TRADE PRACTICES COMMISSION v AUSTRALIA MEAT HOLDINGS PTY

Federal Court of Australia|1988-07-15|Before: Wilcox J, Mr J, Mr P

NEW SOUTH WALES DISTRICT REGISTRY ) No. NSW G.92 of 1988 )

Corrections to the judgment of his Honour Justice Wilcox of 15 July 1988: page 2 In the first line, please substitute "(Australasia)"

page 3 In the second last line, please substitute "sub-s.(1A)" in lieu of "sub-s.(2)" there appearing;

Trade Practices Act 1974, ss.4E, 5, 50, 75B, 81. Protection of Trading Interests Act 1980 (UK), s.5

NSW G.92 of 1988 TRADE PRACTICES COMMISSION v AUSTRALIA MEAT HOLDINGS PTY LIMITED & ORS

page 62 In the second last line, please delete the words

Note: Appearances for the parties should be as follows:

Counsel for the Second, Third and Fourth Respondents:

Solicitors for the Second, Third and Fourth Respondents:

Mr C A Sweeney QC with Mr J S Hilton and Mr G S Charny

Mr A Goldberg QC with Mr A R Emmett QC and Mr P M Briscoe and

TRADE PRACTICES - Mergers - Acquisition by cattle abattoir operator of shares in competitor company - Whether acquiring company 18, or is likely to be, dominant in the relevant market - Definition of product market - Geographical limits of market - Consideration of factors relevant to dominance - Jurisdiction of Court in case where vendors of shares were United Kingdom companies - Whether as a matter of discretion orders should be made against the vendor companies - Width of appropriate undertaking offered as an alternative to order for

Trade Practices Act 1974, ss.4E, 5, 50, 75B, 81. Protection of Trading Interests Act 1980 (UK), s.5

TRADE PRACTICES COMMISSION v AUSTRALIA MEAT HOLDINGS PTY LIMITED & ORS

) ) NEW SOUTH WALES DISTRICT REGISTRY ) NSW G.92 of 1988 ) GENERAL DIVISION )

The proceeding stand over for further hearing at 9.30

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The proceeding stand over for further hearing at 9.30

Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

) ) NEW SOUTH WALES DISTRICT REGISTRY ) NSW G.92 of 1988 ) )

During the afternoon of Tuesday, 26 January 1988 (local time), whilst most Australians were sleeping off their Bicentennial celebrations, a series of meetings was held in London whereby an Australian company, Australia Meat Holdings

Pty Limited ("AMH") acquired the whole of the issued capital

of Thomas Borthwick & Sons (Australia) Limited ("Borthwick"),

an English company which has long been involved in the

Australian meat trade. But, however appropriate the timing of

this "buy back the farm" transaction, a question arises

whether, in entering into the transaction, AMH -- which

already operated several abattoirs in Queensland - contravened

s.50 of the Trade Practices Act 1974. That section relevantly

or indirectly, any shares in the capital, or any assets, of a body corporate if--

as a result of the acquisition, the corporation would be, or be likely to be, in a position to dominate a market for

in a case where the corporation is ina position to dominate a market for goods or services- - -

(i) the body corporate or another body corporate that is related to that body corporate is, or is likely to be, a competitor of the corporation or of a body corporate that is related to the corporation; and

(ii) the acquisition would, or would be likely to, substantially strengthen the power of the corporation to dominate that market.

a body corporate that is related to or associated with a corporation is, or two or more bodies corporate each of which is related to or associated with the one corporation together are, in a position to dominate a market for goods or services; or

a corporation, and a body corporate that is, or two or more bodies corporate each of which is, related to or associated with that corporation, together are ina position to dominate a market for goods or services,

the corporation shall be deemed for the purposes of this section to be in a position to dominate that market.

(a) a reference to a market for goods or services shall be construed as a reference to a substantial market for goods or services in Australia in a State or Territory; and

(b) a reference to dominating a market for goods or services shall be construed as a reference to dominating such a market either as a supplier or as an acquirer of goods or services in that market.

The Trade Practices Commission, the applicant herein, contends that, by 1ts acquisition of the Borthwick shares, AMH, the first respondent, was placed in a position where it would be, or would be likely to be, in a position to dominate the fat cattle market in northern Queensland -- or, alternatively, the separate fat cattle market in each of northern and central Queensland -- or, alternatively, the acquisition would, or would be likely to, substantially strengthen the existing power of AMH to dominate that market or those markets. The transaction having been completed, the Commission seeks an order under s.81 of the Act; either an order under sub-s.(1) for the divestiture by AMH of the acquired shares or else a declaration under sub-s.(2) that the

acquisition is void. To enable the latter order the

Commission has joined as additional respondents the vendors to - AMH of the relevant shares, Thomas Borthwick & Sons (Pacific Holdings) Limited ("Pacific Holdings") and Thomas Borthwick & Sons (UK) Limited ("UK"), and the parent of those two

companies, Borthwicks ple ("plc"). I shall refer to these

three respondents collectively as "the Borthwick respondents".

Borthwick itself, that is the company whose shares were

acquired by AMH, is not a respondent to this proceeding. The relevant provisions of s.81 are as follows:

"81. (1) The Court may, on the application of the Minister, the Commission or any other person, if it finds, or has in another proceeding instituted under this Part found, that a person has contravened section 50, by order, give directions for the purpose of securing the disposal by the person of all or any of the shares or assets acquired in contravention of that section.

