Troubled waters for Ports deal signals increased ACCC scrutiny of transactions involving common ownership and minority interests

ACCC sets sights on specific transactions 10 min read

It seems there are stormy seas ahead for common ownership issues in Australia, as the ACCC has indicated an increased willingness to scrutinise transactions involving parties with minority interests or common ownership in competing firms.

On 26 August 2022, the Super Spirit and Palisade Investment Consortium withdrew its request for merger clearance for its acquisition of the Port of Geelong after the ACCC expressed concerns with the deal due to the consortium's common ownership and management of interests in the competing ports of Port of Geelong and Port of Portland. Critically, the ACCC aggregated the interests managed by the investment manager, Palisade, although ultimately owned by different investors, and examined the impact of the influence this gave to Palisade on competition between the underlying assets.

Following this, Chair of the ACCC Gina Cass-Gottlieb said the ACCC considered minority interests and common ownership to be an 'emerging issue' given the 'control and influence across competing businesses and the risk of concerted practice'.

This Insight provides an overview of the ACCC's approach to common ownership and minority interests, including in the context of proposed merger reforms and international approaches. Given the ACCC's renewed interest in this area, now is the time to seek advice for your deal to ensure you stay clear of rough waters.

The ACCC's approach

Australia's merger regime applies irrespective of the percentage of interest acquired. Unlike other overseas jurisdictions, there is no 'threshold' at which the regime applies. Any acquisition is potentially caught and whether it is prohibited is a substantive question as to whether the acquisition will result in a substantial lessening of competition (SLC). This involves considering:¹

• the owner of the interest and what overlapping interests the shareholder has;
• any contractual or other arrangements (eg veto rights under a shareholders agreement) that might make a minority interest more influential;
• the size and concentration of the remaining ownership shares (including whether the interest could block potentially pro-competitive mergers and rationalisation, eg a 10% shareholder could block compulsory acquisition of all shares by another party);
• the board representation and voting rights of the minority interest;
• the level of interdependence between companies in which there are overlapping interests, and the risk that this gives rise to coordination (for horizontal overlaps) or incentives to foreclose access or supply, or otherwise discriminate (for vertical overlaps); and
• whether the acquisition provides opportunity to access or exchange competitively sensitive information in relation to competitors which could be used to dampen competition between rivals.

Ultimately, according to the ACCC's merger guidelines, 'a level of ownership less than a controlling interest that nevertheless alters the incentives of all parties' may give rise to competition concerns (ACCC Merger Guidelines, paragraph 11).

Spirit Super & Palisade / Port of Geelong

In March 2022, the ACCC released a public statement of issues about the proposed acquisition of the Port of Geelong by the Spirit Super and Palisade Investment Partners Consortium. In that case, a consortium of investors including Spirit Superannuation, a managed client of Palisade and funds managed by Palisade Investment Partners, proposed to acquire 100% of the Port of Geelong.

The ACCC said that the Port of Geelong and the Port of Portland were the two largest Victorian bulk cargo ports and accounted for more than half of bulk cargo in Victoria. The ACCC was concerned that the superannuation and infrastructure funds managed by Palisade would have resulted in Palisade simultaneously managing 100% of the Port of Portland and 49% of the Port of Geelong. The diagram below illustrates the proposed post-merger structure.

The ACCC held concerns about the proposed acquisition notwithstanding the fact that the ultimate owners of the investments managed by Palisade were different. The decision illustrates that the ACCC considers the identity of the manager to be critical because of its view that investment managers can influence the strategic decisions of the assets of the funds they manage, even if the ultimate owners are different. This is similar to the approach taken by merger review agencies overseas, where the 'right to manage' or the acquisition of control by 'contract' can establish 'control' for the purposes of assessing the application of merger control rules.²

The ACCC was concerned in this circumstance that the merger would reduce competition between the ports, arguing in its statement of issues that the common ownership by Palisade, coupled with Palisade's degree of influence over Port of Geelong, would reduce Port of Portland's incentives to compete for customers as aggressively as it otherwise would.

The consortium withdrew its request for merger clearance on 26 August 2022.

A 'careful and thorough' review

Following the withdrawal of the Port of Geelong deal, the ACCC has flagged an increased scrutiny of deals that involve issues of common ownership and/or minority interests.

The Chair of the ACCC said that:

Common fund management and ownership that allow a degree of control or influence by minority interests have the potential to detrimentally effect competition. Parties proposing to acquire interests in critical infrastructure should expect the ACCC’s review will be careful and thorough … the ACCC conducts merger reviews with the rigour warranted by the complexity and significance of a transaction.

The Chair also said at the Ports Australia conference in August that:

Superannuation and other investment funds have interests in many of Australia’s infrastructure assets. The issue of common fund management and ownership among competing firms, including via minority interests, has increasingly become a focus of regulators and policy makers. Parties proposing to acquire interests in Australia’s critical infrastructure can expect a careful and thorough ACCC review as the long-term consequences for competition can be very significant.

