to consider when using electronic signatures:

  • avoid a standardised method which does not take into consideration the type and importance of the document, the context or the identity of the signatory;
  • ensure careful management and oversight of systems and instances in which electronic signatures may be used;
  • obtain the other party’s consent to the use of electronic signatures;
  • obtain an acknowledgement from the signing party that it has executed the document;
  • send a copy of the executed document to the signatory of that document and request an acknowledgment of receipt;
  • exercise caution when choosing an electronic signature software or service provider; and
  • if any electronic signature software or service provider is used:

- set up web, phone identity and knowledge based authentication systems, for example using specific questions with a response only known by the signatory; and

- use unique or complex passwords, which are regularly updated.

Electronic signatures when cross-borders parties are involved

The United Nations Convention on the Use of Electronic Communications in International Contracts (New York, 2005), which only entered into force in 2013, and to which the Australian Government is currently considering accession, aims at assuring that contracts entered into and other communications conducted electronically are as valid as the traditional paper-equivalents. 

This is a reminder that the law applicable to a contract involving cross-borders parties should therefore also be considered when executing a contract, as a particular jurisdiction may still require handwritten and/or witnessed signatures before binding the parties.

In conclusion

Where the enforceability of a contract has come into question because of an electronic signature, the Australian Courts have made findings in these specific circumstances only and will look at the specific facts in order to establish whether the parties intended to be bound.

This causes uncertainty as to what the findings may be in any particular circumstance.

If you have any queries before you execute your next contract or before accepting another party’s electronically executed document, please do not hesitate to contact us.

Footnotes

1Electronic Transactions Act 1999 (Cth) and Electronic Transactions Act 2011 (WA).

2Corporations Act 2001 (Cth).

3 [2015] NSWSC 1907.


Are you fairly standard?

It's time to review your purchase orders and other standard form contracts.

By George Salter and Claire Boyd

From 12 November 2016, the unfair contract term protections in the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) will extend to small businesses, regardless of whether the small business is an acquirer (customer) or a supplier. This will result in a range of standard form contracts routinely used by companies in the energy and resources industry now falling under the unfair contract term protections regime of the ACL.

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 will protect businesses against unfair terms in standard form contracts provided that:

  • the contract is for the supply of goods, services or a sale or grant of an interest in land (including, potentially, mining tenements);
  • at the time the contract was entered into, the business seeking protection from the regime employed fewer than 20 persons (on a headcount basis and excluding any contractors or subcontractors); and
  • the “upfront price” payable under the contract is not more than $300,000 (or $1,000,000 if the duration of the contract is more than 12 months), noting that the “upfront price” is the consideration that is provided or is to be provided under the contract and does not include any consideration that is contingent on the occurrence or non-occurrence of a particular event (e.g. amounts payable in the event an option is exercised by one party, or in the event of a default etc).

The new provisions will apply to all small business contracts that are:

  • entered into on, or after, 12 November 2016;
  • renewed on, or after 12 November 2016, in which case the protections will apply to the entire contract as renewed; or
  • varied on or after 12 November 2016, in which case the protections will apply to the varied terms.

A term of a small business contract will be void if:

  • the term is unfair; and
  • the contract is a standard form contract.

A term in a small business contract will be unfair if all of the following tests are met:

  • the term would cause a significant imbalance in the parties’ rights and obligations under the standard form contract; and
  • the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term (there is a rebuttable presumption that the term is not reasonably necessary to protect those interests unless that party can prove otherwise); and
  • the term would cause detriment, whether financial or non-financial, to a party to the contract if the term was to be applied or relied on.

Terms that could potentially fall foul of these tests include terms that:

  • allow a business to vary the contract without the consent of the counterparty;
  • unfairly restrict a right to terminate the contract;
  • suspend or terminate the services as of right; and
  • impose unreasonable liability and indemnification obligations.

As the 12 November 2016 commencement date approaches, businesses should review their standard form contracts to ensure that they are in compliance with this new regime, noting that businesses that seek to include, apply or rely on unfair terms in small business contracts not only face reputation risks but also compensatory claims under the existing enforcement regimes in the ACL and the ASIC Act.

Energy and Resources

By Elizabeth Avery, Simon Muys and Matt Rubinstein

Snapshot

  • Exposure draft legislation was released today to amend the Competition and Consumer Act 2010 ( CCA ) in line with the majority of the recommendations of the Harper Review

  • The controversial proposed changes to section 46 of the CCA (misuse of market power) will be implemented according to the “Full Harper” formulation.

  • The price signalling prohibitions in the CCA will be removed, to be replaced with a new prohibition on anti-competitive concerted practices.

  • The ACCC has released draft guidelines  on their interpretation of these two provisions, seeking feedback.  Treasury has also released a set of questions seeking specific feedback on a number of the changes.

  • The cartel provisions will be simplified and their exceptions relating to joint ventures and vertical arrangements will be strengthened.