(a) the Court finds, in a proceeding instituted under this Part, that a person (in this sub-section referred to as the 'acquirer') has acquired shares in the capital, or any assets, of a body corporate in contravention of section 50;

(b) the Court finds, whether in that Proceeding or any other proceeding instituted under this Part, that the person (in this section referred to as the 'vendor') from whom the acquirer acquired those shares or those assets, as the case may be, was involved in the contravention; and

{c) at the time when the finding referred to in paragraph (b) is made, any of those shares or those assets, as the case may be, are vested in the acquirer or, if the acquirer is a body corporate, in any body corporate that is related to the acquirer,

the Court may, on the application of the Minister or the Commission, declare that the acquisition, in so far as it relates to the shares or assets referred to in paragraph (c), is void as from the day on which it took place and, where the Court makes such a declaration - -

(d) the shares or the assets to which the declaration relates shall be deemed not

(e) the vendor shall refund to the acquirer any amount paid to the vendor in respect of the acquisition of the shares or assets to which the declaration relates.

(1C) Where an application is made to the Court for an order under sub-section (1) or a declaration under sub-section (1A), the Court may, instead of making an order under sub-section (1) for the purpose of securing the disposal by a person of shares or assets or an order under sub-section (1A) that the acquisition by a person of shares or assets is void, accept, upon such conditions (if any) as the Court thinks fit, an undertaking by the person to dispose of other shares or assets owned by the person,

(2) An application under sub-section (1), (1A), or (1B) may be made at any time within 3 years after the date on which the contravention occurred.

The Australian cattle herd amounts to some 25 million head, of which about 90% are cattle bred for meat production. In Queensland the proportion of beef cattle is even higher. The Australian Bureau of Statistics estimated that, at 31 March 1986, the Queensland herd contained 9,662,031 beasts, of

The Bureau's publication "Livestock and Livestock Products, Queensland, 1985-86" breaks up by breed the Queensland herd as at 31 March 1982; this apparently being

the most recent date for which figures were then available.

Of the total of 9,758,200 head, it was estimated that tropical ~- breeds accounted for 1,906,570, British and European breeds 2,635,460, dairy breeds 276,400 and cross-breeds 4,869,470. The dominant cross-breeds were Brahman/British and Other tropical/British, so that some 60% of all beef cattle were either straight or cross - -bred tropical cattle. There is no statistical evidence before the Court as to the distribution by breed of cattle in Queensland but it is common ground amongst the witnesses that tropical cattle, straight breeds and crosses, predominate in the north of the State and that most British and European breeds are to be found in the south. But their distribution is not defined only by latitudinal boundaries. There are tropical cattle in the arid south west of the State and there are pockets of British and European

There is no evidence as to the proportion of total sales constituted by cattle purchased for breeding purposes. Stud cattle are not relevant to this case. The remainder of the turn-off fall within one of three categories, the difference between which is only the degree of imminence of slaughter. "Fat cattle" are cattle in such a condition that there is no advantage in postponing slaughter. They may be in optimum condition. Alternatively, their condition may be such that, under the circumstances, there is no financial advantage in postponing slaughter; any improvement in condition being outweighed by the cost involved in obtaining that improvement.

The purchasers of "fat cattle" are almost always operators of

abattoirs. "Feed lot cattle" are cattle which are in near optimum condition but which would benefit at acceptable cost from a short stay -- up to 90 days -- 1n a feed lot where they can be intensively fed, usually with grain. "Feed lot cattle" are usually purchased by abattoir operators and housed in feed lots situated near the relevant abattoir. "Store cattle" are cattle purchased with an eye to long term, open pasture fattening. The purchaser may be an abattoir operator; but more often the purchaser will be a pastoralist anxious to put to good use his available grass. Some pastoralists do not breed cattle. They depend entirely upon the profits available from purchasing "store cattle", fattening them and reselling

Exports constitute a major component of the Queensland beef trade, more so in the north than in the south of the State. Ms Rhonda Smith, a Senior Lecturer in the Department of Economics within the University of Melbourne, who has considerable experience in agricultural economics, particularly in Queensland, gave evidence on behalf of the applicant. During the course of this evidence she referred to, and adopted, industry estimates that between 80% and 90% of all beef produced in the north is exported compared to approximately 60% from the south. Although exports are made to many countries, the two most significant export markets are Japan and North America. However, there is some difference in the product predominantly exported to these markets. Japan

takes considerable quantities of prime cuts, that is high

quality cuts -- such as tenderloin, cube roll and strip loin -- which are likely to be served as such and without further processing, other than cooking. These cuts are taken from cattle designated in the trade as "Japanese ox". "Japanese ox" must comply with the specifications laid down by the Australian Meat and Livestock Corporation relating to the export of meat to Japan. Those specifications require that the beast be not more than four years of age and that it have achieved a specified minimum weight. In practice it is easier for British and European breeds, especially those grown on good pastures, to meet these specifications than it is for tropical breeds pastured in arid areas. Consequently, the former tend to dominate the Japanese trade. By contrast, the North American market consists predominantly of "manufacturing meat", that is relatively lean meat intended to be processed by grinding or mincing before cooking. A proportion of most carcasses goes into manufacturing meat. Even in the case of top quality stock, slaughtered to produce prime cuts, much of the carcass can only be used for manufacturing meat. In other cases the predominant purpose of the slaughter is to obtain manufacturing meat. Generally speaking, the proportion of the carcass which is suitable only for manufacturing meat 1s greater in the parts of Queensland where tropical breeds

Frequent reference was made in the evidence to three separate regions of Queensland: the northern, central and

southern regions. Whether those regions each constitute a

separate "market" within the meaning of s.50 of the Trade

Practices Act is a question to which I shall return, but there appears to be widespread agreement upon the existence, and approximate boundaries, of the three regions. They are accepted by the Livestock and Meat Authority of Queensland ("LMAQ"), the Cattlemen's Union and the Australian Bureau of Statistics in defining its statistical divisions. The northern region constitutes that part of Queensland which lies north of a line drawn to follow shire boundaries approximately westerly from the coast just north of Mackay to the Northern Territory border. The northern region therefore includes the towns located on the railway line leading from Townsville to Mount Isa and the cattle stations served by those towns. The central region of the State is accepted as being the area which lies south of the northern region but north of a line drawn approximately westerly from a point a little north of Bundaberg. This region takes in Rockhampton and also the towns on the railway line linking Winton to Rockhampton through Longreach and Emerald. The southern region is the

