Australian Competition and Consumer Commission (ACCC) Chair Rod Sims says that significant changes to the Australian merger control regime are necessary, but is the need for them really borne out when merger review statistics are considered? The debate is only just beginning, but it is clear that a balance will need to be struck between the ACCC’s proposals and the burden on businesses participating in M&A activity in Australia. In this article, we consider the ACCC’s proposals for merger reform.
Following much anticipation, on 27 August 2021, Mr Sims announced sweeping proposed reforms to the Australian merger control regime. Mr Sims said he intends to kick off this “key debate”, citing his concerns about the current merger rules’ fitness for purpose, challenges faced by the ACCC in opposing transactions, and what he sees as increasing concentration and market power in the Australian economy.
Australia’s existing merger regime is a voluntary, non-suspensory “judicial enforcement” model. The ACCC has both informal and formal processes for merger approval that are used to review hundreds of transactions each year. However, if the ACCC wants to enforce the outcome of a merger review decision where parties have decided to proceed regardless of the ACCC’s views, it must persuade the Federal Court that a proposed acquisition is likely to have the effect of substantially lessening competition (SLC) in the future, in breach of section 50 of the Competition and Consumer Act 2010 (Cth) (the CCA). The ACCC considers that this system is out of step with most merger regimes internationally where parties are required to notify the regulator as part of a formal assessment regime and must obtain clearance before they can proceed.
The ACCC’s concerns about the current merger regime
Mr Sims outlined four key areas of ACCC concern that he considers demonstrate why the current merger regime in Australia is not fit for purpose:
1. to prevent an anti-competitive merger, the ACCC must go to Court and prove that the future anti-competitive effects of an acquisition are “likely”.
The ACCC noted that it can be very challenging for the ACCC to obtain evidence of likely future anti-competitive effects, particularly as parties that may be adversely affected by the merger, such as suppliers and customers, are often reluctant to provide evidence. The ACCC also commented that it is disadvantaged in the judicial process as the Court often places significant weight on evidence of company executives about their plans for the future, despite the extent of self-interest involved.
Mr Sims also expressed concern that the nature of the counterfactual test (the state of competition in the future with and without the merger), and the apparent narrow scope of the legal assessment undertaken by Courts, creates what he sees as an opportunity for merger parties to “game the process” through commercial side deals during the merger processes.
The ACCC attributes its lack of success in challenging a handful of merger cases it has sought to take on in Court to these issues, citing the Vodafone / TPG merger, AGL’s acquisition of Macquarie Generation, and Aurizon’s sale of the Acacia Ridge Terminal to Pacific National.
2. there is insufficient focus on the structural conditions for competition.
The ACCC considers that the focus of the evidence on the likely counterfactual should be secondary to the focus on the structural conditions for competition and considerations of the acquisition’s effect on the parties’ ability and incentive to engage in harmful behaviours.
3. the merger control regime is skewed towards clearance.
The ACCC believes a “mindset change” needs to occur as the Australian merger control system is “skewed too far towards letting acquisitions through.” Instead of the question of “why not allow this acquisition,” Australia’s merger control system should reverse the onus and require merger parties to convince the ACCC (or an appeal or review body), “why the acquisition should be allowed on competition grounds”. In the ACCC’s view, Australia’s economy “would be better served by more companies deciding to compete rather than to acquire.”
4. there is a clear gap in our merger law in relation to acquisitions by digital platforms.
The ACCC believes that the existing merger law does not capture acquisitions by digital platforms where acquisitions of nascent rivals pose a relatively low probability of a lessening of competition but, in the ACCC’s view, if it occurs will have a substantial and long-lasting impact on competition. The ACCC considers that the current law does not adequately capture acquisitions that may enable a platform to leverage its existing dominance or control of data into market power in related markets.
