Competition law issues arising from the acquisition of minority shareholdings

Articles Written by Sar Katdare (Partner), Jaime Campbell (Senior Associate), Blake Hunt (Law Graduate)

In August 2020, Amazon’s proposed acquisition of a minority interest in Deliveroo was cleared by the UK’s Competition and Markets Authority (CMA).  At the same time, the Australian Competition and Consumer Commission (ACCC) is continuing to investigate whether the acquisition by Qantas Airways Ltd (Qantas) of 19.9% interest in Alliance Airlines (Alliance) is a contravention of section 50 of the Competition and Consumer Act 2010 (CCA).

We consider what lessons may be drawn from these matters. 

Acquisition of minority interest in Deliveroo by Amazon

Background

In late 2019, the CMA commenced an investigation of Amazon’s proposed purchase of a 16% shareholding in Roofoods Pty Ltd, otherwise known as Deliveroo, in the UK.  The acquisition would provide Amazon with certain rights including representation on the Deliveroo board.

The CMA considered whether the acquisition would be expected to result in a substantial lessening of competition (SLC) within any markets in the UK.

Areas of overlap

While Amazon operates across multiple markets, the main areas of competition between the parties were considered to be:

  • the supply of online restaurant platform services in the UK; and
  • the supply of online convenience grocery delivery services in the UK.

Amazon does not currently operate in the online restaurant platforms market but it had previously entered the market at a limited capacity before exiting in 2018. Amazon does however supply online convenience grocery delivery services and has key partnerships in the UK which make it one of the biggest companies in the market, along with Deliveroo.

Competition concerns

The main areas of concern in both markets were that the acquisition would result in a SLC because Amazon would likely:

  • compete less strongly with Deliveroo;
  • discourage Deliveroo from competing; and/or
  • rely on Deliveroo for its presence in either market. 
Why did the CMA ultimately clear the transaction?
Online Restaurant Platforms Market

The CMA considered that the acquisition would be unlikely to result in a SLC in the online restaurant platforms market because Amazon did not have sufficient control over Deliveroo given it was only acquiring a minority interest. While a 16% interest would provide Amazon with the ability to materially influence, it would not have control over the commercial policy of Deliveroo and would be unable to drive policy in a direction that board members or shareholders objected to. 

Some other factors relevant to the CMA’s decision were that: 

  • Amazon was unlikely to compete materially less vigorously because it would have a strong preference for acquiring a customer (and receiving 100% of the profits from that customer) over allowing Deliveroo to retain that customer (with Amazon receiving 16% of profits); 
  • due to having influence less than would arise from a controlling interest, Deliveroo would be unable to “worsen” its offering (via higher prices or reduced output or quality) to accommodate Amazon; and
  • there would be sufficient competitive constraint on Deliveroo from companies such as Uber Eats and Just Eat post-acquisition.
Online Convenience Groceries Market

Likewise, the CMA considered that the acquisition would be unlikely to result in a SLC in the online convenience groceries market because while Amazon would not have sufficient control over Deliveroo, even if it had material influence over it.

Some other factors relevant to the CMA’s decision were that: 

  • the companies’ offerings in the market were largely differentiated in terms of product range, speed of delivery and price range;
  • there was sufficient competitive constraint in the market to prevent Amazon from increasing prices or competing less aggressively; and
  • the CMA found that uncertainty in the market (as a result of COVID-19) and the potential for competitors to develop their services further reduced the likelihood of Amazon failing to develop its own presence in the market.
Plans to increase interest

In its assessment, the CMA took into account internal documents of Amazon which indicated that the minority acquisition was a “potential first step” towards a full acquisition, rather than a purely financial investment. 

However, these potential future plans did not ultimately impact the CMA’s decision because, if Amazon attempted full acquisition, it would face significant cost and risk being outbid by another buyer. The CMA did caution though that the assessment could be different if Amazon acquired a materially larger interest and such an acquisition would be assessed by the CMA.