The term "abattoir" has been used throughout this case so as to exclude slaughterhouses killing only small numbers of stock for local use; it being accepted on all hands that their existence has no effect upon the resolution of the issues in this case. In other words, all "abattoirs" are licensed export abattoirs. Using the word "abattoir" in this sense, there are presently ten abattoirs in the northern

region of Queensland, as defined above. Two of those

abattoirs, the AMH abattoirs at Mareeba and Mount Isa, are presently closed. AMH has three operating abattoirs in the region, at Cairns, Townsville and Cape River. Borthwick has an abattoir at Bowen and Queensland Meat Export Co Pty Limited -- a member of the Angliss, also called Vestey, group -- operates at Townsville. The remaining three abattoirs are an abattoir at Townsville owned by Tancred (NQ) Pty Limited ("Tancred (NQ)") and two small abattoirs at Innisfail

(Innisfail Butchering Company) and Tolga (Byrnes By-Products).

The central region contains six abattoirs: the Borthwick abattoir at Mackay, three abattoirs at Rockhampton -- owned respectively by AMH, Central Queensland Meat Export Co Pty Limited (Vestey) and Capricorn Meats -- the Teys Brothers (Biloela) Pty Limited abattoir at Biloela and the

In the southern region there are a further 25 abattoirs. Although three of these -- at Dinmore, at Beaudesert and at Bremer River (closed) -- are owned by AMH, and one other by Tancred Brothers Pty Limited ("Tancred"), it is not contended by the applicant that AMH is 1n a position to dominate the southern market. Furthermore, the applicant concedes that, if it is proper to treat the whole of Queensland as constituting, or being part of, a single market, AMH is not in a position to dominate that market. The applicant's case depends upon the proposition that two or more separate fat cattle markets exist within the State. Most of

the voluminous evidence in the case was directed to the

validity or otherwise of that proposition. I must deal with that evidence; but, before doing so, it is desirable to say something about the formation of AMH, the subject transaction

AMH was incorporated in 1986. The company has four equal shareholders, each of which is itself involved in the slaughter of cattle for the export trade: Elders IXL Limited ("Elders"), Metro Meat Limited ("Metro"), SCI Meat & Paper Pty

The discussions which preceded the formation of the company occupied several months. They involved not only the four ultimate participants but also both Borthwick and Vestey. Besides its two Queensland abattoirs, Borthwick has interests in both Victoria and New South Wales. The four ultimate participants in the new venture, which was code-named "Avocado", were interested only in the Queensland abattoirs and their initial proposal was to purchase only those two abattoirs. But Borthwick was unwilling to fragment its operations. So the discussion turned to the possibility of

Vestey decided not to participate in Avocado some time before May 1986. In that month the proposal came to the

attention of the Trade Practices Commission, which expressed

concern at the possibility that it would contravene ss.45 and 50 of the Trade Practices Act. Borthwick was then still a potential participant. The Commission suggested that the venturers lodge an application for authorisation. Instead, they entered into negotiations with the Commission, as a result of which the terms of their draft agreement were amended in such a manner as to cause the Commission to decide not to oppose the proposal. By that time Borthwick had decided not to become a shareholder in the new company. Nonetheless the four shareholders in AMH continued to entertain the hope that AMH would eventually acquire the

The four shareholders in AMH, together with various companies with which they were individually associated, entered into an agreement styled "Shareholders Agreement" on 29 July 1986. The first four recitals to that agreement made apparent the purpose behind the formation of the company:

"A. Each of Elders, Metro, Smorgon and Tancred (collectively referred to as the 'Participants') was, before the date hereof, independently engaged in Queensland, on its own account or through the operation of a related corporation, in the purchase and processing of livestock and the marketing of meat and meat by-products internationally.

B. Due to low utilisation of meat processing plants, owned or controlled by each of the Participants, the cost of meat processing is high, resulting in each of the Participants earning an inadequate return on its investment, and making the continued participation of each Participant in the meat processing industry in Queensland not viable within that industry's present structure.

C. Independent studies undertaken in relation to the Queensland meat processing industry indicate that rationalisation of existing meat processing plants must take place in order to ensure the future well-being of the industry in competitive domestic and international markets.

D. To ensure the continued participation of each of the Participants in the Queensland meat processing industry and to implement the proposals suggested by the independent studies referred to in recital C of this Agreement the Participants have agreed to become associated (on the terms and conditions contained in this Agreement) either directly or through a subsidiary as shareholders in a company called Australia Meat Holdings Pty. Limited ('Company'), which will acquire specified assets owned or controlled by each Participant."

