DYNAMIC SUPPLIES PTY LTD And AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
[2009] AATA 983
•22 December 2009
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 983
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2008/5606
GENERAL ADMINISTRATIVE DIVISION ) Re DYNAMIC SUPPLIES PTY LTD Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Senior Member Bernard J McCabe Date22 December 2009
PlaceBrisbane
Decision 1. The Tribunal affirms the decision under review.
2. This decision will not take effect until 30 days after 22 December 2009.
3. The reasons for decision shall not be published to any person apart from the parties until the decision takes effect.
4. The parties are liberty to apply for orders as to the form in which the reasons for decision are ultimately published when the decision takes effect.
......................[Sgd]........................
Senior Member
CATCHWORDS
CORPORATIONS – Financial reporting – lodgement of annual reports – exemption orders – whether company may be relieved of lodging report – whether lodging report would impose an unreasonable burden – meaning of “unreasonable burden” – unreasonable burden if anti-competitive conduct results from lodging report – lodging report might as opposed to would lead to anti-competitive conduct – no unreasonable burden – discretion not exercised – decision affirmed
Corporations Act 2001 (Cth) ss 319, 340, 342(1)(c)
Trade Practices Act 1974 (Cth) s 46
Incat Australia Pty Ltd v Australian Securities and Investments Commission [2000] FCA 58; (2000) 33 ACSR 462
REASONS FOR DECISION
22 December 2009 Senior Member Bernard J McCabe [Pursuant to s 35(2) of the Administrative Appeals Tribunal Act 1975, these reasons have been edited to exclude some information for reasons explained in the response to the application to suppress information outlined in Dynamic Supplies Pty Ltd and Australian Securities and Investments Commission [2010] AATA 86.]
1. Large proprietary companies are required to prepare a financial report and a directors’ report. The financial report must be lodged with the Australian Securities and Investments Commission (“ASIC”) pursuant to s 319 of the Corporations Act 2001 (“the Act”). Upon lodgement, the report may be inspected by members of the public, including competitors. ASIC has a discretion under s 340 of the Act to exempt a company from complying with the requirement to lodge a report. Dynamic Supplies Pty Ltd (“Dynamic”), the applicant, has asked ASIC to exercise the discretion in s 340 in Dynamic’s favour. It fears the information in the report will be used by competitors to damage it in the market place. ASIC has refused the request. These proceedings consider whether it is appropriate to exercise the discretion in s 340 in this case.
Dynamic and its competitors
2.
Dynamic is a distributor of a range of products known collectively as
“IT consumables”. The most common types of IT consumable are printer cartridges, toner and fax paper. The company is incorporated in Queensland. It has one shareholder. That individual is one of two directors. The other director is Mr Scott McLennan, the managing director of the company. Mr McLennan gave evidence at the hearing and provided two statements.
3.
The general structure of the market for IT consumables in Australia was described by Mr McLennan. [Text omitted] also gave evidence in this regard.
[Text omitted] is a senior manager of a rival company. The applicant also called
Mr Paul Vincent, an accountant who was commissioned to prepare two reports in support of Dynamic’s case.
4. A number of large manufacturers of IT consumables have a presence in the Australian market. These companies include well-known multinationals like Hewlett Packard, Brother, Epson and Canon. The multinationals participate in the Australian market through local subsidiaries. The subsidiaries supply product to local wholesalers, many of whom act as authorised distributors. They also sell direct to retailers. The multinationals also deal directly with some independent wholesalers.
5. Dynamic is the largest of the local, independent wholesalers. It shops around in order to obtain its supplies at the cheapest prices. It buys product from the multinationals, from their subsidiaries in Australia and abroad, and from other sources (including wholesalers) around the world. Dynamic is a significant parallel importer: [text omitted].
6. Mr McLennan said the exchange rate was a constant variable that affected the way in which the company did business. He also explained that not all of the products the company needed were easily obtainable. While around 20% of its products could be readily obtained from a range of sources in response to changes in price, he noted some products were “constrained” in the sense that the company had fewer alternative sources of supply. He pointed out that around [text omitted] of the company’s toner product is produced by Hewlett Packard. He said Hewlett Packard products accounted for about 40% of the Australian market for toner.
