Ashurst Australia
14 August 2013
Competition Law News
Breaking up Australia's oligopolies
WHAT YOU NEED TO KNOW

With the Coalition widely tipped to win the election in September 2013, it seems likely that the issue of
breaking up Australia's oligopolies will be looked at, yet again.

Currently in Australia, it is only in the special case of anticompetitive mergers or acquisitions that the
Federal Court may order that an acquirer divest an illegally acquired target or assets. There is currently
no general divestiture power.

We examine the position elsewhere around the world, and the issues in introducing a general divestiture
power in Australia. In summary, while much political sabre-rattling may yet occur on this front, the legal,
policy and practical hurdles to doing anything effective mean that there may be some time before there is
any action.
Introduction
In January 2013, the Coalition in Australia announced
that:
In Australia, the Federal Court may impose a wide
range of sanctions on companies which contravene
Australia's competition laws – fines and penalties,
imprisonment for their employees and agents involved
in cartels, injunctions, community service orders,
banning orders and, importantly, damages for affected
consumers.
However, the regulatory arsenal in Australia does not
generally extend to breaking up a large company's
operations. It is only in the special case of
anticompetitive mergers or acquisitions that the
Federal Court may order that an acquirer divest an
illegally acquired target or assets.
Every few years, for some decades now,
commentators, legislators, consumer advocates and/or
partisan industry participants call for the courts (or
indeed the ACCC itself) to be given the power to break
up Australia's oligopolies1. Earlier this year, Senator
Xenophon (re)joined this long line, reportedly stating
that he will:
"renew his push for … giving the ACCC the power
to break-up companies that abuse market power,
including predatory pricing tactics"2.
1
2
See submissions made in the Hilmer Inquiry in 1994/5, Dawson
Review of the Trade Practices Act in 2002, 2011 Dairy prices inquiry
etc.
See Press Release Senator Xenophon, "German Giants will squeeze
independents", 12 February 2013.
"We will improve competition laws so competitive
forces drive productivity growth.

We will review competition policy and deliver
more competitive markets because there will
be, for the first time in two decades, a root and
branch review of competition laws.

We will ensure that big and small businesses
get a 'fair go' and do the right thing by each
other in their respective market places."
With the Coalition widely tipped to win the election in
September 2013, it seems likely that the issue of
breaking up Australia's oligopolies will be looked at,
yet again.
In these brief notes, we examine how Australia
might look again at splitting up dominant firms.
Australia
Current law, principle and policy
The Federal Court of Australia may stop an acquisition
of shares or assets which is likely to have the effect of
substantially lessening competition in an Australian
market3. The Court may also "undo" such an
acquisition by requiring the shares or assets to be
3
See ss 50 and 80 of the CCA.
AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA
SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA
divested, if it or the ACCC has not stopped the
acquisition in time4.
However, this is the only "divestiture" power currently
available under Australia's competition law and it has
only very rarely been used. In 1988, Australian Meat
Holdings was required to divest the shares it had
acquired in a competitor.
The power to require divestiture of anti-competitively
acquired shares or assets is also found in other
jurisdictions – most prominently in the US, where the
Supreme Court considers its divestiture remedy under
the Clayton Act to be:
"simple, relatively easy to administer, and sure. It
should always be in the forefront of a court's mind
when a violation of [the US anticompetitive merger
prohibition in s7 of the Clayton Act] has been
found."5
The question now is whether a wider power – the
power to order divestiture as a response to a misuse
of market power by a dominant firm, or even simply to
break up a clearly dominant firm no matter what it
may have done – is justified.
The potential advantages of such a divestiture order
over other sanctions are that:

a well-targeted divestiture order to break up a
dominant firm will eliminate or reduce market
power with one "cut", and can quickly create
several competitor firms in a previously
"monopolised" or oligopoly market; and

a clean, one-off divestiture may involve far less
ongoing supervision/monitoring by the regulator or
court than "behavioural" undertakings or remedies
imposed on a dominant firm.
On the other hand, however:

in most cases, a divestiture order is likely to be
accompanied by ongoing behavioural undertakings
(for example, not to re-acquire the divested
business, dictating how the split businesses may
deal with each other, etc) – thus, the second
advantage noted above may be illusory;

divestiture may not create successful and efficient
stand-alone competing businesses, as they may
lack some of the advantages of the previous whole
firm; and
4
See s81 of the CCA.
5