The agreement provided for the acquisition by AMH of certain assets of the four shareholders. By this means AMH acquired 10 abattoirs -- nine in Queensland and one in the Northern Territory. AMH was also given the right of first refusal to acquire certain additional assets, including the Elders' abattoir at Toowoomba known as "Beef City" and the interests of Tancred, Tancred (NQ) and Foggitt Jones Pty

Limited in the abattoir at Bohle (Townsville) said in the

Part 5 of the agreement dealt with the acquisition by shareholders of cattle in Queensland. It provided that each of the shareholders "shall purchase the whole of their annual requirements of slaughter and feedlot cattle in Queensland in accordance with and subject to the procedures, terms and

conditions" set out in that Part "and not otherwise". By

para.5.01(a) each shareholder agreed to acquire "the first 35,000 of its annual requirements of slaughter or feedlot cattle in Queensland by purchasing the same itself in fat stock markets or by private treaty" at the rate of 1750 per month in each of the months January, February, November and December and at the rate of 3,500 in the other eight months of the year. If a shareholder purchased less than the agreed number in any two month period, the shortfall was not to be carried forward into subsequent months. Cattle acquired pursuant to the agreement by Tancred, for slaughter at Bohle, were to be acquired only "at markets within a radius of 160 kilometres or thereabouts" of Bohle "unless its requirements cannot be purchased by it at such markets due to seasonal

Para.5.02 went on to provide that AMH would purchase any additional fat cattle required by any member of the group, a procedure being specified. However, the agreement also prohibited the slaughter in Queensland of any cattle acquired pursuant to the agreement, whether by the shareholders themselves or through AMH, except by Elders at "Beef City" and by Tancred at Bohle or Oxley (Brisbane). The result was to limit the extent to which the shareholders could compete amongst themselves, and with AMH, for the purchase of fat

Part 6 of the agreement made provision for the allocation and sale of product. Generally speaking, sales

were to be undertaken by AMH itself rather than by individual

shareholders. For that purpose para.10.01 provided for the individual shareholders' export quotas, with some exceptions, to be transferred to AMH. Paragraph 11.01 provided: "Each of the parties agrees that the interests of the Company as provided for in this Agreement will take precedence over the individual interests of the Participants in relation to the

So far as appears there were no further negotiations with Borthwick, either for the sale of its Queensland abattoirs or of its shares, before November 1987. In that month Mr John Gunthorpe, the Executive Director of the Meat Division of Elders, who was one of the founders of AMH and who served as its Chief Executive from 29 July 1986 until April 1987 and who is now Elders' senior nominee on the AMH board of directors, happened to meet Mr Peter Cash, a director, and the Chief Executive, of Borthwick and a director of plc, at Melbourne airport. According to Mr Cash, Mr Gunthorpe made a comment that "it was a pity the Elders deal had not gone through" and that "AMH would have to buy" Borthwick. Mr Cash

replied that there were "lots of other fish in the water".

Despite this conversation AMH made no immediate approach to Borthwick. However, Borthwick became involved in discussions with Teys Brothers (Holdings) Limited ("Teys"), the parent of the companies which respectively operated

abattoirs at Biloela and Beenleigh. On 8 January 1988 an

agreement was made between pic and Teys for the sale to Teys of the whole of the issued share capital in Borthwick, together with the sale of the business of the Japanese branch of another Borthwick company: Thomas Borthwick & Sons International Limited. The consideration for the shares in Borthwick was agreed at $25 million. The agreement contained provisions designed to facilitate the continuance of the

The sale to Teys was made subject to certain conditions, including a condition that the sale be approved by the shareholders of plc. Accordingly, the directors of plc convened an Extraordinary General Meeting of shareholders to

Learning of the Teys' offer, some of the persons associated with AMH became interested in making to plc an alternative offer. But they did not do this immediately. On Friday 15 January 1988 Mr victor Smorgon contacted Mr Trevor Kennedy, Managing Director of Consolidated Press Holdings Limited ("CPH"), which company held a 55% interest in Teys. As a result Mr Donald Bourke, Financial Controller of CPH, spoke to Mr Smorgon. Mr Smorgon told Mr Bourke that AMH wished to discuss the possibility of CPH causing Teys to withdraw its offer, so as to clear the way for an AMH offer to plc. In the event Mr Bourke attended a meeting on the following Monday, 18 January, at the office of Elders. Four other persons were present: Mr Gunthorpe, representing Elders, Mr Jack Smorgon of Smorgon, Mr Geoffrey Tancred

representing Tancred and Mr Robert Wright of Metro.

During the course of this meeting Mr Tancred indicated to Mr Bourke the reason for AMH's interest in Borthwick. The note of the discussion taken by Mr Bourke, the accuracy of which was not challenged in cross-examination,

"Mr. Tancred acknowledged that I had had previous experience in the Meat Industry and was therefore fully aware there was need to rationalise the Industry.

Mr Tancred went on to explain that the AMH had been a very successful partnership and that they were now running a profitable meat processing operation in North Queensland. AMH Saw a new entry, such as Alan Teys, who they claim had no experience in North Queensland, as a real threat to the AMH being able to remain profitable and achieve further rationalisation in North Queensland."

{Mr Alan Teys is the Chairman and Managing Director of Teys

There was then discussion about either CPH or Teys becoming a one-fifth shareholder in AMH. Mr Bourke indicated that neither Teys nor CPH had any idea of the financial performance of AMH or of the investment involved. In response to a question, Mr Bourke said that CPH would normally expect a return of cash outlay within three years, to which Mr Gunthorpe responded that the investment from each AMH shareholder of $13 million had been -- or perhaps he said "would be" -- repaid in a little over two years. In response to a question from Mr Bourke, Mr Wright stated that AMH had

made $22 million in 11 months of operation, on a kill of

600,000 head of cattle. Mr Bourke calculated this out at $36 per head. Mr Tancred commented that AMH should have made an additional $4 per head. He added, according to Mr Bourke's note "that if they had not had competition from Borthwicks then they would have earned another $10 per head" -- taking the total profit to $46 per head. Although Mr Tancred did not refer to competition in respect of cattle purchases, Mr Bourke understood him at the time to be referring to such competition. However, he conceded in evidence that Mr Tancred might have had in mind the possibility of extra profit enuring from increased throughput occasioned by an absence of competition from Borthwick for livestock. As Mr Tancred was not called, there is no evidence as to what he did have in mind. Mr Bourke recorded that those present "also indicated that in the coming year probably the northern plants could

operate with only one of the Borthwick plants, ie Mackay or

No agreement was reached at this meeting. Later that day Mr Gunthorpe telephoned Mr Bourke to inform him that the members of AMH had decided to proceed with a counter bid. But he made a reference to continuing discussions and, a few minutes later, he telephoned again to say that the bid would be made conditional, so as to allow AMH to withdraw if suitable arrangements were made with Teys and CPH relative to Borthwick. Mr Tancred also telephoned Mr Bourke, speaking of

the possibility of compromise and of getting Teys into AMH.

