Insights

09/08/17

Rod Sims outlines the need for a tougher approach to merger analysis and expects more criminal proceedings for cartel conduct

On 4 August 2017, Rod Sims the Chairman of the Australian Competition and Consumer Commission (ACCC) addressed the Law Council of Australia’s Competition and Consumer Workshop to shed some light on the ACCC’s current focus on cartel investigations and a new approach to information gathering in merger analysis.

Key messages

On mergers …

  • Mr Sims acknowledged the ACCC’s poor recent record in challenging mergers in the Courts and Tribunal and, based on international experience, has identified a need to ramp up the ACCC’s investigation activities in complex mergers.  This will mean merging parties in complex deals can expect more intrusive requests (including notices requiring senior management to appear to be examined). The ACCC has in particular sought advice from the US Department of Justice Antitrust Division, which in the past few years has enjoyed a very high success rate in litigation to block mergers that it opposes.
  • Mr Sims expects that the new approach will mean complex clearances take longer and this is likely to mean parties approach the ACCC with remedies earlier in the process.

On cartel enforcement …

  • Over the last few years, the ACCC has invested heavily in developing a team of specialist cartel investigators within the ACCC.  Recent criminal cartel prosecutions indicate that the team is now up and fully operational.  Expect to see more cartel cases – and more often.
  • As part of ramping up its approach to cartel enforcement, the ACCC will be re-examining its Immunity Policy over coming months.

Evidence in merger cases: expect “significant” document requests and examinations of senior executives

Mr Sims also addressed criticisms from the wider business community that the ACCC allows too many mergers resulting in problematically high levels of market concentration. Mr Sims stated in the last financial year:

  • 288 mergers were assessed by the ACCC;
  • 88% of those mergers were pre-assessed on the basis that the was a low risk that the merger would substantially lessen competition;
  • 72% of the mergers that were pre-assessed were completed within 15 days; and
  • 33 mergers were subject to a public review.

Mr Sims acknowledged the ACCC’s unsuccessful track record in opposing contested mergers before the Australian Competition Tribunal and Federal Court.  Mr Sims acknowledged that the ACCC’s approach in opposing mergers before the Tribunal and courts has been criticised for being ‘theoretical and lacking in commercial reality’ and that the ACCC has not been successful in opposing a litigated merger for more than 20 years, in contrast with the experiences of other international competition regulators which enjoy a much higher success rate in blocking contested mergers.

In response to this lack of success, Mr Sims indicated that the ACCC sought input and advice from other competition agencies, including a senior litigator from the US Department of Justice.  Jeanne Pratt has also recently joined the ACCC, from the Canadian Competition Bureau, to head the ACCC mergers group for 12 months.  It is clear that the ACCC considers that merger clearance processes in these and other jurisdictions (such as Europe) involve much more extensive information gathering by the regulator for complex mergers.

In light of the criticism and lack of success, and given its view that this may be the result of less comprehensive information gathering than other agencies, Mr Sims indicated that the ACCC will adopt a more wide ranging approach to gathering evidence in complex merger cases. 

This would include:

  • Greater use and breadth of compulsory information gathering powers – including more use of examinations of senior executives.  The ACCC has the ability to issue s155 notices, which compel recipients to provide information, documents or attend an interview.  Mr Sims said that in assessing complex mergers the ACCC would be looking to gather ‘substantially more evidence’ which would result in an ‘increase in the number of s155 notices, involving examinations under oath and significant document requests’.  These notices appear likely to capture a broader range of documents, including from time periods prior to the merger being contemplated.
  • Lengthening of timelines.  Primarily as a result of increased use and breadth of s155 notices, Mr Sims stated that ‘I think you will now see some lengthening of our timelines on contentious mergers’.  Given that the ACCC often takes 6 – 9 months to assess complex transactions under its current processes, this will be a troubling development to some merger parties.
  • Increased pressure to offer remedies.  Mr Sims stated that merger parties could seek to ‘cut through potential delays by offering satisfactory remedies to deal with competition concerns early’.  This is a clear indication that the ACCC sees that one way merger parties could respond to the new, more onerous, clearance process is by bringing forward undertaking proposals to address potential competition concerns.

