Our current regime is fit for purpose, but what has been put forward? 15 min read
Possible changes to Australia's merger control rules have been on the table for some time and are now being considered by a Competition Taskforce within the Australian Treasury (the Taskforce). On 20 November 2023, the Taskforce issued a consultation paper on possible merger clearance changes (the Consultation Paper).
The Consultation Paper asks whether Australia's merger control processes need changing and sets out three possible options for change. These policy options are designed to address potential shortcomings given a perception that the intensity of competition has weakened across many parts of the Australian economy. In addition, the Consultation Paper considers some changes to the substantive merger control test, primarily to address a potential concern that the current test may not adequately require decision-makers to focus on the structural impact of mergers on affected markets.
We continue to be of the view that the case for change has not been made out. The threat of contravening section 50 of the Competition and Consumer Act 2010 (Cth) (CCA) and the prospect of injunctive action by the ACCC—which the ACCC has demonstrated it is willing to take—means that most parties notify the ACCC of their proposed transactions. There is not sufficient evidence that there is a significant problem of mergers taking place that the ACCC is unable to review and, if necessary, prevent from completing. Accordingly, in our view, Australia's current merger control regime is fit for purpose and does not need to be changed. However, we provide some initial comments on the three options set out in the Consultation Paper, as well as on the substantive changes that have been proposed. We will be watching this consultation process carefully and assessing any further information released.
Treasury is seeking public feedback on the Consultation Paper by 19 January 2024.
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Background
The ACCC has been calling for change since 2021 (see here) and, in particular, for Australia's current informal and voluntary merger regime to be replaced with a mandatory one (see here). In addition to the introduction of a mandatory suspensory formal clearance process, the ACCC has advocated for shifting the onus of proof onto the merger parties to 'satisfy' the regulator that the proposed acquisition is not likely to substantially lessen competition. The ACCC has also called for a broadening of the number of statutory factors to be considered when applying the 'substantial lessening of competition' test, including to deal with firms that have substantial market power.
In August 2023, the Australian Treasurer announced a review into Australia's competition laws, policies and institutions to ensure they remain fit for purpose, with a focus on reforms that would increase productivity, reduce the cost of living and boost wages. The Taskforce was established in Treasury to conduct a review of the merger clearance process, non-compete clauses, new technologies, net-zero transformation and the care economy.
The first area of focus for the Taskforce is a review of Australia's process for merger clearance. The Consultation Paper seeks feedback on:
- the effectiveness of Australia's current merger control regime in allowing beneficial mergers to proceed, while blocking those that may pose substantial competition risks; and
- the potential options for improving the regime (and also invites stakeholders to suggest alternative options or variations of these options).
The Consultation Paper seeks input into how these controls could be better implemented to optimise market conditions for all stakeholders. Feedback gathered will inform government advice on potential directions for change. If change is proposed following this consultation phase, further discussions will take place during implementation.
The possible options for a merger control regime
The Consultation Paper outlines that the Competition Taskforce is considering a range of possible options, drawing on experience globally. It asks stakeholders to provide feedback on whether Australia's existing regime should be retained, and on three possible options for change (and for any alternative suggestions). The Consultation Paper notes that all options would replace the current informal process.
The three possible options are:
- Option 1, voluntary formal clearance regime: businesses could choose to notify a merger (which would be suspended during the period of review) and the ACCC could grant legal immunity from court action if 'satisfied' that the merger would not be likely to substantially lessen competition. Such decisions would be reviewable by the Australian Competition Tribunal (Tribunal) on the papers before the ACCC (presumably with further appeal rights in the Federal Court). This approach also contemplates the introduction of upfront information requirements supplemented with additional procedures to encourage notification of potentially anti-competitive mergers, such as 'call-in' powers. If merger parties do not voluntarily notify and the ACCC has concerns, or they notify the ACCC but decide to proceed with the merger even after the ACCC expresses concerns, the Consultation Paper states that the ACCC would need to commence proceedings in the Federal Court to stop the merger. The Consultation Paper notes that Option 1 would be similar to the voluntary regime that operated in Australia between 2007-17 and to aspects of the current approach in New Zealand and the United Kingdom.