On that same day, 1n London, AMH delivered a letter to the Chairman of plc, Mr Lewis Robertson. That letter contained an offer by AMH to purchase the share capital of Borthwick and the Japanese business upon the same terms as in the Teys agreement, but subject to a variation in the price of the shares from $25 million to $29 million. The offer was made subject to the Teys agreement not becoming unconditional and was stated to be open for acceptance until 31 March 1988 unless withdrawn by AMH in the meantime. However, on the following day -- and apparently as a result of Mr Bourke having, on 19 January, informed Mr Gunthorpe that he saw no point in further discussions -- the offer was varied by

deleting therefrom the reservation of the right of withdrawal.

The letter of offer requested Mr Robertson to communicate the AMH offer to the shareholders of ple before the scheduled Extraordinary General Meeting. But those in control of AMH were not content to leave the matter to the directors of plc. It happened that, at the time, Mr Michael Nugent, Chief Executive of Elders Agribusiness, was in London. He had arranged to lunch with Lord Vestey, the head of the Vestey group. In a move which throws light upon the nature of the relationship between AMH and Vestey at the most senior level, Mr Gunthorpe telephoned Mr Nugent and suggested that he raise with Lord Vestey the concern of AMH to acquire Borthwick. Mr Nugent did so. On 23 January he reported to Mr Gunthorpe Lord Vestey's advice that he (Mr Gunthorpe) contact Mr Bob Parker of Vestey, London. Mr Nugent's fax message went

on: "They are willing to talk. Also may be able to get to

some key Borthwick plc shareholders to get the directors to

slow up so AMH can get its offer unconditional in interests of

Mr Gunthorpe telephoned Mr Parker. Mr Gunthorpe told Mr Parker that AMH would not be in a position to get a board recommendation prior to the shareholders' meeting and that AMH would probably have to try to generate support from individual plc shareholders. Mr Parker said that he would see what he could do. Mr Gunthorpe took from this answer that Mr Parker "was intending to make sure that the shareholders were aware

of the tenets upon which our offer had been placed to them".

Back in Australia other discussions were occuring; these being discussions involving the Trade Practices Commission. On 20 January 1988 Mr Bourke reported to Mr Kerry Packer, the head of CPH, the substance of his discussions with AMH. It was decided to seek legal advice. Mr Bourke prepared a narrative of events and had a discussion with Mr Bruce McWilliam of Allen, Allen & Hemsley, solicitors. Apparently at Mc McWilliams' suggestion, the narrative of events was, on 21 January 1988, faxed to Mr W R McComas, the then Chairman of

As it happened, Allen, Allen & Hemsley were also acting for Borthwick in connection with the matter. At some stage -- the evidence does not indicate when -- it was decided in London that it would be desirable for Mr Ian Tonking of

that firm, in company with Mr Cash, to see Mr McComas in

Canberra in order to ascertain the Commission's likely reaction to the AMH offer. Mr Denis Carey, Group Chief Executive of plc, rang Mr Cash from London and asked him to attend that interview with Mr Tonking. The meeting was held on the afternoon of 21 January. Mr Cash gave Mr McComas some information regarding Queensland abattoirs, including kill levels and market shares. At the end of the meeting, according to Mr Cash, Mr McComas indicated that he could not say that there would not be a problem with the AMH offer. That position was confirmed, in more positive terms, in a fax sent to Mr Tonking later that same day. The fax read:

"I refer to my discussion this afternoon with you and Mr Cash and now confirm my advice that, on the basis of information presently available to the Trade Practices Commission, 1t would take the view that if Australia Meat Holdings Pty Limited proceeds further with its proposal to acquire the issued share capital of Thomas Borthwick & Sons (Australasia) Limited, that acquisition would be likely to contravene s.50 of the Trade Practices Act, in that it would place Australia Meat Holdings Pty Limited in a position where 1t would, or would be likely to, dominate the market for the purchase of cattle in the central and northern regions of Queensland for processing for export, and possibly for local consumption.

This view has been conveyed to Australia Meat Holdings Pty Limited with the request that within seven days of today's date it let me have an assurance that it will not proceed further with its proposal without consultation with the Trade Practices Commission. If this assurance is not forthcoming and Australia Meat Holdings Pty Limited intends to proceed with its proposal, that company has also been informed that the Commission will take such action as it might be advised to intervene in the proposal."

Mr Cash reported the position to Mr Carey; and it appears that Allen, Allen & Hemsley also had contact upon the matter

with both Mr Carey and with Borthwick's London solicitors.

On 24 January Mr Cash left Australia for London. Upon the following day, Monday 25 January, counsel for the Trade Practices Commission moved in this Court for a mandatory interlocutory injunction requiring AMH forthwith to withdraw its offer to purchase the Borthwick shares, the claim being that the acquisition of those shares would contravene s.50 of the Trade Practices Act. Counsel for AMH resisted this application, arguing that the likely effect of such an order would be that the Teys' offer would be accepted by the shareholders in Borthwick so that, without any curial determination that the offer did contravene s.50, AMH would be eliminated from the contest for Borthwick. On behalf of AMH, counsel offered certain undertakings designed to ensure that, if AMH's bid were successful, pending final determination of the matter Borthwick's business would be maintained and conducted independently of, and in competition with, the

I thought that, particularly having regard to the undertakings which were offered, it would not be appropriate to make the order sought by the Trade Practices Commission. But I did not want there to be any misunderstanding by AMH as to its position, and particularly as to the risk which it would run if it proceeded with its offer; the possibility of a divestiture order under s.81(1) having already been raised by counsel for the Trade Practices Commission. After obtaining instructions, senior counsel for AMH made the

"If AMH were to be successful in its bid for the Borthwick shares and the TPC was of the view that that acquisition was a contravention of Section 50 of the Trade Practices Act, the TPC would be able to preserve its position by seeking a divestiture order under Section 81 of the Act. AMH understands that it may suffer severe financial losses 1f the Court were to make such a divestiture order and is prepared to accept the commercial risk of the consequences that may flow from a divestiture order."