7. Mr McLennan also gave evidence about some of the difficulties associated with parallel importing. His statement noted manufacturers tended to favour their local agents. The manufacturers could be hostile towards players like Dynamic that might enjoy higher profit margins. Yet the evidence of Dynamic’s success in obtaining supplies in the international market place in recent times suggests it has not been overly troubled by hostile behaviour from multinationals.
8. [Text omitted], a senior manager with [text omitted], was called to give evidence on behalf of Dynamic. He is an experienced manager in the area of IT consumables. He was asked about “constrained” products. He also spoke about the fact that not all products available in the wider international market place were necessarily useable in Australia. He pointed out that printer cartridges in Japanese printers were often different to those used elsewhere, for example. Even so, he made it clear there was plenty of product available in the international market if one knew where to look. That market was basically competitive and open, although both he and Mr McLennan emphasised that it was important to take into account the impact of changes in the exchange rate.
9. Dynamic sells directly to retailers and to other Australian distributors. It counts some of the largest retailers, like Office Choice and Office National, amongst its customer base.
10. Mr Vincent’s reports analysed Dynamic’s sales. The reports included calculations showing the percentage of sales attributable to different products and the gross profit margins on those products. Mr McLennan agreed the figures were accurate, although he said the company categorised some of the products differently. Nothing turns on that. The business is profitable. Mr McLennan says the company has a sound asset base and its sales are increasing. He estimated the company had about [text omitted] creditors who were collectively owed about [text omitted]. Dynamic carries credit insurance and provided financial information to its insurers in confidence, so they could assess the risk associated with the insurance. Interestingly, Mr McLennan said Dynamic avoided entering into credit arrangements with other traders if that meant it was required to provide sensitive financial data that might be used against it.
The competitive environment
11. I was not provided with evidence from an economist or other expert in defining the structure of the market in which the company traded. I am therefore unable to reach a clear conclusion on the question of whether not any of the players in the market enjoy market power, as that concept is understood in competition laws and policy. Mr Bickford, counsel for the applicant, invited me to infer there were significant barriers to entry, but I do not think the evidence I saw would enable me to reach that view. Indeed, the contrary seems true: the evidence suggests to me there are relatively few barriers to entry into the market for IT consumables. While Dynamic and some of its bigger rivals benefit from advantages associated with their size and scale, the extent of their distribution network, their relationships with customers and a reputation for reliable supply, these things are not insuperable obstacles to a new player. Mr McLennan agreed that there is little product differentiation but strong competition between rivals on price and service. Products can be sourced from a range of suppliers overseas, although I accept that will be easier to do with some products as opposed to others. As Dynamic has demonstrated so far, a nimble trader has little difficulty engaging in competitive behaviour. It can even prosper.
12. Mr McLennan described a recent “price war” between Dynamic and a local company associated with one of the multinationals. He described how the local company aggressively targeted some of Dynamic’s larger customers by offering attractive rebates and discounts over a period that lasted several months. Dynamic was forced to respond with its own pricing strategy, which included offering pre-paid Visa cards as an inducement to its customers. It also incurred additional marketing costs. The campaign sounded like a bonanza for the retailers (and, presumably, their customers) who enjoyed the benefits of the price war. Mr McLennan pointed out sales figures were up during the period as retailers took advantage of the low prices to stock up on product. This intense bout of price competition effectively ended when the rival ceased offering the significant discounts. [Text omitted].
The dangers associated with disclosing additional financial information
13. Mr McLennan said in his statement that there was a fear that rivals and suppliers and perhaps some customers might be inclined to “squeeze” Dynamic more vigorously if they knew the size of Dynamic’s profit margins. Suppliers and customers might hold out for better deals if they knew Dynamic had the capacity to offer better prices. But Mr McLennan, in his oral evidence, and Mr Bickford, in his submissions, said the real fear was that releasing detailed financial information would equip rivals to mount more carefully targeted attacks against Dynamic. The recent “price war” was [text omitted] petered out because Dynamic had the wherewithal to respond effectively. Dynamic might become more vulnerable to these attacks if rivals knew how deep its pockets were.