  • The third line forcing provisions of the CCA will become subject to a competition test.

  • The ACCC will be given additional powers to:

                -authorise mergers, subject to review by the Australian Competition Tribunal (which will lose its power to authorise mergers in the first instance);

                -grant exemptions for conduct that would otherwise contravene the competition prohibitions of the CCA; and

                -grant class exemptions in relation to common business practices that do not generate competition concerns and could otherwise be authorised individually.

  • In exercising many of its powers, the ACCC will not be limited to applying a competition test, but may also assess whether the public benefit of a proposed merger or proposed conduct will outweigh any detriment.
  • The Productivity Commission’s recommendations in relation to the National Access Regime (made in 2013) have been accepted over those made by the Harper panel.  This includes a change that is likely to be seen as reversing the outcome of the recent Tribunal decision in Glencore.

  • The legislation does not pick up recommended changes that would have extended the application of the CCA to some government activities not currently caught, including some activities of local government.

  • The amendments are also limited to changes to the CCA itself, and do not address any of the wider competition policy proposals raised by the Harper Review such as introducing greater competition in health and human services, intellectual property, transport, and the state and territory areas of planning and zoning, retail trading hours and taxi licensing.

  • The changes also do not seek to implement a number of the institutional changes recommended by Harper, such as the introduction of a new “access and pricing regulator”.

Background

The Competition Policy Review chaired by Professor Ian Harper ( Harper Review ) received its Terms of Reference on 27 March 2014 and proceeded briskly through its allotted twelve months to deliver its Final Report on 31 March 2015.  It then took another twelve months for the Commonwealth Government to finalise its response to the Harper Review, having deferred its decision on the section 46 (misuse of market power) recommendation to a further inquiry that ended on 16 March 2016. 

By then the Government was hardly recognisable as the one that had set the Harper Report in motion immediately after the 2013 election.  Small Business Minister Bruce Billson, the architect and champion of the Review, is now chairing the Franchise Council of Australia.  Treasurer Joe Hockey, who first announced the review from opposition in 2010, is the ambassador to the United States.  And Prime Minister Tony Abbott, who in September 2015 appeared to close the book on the Harper Review when he deferred consideration of the section 46 recommendation, is now on the back bench.

Treasurer Scott Morrison now has responsibility for competition policy and the implementation of the Harper Review.  The National Party’s Michael McCormack is now Minister for Small Business, and the Nationals are likely to play an increasing role in the development of competition law and policy in Australia, with Barnaby Joyce as Deputy Prime Minister and Senator Matt Canavan now in Cabinet.  And with Nick Xenophon increasing his influence on the Senate cross-bench, there are interesting times ahead for the CCA.

Next Steps

The Exposure Draft implements most of the substantive Harper recommendations relating to the CCA.  It is expected to be followed by a second round of amendments that will renumber the competition provisions of the CCA (farewell, section 44ZZOAAA) and simplify or remove a number of redundant and overly specified sections including section 47 and the cartel provisions.

Submissions on the Exposure Draft are invited until 5pm on Friday 30 September 2016.  If supported by the states and territories, the Bill may be introduced into Parliament by the end of November for consideration in the Autumn 2017 sitting with potential commencement by the middle of 2017. 

The Australian Competition and Consumer Commission ( ACCC ) also today released its draft guidelines on its approach to the new section 46 – the first of their kind since the Trade Practices Commission’s section 46 background paper in 1990 – which will provide critical guidance to the comprehensively reworked section.  Submissions on those guidelines are due on 3 October 2016.

Misuse of Market Power

The new section

By far the most controversial reform throughout the Harper Review, the reformulation has changed very little since the Draft Report and not at all since the Final Report.  The proposed section 46 now provides that:

                   (1) A corporation that has a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition in that or any other market.

The new test removes the "take advantage" element, introduces an "effects" alternative, and replaces the specific categories of exclusionary conduct with an overall "substantial lessening of competition" standard, which is to be assessed with regard to the following factors:

                   (2) Without limiting the matters to which regard may be had in determining for the purposes of subsection (1) whether conduct has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market, regard must be had to the extent to which:

                          (a)   the conduct has the purpose of, or has or would be likely to have the effect of, increasing competition in that market, including by enhancing efficiency, innovation, product quality or price competiveness in that market; and

                         (b)   the conduct has the purpose of, or has or would be likely to have the effect of, lessening competition in that market, including by preventing, restricting, or deterring the potential for competitive conduct or new entry into that market.

The new section 46 applies the same test as the current sections 45 and 47, though it is not clear how that test might operate in the context of unilateral conduct.  Unlike most provisions of the CCA, the new section 46 does not apply to any specific kind or category of conduct, such as an agreement, an acquisition or an exclusive dealing.  Unlike the current section 46 and similar laws in other jurisdictions, the proposed prohibition does not explicitly target exclusionary conduct. 