- Option 2, a mandatory suspensory regime: mandatory notification of mergers above a threshold (although the ACCC could investigate mergers below the threshold), where transactions are suspended for a period of time while the ACCC conducts its assessment. This approach also contemplates the introduction of upfront information requirements. If at the end of the process, the ACCC finds that the transaction is likely to substantially lessen competition and the parties do not voluntarily abandon the merger, the ACCC would need to commence proceedings in the Federal Court to prohibit the merger. Option 2 is broadly based on the approach taken in the United States and Canada.
- Option 3, a mandatory formal clearance regime—the ACCC's proposal: mandatory notification of mergers above a certain threshold, but the ACCC could 'call in' mergers below the threshold in certain circumstances. Transactions are also suspended for a period of time while the ACCC conducts its assessment. The ACCC would only grant clearance if it is 'satisfied' the merger was not likely to substantially lessen competition or with consideration of public benefits if a merger cannot be cleared on competition grounds. The ACCC's decision would be reviewable by the Tribunal on the papers that were before the ACCC. Option 3 is similar to aspects of Australia's current voluntary merger authorisation regime.
The ACCC has been calling for change for some time, but is it really needed?
Currently, the parties to a transaction have the option of seeking informal clearance or applying for formal authorisation. We believe the current regime provides flexibility and choice to the parties, while also providing the ACCC with wide powers and the ability to direct its efforts and resources in a targeted way. This flexibility would be lost with the introduction of a mandatory regime. We believe there is little evidence that the ACCC is failing to 'catch' undesirable mergers. A mandatory regime would require significant additional funding and resources with arguably little increase in the number of problematic deals caught. At the moment, the ACCC can investigate any deal that gives rise to competition concerns, irrespective of transaction value or the size of the parties, which gives the ACCC very wide powers.
If Australia's voluntary informal process is replaced, what can we expect from each of the options?
The Consultation Paper describes Option 1 as a 'voluntary formal clearance regime'. Under such a regime, while it will not be mandatory for parties to notify the ACCC of a merger, if the parties choose to do so, and the ACCC clears the merger, this will provide immunity from legal action. However, if the parties choose to proceed with a merger without notifying the ACCC or without having received clearance, the ACCC would need to commence proceedings to stop the merger. While we believe there are compelling reasons to maintain a voluntary regime, if this option replaces the current informal clearance process, it will in many cases make this a de facto mandatory regime as parties will wish to seek comfort from the ACCC to proceed with the merger.
In addition, it is not clear how a review of an ACCC decision by the Tribunal interacts with the requirement that the ACCC must commence court action to block a merger. The Consultation Paper notes that the decision-maker under Option 1 is the ACCC subject to review by the Tribunal. However, in circumstances where the ACCC must commence proceedings to prevent a merger, it seems to us that neither the ACCC nor the Tribunal is the final decision-maker, but rather, the Federal Court. It is therefore unclear from the Consultation Paper what role the Tribunal has under Option 1. We believe it is not only appropriate, but important, that the Federal Court is the ultimate decision-maker. This provides an important check on the power of the ACCC and is crucial in circumstances where most mergers are largely efficiency enhancing and do not negatively impact competition. The test under Option 1 also suffers from the requirement that the ACCC be 'satisfied', which we discuss further in relation to Option 3 below.
The Consultation Paper describes Option 2 as a 'mandatory and suspensory regime'. Option 2 will provide the ACCC with both notification in a timely manner and comfort that transactions will be suspended while the ACCC has time to conduct its review. The ACCC is not prevented from investigating matters below the threshold. It also has the potential to provide a greater level of certainty for merger parties on whether notification is required and how long the process will take. Importantly, it also retains the role of the Federal Court as the final decision-maker.
