This article first appeared in Lexis Nexis Competition and Consumer Law News, Vol 32, No 5., July 2016, pp. 212-214
Introduction
On 16
June 2016, the Australian Competition and Consumer Commission (ACCC) announced
that it had accepted court enforceable undertakings from Primary Health Care
Limited (Primary) and Healthscope Ltd (Healthscope) requiring the divestiture
or forced sale of extensive pathology assets in Queensland.[1] The ACCC required this divestiture because in
its view Primary’s acquisition of Healthscope’s Queensland pathology assets in 2015
had breached section 50 of the Competition
and Consumer Act 2010 (CCA).
The Primary/Healthscope
divestiture sends a strong warning to all businesses which may seek to complete
a merger or acquisition without first seeking ACCC clearance – namely that the
ACCC will not sit idly by and allow transactions which it believes substantially
lessen competition to stand. Rather the ACCC will take action to reverse the
effects of the transaction to “restore a competitive market structure”. Indeed,
in many respects Primary and Healthscope can consider themselves to have been
quite fortunate in avoiding the imposition of much more serious penalties.
Background
The
divestiture undertaking came about because the ACCC believed that the
acquisition by Primary of Healthscope’s Queensland pathology assets contravened
section 50 of the CCA. Section 50 states:
(1) A corporation must not directly or
indirectly:
(a) acquire shares in the capital of a body
corporate; or
(b)
acquire any assets of a person;
if the acquisition would have the effect, or
be likely to have the effect, of substantially lessening competition in any
market.
After
conducting an extensive investigation, which included the use of multiple statutory
notices and the compulsory examinations under oath of executives from both
Primary and Healthscope, the ACCC concluded that:[2]
The
removal of the Healthscope Queensland pathology business from the relevant
market/s through Primary’s acquisition of the Healthscope assets would be
likely to have the effect of substantially lessening competition in one or more
markets in contravention of section 50 of the Act.
Neither
Primary or Healthscope agreed that the acquisition would have had the effect of
substantially lessening completion in a market.
However, they both agreed to enter into the divestiture undertakings in
order to address the ACCC’s competition concerns.[3]
Transaction history
In the
Undertakings the ACCC sets out the history of the transaction.[4] The ACCC stated that on 17 December 2014
Healthscope entered into arrangements with Primary to sell certain pathology
assets including:
· rights to non-pathology collection centres and laboratories;
· rights to hospital relates pathology collection centres located in
private hospitals and associated hospital complexes; and
· property and inventory associated with Healthscope’s pathology business.
The two
companies also entered into a number of service agreements and agreements to
transfer employees from Healthscope to Primary. There was also an ancillary
agreement to terminate ongoing litigation between the two companies.
The
transaction was completed on 2 February 2015.
However,
neither Primary or Healthscope informed the ACCC of the transaction. Rather the
ACCC only became aware of the transaction after the event when it started to
receive complaints from market participants.
That the
parties decided to complete the transaction without seeking ACCC approval is
very surprising. As stated by ACCC
Chairman Rod Sims:
Primary
and Healthscope completed the transaction without notifying the ACCC, despite
being on notice that the ACCC would have serious concerns about the likely
competitive effect…
It is of
considerable concern to the ACCC that well-advised firms such as Primary and
Healthscope chose to complete the transaction in the way that they did.[5]
Sim’s
reference to the parties having been on notice of the ACCC’s concerns was a
reference to the ACCC’s earlier 2012 decision to block the sale of the very
same Healthscope assets to Sonic Healthcare Limited (Sonic). As stated by the ACCC in relation to that
matter:
The proposed acquisition (by Sonic of Heathscope’s
pathology business) in Queensland would result in the removal of a substantial
competitive constraint on the two major pathology providers in that state.
Whilst Sonic and Primary are the clear market leaders in Queensland,
Healthscope is an important competitor in that market.[6]
One can
well understand the ACCC’s concerns about a Primary – Healthscope merger given
that it represented a tie-up between the first and third largest pathology
providers in Queensland, in circumstances where the ACCC had already blocked a
proposed tie-up between Sonic and Heathscope, the second and third largest
pathology providers in Queensland.
Undertakings
Pursuant
to the Undertaking, Primary has been required to divest virtually all of the
assets which it acquired from Healthscope. As stated by the ACCC, the
Undertakings “largely reverse the acquisition”. The Divestiture Assets are
listed at Schedule 4 to the Undertakings and include:[7]
· Service Level Agreements with leases;
· Service Level Agreements without a lease;
· Rights to use and occupy leasehold properties for collection centres;
· Rights to use and occupy leasehold properties for laboratories and
associated collection centres; and
· Furniture, equipment, laboratory equipment and consumables.
In other
words, over 70 full-functioning collection centres are required to be sold.
The ACCC
has also approved a prospective buyer for the divested assets, namely Medilab
Pathology, which is described as an experienced pathology provider based in
Sydney.
Accordingly,
the effect of the divestiture will be that Medilab will become a new entrant to
the Queensland pathology market. The ACCC has approved Medilab as an
appropriate entity to acquire the Divestiture Assets because of it did not
operate any existing pathology businesses in Queensland.
While
Medilab has been approved by the ACCC as an Approved Purchaser of the
Divestiture Assets, this does not mean that all of the Divestiture Assets have
to be sold to Medilab. It is also possible
for other pathology providers to become Approved Purchasers.