Acquisition of minority interest in Alliance by Qantas

Background

In February 2019, Qantas announced it had acquired a 19.9% interest in Alliance making Qantas Alliance’s largest shareholder. Qantas did not obtain board representation and announced that it was supportive of a ‘business as usual’ approach to the management of Alliance. In August 2019, the ACCC released a Statement of Issues identifying preliminary concerns that the completed acquisition was likely to have the effect of substantially lessening competition in contravention of section 50 of the CCA. 

At the time of acquisition, Qantas indicated that it expected to build on its shareholding, with a longer-term view of taking a majority position in Alliance.  However, Qantas subsequently provided an undertaking to the ACCC that no further interest would be acquired until the ACCC completed its investigation.

While Qantas primarily provides regular passenger transport (RPT) services in the domestic and international markets, it also provides chartered fly-in fly-out (FIFO) services in Australia.  Alliance is a specialist airline based in Brisbane that primarily acts as a chartered FIFO service provider across Australia, New Zealand, the Pacific Islands and South East Asia, catering to group services including sporting teams, corporate group travel and government delegates.

Areas of overlap

The main areas of overlap identified by the ACCC were as follows: 

  • Charter Services:  Qantas is in competition with Alliance for corporate customers requiring FIFO services, principally in regions including Queensland, Northern Territory and Western Australia. In relation to some of these services, Alliance operates in cooperation with Virgin Australia (Virgin), under a charter agreement; and
  • RPT Services:  Qantas is in competition with Alliance for RPT routes between Brisbane and regional areas, Bundaberg and Gladstone.
ACCC’s concerns

The ACCC published a Statement of Issues (SOI) outlining its preliminary competition concerns with the acquisition. The SOI focussed on the close competition between Qantas and Alliance in regional markets and FIFO travel. The ACCC considered that competition concerns may arise as a result of the following: 

  • putting Qantas in a position to limit fundraising by Alliance, thereby blocking alternative investors;
  • the potential impact Qantas’ shareholding may have on Alliance’s perception as an independent competitor to Qantas, thereby affecting its ability to grow and compete;
  • positioning Qantas to seek and use material influence over Alliance to lessen competition between Qantas and Alliance and/or Virgin; and
  • reducing Qantas’ incentive to compete with Alliance because it has an interest in Alliance’s profits.

In particular, the ACCC appears concerned that the acquisition will result in a SLC given that Alliance is Qantas’ only competitor in flight paths from Brisbane to regional centres, Bundaberg and Gladstone.

The ACCC investigation is continuing.

Conclusion

The CMA draws a clear distinction between “influence” and “control” in determining whether the acquisition of Deliveroo by Amazon would result in a SLC in a market. Where a party has the former but not the latter, the CMA has indicated that the transaction will not result in a SLC.

For example, while the CMA determined that Amazon would have some degree of influence over Deliveroo, it considered that it did not have control over Deliveroo’s management and was not able to force it into lessening prices or offers.  The CMA concluded: “it does not amount to an ability to drive policy in a direction that other shareholders, management or the board object to. As such we cannot assume that Amazon will be able to drive policy in a direction that would lead to a SLC…”, or to put it aptly, “[t]he ability materially to influence a target’s policy is not an ability to control it”.

Qantas did not obtain board representation as a result of its minority acquisition and accordingly is likely to have less influence over Alliance let alone control.  On the basis of the CMA’s reasoning, this transaction should not result in a SLC and if the ACCC’s investigation culminates in proceedings, those proceedings are likely to be vigorously defended. 

Both cases of course serve as a good reminder that under Australian law any acquisition of shares or assets will give rise to ACCC interest (and a potential breach) where the acquisition may result in a SLC.   

Johnson Winter & Slattery are advising Qantas in relation the ACCC’s investigation of its acquisition of a 19.9% interest in Alliance.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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