The new section 46 removes the specific provisions dealing with predatory pricing, including the infamous “Birdsville amendment”.  It also removes the guidance relating to the interpretation of “take advantage” but retains the guidance on establishing when a corporation has substantial market power.

ACCC interpretation

The ACCC has issued a draft Framework for Misuse of Market Power Guidelines ( Draft Guidelines ) which provides that:

                The objective of a misuse of market power provision is to prohibit unilateral conduct by a corporation with substantial market power that interferes with the competitive process by preventing or deterring rivals or potential rivals from competing on their merits.  Sometimes this is broadly referred to as ‘exclusionary conduct’.1

The Draft Guidelines identify refusal to deal, predatory pricing, tying and bundling, and margin/price squeeze as potential misuses of market power, and list as examples:

  • refusal to supply an essential input (e.g. refusing to supply cement to a rival ready-mix concrete plant);

  • land banking (e.g. a fuel retailer with 7 out of 8 retail fuel sites in a major town buys the first option to purchase two new designated sites with no plans to use them);

  • predatory pricing (e.g. for 12 months the publisher of a free regional newspaper reduces its advertising rates to less than 50% of the rates offered by a new entrant, which does not cover its printing and distribution costs); and

  • bundling a competitive product with a monopoly product (e.g. a firm will only sell its patented drug to pharmacies to agree to buy all their requirements of a drug that is about to lose its patent from the firm).

The Draft Guidelines also note conduct that would not raise concerns under the new section 46:

  • innovation, regardless of how “big” the firm is;

  • efficient conduct designed to drive down costs;

  • responding to price competition with matching or more competitive (above cost) price offers; and

  • responding efficiently to other forms of competition in the market such as product offerings and terms of supply.

As examples of this conduct, the Draft Guidelines list:

  • research and development (e.g. a firm developing a substantially improved version of an existing technological product that causes many suppliers of the first generation product to close);

  • standardised or national pricing by large retail chains (e.g. a firm opens a store in a new town and its above-cost prices cause small retailers to become unprofitable and close);

  • price war (e.g. four large firms without market power engage in a price war that causes smaller suppliers to close); and

  • investing in new production technology to increase efficiency (eg an iconic lawnmower manufacturer invests in new production technology to lower the cost and improve the reliability of its lawnmowers in order to prevent an international manufacturer from entering).

The ACCC’s statement of the objective of a misuse of market power section is a sensible one, but it is not clear how that objective is fulfilled by the new section 46.  The ACCC’s examples are a useful guide to the ACCC’s interpretation and its enforcement priorities, but they will not bind third parties or a court.  Early court consideration of the scope of the section will be critical. 

It also remains unclear  whether the mandatory court factors, requiring consideration of pro- and anti-competitive purposes and effects, will provide much clarity or predictability to the new law, since there is no legislative guidance on what weight should be given to each purpose or effect.  The well-accepted challenge with this law is to avoid chilling the competitive conduct of larger firms (which would leave consumers worse off) while also preventing firms with market power from excluding competitors from the market.  The proposed prohibition does not address that challenge head on, but leaves the resolution of this important question to the courts.  This introduces greater uncertainty and will likely result in higher internal compliance costs for large businesses, more investigations and potentially more litigation, without necessarily delivering a superior outcome in terms of competition enforcement.

Price signalling and concerted practices

The Exposure Draft also amends section 45 of the CCA to provide that a corporation must not act:

          engage with one or more persons in a concerted practice that has the purpose, or has or is likely to have the effect, of substantially lessening competition.

The ACCC has in some past cases found it difficult to establish the element of commitment, rather than mere hope or expectation, that is required to establish an understanding under the current section 45.  The addition of a prohibition against concerted practices is designed to capture anti-competitive information exchanges where there is no commitment to act.

The Harper Review considered that the meaning of “concerted practice” did not require any legislative definition, but described it in the following terms:

          The word “concerted” means jointly arranged or carried out or co-ordinated.  Hence a concerted practice between market participants is a practice that is jointly arranged or carried out or co-ordinated between the participants.  The expression “concerted practice with one or more persons” conveys that the impugned practice is neither unilateral conduct nor mere parallel conduct by market participants (for example, suppliers selling products at the same price).

The Exposure Draft legislation follows the Harper recommendation and does not provide any definition of the term “concerted practice”.  The Explanatory Memorandum provides that:

         The concept of a concerted practice is well established in competition law internationally. The amendment to introduce the concept of a “concerted practice” is made to recognise that lesser forms of coordination than what has been judicially interpreted as required for a contract, arrangement or understanding, should be captured by section 45, provided the practice has the purpose, effect or likely effect of substantially lessening competition…

        The interpretation of a “concerted practice” should be informed by international approaches to the same concept, where appropriate.  Broadly, international jurisprudence suggests that coordination between competitors, where cooperation between firms is substituted for the uncertainties and risks of independent competition, is potentially a concerted practice.