Proposed merger law reforms
In light of these concerns, Mr Sims set out three key planks to the proposed reforms of the merger regime:
A new formal merger review process
Replacing the existing voluntary regime that allows merger parties to obtain clearance through informal merger review, merger authorisation or Federal Court Declaration, the ACCC proposes a new mandatory and suspensory system with the following elements:
- all acquisitions above the specified thresholds would be subject to mandatory notification to the ACCC before completing;
- the regime would become “suspensory” meaning that the notified acquisition would be prohibited from completing unless clearance is granted;
- a “simpler process” would exist for acquisitions above the thresholds that do not raise serious competition concerns where parties can obtain a “notification waiver”;
- for acquisitions that fall below the thresholds, merger parties can still request ACCC clearance based on the current pre-assessment process;
- the ACCC has a “call in” power to formally review potentially problematic proposed acquisitions that fall below the thresholds;
- merger parties would need to provide all evidence with their initial application in support of their notification;
- the ACCC would publish detailed reasons for its decisions to clear or block a proposed acquisition; and
- the ACCC’s merger decisions would be subject to limited merits review by the Australian Competition Tribunal (the Tribunal), in which the Tribunal would only be permitted to take into account material provided with the initial application to the ACCC, except in the limited circumstances of a later development.
Changes to the substantive merger test
The ACCC also proposes four main reforms to the merger test, specifically:
- Updating the merger factors to focus on structural conditions for competition that are changed by the acquisition to the detriment of competition, as well as the inclusion of new factors that address whether the acquisition may result in the loss of potential competitive rivalry and / or increase access to, or control of, data, technology and other significant assets.
- Amending the definition of “likely” in section 50 of the CCA to mean “a possibility that is not remote,” to make it clear that to establish breach of the merger laws, it is not necessary to be persuaded on the balance of probabilities that there is a real commercial likelihood of an SLC (as is the current position in case law).
- Inclusion of a deeming provision that acquisitions involving substantial market power will SLC where one of the merger parties has substantial market power and, as a result of the acquisition, that position is likely to either be entrenched, materially increased or materially extended.
- Consideration of other agreements between merger parties in its merger review as part of the SLC assessment to prevent parties from taking steps to change the counterfactual or take advantage of the anti-overlap provisions in section 45 of the CCA in order to get an anti-competitive merger cleared.
Reforms to deal with acquisitions by large digital platforms
The ACCC also proposes a tailored test for acquisitions by certain digital platforms. The specific firms subject to these tailored rules are dependent on:
- the size and scope of the digital firm’s service in Australia;
- whether it is a “gateway” firm that is able to control how other businesses interact with consumers; and
- the firm’s market power.
The ACCC suggested that the tailored test may incorporate a lower threshold for establishing the probability of competitive harm than what is applied for acquisitions in the economy more broadly. The ACCC says this reflects its particular concern about digital platforms buying out potential competitive threats before they have had a change to develop into full-blown competitors, and is intended to ensure that the full range of acquisitions by such platforms can be scrutinised by the ACCC.
The tailored test would also consider other elements to scrutinise acquisitions of nascent competitive threats more closely or which the ACCC considers would leverage existing dominance and / or control of data into market power in adjacent markets.
Initial reactions and where to next?
As Mr Sims mentioned: this is only the start of the debate. The announcement raises a number of big questions as the business and legal communities embark on this merger reform journey, including:
Is the existing system really so inadequate?
There is a real question about the extent to which the critical premise that underlies Mr Sims’ concern – that the current merger system is unfit to adequately protect competition and does not give the ACCC enough control to determine outcomes – is actually borne out in the data.
Over the past five years, the ACCC has considered 1,507 mergers; 148 of which the ACCC publicly reviewed and 92 of those the ACCC approved unconditionally. This means that a substantial 36% of those publicly reviewed transactions were not approved unconditionally, comprising:
- 20% that were withdrawn by the merger parties, often following the ACCC or another regulator expressing competition law concerns;
- 11% that were approved subject to conditions, which means the ACCC got the merger parties to make a court enforceable commitment (typically a commitment to divest a problematic part of the business to allay competition law concerns) before the parties could achieve clearance; and
- ~ 4-5% that the ACCC opposed outright.
The data actually suggests that the ACCC has prevented, deterred or reshaped a significant number of transactions each year. In the vast majority of cases, merger parties have not challenged the ACCC’s views. Cases challenged in Court represent a very small proportion of cases directly or indirectly opposed by the ACCC.
What types of “thresholds” does the ACCC have in mind?