14. [Text omitted] was not privy to all of Dynamic’s confidential information. He is an officer of another participant in the market, after all. He said he would have no difficulty obtaining Dynamic’s price lists, so he always had a good idea of what Dynamic was charging its customers. He agreed in his evidence that it would be interesting to know what Dynamic’s profit margins were on various products. [Text omitted]. He also suggested Dynamic’s rivals would find the information useful when setting their own prices. (That is consistent with the evidence of Mr McLennan who conceded in his statement that he accessed financial information about his rivals wherever possible.) [Text omitted] explained that information about Dynamic’s profit margins could be combined with readily available information about prices to build a reasonable appreciation of the company’s financial position. He said [text omitted] senior management often asked for information about the profitability of suppliers, but he suggested in cross-examination that the questions were directed towards obtaining an understanding of the market rather than the particular circumstances of a company like Dynamic. He added that he was not aware that anyone from [text omitted] had retrieved the financial data provided to ASIC by one of Dynamic’s major rivals to conduct this sort of enquiry.
15. [Text omitted] did point out that [text omitted] had no interest in misusing the information in question. It did not want to hurt Dynamic. [Text omitted]. That calls into question the motivation of the multinational associated with the local company that staged the recent “price attack” on Dynamic. The extent of that multinational’s involvement – if any – with the actions of its local associate was never established.
16. Mr Vincent was questioned at the hearing about his reports. He ultimately agreed he was unable to predict what participants in the market would do with the information derived from the financial reports. He agreed that would require evidence from a marketing expert. But Mr Vincent, an accountant, insisted the information in the reports was likely to be useful to competitors. It would enable them to develop a clearer picture of costs, debt and other information about the way in which Dynamic’s business was run. He said information about the strength of the balance sheet and net assets might give valuable clues as to Dynamic’s ability to withstand a price attack.
17. Mr Golledge, counsel for ASIC, invited Mr Vincent to accept that a rival bent on hurting Dynamic would be able to piece together most of the information it required without the financial reports. Mr Golledge suggested the rivals would not be able to derive any extra useful information from the reports. Mr Vincent disagreed.
18. Given the evidence of Messrs [text omitted] and Vincent, I am prepared to accept the information contained in the financial report is likely to be accessed and used by at least some of the other participants in the market. In particular, I accept Mr Vincent’s contention that the information might be of particular interest to rivals who could use it to hone their marketing and pricing strategies. I also accept the more targeted and even ruthless competition that results could lead to a more difficult time for Dynamic in the market place. More aggressive competitive conduct could impact on Dynamic’s profitability and ultimately threaten its survival if it could not respond effectively. That would have implications for Dynamics shareholders, employees, creditors and perhaps its customers.
The legislation
19. I have already noted that s 340 of the Act includes the power to order that a company be relieved of the obligation to comply with the requirement in s 319 of the Act. The criteria governing the exercise of the discretion to make an order are set out in s 342 of the Act. Section 342 provides, relevantly:
(1)To make an order under section 340 or 341, ASIC must be satisfied that complying with the relevant requirements of Parts 2M.2, 2M.3 and 2M.4 would:
(a) make the financial report or other reports misleading; or
(b) be inappropriate in the circumstances; or
(c) impose unreasonable burdens.
20. The application in this case has focused on s 342(1)(c). The Act does not provide explicit guidance as to what will make disclosure inappropriate in what circumstances. One must look for that in the policy evident in the Act.
21.