International approaches to the “concerted practices” concept are complicated by the fact that in Europe the concept needs to cover all forms of coordination below an agreement – there is no separate category of “understanding” as there is in Australia.  In Europe there is also an exception for concerted practices that contribute to efficiencies, and it is not clear that the Australian “substantial lessening of competition” would protect such practices.

The Explanatory Memorandum appears to focus on private disclosures of information, noting that:

        The public disclosure of pricing information can help consumers to make informed choices and is unlikely to be harmful to competition.

However, the new section is not limited to private information and the new prohibition may extend to the disclosure of public information. 

The ACCC has provided a draft Framework for Concerted Practices Guidelines which provides a similar definition to that set out in the Explanatory Memorandum:

        A concerted practice is a form of coordination between competing businesses by which, without them having entered a contract, arrangement or understanding, practical cooperation between them is substituted for the risks of competition.2

The ACCC sets out a number of examples of conduct that would be likely or unlikely to constitute concerted practices, but does not identify clear principles beyond its initial definition.  There remains a great deal for the courts and the ACCC to do before the definition of concerted practices is established in Australia with any certainty. 

The ACCC has expressed concern about price signalling and information sharing conduct in relation to the boycott of beef cattle sales, 3  bank rate-setting, 4  airline capacity, 5  eggs, 6  and of course petrol prices, in relation to which the ACCC settled court proceedings in late 2015. 7  As with the new misuse of market power prohibition, the ACCC can be expected to take action under the concerted practices prohibition as soon as it has an opportunity to do so. 

Consistent with the overall simplification of the CCA, the current price signalling provisions – which currently only apply to the banking sector – will be repealed as they will be replaced with this broader prohibition. They have never been used and are unlikely to be missed.

Cartel provisions

One of the more significant amendments to the CCA is in relation to the cartel provisions, which are considered both overly complicated and confusing in their current form and provide only limited exceptions for joint ventures and vertical arrangements.

Simplification

The Exposure Draft does not simplify the cartel provisions – which we can expect in the next round of changes – but it does remove the overlap between the new cartel provisions and the old framework by removing all references to exclusionary provisions and modifying the cartel provisions to cover collective boycotts, that is, restrictions on acquisition as well as supply.

It also removes the definition of “likely” that was specific to the application of the cartel provisions to “actual or likely competitors”.  That definition provided that “likely” meant “a possibility that is not remote”, which was found to be a low threshold in Norcast v Bradken. 8  The definition of “likely” will now be aligned throughout the CCA as interpreted by the courts. 

Extra-territoriality

The Exposure Draft confines the application of the provisions to cartel conduct that affects competition in Australian markets, that is, conduct occurring in trade or commerce within Australia or between Australia and places outside Australia. 

Joint venture exception

The Exposure Draft broadens the current exception for joint ventures to provide appropriate exemptions for joint venture activity, which will no longer be limited to contracts or to supply joint ventures.  Instead, the exception will apply to any restriction in a contract, arrangement or understanding that is for the purposes of, or is reasonable necessary for undertaking, a joint venture for the production, supply or acquisition of goods or services.

Vertical arrangements exception

The Harper Review recommended that vertical arrangements be exempted from the cartel provisions and addressed by sections 45 or 47 to the extent that they have the purpose, effect or likely effect of substantially lessening competition.  The Exposure Draft provides a broad exception for restrictions in vertical arrangements for the supply or acquisition of goods or services. 

This exception is particularly notable for its potential to exempt dual distribution models, where a supplier provides services both directly to the public and through intermediaries, from per se liability as was argued in the ACCC’s recent price-fixing cases against ANZ and Flight Centre.  These arrangements would instead be assessed under the substantial lessening of competition test, which would arguably have been a more appropriate basis for the ACCC to pursue those cases. 

The new exception may also lead to different results in matters such as the ACCC’s recently concluded investigation into Expedia and Booking.com, which was similar in some respects to the Flight Centre case in that the online booking agencies prevented hotels from directly offering rooms at cheaper prices through other channels including the hotels’ own offline channels. 9

If these issues are, in the future, to be assessed through a substantial lessening of competition test rather than a per se prohibition, some suppliers may be more willing to defend their arrangements rather than settling.

Vertical arrangements

Third line forcing

Under the Exposure Draft, third line forcing will no longer be prohibited per se but will be subject to a competition test.  This will bring Australian law in line with comparable international jurisdictions and other provisions of the CCA.  At present the ACCC receives hundreds of notifications of third-line forcing conduct each year and has only ever taken action against a handful, so this change will relieve a significant administrative burden on both business and the ACCC. 

Resale Price Maintenance

By contrast, resale price maintenance will remain prohibited on a per se basis, that is, it will not be subject to a competition test.  The Harper Review recognised that attitudes towards resale price maintenance had shifted internationally, notably in the US Supreme Court case of Leegin Creative Leather vs PSKS, 10   which in 2007 overturned almost 100 years of precedent and examined – and approved – resale price maintenance conduct under a “rule of reason” analysis.  However, the history of third line forcing regulation in Australia shows how long it can take for a per se rule to be relaxed.

