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Key issues in designing a mandatory merger regime for a modern economy

What are the main features of a mandatory merger regime?

What ownership threshold should apply?

One of the first questions that mandatory filing regimes define is the level of interest acquired by the purchaser in the asset, business or entity for the regime to apply.

Currently, under Australia's laws, section 50 of the Competition and Consumer Act 2010 (Cth) prohibits any acquisition of shares or assets which have the effect or likely effect of SLC. Section 50 therefore has the potential to capture the acquisition of any level of interest (ie there is no minimum shareholding or asset size required to trigger the prohibition). This means that the ACCC has powers to review acquisitions of minority interests if it has concerns that the transaction could raise competition issues resulting in an SLC.

Foreign jurisdictions with mandatory merger control regimes have a range of approaches for defining the type of interest required to trigger a notification requirement. However, they have sought to widen their jurisdictions to review competition issues raised by acquisitions of minority interests and cross-shareholdings, which, as noted above, the ACCC currently has the power to review.  

In Europe, the European Union (the EU) Merger Regulation applies only to acquisitions that result in a lasting 'change of control'. The 'control' threshold does not apply to minority interests falling short of 'control'. The European Commission (the EC) has considered introducing a system to review non-controlling minority shareholdings that create a 'competitively sensitive link'1 (ie in a competitor or vertically related company, with shares of between 5 and 20% and some additional rights).

In the UK, the relevant consideration is whether the transaction will result in the acquisition of a 'material interest'. Although this threshold is lower than the EU 'control' test, the UK is also considering whether its merger control regime should be widened to better capture minority interests.2

In the US, which effectively requires an interest of 50% or more, the Federal Trade Commission (the FTC) previously proposed changes to its merger notification rules that would have captured acquisitions of over 1% of voting securities in a competitor. These amendments were not ultimately implemented, but the FTC is now considering the adequacy of the existing approach to common ownership via minority interests, in a refresh of its merger guidelines, which were expected to be released at the end of 2022.3

Arguably, the ACCC currently enjoys wider powers to review minority transactions than foreign agencies with mandatory regimes.

If Australia were to introduce a mandatory merger regime, the level of interest acquired would need to be defined above the current level; otherwise, the ACCC would be inundated with filings it would not have the time or resources to review. The Chair recently flagged that the ACCC is considering and refining its thinking around mergers involving commonly held and/or managed minority interests, the extent to which concerns are raised about control and influence across rival firms, and the risk of concerted practices (see our Insight ). It will be interesting to see how these concerns play out, if at all, in the ACCC's proposed architecture of a mandatory merger control regime in Australia.

Thresholds: turnover, size of parties, market share tests, size of transaction tests?

Mandatory regimes overseas usually contain 'thresholds' to determine whether a transaction must be notified. There are challenges in calibrating thresholds, including inadvertent over or under capture, and them being sufficiently clear and easy to apply to assist deal and contractual certainty. 

Broadly, there are three types of notification thresholds used globally: (1) turnover / size of parties; (2) market share; and (3) transaction size. However, there is also a trend towards industry-specific thresholds or considerations to combat unique competition issues that arise in certain markets. Indeed, the ACCC has considered this approach in the context of digital platforms.4 As noted above, Commissioner Stephen Ridgeway flagged that the ACCC is still pursuing a digital platform-specific merger test.

One common theme that led overseas agencies to seek reforms to their own regimes in recent years is that turnover and market share thresholds may 'under capture' potentially harmful transactions. Because revenue is typically used as a proxy for market size, overseas regulators have articulated concerns that this creates the potential for so-called 'killer acquisitions' to 'fly under the radar' when one party has no or little revenue.5 This was highlighted by regulators in relation to acquisitions by various digital platforms in the 2010s. For example, Facebook's acquisition of Instagram did not satisfy the turnover tests in the EU, as Instagram had no revenue at the time of the acquisition.

Accordingly, a range of overseas jurisdictions have sought to introduce additional tests to capture these types of transactions, including instituting 'size of transaction' thresholds (in addition to existing turnover thresholds)6 or expanding existing 'call-in' powers.7

In the EU, there has been a rise in the use of existing powers that permit member states to refer to the EC mergers that affect trade between and within EU member states,8 and other jurisdictions have created industry-specific or player-specific merger rules. This approach has been adopted in Norway, where specified firms must notify the regulator of all mergers. Similar regimes have been proposed in France, Italy and the Netherlands.9

Gina Cass-Gottlieb has indicated that careful consideration is needed to ensure that the thresholds are appropriately calibrated to ensure the ACCC has the ability to review transactions in smaller markets. At the Standing Committee on Economics, she noted the following, on the question of the thresholds to apply:10

Based on this, it is therefore possible that the ACCC may propose thresholds combining various elements11. 