As it happens, ASIC addressed itself to that task when it devised Regulatory Guide 43: Financial Reports and Audit Relief (2008) (“RG43”). A copy of RG43 was included in the T-Documents. RG43 draws on the decisions of the Tribunal and the Federal Court in Incat: see Re Incat Australia Pty Ltd and Australian Securities and Investments Commission [1999] AATA 800; (1999) 33 ACSR 132 and Incat Australia Pty Ltd v Australian Securities and Investments Commission [2000] FCA 58;
(2000) 33 ACSR 462. RG43 notes that in the course of his decision in Incat in the Federal Court, Heerey J suggested (at 465) it was necessary to consider:
·the nature of the requirements to be performed;
·the policy objective of the legislation that larger companies lodge accounts; and
·the extent of any economic detriment like to flow to the applicants if they are obliged to comply;
when deciding whether the applicant faced an “unreasonable burden”.
22. In this case, the obligation to file a report is not in and of itself especially burdensome. I was told Dynamic was finalising its annual accounts, and it is presumably a relatively simple task to compile the report having regard to that material. I also note the policy objective that encourages larger companies to lodge the reports in question. The evidence established that a number (if not all) of Dynamic’s large rivals file these reports – which raises the question of why Dynamic should be treated any differently. It follows the first of the two matters referred to by his Honour in Incat do not support an argument that publication would impose an unreasonable burden.
23. Mr Bickford also encouraged me to consider the balance of burdens and benefits associated with disclosure. I accept it is appropriate to do so. I will say more about the nature and extent of potential burdens to Dynamic later in the course of these reasons. I expect that creditors may derive some benefits from the reports. [Text omitted], for example, said he would ordinarily expect to see financial information before extending credit. I accept most of the company’s creditors appear to have been prepared to extend credit without the benefit of that information, no doubt at least partly because of Dynamic’s good track record. I also expect other participants in the market would be interested in the information because it might help them position themselves and their products more effectively, as [text omitted] suggested. Employees of Dynamic might also want to know about the financial health of the company, but they do not appear to have suffered from the lack of formal information provided to date. (Mr McLennan indicated he was reasonably diligent in providing information to employees in any event.) In other words, while Parliament may have assumed the information would be important to these users when it imposed the general obligation to disclose, it is unclear whether any of them would be seriously hurt or disadvantaged if it were not available.
24. Mr Bickford said the limited benefits for other users had to be balanced against the detriment to Dynamic. He argued the nature of the market and Dynamic’s business made it especially vulnerable if the reports were made available to competitors. He suggested this was exactly the kind of situation ASIC should have had in mind when considering whether to exercise the discretion. He pointed out that RG43 contemplated that possibility, so there was nothing novel in the application.
25. RG43 offers examples of situations where an unreasonable burden might be imposed. RG43.37-43.42 discusses the possibility that filing reports will provide customers, rivals or suppliers with precise information that will confer an advantage over the applicant and hurt its interests. The example commences with the cautionary statement that:
[o]nly in rare circumstances will ASIC grant relief on the basis that a particular disclosure requirement imposes an unreasonable burden because customers, competitors or suppliers may be able to use the information disclosed to the applicant’s competitive disadvantage.
26. The current version of RG43 replaces an earlier version that was introduced in 1993 and updated in 1996. Dynamic suggested the superseded policy should prevail to the extent of any inconsistency. The current and superseded versions of the policy are broadly similar, although there is a more extensive discussion of the circumstances in which competitive disadvantage might be an issue in the current document. Dynamic criticises the same thing in both policies. It objects to any suggestion the discretion would only be exercised rarely. Mr Bickford suggests that policy puts a gloss on the words of the Act. I agree. I accept any exercise of a discretion to relieve someone from the consequences of the application of a general rule is, by its nature, an exceptional act in the strict sense of that term. The discretion need not be exercised rarely, although I acknowledge one would not expect to see it exercised so regularly that it undermines the rule from which the exception is made. The better course is to focus on the more general inquiry of whether it is appropriate to exercise the discretion in the circumstances in light of the policy underlying the Act. In other words, is there a good reason for departing from the general rule in this case?
Should the discretion in s 340 of the act be exercised in favour of dynamic?