However, resale price maintenance will now be able to be notified to the ACCC, immunising notified conduct from prosecution unless the ACCC overturns the notification, and ensuring the ACCC’s notification team will be busy even without third line forcing notifications.  Resale price maintenance will become immune 60 days after notification, significantly longer than the 14 days that currently applies to third line forcing.  The Exposure Draft also includes an exception for resale price maintenance conduct between related bodies corporate.

Section 47 simplification

The Harper Report recommended that section 47 be repealed and its role taken over by its revised section 46 and section 45, which together would address conduct by a business with market power, contracts, arrangements, understandings, and concerted practices that have the purpose, effect or likely effect of substantially lessening competition.  If not repealed, section 47 should be simplified to improve its legibility and expand its coverage.

The Exposure Draft retains 47 and does not yet simplify it.  Although much section 47 conduct will be addressable under sections 45 or 46, there is value in a separate section that specifies forms of conduct that may contravene the CCA and gives guidance to business. 

Merger Processes

There will be some significant changes to the formal merger process, following the Government’s acceptance of the Harper panel’s recommendation to combine formal clearance with authorisation. The current formal merger clearance process will be removed, and the merger authorisation process will be reformed according to the following structure:

  • the ACCC will be the decision maker at first instance and be able to authorise a merger if it:

                     - does not substantially lessen competition; or

                     - would result or be likely to result in a benefit to the public that would outweigh any detriment;

  • this process will not be subject to any prescriptive information requirements, but the ACCC will be empowered to require the production of business and market information;
  • strict timelines will apply, which can only be extended with the consent of the merger parties;
  • decisions of the ACCC are to be subject to review by the Australian Competition Tribunal under a process that is also governed by strict timelines; and
  • the Tribunal will make its decision based upon the materials that were before the ACCC, but will have the discretion to allow further evidence or to call and question a witness.

Authorisation, notification and class exemptions

In line with Harper and the Government’s overall approach to the simplification of the CCA, amendments will be made to the authorisation and notification process to ensure that:

  • only a single authorisation application is required for a single business transaction or arrangement;
  • the ACCC can grant exemptions from sections 45, 46, 47 and 50 of the CCA; and
  • the ACCC can grant a “class exemption” in respect of classes of conduct unlikely to raise competition concerns.

In determining whether to grant an authorisation or exemption, the ACCC will be able to take into account both competition and public benefit considerations.

The class exemption power for “common business practices that do not generate competition concerns, or are likely to generate a net public benefit”, is particularly interesting.  It mirrors the block exemption power of the European Commission, which has been exercised to exempt certain categories of vertical restraint and concerted practices, 11 technology transfer agreements 12 and cargo liner shipping. 13 This last area is expected to be an early application of the ACCC’s class exemption power if the international cargo liner shipping framework in Part X of the CCA is repealed.

Private actions

The CCA currently supports the bringing of private actions by allowing a party to proceedings to rely on a finding of fact made by a court in civil penalty proceedings as prima facie evidence of that fact.  The Exposure Draft implements the Harper Review’s recommendation that parties to private proceedings will additionally be able to rely on admissions of fact made by the person against whom the proceedings are brought.  This could, for example, enable parties to private proceedings to rely on evidence given by witnesses during cross-examination in civil penalty proceedings or, more significantly, in statements of agreed facts provided as part of a negotiated settlement.

Power to obtain information

The Exposure Draft would increase the ACCC’s power to obtain information, documents and evidence under section 155 to include investigations of alleged contraventions of court enforceable undertakings, and also increases fines for non-compliance to 100 penalty units (up from 20) or two years imprisonment (up from 6 months). 

However, it also introduces a “reasonable search” defence for a failure to produce documents on the basis that a person has undertaken a reasonable search for the documents.  In determining whether they have made a reasonable search, a person may take into account:

  • the nature and complexity of the matter to which the notice relates;
  • the number of documents involved;
  • the ease and cost of retrieving a document;
  • the significance of any document likely to be found; and
  • any other relevant matter.

Access to infrastructure

The Government simultaneously released its response to the 2013 Productivity Commission inquiry into the National Access Regime as part of its response to the Harper Review, and accepted the Productivity Commission’s recommendations rather than those made by Harper.  The Exposure Draft implements the Productivity Commission’s proposed amendments to the declaration criteria, including the following:

  • instead of assessing whether access would promote a material increase in competition in at least one market, a comparison will be made of competition with and without access on reasonable terms and conditions following declaration , which would reverse the Tribunal position in the Glencore/Port of Newcastle decision currently under appeal (though the Explanatory Memorandum occasionally slips into the “with and without access” formulation) 14 ;
  • the test for whether it would be “uneconomical” for anyone to develop another facility will be satisfied where total foreseeable market demand over the declaration period could be met at the least cost by the facility (taking into account the costs of coordinating multiple users);
  • the decision-maker must consider whether access (or increased access) would promote the public interest (taking into account investment incentives and compliance and administration costs), and not whether it would be contrary to the public interest; and
  • the criterion relating to existing access regimes be replaced with a threshold clause stating that the decision-maker does not need to consider an application or recommendation if the regime is subject to an effective access regime.