Schedule
2 of the Undertaking includes a “Proposed Purchaser Notice Form” which other
pathology providers can lodge with the ACCC in the event that they wished to
purchase any of the Divestiture Assets.[8]
Such a situation may arise if Medilab decides that it does not wish to purchase
a particular Divestiture Asset, in which case, Primary would be able to seek
another buyer, but only an Approved Buyer as determined by the ACCC.
Forced Divestiture
The
Undertaking sets out a time frame for the sale of the Divestiture Assets to
Medilab, which is described as the Initial Sale Period. Whilst the Initial Sale Period has remained
confidential, it is likely to be a period of approximately twelve months during
which time all negotiations with Medilab concerning the sale of the Divestiture
Assets, including the sale price, will have to be concluded.
If the
sale of all or part of the Divestiture Assets does not occur within the Initial
Sale Period, the forced divestiture provisions in the Undertaking will take
effect. These provisions state:[9]
In the
event that the divestiture of any of the Divestiture Assets to an Approved
Purchaser is not completed by the end of the Initial Sale Period, then those Divestiture
Assets become unsold assets (Unsold Assets) and the provisions of clause 9.
If any of
the Divestiture Assets have not been sold by the end of the Initial Sale
Period, the Undertaking requires Primary to dispose of the remaining assets
through a Divestiture Agent, approved by the ACCC. As is apparent the existence of forced
divestiture provisions in the Undertaking places a great deal of pressure on
Primary to agree to commercial terms with Medilab during the Initial Sale
Period or face what will effectively be a “fire sale” of the remaining assets.
Risky behaviour
The ACCC
made particular reference in its media release to its decision not to seek
additional remedies against both Primary and Healthscope for having undertaken
this transaction without having first sought an ACCC clearance:[10]
The ACCC
has decided not to commence proceedings against both Primary and Healthscope
seeking penalties and other remedies including divestiture. In making this
decision, the ACCC’s motivation has been to restore a competitive market
structure in Queensland as expeditiously as possible, and the onerous
undertakings given by Primary and Healthscope achieve that.
The other
remedies which would have been available to the ACCC had it decided to take
legal action against Primary and Healthscope for a breach of section 50 of the
CCA included pecuniary penalties and disqualification orders.
In terms
of pecuniary penalties, the ACCC could have sought penalties from both Primary
and Healthscope of the greatest of:
· $10 million;
· three times the total benefit reasonably attributable to the illegal
conduct or
· 10% of the annual turnover of each of Primary and Healthscope in the
twelve months ending at the end of the month in which the illegal conduct
occurred.
In other
words, Primary could have been exposed to a total pecuniary penalty in relation
to this transaction of as much as $161 million based on its total 2014-2015 revenue
of $1.618 billion.[11]
Healthscope’s exposure could have been as high as $240 million based on its total
2014-2015 revenue of $2.4 Billion.[12]
While it
is unlikely that a court would have imposed pecuniary penalties of this
magnitude in this particular matter, businesses must be aware that the
penalties being imposed by Australian Courts for contraventions of the CCA are
rising and are likely to continue to rise. It is just a matter of time before the
Court start imposing much larger pecuniary penalties for contraventions of the
CCA, including the pecuniary penalties equivalent to 10% of total annual revenue.
The other
significant remedy which the ACCC could have sought in relation to this
transaction were orders disqualifying directors and senior managers of both
Primary and Healthscope from managing these corporations or any other corporations
for a number of years. This is a
particularly relevant consideration for all full time directors of large
publicly listed corporations, such as Primary and Healthscope, who may be
excluded from their primary profession for many years for having engaged in a
contravention of the CCA.
Conclusions
The risks
of consummating a merger without first seeking ACCC approval can be very
serious, particularly in circumstances where the parties did so with knowledge that
the ACCC had competition concerns about the transaction. In this instance,
Primary and Healthscope may have been quite fortunate to achieve the outcome
which they did, particularly in terms of avoiding litigation, the imposition of
significant pecuniary penalties and orders disqualifying their senior
executives from managing corporations for a number of years. Having said that Primary and Healthscope have
probably not yet felt the full effects of this unfortunate transaction in terms
business disruption, management time, legal costs and ultimately the costs of
having to dispose of the relevant assets at bargain basement prices.
[1] ACCC
Media release, ACCC to restore
competition for pathology services in Queensland, dated 16 June 2016 at http://www.accc.gov.au/media-release/accc-acts-to-restore-competition-for-pathology-services-in-queensland
[2] Ibid.
[3] Primary Health Care Limited, Undertaking to the Australian Competition and Consumer Commission, dated 15 June 2016
at http://registers.accc.gov.au/content/index.phtml/itemId/1196395 and Healthscope Ltd,
, Undertaking
to the Australian Competition and Consumer Commission, dated 15 June 2016
at http://registers.accc.gov.au/content/index.phtml/itemId/1196407 (Undertakings)
[4] Ibid.
[5] ACCC, above n 1.
[6] ACCC Media Release, ACCC to oppose Sonic’s acquisition of Healthscope’s pathology business
in Queensland, dated 11 October 2012 at http://www.accc.gov.au/media-release/accc-to-oppose-sonics-acquisition-of-healthscopes-pathology-business-in-queensland
[7] Undertakings, above n 3.
[8] Ibid 32-33.
[9] Ibid 16-20.
[10] ACCC, above n1.
[11] Primary Health Limited, 2015
Annual Report at http://www.primaryhealthcare.com.au/irm/content/annualreport/2015/#1
[12] Healthscope Ltd, 2015 Annual
Report at http://www.healthscope.com.au/application/files/8614/5006/0081/Healthscope_Annual_Report_FY15.pdf
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