In circumstances where the ACCC has acknowledged that 'most parties do not challenge the ACCC when it opposes tie-ups'1 and that its concerns with the current regime relate largely to a 'small proportion' of mergers that are occurring, it is appropriate and important to retain the requirement for the ACCC to seek an order from the Federal Court to prevent an anti-competitive merger. While we acknowledge that pursuing litigation is resource intensive, it is required very rarely and is also likely to become easier for the ACCC if a mandatory suspensory regime with information requirements and filing fees is in place. Further, the overall costs of Option 2 (including litigation) are likely to be less than the overall costs of Option 3 given the likely significant expense of preparing (for parties) and reviewing (for the ACCC) ACCC applications with a limited merits review to the Tribunal, as has been seen in the merger authorisation context.
The efficacy of Option 2, however, would depend on a range of factors:
- Thresholds: the thresholds for notification would 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. We consider that any thresholds would also need to outline a threshold level of domestic turnover that triggers notification. Without a domestic turnover threshold, we believe the thresholds proposed by the ACCC would result in significant over capture. Establishing thresholds is not straightforward, and jurisdictions with such thresholds have detailed guidance on how turnover is calculated and allocated to which jurisdiction, as well as what constitutes a corporate group. Such guidance would need to be developed, ideally with a level of consistency and convergence with other jurisdictions.
- Process: while Option 2 contemplates the introduction of upfront information requirements, overseas experiences show that it is not uncommon for merger regimes to also provide for a simplified or short-form process for mergers that are unlikely to raise any competition concerns. The ACCC has also publicly advocated for a process that involves the granting of 'waivers' within a short time frame for mergers that meet thresholds but do not give rise to issues. We consider that this will be an important element of any mandatory regime.
- Timing: Option 2 would need to incorporate statutory timeframes during which the regulator must make a decision, or the transaction will be deemed unconditionally approved (as in the EU). This would provide the merger parties with certainty as to timing and minimise information-gathering burdens.
For further information, see our Insight: 'Key issues in designing a mandatory merger regime for a modern economy'.
The ACCC's proposal and the problem with the 'satisfied' test in a mandatory regime
The ACCC is advocating for a mandatory formal clearance regime that would require mandatory notification of mergers above certain thresholds, while retaining a 'call-in' power. The ACCC would only grant clearance if it is 'satisfied' the merger is not likely to substantially lessen competition or will not result in a net public benefit if a merger cannot be cleared on competition grounds. This is largely an 'administrative model', with transactions requiring ACCC approval before they can proceed.
Both Options 1 and 3 contemplate a shifting of the burden of proving that a transaction does not substantially lessen competition to the parties. In both options, the ACCC will only grant clearance if it is 'satisfied' the merger is not likely to substantially lessen competition (although it appears from the Consultation Paper that, under Option 1, the ultimate decision would be made by the court on a different test). The 'satisfied' test is different from Option 2 and the current regime where the court can only prevent a merger if, on the balance of probabilities, it is likely to substantially lessen competition. This is an important difference, and we have concerns with the use of the 'satisfied' test.
Under the current informal regime, a merger is unlawful if it will have the effect or likely effect of substantially lessening competition. The courts have interpreted 'likely' to mean a 'real chance', which must be proved on the balance of probabilities. This is a low threshold, but it has generally been fit for purpose in the context of the current voluntary regime where only those mergers that are likely to pose competition issues are opposed by the ACCC. Whether a merger is likely to have the effect of substantially lessening competition is ultimately a question for the Federal Court to decide.