(as an extension of the previous point) divestiture
may introduce substantial inefficiencies, in disintegrating efficiently linked business units,
undermining economies of scale, innovation and
investment capability, and a myriad of other
possible detrimental outcomes.
These mixed policy implications suggest some caution
is required. However, it may be the case that
divestiture is to be properly preferred in the right case
and context, where the disadvantages are minimised.
On this basis, there may be an argument to include a
divestiture order in the Australian competition law
arsenal – but to be used only in the (probably) rare
case to which it is most suited.
Previous reviews
In the Dawson Committee report of January 2003,
there was a clear recommendation not to introduce a
divestiture remedy (beyond the existing merger
remedy mentioned above). The report stated:
"A corporation with substantial market power does
nothing illegal through the simple possession of
shares and other assets. The prohibited conduct is
the taking advantage, for a proscribed purpose, of
that market power. Conceptually, divestiture is
inappropriate in this context because there is no
clear nexus between the assets to be divested and
the contravening conduct. For example,
identifying the specific assets to be divested to
preclude a corporation from taking advantage of its
market power for a proscribed purpose would be
difficult at best and arbitrary at worst."
Before the Dawson Committee, the Hilmer, Cooney
and Griffiths Committees all came to the same
recommendation. Particularly, the Hilmer Committee
stated in its report of 1993:
"The Committee … is not persuaded that the many
disadvantages of providing a general divestiture
power are outweighed by the possible advantages.
… There have been no cases in Australia of
persistent misuse of market power and there is no
demonstrated need for such a remedy. … The
Griffiths and Cooney Committees both considered
allowing divestiture as a remedy in cases of
persistent misuse of market power, but
recommended against such a proposal. A
significant factor influencing these
recommendations was that, in contrast to most
other remedies, structurally separating a
corporation will not have a predictable result."
US v EI Dupont Nemours & Co [1961] 366 US 316.
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14 August 2013
2
Query however, whether the finding of the Hilmer
Committee in 1993, that there "is no demonstrated
need for such a remedy", is equally applicable today.
Practice internationally
Internationally, divestiture orders (other than in
relation to anticompetitive mergers) have rarely been
used, and are largely seen as the most drastic of
remedies for misuse of market power.
United States
There has been no contested divestiture order by a US
court in a monopolization case (rather than a merger
case) since 19666.
However, in the early 1900's, the Standard Oil case
stands out as a model for divestiture remedies. In
1911, the US Supreme Court found that Standard Oil
had engaged in various discriminatory and predatory
practices to acquire a dominant position in the oil
refining industry, controlling over 60% of US
production in 1909. The Court confirmed that the
company should be broken up into 34 independent
businesses, each a local geographic monopoly. Some
of these went on to become the oil industry
behemoths of today: Jersey Standard became Exxon,
Standard Oil Company of New York became Mobil and
Standard Oil Company of California became Chevron.
Counsel for Standard Oil contended that a divestiture
remedy would create great inefficiency, raise prices,
see hundreds unemployed, negatively impact the US
economy and foreign trade, and simply create minimonopolies in the regions in which they would operate
(rather than competing firms). However, the divested
businesses grew rapidly (collectively fourfold over the
following 6 years), began to compete directly, and
(with his remaining minority interests in the
businesses) doubled Rockerfeller's wealth to become
the richest man in the world.
In 1966, the Supreme Court in US v Grinnell reviewed
divestiture orders on the encouraging basis that:
"we start from the premise that adequate relief in
a monopolization case should … break up or render
impotent the monopoly power found to be in
violation of the Act".
The Court went on to confirm the divestiture of
business assets by the defendant, with details to be
determined by the Federal Circuit Court.
Since 1966 however, notwithstanding the Supreme
Court's tough "premise" above, there has been no
other significant instance in which a divestiture has
been ordered by a US Court in a contested
monopolization case.
The AT&T case in the 1980's came close – there, AT&T
was broken up into the "baby Bells" (the 7 regional
monopoly local carriers) by consent decree settled
between AT&T and the Government to end longrunning litigation in 1982. However, the disputes
continued. In the subsequent years there were over
900 petitions filed with the DC District Court in relation
to the "line of business" restrictions in the consent
decree.
Nevertheless, the break-up of AT&T was followed by a
surge of competition in long-distance calls – again,
suggesting itself as a model case for divestiture
remedies. However, this growth was arguably, at
least, unrelated to the new industry structure and
much more to do with changing consumer behaviour
and demand. Since the 1980's, the "baby Bells" have
re-aggregated and now lie largely within Verizon
Communications, AT&T Inc. and Qwest Corporation.
European Union
The European Commission has never applied a
divestiture order to a firm abusing its dominance
(although it is empowered to do so).
The relevant EU regulation expressly states that
changes to the structure of a dominant firm are only
to be applied where "there is a substantial risk of a
lasting or repeated infringement that derives from the
very structure of the undertaking" (see paragraph 12
of Council Regulation 1/2003). This requirement
consigns the divestiture power to only the rare case
indeed.
Canada
Section 79 of the Competition Act prohibits a firm in a
position to "control … a class or species of business"
from engaging in "anti-competitive acts" which "have
the effect of preventing or lessening competition
substantially in a market". Where an order prohibiting
illegal conduct is "not likely to restore competition",
the same provision empowers the Competition
Tribunal to make an order "to take such actions,
including the divestiture of assets or shares, as are
reasonable and as are necessary to overcome the
effects of the practice in that market".
As in Europe however, there has been no divestiture
order for an abuse of dominance under section 79.
6
United States v Grinnell Corp 384 U.S. 563 (1966).
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United Kingdom
In the UK, in addition to the European law on
prohibition of abuses of dominance, the Enterprise Act
includes special provisions for "market investigations"
in concentrated industries to be conducted by the
Competition Commission, at the request of the Office
of Fair Trading or the relevant Minister. Once
referred, the Commission must conduct its market
investigation and decide (within 2 years) "whether any
feature, or combination of features, of each relevant
market, prevents, restricts or distorts competition in
connection with the supply or acquisition of goods or
services in the United Kingdom" – that being, an
"adverse effect on competition".
On finding any "adverse effect on competition" in the
market(s) referred to it for investigation, the
Competition Commission must also decide on what
action should be taken by it, or by others, "for the
purpose of remedying, mitigating or preventing the
adverse effect on competition", having regard to "the
need to achieve as comprehensive a solution as is
reasonable and practicable to the adverse effect on
competition".
Ultimately, to remedy an adverse effect on
competition in this context, the Competition
Commission may make orders:

prohibiting conduct such as withholding supply,
discriminating between customers, or acquiring
shares or assets (among other conduct);

regulating prices;

to supply goods or services; and/or

(most relevantly here) the "division of any
business" and the transfer of property, rights,
liabilities or obligations.
The most recently concluded market investigation of
BAA airports (from March 2007 to March 2009)
resulted in the Competition Commission making orders
for the divestiture by BAA of Gatwick, Stansted and
either of Glasgow or Edinburgh airports, within
specified periods determined by the Commission.
These orders were based upon the Commission's
findings that there were "a number of features" of the
relevant markets which gave rise to "adverse effects
on competition", including that:
"… common ownership of the three BAA London
airports is a feature of the market which prevents
competition between them."
Currently, the UK Competition Commission is
conducting a market investigation into "aggregates,
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14 August 2013
cement and ready-mixed concrete". It has recently
published a "provisional findings report", some 16
months after the referral, which includes consideration
of orders for divestiture of cement production capacity
and ready-mixed concrete plants, from the hands of
their private owners.
The Competition Commission's power to order
divestiture of businesses or business assets is unusual.
Two factors set it apart from the US, EU and Canadian
law:

first, the divestiture sanction is being used by the
regulator – as is clearly not the case elsewhere;
and

secondly, and more fundamentally, there is no
requirement under the UK law that the business in
question has engaged in anti-competitive conduct
(whereas there must be a finding of illegal conduct
– monopolization (US) or abuse of dominance (EU
and Canada) – before the sanction is applied
elsewhere). It is enough that a market structure
being examined by the UK Competition
Commission has "features" which give rise to
"adverse effects on competition".
In conclusion from this brief whip around the world,
orders for the divestiture of business assets by a
dominant firm have a mixed record across other major
jurisdictions – there have been some very significant,
and arguably successful cases, but in most
jurisdictions, other than the UK, the sanction has
fallen into disuse.
With this mixed international record, what approach
should we take in Australia?
Practical issues
Whatever the broad policy "need" for a wide-ranging
divestiture remedy may be, there are several very
important practical issues to be dealt with if it is to be
taken up. These include:

What is the primary objective to be achieved?
Where a misuse of market power has occurred, a
divestiture remedy may be intended to achieve two
things:

first, to impose a sanction or penalty on the
infringing firm, and by doing so, deter others
from infringement; and

secondly, to achieve a more competitive
market structure.
4
In our view, the second of these is the more
important objective to be held in mind. Penalising
the infringing firm (and deterring others) can be
dealt with directly by other remedies targeted
specifically at it – such as penalties, injunctions
etc. Divestiture however, impacts everyone in the
market, and competition between them. Thus it is
important that regulator have clear regard to likely
wider competitive outcomes as its first concern in
considering a divestiture remedy.
winner with (usually a transient) monopoly,
provided that the monopoly (or market power) is
then not separately abused – as articulated by
Learned Hand J in Alcoa:
"A single producer may be the survivor out of a
group of active competitors, merely by virtue of
his superior skill, foresight and industry. In
such cases a strong argument can be made
that, although the result may expose the public
to the evils of monopoly, the Act does not
mean to condemn the resultant of those very
forces which it is its prime object to foster: finis
opus coronat. The successful competitor,
having been urged to compete, must not be
turned upon when he wins."
A divestiture order ought not to be made where it
will be unlikely to make relevant markets more
competitive, even if forced divestiture of business
assets would negatively impact on the infringing
firm so as to prevent recurrence or deter others.

What is an appropriate threshold for the
exercise of a divestiture power?
In our view, this alone is reason enough not to
follow the UK example – to dull the competitive
urge in Australian markets with the threat of
breaking up the business(es) which succeed is
likely to reduce the competitiveness of those
markets.
Is it simply "market features" with an
"adverse effect on competition" – or must
there have been an abuse of market power by
the firm to be split up?
Secondly, whether or not this approach is desirable
from a policy perspective, the Australian
Commonwealth government may be
constitutionally constrained in replicating the UK
legislation. A compulsory divestiture of business
assets may infringe the requirement under
s51(xxxi) of the Commonwealth Constitution that
property only be acquired (or divested to others)
under Commonwealth legislation on "just terms"7.
Particularly if the UK model were adopted:
The UK Competition Commission has the power to
require divestiture simply where there are market
"features" (such as common ownership, barriers to
entry or market concentration – none of which may
be attributable to an individual market participant)
which have an "adverse effect on competition". No
anticompetitive conduct by the firm to be split up
is required.
Future Australian governments may be tempted to
look closely at the UK model. It is a process by
which governments may directly target particular
Australian oligopoly industries, and, through an
independent regulator, impose upon them a
structural "solution" to address their perceived
deficiencies. In relation to some Australian
concentrated industries, at least, such a direct
assault may be popular.
However, despite the potential political attractions
of the UK model, in our view, a divestiture remedy
should be imposed only where a company has
abused its monopoly or market power – that is, in
the Australian context, contravened s46 of the
CCA, by taking advantage of its substantial market
power. This is for two main reasons:
First, the UK approach, which does not require a
contravention, potentially runs contrary to one of
the fundamental tenets of antitrust policy: that
competition will be fostered by rewarding the
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
a compulsory divestiture of business assets, in
effectively "fire sale", time limited
circumstances, is unlikely to deliver "just
terms" to the vendor for the assets sold – even
more so where the divestiture results in
additional costs or inefficiencies being imposed
on the remaining business of the vendor; and

the divestiture would not fall within an
exception to the constitutional requirement:
that is where divestiture is required "as a
penalty for proscribed conduct" by the firm
required to divest (in sharp contrast to the
position where a divestiture is ordered after it
has undertaken an illegal, anticompetitive
Placitum 51(xxxi) of the Constitution provides that the
Commonwealth Parliament has power "to make laws for the peace,
order and good government of the Commonwealth with respect to
… the acquisition of property on just terms from any State or person
…".
5
merger8 or having been found to misuse its
substantial market power).
market power which underpins the contravening
conduct.
For these reasons, if a divestiture power is to be
fostered in Australia, it is preferable that it should
only follow on from, and as a remedy for, a
contravention of existing Australian competition
law: be it undertaking an illegal merger or
acquisition (as is already the case), or taking
advantage of substantial market power.

How should a divestiture power be
administered?
Bearing in mind the points above, to be effective, a
divestiture remedy for taking advantage of
substantial market power should only be invoked
where:

the impugned firm's market power, and the
contravening conduct, are clearly derived from
the structure of the business operations of the
firm;

the divestiture of a particular identified part of
the firm will address directly the prospect of
contravening conduct recurring; and

the resulting market structure is likely to be
appreciably more competitive (and hence more
likely to constrain any remaining market
power) than the position pre-divestiture.
Criteria of this sort are important to avoid (or
minimise) the potential for arbitrary outcomes
which concerned the Hilmer Committee and others.
Further, these criteria reflect the EU regulatory
requirement that a divestiture remedy be available
only in cases where the misuse of market power
"derives from the very structure of the [firm]".
However, notwithstanding the common sense
underpinning them, these further criteria may be
deceptively complex in application. How does one
assess precisely which assets or business
operations are the source from which the
contravening conduct is derived? For example,
where there are regulatory barriers to entry,
established customer relationships or high
switching costs for those customers, it is less likely
that divestiture of any of the company's assets will
address concerns as to market power and the
contravening conduct derived from it. Perhaps
though, divestiture will be more clearly appropriate
where unutilised production capacity (from an idle
plant, for example) is an important source of the
8
In our view, there should be very few short cuts
around these criteria – they are necessary to
ensure that courts impose a divestiture upon a firm
only where it will have a beneficial effect (so far as
the public interest is concerned) on both the firm
and the market in which it operates.