What this means for merger parties

As noted by Mr Sims, approximately 90% of mergers notified to the ACCC are ‘pre-assessed’ without going to a full public review.  Of the remaining 10% of mergers that are not pre-assessed, generally these may expect increased scrutiny and longer review time frames.  This is already a trend that we have seen over the past few years, with fewer mergers being publicly reviewed but longer time frames for those that are (see chart).  In recent years, we have also experienced longer pre-assessment time frames.  With the new proposals, these trends look set to accelerate.

 

These changes are likely to have the effect of making clearance pathways outside of the ACCC look more attractive to merger parties.  These alternatives include:

  • Tribunal authorisation.  As noted in our recent update on the Tabcorp / Tatts merger, merger authorisation can be an effective route to secure competition clearance for acquisitions involving public benefits and that the Tribunal has shown a clear intention and ability to deal with applications in a timely manner.  While the proposed Harper review changes remove the ability of merger parties to directly apply to the Tribunal for authorisation, authorisation is likely to remain a viable option for some mergers – and the Harper changes open up the prospect of bringing public benefit arguments to the ACCC directly.
  • Federal Court.  Merger parties can either seek to defend their position in court if they attempt to complete a transaction in the face of ACCC opposition (as Metcash did in 2010), or pro-actively apply to the court for a declaration that the transaction would not be unlawful (as AGL did in 2003).

Gilbert + Tobin has extensive experience in merger litigation, including acting for two of the three parties who have successfully applied for authorisation in the Tribunal. 

Cartel investigations – a pipeline of cartel matters and a specialist criminal cartel unit

Following the ACCC’s first successful criminal conviction resulting in a AU$25 million fine against Japanese shipping company Nippon Yusen Kabushiki Kaisha (NYK) last week, Mr Sims drew attention to the ACCC’s recent investment in its specialist criminal cartel unit. Mr Sims stated that the ACCC has now developed a pipeline of cartel matters that have been referred to the Commonwealth Director of Public Prosecutions (CDPP) for assessment.

Since criminal sanctions for cartel conduct were introduced in 2010, the CDPP has only commenced two proceedings for alleged involvement in a cartel conduct.  Having established a dedicated criminal cartel unit as well as recent indications of a growing pipeline of investigations, we expect that the CDPP will institute further criminal proceedings for cartel conduct in the near future.

Mr Sims also drew attention to the Federal Court’s judgment in NYK that made it clear that the penalty could have been much higher but for NYK’s early plea and past and future cooperation with the ACCC. Mr Sims stated that majority of the ACCC’s current cartel investigations involve an immunity applicant and/or cooperating parties. Mr Sims announced that the ACCC will conduct a review of its Immunity and Cooperation Policy with a focus on further incentives for parties that cooperate with the ACCC in cartel investigations.

While it is unclear how the ACCC may further incentivise its Immunity and Cooperation Policy, it appears as though the ACCC is aiming to build on its success in NYK by increasing the number of criminal cartel investigations it has on foot. The ACCC’s strategy will be to encouraging more corporate whistle-blowers to proactively identify their involvement in cartel conduct and cooperate with the ACCC in its investigations.

Mr Sims also took the opportunity to highlight recent developments in the law with respect to anti-competitive and cartel conduct. Specifically, Mr Sims drew attention to the ACCC’s success in:

  • the High Court’s decision to dismiss the appeals of Air New Zealand and PT Garuda in the Air Cargo cartel cases by establishing that the relevant market was sufficiently “a market in Australia” where the airlines “tussled” to meet the demand of Australian customers; and
  • the High Court’s decision in Flight Centre which established that principals and agents may be in competition in situations where competing offers are made directly to consumers.

 

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