While the 'satisfied' test has been used in the non-merger authorisation process for some time, it is in respect of conduct that would otherwise be contraventions of the CCA (such as cartels or arrangements that substantially lessen competition) where the effect of the conduct is outweighed by a public benefit. This reflects the presumption that the conduct is anti-competitive and, arguably, the test is appropriate in these circumstances. In the merger authorisation context, the 'satisfied' test is part of a voluntary process which is generally utilised by those mergers likely to raise competition concerns and where there may be a public benefit. In contrast, in circumstances where most mergers do not raise competition concerns, it is not appropriate to require the ACCC to be 'satisfied' that they are not anti-competitive. This is an inappropriate burden on the parties and does not reflect the approach in overseas jurisdictions. We believe the 'satisfied' test will likely see deals blocked in Australia that are cleared by our overseas counterparts, which will have significant implications for economic activity in Australia.
The ACCC's proposal also involves its decision being reviewable by the Tribunal on the evidence before the ACCC, rather than by the Federal Court. As already noted above, we believe that it is both appropriate and important that the evidence can properly be tested in a court or tribunal, including through adducing new evidence and cross-examination. The current authorisation process, where parties are limited to the evidence before the ACCC, not only makes the ACCC process extremely onerous but does not allow for a proper testing of the evidence on appeal.
Under an administrative model, we believe there is also a greater need for transparency. In particular, there would need to be appropriate transparency in respect of the ACCC's concerns, reasoning and decisions, including the evidence it has relied on, in a timely manner. This may also assist future merger parties. Limited transparency can materially hinder parties' ability to understand precisely the reasoning and evidence on which the regulator relies when identifying concerns about transactions. Increased transparency should be coupled with 'rights to be heard', as exist in other jurisdictions (eg in the EU there is the oral hearing, and in the UK the hearing process is a core feature of the merger regime). These are very important in an administrative model.
Other changes to the substantial lessening of competition test
The Consultation Paper also discusses the ACCC's proposal to change the test for whether a merger is likely to substantially lessen competition. This includes three options:
- Option A: to amend section 50(3) of the CCA, which sets out 'merger factors' to which the ACCC may, and Federal Court must, have regard by:
- amending the merger factors that a decision-maker must take into account when assessing the impact of mergers to include creeping acquisitions, loss of potential competition, access to or control of data and other significant assets, market power, interlocking directorships and to expressly refer to the changes in market features resulting from a merger; or
- removing the factors from the legislation to simplify the 'substantial lessening of competition' test.
- Option B: to expand the 'substantial lessening of competition' test to include mergers that 'entrench, materially increase or materially extend a position of substantial market power'.
- Option C: to allow the consideration of related agreements (eg non-competes).
Currently, section 50(3) sets out a list of 'factors' the Federal Court must take into account in considering whether a transaction will substantially lessen competition. It does not limit the matters that the Federal Court, and of course the ACCC, may take into account. In practice, the ACCC can and does take into account a broad range of matters when assessing a transaction against the 'substantially lessening competition' test. It does already take into account matters such as the loss of potential competition, access to data and interlocking directorships. The possible changes set out in Options A, B and C can and should be considered as part of the 'substantial lessening of competition' test. The ACCC is a very experienced authority capable of conducting effects-based analyses. Introducing any prescriptive requirements risks unnecessarily over-complicating the 'substantial lessening of competition' test and undermining the inherent flexibility and effectiveness of the current test.
Specifically, we do not agree with the proposed expansion of the 'substantial lessening of competition' test as outlined in Option B to include mergers that 'entrench, materially increase or materially extend a position of substantial market power'. An effects-based assessment should already capture deals that lead to an entrenchment of market power. Expanding the test to account for this could also create an undue focus as to whether the merger parties have substantial market power. This will lead to detailed and expensive analyses as to market definition which are inherently difficult. While there are jurisdictions, such as the EU and a number of European Member States, that have regard to whether a merger would create or strengthen a dominant position, this is done in the context of an overall assessment of the effects of the merger on competition.
The closing date for submissions is 19 January 2024.
A copy of the Australian Treasury's consultation paper can be found here.
Footnotes
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Global Competition Review, 'ACCC concerned about US style merger regime', see here.