How should a court view the trade-off
between potential increased competition and
the potential for inefficiencies and other
negative impacts?
In addition to the criteria set out above, a court
considering a divestiture remedy should also
consider whether there will be such inefficiencies
and other costs from the divestiture imposed on
the firm, that (due to its reduced ability to
compete effectively post-divestiture) competition in
the market will not be improved.
Additionally, the courts and regulators must be
alive to, and check against, the possibility that
they are really being implored by competitor
plaintiffs or industry complainants to inhibit the
competitiveness of a more efficient firm – with
divestiture then having potentially serious
anticompetitive effects.
Breaking up the business operations of major
companies will rarely be simple, and will always
involve trade-offs. The Standard Oil divestitures
were reputedly easier by virtue of the various
businesses operating semi-independently prior to
break up – but such conditions will be rare in
today's world where integration synergies and cost
efficiencies are universally sought and highly
prized.
By way of example, in a modern grocery
supermarket business, key assets may include a
major distribution centre servicing a wide network
of stores in a region, and corporate relationships
with major suppliers. These are not elements
which can be readily "divested" without leaving the
business far less able to function effectively. In
banking, there are very significant scale
efficiencies, not least in relation to the cost of
funds.
Ultimately, the court must make a judgment on
the likely effect of a divestiture order – will it
achieve the ultimate objective of promoting
competition (or at least preventing further
See WSGAL v TPC [1994] FCA 1079
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6
anticompetitive outcomes, without serious tradeoffs) in the relevant market(s)?

Does the need for court supervision on an
ongoing basis play a role?
Finally, an order to divest should not create a
thriving industry in monitoring compliance with the
order. This is a key concern for courts requiring
divestiture of business assets. The record
following on from the consent decree in the AT&T
case cited above, involving around 900 subsequent
petitions for clarification and enforcement, is
sufficient warning in this regard.
In structuring divestiture remedies in the merger
context, the ACCC identifies the following issues for
supervision by it, in its Merger Guidelines:

the identity of the purchaser;

timing of the sale;

regulating ongoing commercial relationships
between vendor and purchaser (eg supply of
inputs etc);

the preservation of the business assets to be
divested;

arrangements to apply if divestiture cannot be
effected in time; and

reporting to the regulator on progress and
compliance with the orders made.
In addition, the court may need to order, and then
monitor, that the vendor not re-enter the industry for
a period of time, or compete in certain products or
areas.
As this list of issues for monitoring and supervision
shows, it is highly likely that careful and detailed
behavioural rules will have to be laid down in making a
divestiture order, so that the divestiture order has real
teeth. As it does so, of course, the court must
consider and assess the wider issues of whether it is
able practically to monitor and enforce compliance
with all these details implicit in any effective
separation of businesses – if it cannot, then a powerful
argument arises that the order to divest should not be
made in the first place.
Conclusion
While "breaking up dominant firms" may sound straightforward when promised on the campaign trail, there
are complex issues involved – touching on Commonwealth constitutional limitations, fundamental microeconomic policy settings, potentially imposing significant inefficiencies on successful businesses and the search
for workable ways in which to monitor and ensure compliance with any orders made.
Further, these complex issues arise in a context in which the target firm is likely to be highly motivated to
contest the process, and have significant resources to employ in doing so.
In short, while much political sabre-rattling may yet occur on this front, the legal, policy and practical hurdles
to doing anything effective mean that there may be some time before there is any action.
Author
Bill Reid, Partner
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14 August 2013
7
Competition Team Contacts
Liza Carver
Partner
Sydney
T: +61 2 9258 5897
E: [email protected]
Peter Armitage
Partner
Sydney
T: +61 2 9258 6119
E: [email protected]
Bill Reid
Partner
Sydney
T: +61 2 9258 5785
E: [email protected]
Ross Zaurrini
Partner
Sydney
T: +61 2 9258 6840
E: [email protected]
Alice Muhlebach
Partner
Melbourne
T: +61 3 9679 3492
E: [email protected]
Darren Grondal
Partner
Perth
T: +61 8 9366 8169
E: [email protected]
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