However, tiered and alternative thresholds can create complexity and uncertainty, and also significantly risk 'over capture'. Regimes that rely on market share thresholds can be difficult and uncertain, as they require common ground on the definition of the market – in relation to which 'reasonable minds can differ' and can be difficult to define in new and nascent markets – thereby creating significant uncertainty.

'Over capture' is not just a theoretical risk – it has practical consequences in terms of the increased demands (and costs) involved in the ACCC appropriately staffing merger review to ensure approval in a timely and predictable manner. The thresholds would therefore need to be appropriately calibrated to avoid over capture, to ensure the regime is correctly targeted and does not unnecessarily raise ACCC (and taxpayer) costs. 

Process and timing

The current ACCC regime for filing mergers provides a degree of choice and flexibility. Australia currently has two main ACCC merger review processes from which parties can choose.12 

  • The ACCC informal merger clearance process is flexible, and has no prescriptive time periods or requirements around the extent and type of information that needs to be submitted to the regulator, although there is ACCC guidance on both timing and content. Parties tend to submit a freehand 'letter' to the ACCC, which may then request additional information it considers necessary for its review.
  • The ACCC formal authorisation process is more prescriptive, requiring the submission of a public application addressing certain specified categories of information. There is technically a 90-day statutory review period but, in practice, and as has been observable in recent authorisation matters, the period can be extended by agreement with the applicant(s). Parties must provide a court enforceable undertaking not to complete the transaction while the review is underway. If the statutory review period expires without a positive ACCC authorisation decision, the merger is deemed to be prohibited. However, a positive ACCC authorisation decision gives the merger parties statutory immunity. There has been a rise in the popularity of the formal authorisation process, with three applications lodged with the ACCC in 2022 alone (before which only three had been lodged since 2018, when the process was first introduced).

There is a question as to the timeframes that would be prescribed in any mandatory regime in Australia, given how different the two current regimes are. On the one hand, the informal regime provides complete flexibility for the ACCC; whereas the formal authorisation regime has a prescriptive period, which has evolved to be more flexible in practice, albeit with the applicants' consent.

Mandatory filing forms, simplified processes for straightforward mergers, and review periods

A number of overseas jurisdictions, including the EU, US and UK, have merger filing forms that prescribe what information and documents must be provided to the regulator as part of the merger notification.13 Some regulators do not start considering the proposed transaction until a merger filing is complete (ie all prescribed information and documents have been provided), giving them considerable discretion to require additional information and prevent the statutory period from commencing. Preparing a merger filing in some jurisdictions can be very burdensome for parties, with them spending a considerable amount of time in 'pre-notification' or 'pre-filing' discussions with foreign agencies. While these regimes have the benefit of statutory timetables for review, in reality parties are often held up in lengthy pre-notification discussions (some of which can last for months), which creates additional uncertainty. Moreover, increasing uses of 'stop the clock' notices once the statutory review period has commenced have further undermined the certainty associated with statutory review periods.   

When examining jurisdictions overseas, we see it is not uncommon for merger regimes also to provide for a simplified or short form process for mergers that are unlikely to raise any competition concerns.14 For example, the EC has adopted a simplified procedure,15 whereby parties disclose limited information by way of a 'Short Form CO', and the EC provides a clearance decision within 25 working days from the date of notification where there are no overlaps or the parties' combined shares fall below certain thresholds.16  

Statutory time periods and review phases

Jurisdictions with mandatory merger control regimes tend to have statutory timeframes in place during which the regulator must make a decision or the transaction will be deemed unconditionally approved (as in the EU). This is the opposite of the position under Australia's formal merger authorisation process, whereby applications are deemed to be refused if no decision is taken by the time the statutory period has lapsed (s90(10B)). There is often flexibility built into those time periods for overseas regulators, with the regulator able to 'stop the clock' while waiting for responses to requests for information, or if insufficient / incomplete information has been provided to it.  

In Australia, there is currently no formal distinction in review periods in each of the informal and authorisation regimes, processes or forms for transactions raising less or more complicated competition issues, although in practice the quantity of information submitted is less, and reviews take less time, for more straightforward matters. Ultimately, an ideal regime will provide deal parties with certainty as to timing and minimise information-gathering burdens.

Transparency and access to the file

Overseas regimes vary in the level of disclosure and transparency they provide to parties in relation to materials submitted by third parties and the decision-making of the agency. For example, the UK Competition and Markets Authority (the CMA) publishes all the submissions of merger parties and third parties, as well as CMA decision-making. The EC publishes comparatively less, but does publish its decisions, and offers parties, including interested complaints, 'access to the file'. Under the current processes available in Australia, the level of transparency varies depending on the process chosen. In the current formal merger authorisation regime, all materials submitted by applicants and third parties, as well as ACCC decisions, are published on the ACCC's website, subject to commercially sensitive material being redacted. In contrast, the ACCC's informal regime provides very limited transparency. Less transparency can materially hinder parties' ability to understand precisely the reasoning and evidence on which the regulator relies when identifying concerns about transactions. However, it also places an increased onus on the regulator to process and publish third party material, as well as produce its own decisions. The precedential value of the ACCC's reasoning may, as well, assist parties in future transactions.   