In the result, I accepted AMH's undertakings and I declined to

As previously indicated, several relevant meetings were held in London on 26 January. The first was the Extraordinary General Meeting of the shareholders of plc. The Chairman, Mr Robertson, read a statement to the meeting in which he referred to the advantages to the Borthwick group of the sale of the Australian business and in which he justified the price negotiated with Teys. He then went on to refer to the AMH offer, and the board's thinking in relation thereto:

"On 18 January, however - ten days after the announcement of the Teys agreement - there arrived the offer from Australia Meat Holdings, 'AMH', which was the subject of the circular which your Board issued on 22 January. This offer was ~- for the Australian assets - in the amount of A$29mn as against the Teys agreement figure of A$25mn; both offers covered the ancillary Japanese business at approximately asset value. Naturally your directors saw important attractions in a price advantage of A$4mn ... and they sought urgently to satisfy themselves that the two offers were in other respects comparable, so that price could be the simple determining factor.

Unfortunately it proved that there was one point of difference, and a very important one. Both offers included, as a condition, that the necessary approvals should be forthcoming, both in Australia and in the UK. One of those approvals, crucial to any final deal, was that of the Trade Practices Commission ...

Assurances were received that the TPC would have no objection to the completion of the Teys transaction, and would take no steps to stop it; but Borthwicks' advisors received written intimation by the TPC that the acquisition of the Borthwicks Australian business by AME - as distinct from Teys - 'would be likely to contravene' the relevant section of the Trade Practices Act; that the TPC was requesting an assurance that AMH would not proceed further without consultation with the Commission; and that the Commission would, failing such assurance, take such action as it might be advised to intervene in the proposal.

The effect of this indication, unless it could be modified or Borthwicks could in some way be shielded from its implications, was to confront the Borthwicks Board with a choice between two substantially different proposals. One, the Teys agreement, offered A$25mn and was ~ subject to your agreement today - certain, and a firm commitment; but if the Borthwicks shareholders did not approve it, and if the whole procedure were not completed by 1 February, the offer would lapse. The other, the AMH offer, carried a higher price of A$29mn, but was at that moment not certain, in that not only did it not have TPC clearance, it had a clear indication that such clearance would not be granted - if at all - until after a period of investigation. Moreover, though Borthwicks might decide to accept the risk of the outcome of the TPC's enquiries, it seemed that it would probably be able to do so only on the basis that the Teys offer would lapse by reason of its time-limit, and that even a conditional agreement with AMH could be the subject of an injunction imposed by the TPC pending its investigations. In other words, Borthwicks might fall between two stools and find itself with no agreement at all - not even a conditional one - because Teys had lapsed, and AMH had been enjoined against entering into any agreement. It was felt that if this state of affairs were allowed to develop, Borthwicks' bargaining position thereafter would be very, very gravely weakened; even if AMH eventually

received clearance, Borthwicks would have no firm agreement and the buyer would be free to vary his conditions or his price; and meanwhile the effective value of the Borthwicks Australian business would have been damaged, not least by the very serious uncertainty and unease engendered among staff.

Your Board strove to secure from AMH terms that would surmount these difficulties, whether by obtaining some more positive assurance from the TPC, or by providing an AMH commitment to assume entirely for their own account the whole of any TPC risk and its consequences. Despite the most serious and determined efforts, no such assurance or commitment was forthcoming up to last Friday; and your Board came unanimously to the view that Borthwicks could not wisely accept the tisk of losing the certain and acceptable Teys transaction, in exchange for the uncertain - indeed, on TPC indications doubtful - though financially more favourable AMH offer.

Accordingly we recommended, in a circular issued on Friday, 22 January, (after allowing the maximum possible time for a more helpful response from AMH, or from the TPC, on the sought-for assurances and commitments) that the Teys sale should continue to be recommended to shareholders; and had there been no further development in the past four days, we would still so recommend.

But since Friday, and subsequent to the issue of the circular letter of that date, your

Board's efforts to resolve the uncertainties of the AMH offer have borne fruit.

Followang an unsuccessful application by the TPC to the Courts in Australia for a restraining injunction, AMH have given certain undertakings to the TPC to the effect that they will make no changes at all to the Borthwicks Australian businesses, pending the outcome of a TPC enquiry in February. On this basis the TPC will not now intervene to prohibit the sale of the businesses to AMH, and our advisors are now satisfied that we can enter into a firm commitment with AMH. AMH have sent us a signed agreement in essentially the same terms as the Teys agreement but conditional only on the Resolution approving the Teys agreement not being passed, and are able to make the purchase moneys available in London for an immediate completion.

Your directors believe that in these circumstances they can, and in the shareholders' interests they should conclude such an agreement with AMH, thus securing the more favourable price offered by them, whilst avoiding the earlier risks of uncertainty and possible frustration of the sale, to which I have referred. ...

I hope that this explanation has clarified the difficulty in which the Board was placed by the circumstances of the two offers, and the attitude of the TPC as stated to us last week; and I am sure that it will be agreed that a fully favourable transaction, at a price of AS$S4mn higher, is to be preferred if all obstacles can be and have been removed."