There are also some process changes, such as automatic declaration where the Minister does not make a decision within the time period (rather than the opposite), and automatic revocation of certification if a state regime changes. 

Finally, the changes resolve an uncertainty about the scope of what the ACCC can order a facility owner to build by making it clear that the ACCC’s order can include increasing the capacity of infrastructure and not just its geographic reach (a particularly relevant debate in the pipeline sector).

Competition

The Exposure Draft has changed the definition of “competition”, but this is not as dramatic as it sounds.  The new definition includes competition from goods and services that are capable of importation, not only those that are actually being imported.  This recognises that credible threats of imports can exert competitive pressure on the relevant market in Australia, and is sure to be referred to extensively in merger submissions. 

What’s missing?

The Exposure Draft omits two of the Harper Review recommendations that were accepted in principle by the Commonwealth Government last year.  These are:

  • Recommendation 24, which would extend the competition law provisions of the CCA to the Crown insofar as it engages in any activity in trade or commerce, rather than applying only insofar as the Crown carries on a business as under the current position; and
  • Recommendation 26, which would extend the extraterritorial reach of the CCA to apply to overseas conduct that has relates to trade or commerce within Australia or between places in Australia and outside Australia, rather than requiring a connection with Australia based on residence, incorporation or business presence.

By its nature, the Exposure Draft deals only with changes to the CCA and does not progress the broader competition policy reforms recommended by the Harper Review in the areas of health and human services, intellectual property, transport, and the state and territory areas of planning and zoning, retail trading hours and taxi licensing.  These reforms are continuing under different Commonwealth, State and Territory and intergovernmental processes. 

The changes also do not pick up on significant proposals made by Harper to reform a number of the institutional arrangements, such as a proposal for a new “access and pricing regulator”, a new national competition policy body and the re-introduction of competition payments.  These reforms will also require inter-governmental support.

 

 

 

1 At p 4.
2 At p 3.
3  Senate Rural and Regional Affairs and Transport References Committee, Effect of market consolidation on the red meat processing sector , Interim Report, May 2016 at p 26.
4  “ACCC's Rod Sims warns of 'gaps' in cartel laws”, Australian Financial Review , 23 April 2015.
5  “ACCC concerned by Qantas comments over price war”, Sydney Morning Herald , 3 September 2013.
6  “ACCC demands tougher competition laws”, The Land, 7 April 2016.
7  “Petrol price information sharing proceedings resolved”, ACCC Press Release, 23 December 2015.
8   Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235 (19 March 2013).
9  “Expedia and Booking.com agree to reinvigorate price competition by amending contracts with Australian hotels”, ACCC Press Release, 2 September 2016.
10   Leegin Creative Leather Products, Inc. v. PSKS, Inc. , 551 U.S. 877 (2007).
11  Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices.
12  Commission Regulation (EU) No 316/2014 of 21 March 2014 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements.
13  Commission Regulation (EC) No 906/2009 of 28 September 2009 on the application of Article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices between liner shipping companies (consortia).
14  Explanatory Memorandum at [13.20].

 

 

 

 

 

 

 

Competition and Regulation

By Phil Edmands

Phil Edmands presents at the Africa Down Under Mining Conference the below paper which is not intended as a legal treatise on investment in Africa.  Rather it makes some practical observations about making a success of that investment, and about Australia's role in facilitating it. 

Energy and Resources

By Marshall McKenna

The recent Griffiths v Northern Territory [2016] FCA 900 decision has been a landmark ruling in awarding compensation for the extinguishment of native title. The case has attracted immediate and expansive national press to the effect that a wave of other native title compensation claims were likely to exceed $1 billion dollars and that State Governments would claw back such sums from miners.

While likely to be true to an extent, these headlines have overlooked key realities in the case:

  1. Most historical impacts on native title are not going to be the subject of compensation;
  2. For native title agreements that have been entered into already, compensation has been paid, with the highest exposure to compensation being circumstances where native title rights were affected by acts that were allowed after arbitration;
  3. The State legislation and agreements allowing ‘flow through’ of native title compensation to mining and other tenure holders is directed at the compensation payable in relation to specific tenure, whereas the compensation for native title is assessed by courts on a global basis; and
  4. Without minimising the impact of the decision or the importance of native title rights and interests, the quantum per hectare arising under the case is (including the component for injury to feelings of indigenous people) relatively modest.

