Focus: Navigating the proposed price signalling legislation
4 April 2011
In brief: Last week, the Federal Government introduced into Parliament legislation to prohibit the disclosure of pricing and other information. The proposed law, if enacted, will have wide-reaching consequences. Partners Fiona Crosbie (view CV) and David Brewster (view CV) explain.
- What are the exceptions to the prohibitions?
- Concerns with the scope of these exceptions
- Authorisation and notification unlikely to be of practical utility in many scenarios
- Costs of ACCC investigations
How does it affect you?
- If passed, the Bill will introduce two new civil prohibitions on information disclosure. It will apply to the supply of goods or services prescribed by regulation. The Federal Government has stated that financial services will be the first to be prescribed.
- The 'private disclosure' prohibition prohibits private disclosures of pricing information to competitors, regardless of whether the purpose or effect of the conduct is anti-competitive. However, there are real questions about the prohibition's scope as it could render illegal a variety of everyday, legitimate commercial arrangements between competitors.
- The 'general disclosure' prohibition prohibits any disclosures, private or public, of information regarding:
- prices for goods or services to be acquired or supplied by the corporation;
- the capacity of the corporation to acquire or supply goods or services; or
- any aspect of the corporation's commercial strategy.
A general disclosure will only be illegal where it is made for the purpose of substantially lessening competition in a market. While this requirement is relatively difficult to establish, it is far from insurmountable, as past court cases illustrate. Moreover, the breadth of the prohibition will inevitably subject more companies to investigations by the Australian Competition & Consumer Commission (the ACCC), even if no litigation ensues.
- A breach of the prohibitions may result in civil penalties for companies of up to $10 million, or three times the total benefits obtained by reason of the contravention or 10 per cent of the company's annual turnover, whichever is greater. For individuals, the maximum penalty for each act in contravention of the prohibitions is $500,000.
The private and general disclosure prohibitions will not apply to disclosures that are:
- authorised by law;
- made between related bodies corporate;
- made in relation to a collective bargaining notice;
- made in the course of engaging in conduct that is covered by an existing authorisation;
- covered by a notification that has been lodged with the ACCC; or
- made to comply with a company's continuous disclosure obligations under the Corporations Act 2001 (Cth).
The Bill also contains a number of exceptions that relate specifically to the private disclosure prohibition, including disclosures:
- between competitors in a supplier/customer relationship;
- to an unknown competitor;
- made for the purposes of a proposed or an existing joint venture; and
- made in connection with an acquisition of shares or assets.
The Bill further provides that:
- a party may obtain authorisation for a disclosure, provided the ACCC is satisfied that a public benefit test has been met;
- a party may lodge a notification of a proposed disclosure with the ACCC. Statutory immunity will apply 14 days after the notification is lodged, unless the ACCC revokes the notification; and
- a company will not be 'knowingly concerned' in a breach of the disclosure prohibitions by another party simply because it has received pricing information.
Upon release of the exposure draft of the Bill, concerns were raised about the potential for the private disclosure prohibition to capture a range of legitimate commercial conduct, given the limited scope of the available exceptions to the prohibition. The Government has addressed some of these concerns but rejected calls for an additional carve-out based on legitimate business justifications.
In our view, the exemptions remain too narrow and give rise to significant uncertainty regarding their likely scope. Examples of problematic applications of the prohibitions to legitimate business conduct are discussed below.
Limitations of the joint venture exemption
The Government has stated that the amended joint venture exemption in the Bill will apply to syndicated loan arrangements. However, it fails to address many other situations in which competitors might wish to discuss or enter legitimate collaborative commercial arrangements that do not constitute a joint venture. For example:
- banks that interact with each other outside a syndicated loan scenario may have a legitimate commercial reason to discuss pricing arrangements with a common customer, as in a situation of insolvency. This would be prohibited;
- competitors might wish to discuss efficiency-enhancing collaborative endeavours that are not set up as a joint venture, such as back-office outsourcing or common procurement arrangements, that require communication on historic or future pricing information. Even if the competitors ultimately sought authorisation from the ACCC for any such arrangement, their preliminary discussions leading up to a decision to approach the ACCC could be illegal.