The shareholders did take that view. No formal resolution was put but, in an informal vote for the guidance of the directors, the shareholders unanimously indicated that they favoured the AMH offer. The meeting was then adjourned. During the adjournment a sale agreement with AMH was signed and exchanged. Upon resumption of the meeting the Chairman put to the meeting the resolution, of which notice had been given, to approve the sale to Teys. This was defeated; whereupon the Chairman announced that the agreement with AMH

had become unconditional and would be completed forthwith.

The agreement was completed that day, meetings of the directors of the vendor companies, Pacific Holdings and UK,

being held to authorize the relevant stock transfers.

On the following day, 27 January, the directors of ple met. In dealing with Mr Cash's position, Mr Robertson reported to the directors that Mr Cash "had played a

considerable part in the successful disposal negotiations".

When the matter was before the Court on 25 January 1988 AMH was the only respondent. I was informed that the only major issue would be the definition of the relevant market, that the parties could be ready to litigate the matter within three or four weeks and that the hearing would occupy about one week. Accordingly, and having regard to the desirability of minimising the period during which AMH would be bound by its undertakings, I directed that the final hearing commence on Monday 29 February 1988. I stood the

On 2 February I granted leave to the applicant to amend the Application which it had filed on 27 January so as to add as additional respondents Pacific Holdings and ple. At that time counsel for the additional respondents indicated that their clients would contest the jurisdiction of the Court to grant relief against them and sought an opportunity to raise this as a preliminary issue before the commencement of the final hearing. I fixed 15 February for the consideration of that matter. I made directions for the exchange of proofs

On 15 February 1988 UK was added as a respondent, the applicant having in the meantime realized that this company was one of the vendors of the shares. The Borthwick

respondents then applied for an order setting aside service

upon each of them upon the basis that the Court had no jurisdiction to grant relief against any of them pursuant to

s.81(1A) of the Trade Practices Act. I heard some argument

that day upon the matter of jurisdiction but it quickly became apparent that the resolution of that question depended upon the determination of certain issues of fact. Counsel for the Borthwick respondents conceded that s.50 might apply to the acquisition of shares in a company incorporated outside Australia, and being shares registered outside Australia, provided that the company carried on business in Australia. But they argued that jurisdiction to make an order under s.81(1A) was not attracted merely by the circumstance that the vendor carried on business in Australia; a matter they put in issue in relation to each of their clients. They submitted that s.81(1A) could only be applied against the Borthwick companies if those companies had been involved in Australia in the breach of 5.50. For their part, counsel for the applicant contended not only that the Borthwick respondents, or some of them, carried on business in Australia. They also claimed that those respondents had been involved in the contravention of s.50 within Australia. Having regard to the disputes between the parties upon what were agreed to be critical questions of fact, I ruled that it was not appropriate to determine the matter of jurisdiction as a preliminary issue and I adjourned the notice of motion until the trial. I directed that the Borthwick respondents file defences by 19 February 1988, but that such filing be without prejudice to their claim that the Court lacks jurisdiction to grant relief

During the course of the trial a further notice of motion, to like effect, was filed by the Borthwick respondents. Both motions were considered together and evidence was adduced by both the applicant and the Borthwick respondents upon the question of jurisdiction. After hearing argument I indicated my view -- for reasons which I then shortly stated -- that, if the contravention of 5.50 were to be established, the Court would have jurisdiction to grant the relief sought; whether that jurisdiction ought, in all of the circumstances of the case, to be exercised being, of course, a separate question to be considered at the conclusion of the evidence. Accordingly, I dismissed the notices of motion. As the evidence which had been adduced on the motions was relevant both to the question of involvement and to the question whether the Court, in the exercise of its discretion, ought to refuse relief under s.81(1A), I admitted as evidence in the principal proceeding the whole of the evidence tendered in connection with the notices of motion. I also indicated that I would deal with the matter of jurisdiction more fully

Counsel for the Borthwick respondents sought leave to appeal against my order dismissing the notices of motion. I refused that application. It seemed to me that an appeal would not raise any question of general importance. My resolution of the matter of jurisdiction had turned upon conclusions of fact. Moreover, I was conscious that any

appeal at that stage would inevitably disrupt the hearing of

the principal proceeding; to the possible prejudice of a Party, AMH, who was not concerned with the matters sought to be argued on the proposed appeal. It would remain open to the Borthwick respondents to appeal upon any appropriate ground, including jurisdiction, if they were dissatisfied with the orders made in the principal proceeding. For similar reasons I refused to order a stay of proceedings whilst the Borthwick

respondents applied to a Full Court for leave to appeal.

Notwithstanding my view about the undesirability of an appeal at that stage upon the question of jurisdiction, the Borthwick respondents applied to a Full Court for leave to appeal. That application was unsuccessful, the Full Court holding that the application was incompetent: see Thomas

Borthwick & Sons (Pacific Holdings) Limited v Trade Practices

Commission (Bowen CJ, Lockhart and Sheppard JJ, 15 April 1988,

In the event the estimate that a hearing would occupy one week proved sadly astray. The hearing in fact occupied a total of 23 days. The extra time was partly occasioned by the joinder of the Borthwick respondents, involving issues relevant only to those respondents, but the major cause of the expansion of hearing time was the amount of evidence which the applicant and AMH, particularly AMH, adduced upon the issue of market definition. I am sure that the parties intended this material to be helpful to the Court and I salute the industry

of the many people involved in its collection and analysis.