27. It would be artificial to refer to anti-competitive consequences without reference to Australia’s competition law. The bulk of Australia’s competition law is set out in Part IV of the Trade Practices Act 1974. The provisions of the Trade Practices Act define and prohibit particular examples of anti-competitive conduct. The applicant in this case complains about conduct like predatory pricing that might amount to a misuse of market power in contravention of s 46 of the Trade Practices Act.
28. I agree that some of the conduct described by Mr McLennan in particular might amount to predatory pricing in breach of s 46 of the Trade Practices Act. On the other hand, it might not. The evidence did not clearly establish there were barriers to entry into the market for IT consumables (if that is how the market should be characterised). That tends to suggest none of the players in the market possessed the sort of market power that might be misused in breach of s 46 of the Trade Practices Act. In the absence of market power, the conduct in question is just vigorous competition which benefits consumers, even if it is costly or even fatal to one or more the traders.
29. It is notoriously difficult to determine whether conduct breaches s 46 and the other provisions of Part IV of the Trade Practices Act. It is a task that requires the assistance of expert evidence on market structure and the behaviour of rivals in an industry like this. As Mr Vincent conceded in cross-examination, he was not qualified to provide expert assistance of this kind. I was not referred to evidence from anyone else who might qualify as an expert in these matters. In the absence of that evidence, the most I can say is that publication of the data in the reports might lead to anti-competitive consequences which hurt Dynamic.
30. The possibility of anti-competitive consequences is probably not enough to satisfy the criterion in s 342(1)(c) of the Act, which says the discretion to waive compliance is enlivened if publishing the data “would … impose unreasonable burdens” (emphasis added). I do not think the evidence before me permits me to conclude the anti-competitive result would – as opposed to might – occur.
31. I would not exercise the discretion in Dynamic’s favour even if I adopted a more generous interpretation of the wording of s 342(1). ASIC is not well-placed to deal with allegations of anti-competitive conduct. It recognises as much in RG43.41. Given the complexity of the task, it should ordinarily be left to the Australian Competition and Consumer Commission (“the ACCC”). ASIC would only rely on anti-competitive impact as a basis for giving relief where the evidence clearly demonstrated that a breach of the competition laws would result if the information was made available. That is not the case here.
32. Mr Bickford, in his oral submissions, suggested that the provisions of the Trade Practices Act were vague and difficult to enforce. He said ASIC should use its power in a case like this to achieve the same competition objectives without requiring recourse to the ACCC and the competition laws.
33. I disagree. The competition laws may be complex and difficult to invoke, but they define what is impermissible. Anti-competitive conduct should only be the subject of regulatory action where it contravenes the provisions of the Trade Practices Act. If the conduct is not prohibited by that Act, then it should be allowed – or at least it should not be disallowed on the basis it is anti-competitive. ASIC should not be asked to take regulatory action against anti-competitive conduct in circumstances where it is unclear whether the ACCC would or could act. If ASIC were to act in such a case, it would effectively be devising its own competition policy that was at once broader and more interventionist than the official policy embodied in the Trade Practices Act and administered by the ACCC.
34. On balance, I am not satisfied that complying with the obligation to file the reports imposes an unreasonable burden on Dynamic.
Conclusion
35. I am satisfied the discretion in s 340 of the Act should not be exercised in the applicant’s favour. The decision under review must therefore be affirmed.
36. The operation and implementation of the decision under review should be stayed for a period of 30 days following the publication of these reasons. I will also invite the parties to make submissions at a directions hearing on the form in which my reasons in this case are to be published. In the interim, publication of the decision and reasons for the decision should be restricted to the Tribunal and the parties (including their legal representatives) until further order.
I certify that the 36 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.
Signed:............................[Sgd]..................................................
Patrick MacDonald, AssociateDates of Hearing 26-27 August 2009
Date of Decision 22 December 2009
Counsel for the applicant Mr P Bickford
Solicitor for the applicant Clayton Utz Lawyers
Counsel for the respondent Mr S GolledgeSolicitor for the respondent Australian Securities and Investments Commission
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