The ACCC has not indicated the nature of the thresholds referenced. Currently, the ACCC guidance specifies notification is generally expected where the parties’ combined market share would be over 20% in any relevant market. In some sectors, the ACCC expects to be notified of all transactions regardless of market share. Internationally, the most typical tests used for notification thresholds involve the size of the transaction and / or merger party turnover, and sometimes asset values on a global, regional and / or national basis. There will be a question as to which threshold type(s) the ACCC adopts.
What “tailored test” will the ACCC develop for acquisitions concerning digital platforms?
It remains to be seen how the ACCC will develop its thinking on how:
- to fairly determine which digital platforms will be subject to the digital platform specific test;
- the nature of the test that applies to the analysis of mergers by specified digital platforms – will the ACCC only be required to prove its case to a standard that is even lower than the more general proposals; and
- the notification thresholds for mergers involving digital platforms differ from those proposed to apply to the broader economy.
This proposed test and other potential digital platform specific rules will be addressed by the ACCC as part of its Digital Platforms Services Inquiry report due to be provided in September 2022.
How much additional time and cost burden will result for merger parties in Australia?
Without question, the ACCC’s proposal to convert the Australian system from a voluntary, non-suspensory model to a mandatory, suspensory model will result in a significant uptick in work to prepare and front-load merger clearance applications, including to lodge “technical” filings – that is filings that are technically triggered because of tripping notification thresholds but which do not raise competition law issues. While the ACCC proposes a “simpler process” for parties to obtain a “notification waiver” where acquisitions are above the thresholds but do not raise competition law issues, this will place a significantly higher time and cost burden on parties than under the existing regime. This additional process for transactions which do not raise competition concerns and the delays associated with that process, in addition to a similar but separate process already required for foreign investment, would increase the regulatory burden on those investing in Australia.
It is also questionable whether the formal process will necessarily allow for greater certainty on review times, especially as it is far from clear whether there will be statutory timelines associated with below thresholds acquisitions that are reviewed by the ACCC by way of the pre-assessment or “call in” routes.
To what extent will the new process lead to any greater transparency?
Although it is proposed that the ACCC would “publish detailed reasons for its decision to clear, or decline to clear, proposed acquisitions”, it is unclear if it is intended that such reasons would be published for every proposed acquisition that the ACCC reviews, including those that are below thresholds but which merger parties notify by way of the pre-assessment option or which the ACCC “calls in”, or just those proposed acquisitions that are above thresholds and undergo at least a Phase 1 review. It also remains to be seen what is meant by “detailed” – will the ACCC issue reasons for decision akin to Public Competition Assessments the ACCC currently issues for decisions following a Statement of Issue or a section 87B undertaking process or merely something similar to what the ACCC already publishes for publicly reviewed Phase 1 cases?
What checks and balances are appropriate?
The ACCC proposes to replace the judicial enforcement model that has underpinned the Australian merger control regime since inception, modelled on the United States system. With a limited merits review model, no avenue to have a decision reviewed in the Federal Court and no ability to seek a declaration from the Federal Court that a proposed acquisition will not SLC, there are real questions as to how appropriate checks and balances in our system of merger regulation are maintained. The notion of “limited merits review”, as it has previously been applied in particular sectors (such as energy), has effectively eliminated review processes given it has been defined so narrowly as to largely amount to judicial review, which is a very different model. It is worth noting, however, that any ACCC clearance decision, being an administrative decision, will remain subject to judicial review.
Will reversing the onus of proof reduce incentives to invest and chill competition?
The ACCC’s proposed deeming provision presumes that an acquisition by a company that the ACCC considers has substantial market power would result in an SLC, and “specific proof” of competitive effects ought not to be required in order for the acquisition to be considered unlawful. The likely effect of this will be to change the competitive dynamics of M&A auction processes, with some bidders now being subject to significant timing and certainty risks that other bidders are not subject to. By increasing the impediments to exit, or reducing the available avenues to exit, the proposed changes to the legal standard for buyers of some scale could curtail the appetite of investors to fund start-ups or to make significant investments or acquisitions in Australia. Given the practical difficulties that may arise in recouping that investment once the ability of a range of potential buyers to effectively compete for an asset is much more limited than the current regime facilitates, investors may be reluctant to risk their capital in new businesses, creating a significant barrier to entry and therefore reducing competition and innovation. This in turn could have an adverse impact of the choice of Australia as a destination for the global investment of capital.
Much debate lies ahead!