Private disclosure prohibition affects all pricing information
The private disclosure prohibition applies to all pricing information. The nature of the information and its potential to damage competition is irrelevant under the private disclosure prohibition. Accordingly, it will be illegal for competitors to discuss:
- historical industry pricing information, even if this is discussed for a legitimate purpose such as identifying opportunities for improvements in industry competitiveness or lobbying governments;
- information of no competitive significance. For example, pricing information that is stale due to the passage of time, and of no relevance to future price competition, could not be discussed between competitors; and
- information that is already in the public domain. Competitors will not be able to avoid liability by limiting communications to public domain information, since this also is captured by the private disclosure prohibition.
Preliminary M&A discussions
Another example of legitimate commercial disclosures that may not be covered by the exceptions are preliminary discussions in relation to mergers and acquisitions. While there is an exemption to the private disclosure prohibition for discussions involving the acquisition of shares or assets, this exemption is limited to 'an actual or proposed contract, arrangement or understanding'. In the preliminary stages of merger discussions, there may be no 'proposed contract', particularly at a point in time when the terms and scope of any transaction have not yet been agreed or negotiated with any specificity.
Further, where public companies are concerned, characterising preliminary merger discussions as a 'proposed contract, arrangement or understanding' could trigger a continuous disclosure obligation to make a market announcement under stock exchange listing rules. Preliminary pre-merger discussions will, accordingly, have to be handled carefully.
The examples above illustrate a problem inherent in the Bill, whereby a broad range of conduct is prohibited, subject to limited exceptions. Uncertainties regarding the scope of the exceptions, and their likely interpretation by the courts, create risk for businesses, which will bear the onus of establishing that one of the exceptions applies.
As noted, companies may lodge an authorisation or notification of a proposed disclosure with the ACCC in order to obtain legal immunity. These regimes may be of assistance for some collaborative arrangements between competitors. However, in many situations the waiting period before immunity applies (14 days for a notification, and up to six months or longer for an authorisation) will not be practical. Additionally, the public nature of the authorisation and notification processes makes them inappropriate during preliminary negotiations between competitors, given the parties will not have negotiated a firm proposal capable of public disclosure.
Another key issue for business in relation to the prohibitions is the cost of ACCC investigations. The broad scope of the prohibitions raises a significant risk that companies may find themselves the subject of an ACCC investigation and will have to expend substantial resources responding to the ACCC's inquiries.
The ACCC has the statutory power to demand the production of documents and information, to conduct interviews on oath and to raid premises. It is likely that the ACCC will make full use of these powers in enforcing the new prohibitions and, given the breadth of the prohibitions, it may be difficult to challenge the ACCC's right to do so.
Even if a company has a legitimate business purpose for making a disclosure about prices, such as a desire to communicate with shareholders or customers, the ACCC may still wish to investigate and require the production of underlying documentation in order to determine if there is a secondary purpose of signalling to competitors. For example, the ACCC has continued to raise concerns regarding public statements by banks regarding future interest rate increases, even where the banks have consistently put forward legitimate commercial reasons for making such statements.
Although the new prohibitions are targeted at anti-competitive price signalling and information exchange between competitors, the breadth of the prohibitions and the limited exceptions mean that the laws have broad implications for businesses operating in Australia.
Please contact us if you require advice, including training in relation to the proposed price signalling reforms and how they may affect your business.
- Fiona CrosbiePartner,
Ph: +61 2 9230 4383
- David BrewsterPartner,
Ph: +61 3 9613 8707
- Carolyn OddiePartner,
Ph: +61 2 9230 4203
- Jacqueline DownesPartner,
Ph: +61 2 9230 4850
- Kon StelliosPartner,
Ph: +61 2 9230 4897