In brief 5 min read
The Full Federal Court has dismissed the ACCC's appeal against Aurizon's proposed sale of the Acacia Ridge rail terminal to Pacific National. The Full Court held that the acquisition was unlikely to substantially lessen competition, even in the absence of a behavioural undertaking from Pacific National.
- To find a contravention of section 50 of the Competition and Consumer Act 2010 (Cth) (CCA), a speculative impact on competition is not sufficient.
- While merger parties in contested merger cases can offer an undertaking, it cannot form part of the court's assessment as to whether the acquisition would contravene s50 of the CCA.
- The court can order compliance with an undertaking in lieu of granting injunctive relief.
In July 2017, Aurizon agreed to sell the Acacia Ridge rail terminal in Queensland (the Terminal) to Pacific National (PN). PN is the largest provider of rail linehaul services in Australia.
The ACCC refused to grant informal clearance to the proposed acquisition and did not accept a number of undertakings offered by PN. In July 2018, the ACCC instituted proceedings in the Federal Court alleging, amongst other things, that the acquisition would contravene s50. The ACCC argued that PN's ownership of the Terminal would have the likely effect of substantially lessening competition in the supply of interstate rail linehaul services as it would allow PN to discriminate against third party users of the Terminal thereby raising barriers to entry and deterring new entry.
In May 2019, the trial judge accepted a behavioural undertaking from PN to the effect that it would not engage in discriminatory conduct against competitors when providing access to the Terminal. On the basis of this undertaking, the trial judge found that the proposed acquisition would not contravene s50.
The trial judge noted that, however, without the undertaking, he would have found that the proposed acquisition contravened s50. This is because the trial judge could not rule out the real commercial chance of another provider of rail linehaul services emerging and seeking access to the Terminal.
In June 2019, the ACCC appealed the trial judge's decision. Aurizon and PN both also cross appealed.
The key issues in the appeal were:
- What was the likelihood of a new entrant in the next five to 10 years if the proposed acquisition did not proceed?
- What is the meaning of 'likely' in s50 of the CCA?
- Was the trial judge wrong to take PN's offer of an undertaking into account when assessing whether s50 of the CCA has been contravened?
- Was the form of PN's undertaking appropriate?
The Full Court handed down its decision on 6 May 2020, allowing the cross-appeals by Aurizon and PN but dismissing the ACCC's appeal. The majority judgment was delivered by Justices Middleton and O'Bryan and the minority judgment was delivered by Justice Perram.
The Full Court found that the proposed acquisition was unlikely to substantially lessen competition in the relevant market and released PN from the undertaking.
The competition analysis
The central issue was whether PN's ownership of the Terminal would deter new entry of a rail linehaul service provider by reason of PN's ability to discriminate against that entrant. Related to this was whether new entry of a rail linehaul service provider was likely and not merely speculative.
The majority of the Full Court found that:
- while the comparison under s50 regarding the future with or without the acquisition requires predictions about various future facts, each fact does not need to be shown to be 'likely' in its own right to form part of the court's assessment; and
- the relevant test is whether it is 'likely' the acquisition would have the effect of substantially lessening competition after an evaluation of all the evidence, taking into account the significance of the predicted facts and circumstances to competition and the likelihood of such facts and circumstances occurring in the future.
During the trial, the ACCC argued that Qube would be a likely entrant. Qube's evidence, however, showed it did not intend to do so. The Full Court therefore found that the prospect of new entry was only a mere possibility and speculative. On that basis, the Full Court concluded that PN's acquisition of the Terminal would not be likely to substantially lessen competition.
The meaning of 'likely'
The majority of the Full Court confirmed that 'likely' in the context of s50 means a 'real chance' or 'real commercial likelihood', but need not be 'more probable than not'.
The court's power to accept undertakings
The majority of the Full Court went on to make a number of observations about the court's power to accept undertakings from merger parties. The majority commented that:
- the court only has the power to accept an undertaking after a contravention of s50 is found;
- the undertaking offered by PN should not have been taken into account as part of the relevant factual matrix when assessing whether the acquisition would contravene s50; and
- the court may accept an undertaking instead of granting injunctive relief and is not limited to accepting an undertaking in the form of the injunctive relief sought by the ACCC.
The majority of the Full Court agreed that PN's behavioural undertaking was atypical of those normally accepted by the court, but rejected the ACCC's claims that PN's undertaking was vague and incapable of enforcement and insufficient to prevent PN from engaging in anti-competitive conduct.
While both PN and Aurizon welcomed the Full Court's judgment, the ACCC indicated it is carefully considering the decision.
ACCC Chairman Rod Sims said the outcome 'demonstrates the real difficulty of applying the substantial lessening of competition provisions in the legislation'. He further commented that 'we've got a merger law at the moment that is probably damaging the productivity of the economy so I would have thought this is as an important a reform as others that are being mentioned in the context of the post-COVID recovery'.
If you would like to discuss the decision and the implications for merger parties going forward, please get in touch with one of our team members.