ACCC past practice

The Port of Geelong case was not the first time the ACCC considered issues arising from common or minority interests, although the issues were different in the past. For example:

• In Dye & Durham (D&D) / Link Administration Holdings (Link) (2022) the ACCC considered competition issues arising from vertical overlaps between D&D's legal practice management software, and Link's 42.77% shareholding in PEXA Group Ltd, a provider of electronic legal document lodgement services. Essentially, the ACCC was concerned that the merged entity would engage in mutual self-preferencing conduct which would harm the merged entity's competitors. The ACCC said in its statement of issues that, despite the interest in PEXA being a minority shareholding, the interest was a substantial stake and the combined D&D-Link entity would have significant influence in respect of PEXA's strategy and behaviour because:

  (a) Link was the largest individual shareholder in PEXA, with others being widely dispersed;

  (b) Link could nominate two directors to PEXA's board; and

  (c) Link accounts for PEXA as an equity-accounted investee on the basis that it has significant influence over PEXA.

  The ACCC said its competition concerns arose even absent a finding of D&D-Link controlling PEXA because of the alignment between D&D and PEXA. This is despite the fact that other shareholders in PEXA would be unlikely to directly benefit from conduct benefitting D&D, and that PEXA's directors had fiduciary duties to act in the interest of PEXA. The ACCC cleared the transaction conditionally after D&D provided a court-enforceable undertaking to divest D&D's existing Australian business to an ACCC-approved purchaser. The ACCC is yet to release its full reasoning.
• In the context of the ACCC's unconditional clearance of the Qube / Brookfield etc consortium's 'break up' bid for Asciano in 2016, the ACCC considered whether any issues arose by virtue of cross-shareholdings held by the various investors in other businesses. In particular, the ACCC considered the ability of the various shareholders to influence the operations of their investments to engage in self-preferencing conduct or obtain access to competitively sensitive information that would result in an SLC. The ACCC also specifically considered 'the common financial interests between the Consortium parties created by the transaction structure'³, but ultimately concluded that the various cross-shareholdings were not likely to give any member incentives to favour another member. However, the ACCC did note that any changes—including related acquisitions—could be considered by the ACCC in the future.⁴
• The ACCC did not oppose the acquisitions of 40% and 9.99% of Glencore Agriculture by CPPIB and bcIMC respectively (2016). A subsidiary of Glencore was involved in grain storage and in port services. The two investors had interests in a rail operator, Pacific National. The ACCC considered whether these interests would reduce the ability of other rivals in rail or grain to compete. The ACCC did not think the investors would use their influence over Pacific National to disadvantage competitors due to the nature of the minority interests and the market position of competitors.
• The ACCC also considered acquisitions of minority interests in Compare the Market / iSelect (cleared, 2021) (35%), Barro / Adelaide Brighton (cleared, 2022) (43%) and the initial Qantas / Alliance Airways investment (19.9%, review ongoing). In iSelect, the ACCC noted that 'in some cases, even minority shareholdings in a competitor can lead to muted competition between the parties', although it ultimately determined the acquisition would not result in an SLC.

These cases, together with recent ACCC statements, reflect a growing willingness by the ACCC to scrutinise these types of transactions.

Reforms ahead?

In March 2022, the Senate Standing Committee released a report on the implications of common ownership and capital concentration in Australia. In its report, the Committee noted that 'common ownership has the potential to undermine competition within the Australian economy' and said it 'is critical that Australia's market regulators are proactive in understanding the risks'.

The Committee recommended the introduction of a new legislative requirement for the ACCC to actively monitor the extent of common ownership in Australian markets. It also recommended that the ACCC should be empowered to take common ownership implications into account when assessing merger applications'.

The recommendations are particularly pertinent in light of the Federal Government's proposal to introduce a public register of beneficial ownership, which would provide greater transparency to enable the ACCC to consider these issues.

The Chair of the ACCC referred to these recommendations in August 2022, saying that common ownership '[has] increasingly become a focus of economic regulators'. The Chair has also stated that the ACCC is aware that common ownership issues are given 'close interest around the world' and that the ACCC is continuing:

'to carefully consider and refine [its] thinking around mergers and conduct that involves commonly held and/or managed minority interests and the extent to which concerns are raised about control and influence across rival firms and the risk of concerted practices. For example, do such holdings across competing companies have a chilling effect on company decision-making and their incentives to compete? Do they create financial incentives that distort and dampen competition? How is information from different companies quarantined when a party owns a minority interest in two or more?' 

The 'close interest' referred to by the ACCC Chair includes consideration of similar issues in the EU, the UK and the US, with a view to expanding the scope of merger regulations. Some of these include:

• European Union: following a 2014 European Commission White Paper recommending competition laws be amended to capture shareholdings above 5%, the European Parliament conducted a study considering competition issues arising from joint ownership by institutional investors. In September 2022, the European Commission proposed laws limiting cross-media ownership via the European Media Freedom Act.
• United Kingdom: the UK Government has signalled an intention to expand the scope of the UK's merger control regime, following the 2022 UK Government's consultation on competition policy reform and the more recent report on The State of UK Competition. The report reviewed common ownership across several major markets in the UK and noted that ignoring common ownership led to underestimating market concentrations.
• United States: the FTC is currently consulting on proposed changes to the agency's approach to common ownership as part of its broader consultation on modernising its merger guidelines.

Next steps

If the ACCC seeks to follow the international tide of merger reforms to account for common ownership or minority interests, it may need to articulate the precise levels of ownership it thinks should be captured by any new regulation. This is particularly important if the ACCC continues to promote the introduction of a suspensory and mandatory merger review regime. Given the ACCC Chair's public support for such a regime, along with increasingly staunch rhetoric, this may be making landfall in Australia in the future. 

We recommend seeking advice about your transactions if you are concerned about what this could mean for your deal. Allens leads the market in getting transactions through the ACCC, often at an early stage in the review process, and can advise you on next steps.