Significantly, native title compensation is applicable only to acts that impacted native title rights and interests where those acts occurred on or after 31 October 1975, the date that the Racial Discrimination Act 1975 came into effect.  The vast majority of improved and therefore more valuable land in Australia was alienated by the Crown prior to 1 January 1975, outside the statutory protection of the Racial Discrimination Act and thus in a period where the States had the legislative power to acquire native title without compensation.

In terms of resolving future acts on the basis of native title agreements, there have been no reliable statistics . Anecdotally, more than half and most likely over three quarters of future acts (i.e. grants made after 1 January 1994, the commencement of the Native Title Act 1993) have been compensated by miners and other proponents already.  However, there are comparatively few agreements dealing with the period from 31 October1975 to 1 January 1994 despite the bulk of the ‘uncompensated’ acquisitions of native title rights being attached to grant of rights in that period.  It remains to be seen how many compensable acts occurred in that timeframe.

Further, there is a potentially insurmountable problem as to the proposition that the States will seek recovery of compensation paid from the holders of relevant tenure.  The States’ ‘recovery’ legislation and agreements generally seek to flow through compensation payable in relation to the particular tenure held. Unfortunately (or fortunately for the tenure holder) the assessment of native title compensation  does not work on that ‘lot by lot’ approach.  In Griffiths, the assessment of compensation was undertaken on an ‘in globo’ approach.  Put another way, the basis of the proposed government ‘flow through’ approach is incompatible with the Court approach.

That is not to say that the Government will not seek to levy a recovery for any compensation to which it is liable.  However, it is more likely that the State will take the approach of recovering native title compensation though indirect mechanisms such as increased rents and fees applicable to relevant tenure.  Instead of directly impacting miners or other tenure holders whose interests have affected native title rights and interests but who have not made a contribution to compensation, this approach will potentially spread costs across the industry.

Finally, there are two observations to be made about the quantum.

First, there does not appear to be a linear connection between the two types of impact – damages for loss of connection to country is likely to depend on the cultural importance of the land rather than its economic value. Accordingly, in Griffiths, the relatively modest compensation for economic value of the land ($512,000) is reflective of the limited value of remote and isolated land whereas the more significant component of ‘solatium’ ($1.3M) is for loss of connection to country based on strong evidence of traditional connection. 

Second, the overall compensation (based on land area) is less than $1,400 per hectare. While not insignificant, if one considers the compensation agreements that have been entered into with private landholders and pastoralists, the quantum in question is not especially generous.

Compensation in relation to native title rights will take some time to be ascertained and it is not yet clear where the ultimate liability will lie.  It is also an irony of the system that compensation will likely be denied to the most heavily affected native title claim groups.  For example, the Larrakia people of Darwin failed in their claim because of the impact of settlement, and are thus not entitled to any compensation.  Additionally, destruction of native title rights in the most arable areas of Australia largely occurred in the 19th and early 20thcenturies, well before the Racial Discrimination Act triggered the need to compensation native title holders for the destruction of their rights.

This opinion piece originally appeared in Australasian Lawyer.

Energy and Resources

By Bernadette Jew and Peter Reeves

Blockchain and smart contracts have set us on a collision path, posing challenges that we haven't had to deal with before. People with technology, commercial and legal expertise all need to work together in the blockchain environment - and their expectations can be quite different.

Corporate Advisory, TMT

By Elizabeth Avery and Emma Ringland

In the decade since the ACCC last updated its Media Merger Guidelines,1 the competitive landscape in media has unimaginably transformed.  Technology has enabled new ways of delivering content and has also facilitated the emergence of new types of content.  These changes call into question the continuing relevance of prior analytic frameworks for competition analysis in media mergers. 

In this context, the ACCC’s release last Friday of the draft Media Merger Guidelines (Draft Media Merger Guidelines), is timely.2  As the ACCC recognised, this is because of the “significant changes taking place in the media environment and the potential impact of these on competition and the mergers considered by the ACCC”.  The ACCC has observed that these changes arise:

  • from the impact of new technology, affecting the way media is delivered and consumed and the nature of competition in media markets; and
  • potentially, from the Australian Government’s proposed removal of two of the five restrictions within Australia’s media control and ownership rules under the Broadcast Services Act 1992 (Cth), namely, the “reach rule”3 and the “2 out of 3 rule”,4 creating the potential for new mergers.

The theme of technological change and convergence and its relevance to regulatory frameworks has been apparent in the ACCC’s consideration of the media sector prior to the release of the Draft Media Merger Guidelines.  Indeed, the ACCC noted the structural changes in the media industry and changes to consumers’ viewing patterns in its March 2016 Public Competition Assessment regarding its decision in October 2015 not to oppose the FOXTEL – Ten transactions.

Technology, and technological convergence, is continuing to drive change

Mr Rod Sims also drew attention to this theme in his November 2015 speech, “Promoting innovation through competition”, when he observed:6

“Regulation that relies on particular platforms will always run the risk of being obsolete as technology and consumer preferences change”.

Mr Sims also noted:

“… with the rapid technological convergence in the media industry… policy makers and regulators should aim for a neutral treatment of different technologies.  In this regard, this seems to require a shift away from regulation based on delivery platforms”.