Gun jumping

Based on the experience of overseas regimes, the corollary of introducing a mandatory merger regime is that businesses need to be a lot more careful about gun-jumping risks, which carry significant penalties and tend to be fairly aggressively enforced by foreign agencies. Under a mandatory regime, until a proposed transaction has been approved by the regulator, parties are at a heightened risk of pre-implementation (ie implementing a merger without clearance) and the cartel risks associated with this (especially if the merging parties are competitors). To date, there was only been one case in which the ACCC has taken enforcement action for gun-jumping risk relating to cartel conduct (ie ACCC v Cryosite in 2019 – see our Insight. A mandatory regime could introduce additional enforcement risk for pre-implementation conduct.  

  1. European Commission, 'White Paper – Towards more effective EU merger control' (2014)

  2. A 'competitively sensitive link' would require:

    • an acquisition of a minority shareholding in a competitor or vertically related company; and
    • the competitive link would be considered significant if the acquired shareholding is 1) around 20%; or 2) between 5% and 20% but accompanied by additional factors such as rights that give the acquirer a 'de-facto' blocking minority, a seat on the board of directors or access to commercially sensitive information of the target.

  3.  In 2022, the FTC, in conjunction with the Department of Justice, issued a public request for information about merger enforcement, including a request for comments about the current approach to common ownership. See https://www.ftc.gov/news-events/news/press-releases/2022/01/federal-trade-commission-justice-department-seek-strengthen-enforcement-against-illegal-mergers

  4. In February 2022, the ACCC published a Digital Platform Services Inquiry Discussion Paper that considered potential reforms to merger laws relating to digital platforms, including the introduction of specific merger notification requirements for acquisitions by large digital platforms.

  5. As the OCED notes, a turnover threshold 'can be a useful filter to ensure that transactions that might reduce existing competition in reasonably important markets are examined by competition agencies'; however, 'a loss of potential competition might not be captured by such a filter': https://one.oecd.org/document/DAF/COMP(2020)5/en/pdf, [170].

  6. This occurred in Germany and Austria. The OECD recognises that one benefit of a transaction value threshold is that it 'would enable high value low turnover transactions that might pose a threat to potential competition to be investigated': https://one.oecd.org/document/DAF/COMP(2020)5/en/pdf, [169].

  7. The EC can now call in transactions that were previously not reportable under the referral mechanism under Article 22 of the EU Merger Regulation: https://www.linklaters.com/en/insights/blogs/linkingcompetition/2021/april/european-commission-new-guidance-on-merger-referral-policy-to-catch-non-reportable-deals.

  8. Article 22 of the EU Merger Regulation permits member states to refer to the EC mergers that affect trade between and within member states. Historically, the EC has tended to discourage referral requests under Article 22 where the referring member state lacked original jurisdiction to review the merger itself, based on national review thresholds (typically, turnover related). However, the EC now has a policy of encouraging and accepting referral requests from member states under Article 22 (provided the conditions are met), even if the merger is not notifiable at a national level. This revised policy position was observed in the Illumina / GRAIL merger in April 2021, for which Article 22 was invoked: see: https://ec.europa.eu/commission/presscorner/detail/en/IP_22_5364.

  9. https://one.oecd.org/document/DAF/COMP(2020)5/en/pdf, [181]-[184].

  10. Standing Committee on Economics, 11 October 2022.

  11. Parties can also seek comfort via a third route but seeking a declaration from the Federal Court.

  12. For example, in the EU, 'Form CO' must be submitted to the EC. This requires the parties to set out information including a description of the merger, information about the parties, details of ownership and control, turnover for each of the parties, copies of transaction documents, copies of minutes from board and shareholder meetings in which the proposed transaction was discussed, including related analyses, studies, presentations, etc., information about the relevant markets, and information about any efficiencies arising from the transaction.

  13. In May 2022, the EC launched a public consultation into further proposed simplification of its merger procedures, having found that around 93% of all mergers notified to the EC each year did not raise competition concerns. The proposal includes introducing 'super-simplified' treatment for certain mergers (eg where there are no horizontal overlaps or vertical relationships between the parties). The new rules are expected to take effect in 2023. See https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52013XC1214(02)&from=EN, p 5.

  14. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52013XC1214(02)&from=EN

  15. Broadly speaking, the simplified procedure applies in circumstances including where: there are no horizontal overlaps or vertical relationships between the parties; or combined market shares of all the parties that engage in overlapping activities is less than 20%, and none of the individual or combined market shares of the parties engaged in activities in an upstream or downstream market from another party is 30% or more; or where a party proposes to acquire sole control of another party over which it already has joint control.