However, although none of the evidence is irrelevant, much of it has proved to be of little assistance. It is for me a matter of concern that the curial determination of the limits of a market -- about which question I assume commercial people frequently make almost intuitive judgments -- should be seen as requiring the time, effort and expense involved in this case. My concern is intensified by the circumstance that, almost by definition, proceedings to prevent a breach of 5.50, or to reverse the effects of an antecedent breach, will always involve a measure of urgency. I suppose that the very flexibility of the concepts of market and of dominance necessarily casts a wide evidentiary net; but, in this type of litigation, there is a particular need for rigorous consideration of the probative value of potential items of

In particular I deprecate the course, taken by AMH, of supplying to economists proofs of the evidence to be given by other witnesses and then eliciting from those economists opinions as to the proper conclusion upon the definition of the market. Economists are able to assist the Court in relation to economic principles. But, once the relevant principles are expounded, their application to the facts of the case is a matter for the Court. The proper definition of a market is entirely a matter of fact, the determination of which ought not to be made more protracted and expensive by

In the event, the necessity of finding other hearing days, given existing commitments, has prolonged the

finalization of the case beyond what I would have wished.

I had occasion, in Mark Lyons Pty Limited v Bursill

Sportsgear Pty Limited (1987) 75 ALR 581 at pp.588-591, to

discuss at some length the concept of "market", as that term is used in Part IV of the Trade Practices Act. I drew particularly upon the seminal decision of the Trade Practices

Tribunal (Woodward J presiding) in Re Queensland Co-operative

Milling Association Limited (1976) 25 FLR 169. I need not

repeat my previous comments. But it is necessary to observe that, in Mark Lyons -- as in each of the authorities referred to therein -- the alleged market was one in which the relevant company acted as a vendor of goods or services to the public. Consequently, in discussing substitutability, the cases refer to the possible consequences of a decision to "give less and charge more"; to borrow the language used in Queensland Co-operative Milling at p.190. In the present case, the alleged market is one in which AMH acts as a purchaser of cattle from a wide variety of vendors, mainly breeders. It is the obverse situation; but nonetheless the description of a

market contained in Queensland Co-operative Milling continues

"A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them. (I£ there is no close competition there is of course a monopolistic market.) Within the bounds of a market there is substitution

~- substitution between one product and another, and between one source of supply and another, in response to changing prices. Soa market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. Let us suppose that the price of one supplier goes up. Then on the demand side buyers may switch their patronage from this firm's product to another, or from this geographic source of supply to

another. As well, on the supply side, sellers can adjust their production plans, substituting one product for another in their output mix, or substituting one geographic source of supply for another. Whether such substitution is feasible or likely depends ultimately on customer attitudes, technology, distance and cost and price incentives.

It is the possibilities of such substitution which set the limits upon a firm's ability to 'give less and charge more'. Accordingly, in determining the outer boundaries of the market we ask a quite simple but fundamental question: If the firm were to 'give less and charge more' would there be, to put the matter colloquially, much of a reaction? And if so, from whom? In the language of economics the question is this: From which products and which activities could we expect a relatively high demand or supply response to price change, i.e. a relatively high cross-elasticity of demand or cross-elasticity of supply?"

One of the expert witnesses called on behalf of AMH, Associate Professor T G Parry of the Faculty of Economics at the University of New South Wales, discussed in his evidence the concept of "market". Drawing upon that evidence, and the decided cases, counsel for AMH put the following submissions relating to the concept of "market":

take into account substitution possibilities in both consumption and production. The

quality or other characteristics of the products, does not by itself place the

based on what happens (or would happen) on either the demand or the supply side in

I adopt this submission and I hold that, in considering whether there are separate fat cattle markets within Queensland, it is necessary to consider what would happen on the supply side in response to a change in the price

There is an issue between the parties as to the relevant product market. The applicant contends that the product market consists of cattle turned off for immediate slaughter and that it does not include either store cattle or feed lot cattle. AMH, by contrast, submits that there is but a single product -- beef cattle -- which includes all three categories. It is, of course, necessary to identify the relevant product in order to determine the geographical area

I have already set out a description of each of the relevant categories. There is general agreement amongst the witnesses that, in relation to a small proportion of cattie turned off for sale, informed people may differ as to the

appropriate category in which to place a particular beast. At

the extremes there is no problem. Provided that abattoir capacity is available, there 1s no point in postponing the slaughter of an animal in optimum condition. Similarly, except perhaps in times of severe drought, cattle in poor condition are unlikely to be slaughtered. But differences may occur in relation to cattle in good, but sub-optimal, condition. One person may consider that any improvement in condition will not be worth the cost involved in achieving it. Another may think that a period in a feed lot -~- or even on open pasture -- is worthwhile. Those witnesses who dealt with the matter used different language to refer to the proportion of cattle in connection with which opinions might differ as to whether they were store or fat cattle. Mrs Smith compared the position with "drawing lines on a map when you want to divide up regions, there is going to be a blur at the edges; but by and large the animals fall into quite clearly defined categories". Mr Grahame Flynn, General Manager, Livestock, of AMH said that there was "a top end" where stores and fat cattle merge but he agreed that, subject to that qualification, there was "a clearly understood and universally applied distinction" between these two categories. His evidence went on: "Q If a cattle jobber gave evidence to

females, there is a big interlap against (sic) with store. When

there is a flush in the season the store buyer will come into the boning cow market and compete very strongly, to put more condition on them, get a calf out of them and then sell them.

Q But competition between store buyers and fat cattle buyers is fairly unusual, is it not?

Q It bespeaks exceptional circumstances in the market, does it not?

A I keep repeating it is the 20 per cent, that there is a continual intermingle both in the female and the male cattle.

Q The reason why those terms fat cattle and store cattle are used so universally is so that people in the cattle industry have a clear understanding of what they mean, do you not agree?

At a glance

Court

Decision date

Before

Source

Judgment (705 paragraphs)

Parties

Cases Cited (8)

Cited By (6)