More generally, the Draft Media Merger Guidelines are being released in a context where technological changes are resulting in greater emphasis on technological neutrality in regulation across industries.  For example, the recommendations of the Financial System Inquiry’s Final Report (in December 2014) included that the Government work with the financial sector to identify and amend priority areas of regulation with respect to technology neutrality, as well as embedding the principles in the development processes for future regulation (see our client update on this topic here).

What do the Draft Media Merger Guidelines tell us?

Counterfactual analysis

As with all merger analysis, the ACCC applies a forward looking analysis to consider whether a merger is likely to substantially lessen competition, comparing the competitive landscape if the media merger proceeds, against the landscape if it does not.  While the ACCC acknowledges that it will take into account the changing nature of technology and its competitive impacts, it observes that it “will not base its merger analysis on predictions or speculation about hypothetical technological changes outside the usual time frame for consideration”, generally 1 – 2 years.

Given the rapid pace of technological evolution, this view may be difficult to apply in practice – one person’s speculation is another’s realised innovation.  (Ten years ago, who would have thought that Google and Facebook would become close competitors?)

Markets of interest

The Draft Media Merger Guidelines observe that media outlets typically generate revenue from advertising and / or subscription fees, and, on that basis, identify three activities that are likely to form the basis for the ACCC’s consideration of relevant markets:

  • the supply of content to consumers, directly or via an aggregator;
  • the supply of advertising opportunities to advertisers; and
  • the asquisition of content from content providers.

The Draft Media Merger Guidelines also indicate that the ACCC will consider the extent of substitution between the parties, which may involve a consideration of the mode of delivery, and potentially also the type of content supplied.

Types of mergers that may harm competition

The Draft Media Merger Guidelines observe that the ACCC’s primary focus will be the likely unilateral effects on competition, though it may also need to consider the likelihood of coordinated effects arising from a media merger.  The competition factors identified are not unique to media-related mergers, though examples from the media industry are suggested by way of illustration.  (For example, the ACCC suggests that one potential outcome of the exercise of market power could be a significant and sustained reduction in service which, in the media context, could be a reduction in the quality or variety of the service or content, or an increase in the number or length of advertisements.)

Possible issues that may arise in the competition assessment of media mergers

The Draft Media Merger Guidelines set out how the ACCC intends to consider six issues that it has identified as potentially arising in media merger assessments, summarised below.

Part 1 of a table on issues and considerationsPart 2 of a table on issues and considerationsPart 3 of a table on issues and considerations

What next?

The ACCC is seeking comments on the Draft Media Merger Guidelines by Friday 14 October 2016.  Submissions can be lodged here.  We will continue to monitor developments and provide further updates – please let us know if you would like any more specific information.

Footnotes

1See http://www.accc.gov.au/system/files/Media%20Mergers%20-%202011.pdf.

2http://www.accc.gov.au/media-release/accc-seeks-comments-on-its-draft-guidelines-for-assessing-media-mergers

3The "reach rule” refers to the restriction preventing one person (or company) controlling commercial television broadcasting licenses that collectively reach more than 75 per cent of the Australian population.

4The "2 out of 3 rule” refers to the restriction preventing one person (or company) controlling more than two of the three regulated media platforms (a commercial radio broadcasting licence, a commercial television broadcasting licence or an “associated newspaper”) in any commercial licence area.

5See in particular paragraphs 38 – 40, ACCC, Public Competition Assessment, Foxtel Management Pty Ltd and Ten Network Holdings Ltd – proposed acquisitions, 2 March 2016.  Accessible online at http://registers.accc.gov.au/content/trimFile.phtml?trimFileTitle=MER16+1918.pdf&trimFileFromItemId=1190276&trimFileName=MER16+1918.pdf.

6See “Promoting innovation through competition”, RBB Economics Conference, 5 November 2015.  Accessible online at https://www.accc.gov.au/speech/promoting-innovation-through-competition.

7These three rules are as follows: (1)  the “5/4 rule”, which refers to the restriction that at least 5 independent media voices must be present in a metropolitan commercial radio licence areas (the mainland state capital cities), and at least 4 in regional commercial radio licence areas; (2) the “one to a market rule”, which refers to the restriction that a person (in their own right, or as a director of one or more companies) must not be able to exercise control of more than one commercial television broadcasting licence in that licence area; and (3) the “two to a market rule”, which refers to the restriction that a person (in their own right, or as a director of one or more companies) must not be able to exercise control of more than two commercial radio broadcasting licences in the same licence area.

*The authors acknowledge the assistance of Tina Sun in the preparation of this article.

Competition and Regulation

A number of Gilbert  + Tobin experts review the regulatory aspects relating to the banking industry in Australia. 

Banking and Infrastructure, Competition and Regulation, Mergers and Acquisitions, Restructuring and Insolvency, Tax

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