What’s happened?

On 20 November 2023, the Treasury’s Competition Taskforce released its consultation paper setting out potential options to reform Australia’s merger control regime (Consultation Paper) as part of its two-year Competition Review and has asked for submissions by 19 January 2024.

The establishment of the Competition Taskforce in August 2023 and the release of this Consultation Paper follows the ACCC’s submission to the Government in March 2023 recommending that Australia needs to shift to a mandatory and suspensory notification regime, as well as changes to the current merger review and appeals processes and substantive changes to the merger control test.  We’ve previously analysed the ACCC’s proposals in depth and explained our view on why the ACCC hasn’t made the case for merger shake-up.

Importantly, the Consultation Paper is seeking views on a much broader basis than the ACCC’s recommendations.  In this alert, we distil the various options and issues raised by the Competition Taskforce for consultation to assist you in considering how they may impact your M&A activities. We will follow up with a deeper dive into some of the key elements in due course.

What are the options being considered by Treasury?

Australia’s current merger control regime is a voluntary “judicial enforcement” model.  Although it is voluntary for parties to notify a transaction, if the ACCC has competition concerns with a transaction it may commence court action to stop the parties from proceeding or other remedies (e.g., divestitures).  If a Foreign Investment Review Board approval is sought, then ACCC engagement is practically mandatory if the merger parties operate in the same industry.  The ACCC has guidance as to the types of transactions that should be voluntarily notified and parties have the option to seek “informal clearance” from the ACCC (i.e., a letter of comfort from the ACCC that it will not take further action).  Merger parties can also seek formal merger authorisation from the ACCC, which is a statutory process under which parties can obtain legal protection from court action.  It is common practice in Australia for parties to voluntarily notify the ACCC to seek either informal clearance (or less commonly, merger authorisation) to obtain some commercial certainty that the ACCC will not interfere with a proposed transaction. 

The Consultation Paper presents three ‘options’ for re-designing Australia’s merger control regime, although it states that it remains open to hearing other views or variations to these options as part of its consultation.  The three options can be distilled into the following:

• Modifying the current judicial enforcement model
  • Option 1: Keep notification voluntary, but introduce a formal clearance process under which businesses may seek legal immunity from court action.  If parties voluntarily seek clearance, then the transaction would be suspended during the review period.  The ACCC may grant clearance where it is satisfied a merger is not likely to substantially lessen competition (SLC), and parties can apply to the Competition Tribunal to review the ACCC’s decision.  If parties do not notify and/or decide to proceed with a merger notwithstanding a negative clearance decision, the ACCC would need to commence court action.  This is similar to the New Zealand model.
  • Option 2: Alternatively, introduce a mandatory and suspensory notification regime. Mergers that meet the specified threshold must be notified to the ACCC and the transaction would be suspended for a period while the ACCC conducts its assessment. The ACCC would need to commence court action to prevent any transaction it considers would be likely to SLC. This is similar to the United States model. 
• Option 3: Shifting to an administrative model as proposed by the ACCC. Under this model, mergers that meet the specified threshold would need to be notified, the ACCC would be the decision-maker with the ability to appeal to the Competition Tribunal and the relevant test for clearance is whether the decision-maker is “satisfied” that the merger is not likely to SLC. In this model, the ACCC can prevent mergers in its own right and does not need to take action in the Federal Court to block a merger. The Federal Court’s role would be limited to judicial review of the ACCC’s decision and, subject to merger control reform outcomes, may continue to retain the power to issue declarations that certain mergers do not SLC. This is similar to the European Union model.

Out of the options canvassed in the Consultation Paper, the ACCC’s proposed shift to an administrative model (Option 3) would be the most radical departure from the current regime. The table below summarises the key features of the current regime vs. the three options proposed by the ACCC. 

Why does Treasury think there’s a need to consider merger reform?

In this Consultation Paper, Treasury repeats its concerns regarding Australia’s declining productivity, increasing market concentration and significant price mark-ups across the economy, trends that suggest a weakening of competition here over the last 20-25 years. Treasury has cited recent papers linking increasing market power and changing technology to a slowdown in productivity [link], as well as OECD findings of increasing evidence tying excessive concentration to poor economic outcomes [link]. 

The ACCC argues that part of this problem is due to the weakness of Australia’s current merger control regime. According to the ACCC, the current enforcement model is ‘skewed towards clearance’ when potential anti-competitive effects of a merger are unclear and the current voluntary notification system is ineffective because parties are failing to notify, threatening to complete prior to receiving a decision, or providing insufficient or inaccurate information to the ACCC.

The Treasury acknowledges there’s a lack of comprehensive statistical evidence demonstrating the correlation between merger control regime, industry concentration and market outcomes in Australia. However, the Consultation Paper states that the international evidence on these issues is growing including retrospective econometric studies and, ‘on balance’, they point to a large proportion of mergers resulting in anti-competitive effects, while other evaluation studies found little or no evidence of efficiency gains by newly formed firms.  On this basis, Treasury considers that the evidence ‘suggests’ that too many anti-competitive mergers have been allowed to proceed in these jurisdictions and “merger enforcement has been too lax over the past 25 years”.  Although none of the cited papers focus on Australia, the Consultation Paper considers they are relevant to considering the effectiveness of Australia’s merger control regime in promoting competition that enhances the welfare of Australians. 

Notably, Treasury does not consider the economic impact that some of the modifications being proposed would have on investment and innovation.

Treasury also notes that Australia isn’t alone in considering merger reforms and is grappling with similar issues to other OECD countries, such as concentrated markets, industries with one or more entrenched or dominant firms, serial or creeping acquisitions, acquisitions by digital platforms, common ownership of minority interests in competing firms and interlocking directorship.

Specific elements of merger control

The Consultation Paper is seeking views on several elements of any re-design of Australia’s merger control regime, including the following key ones.  We’ve previously considered most of these elements in our analysis of the ACCC’s merger reform proposals.

Procedural elements

• Notification system: Should merger notification remain voluntary or become mandatory? If notification is to become mandatory, how should notification thresholds be designed and should there be an ability to review non-notifiable mergers (i.e. a call-in power)?
• Upfront information requirements: If the regime is to stipulate upfront information requirements, who should be setting these requirements (e.g., regulation or ACCC guidance)?  What checks and balances could be incorporated to ensure they’re not overly onerous and what should be the consequences for providing inaccurate information?
• Suspension: If the regime is to be suspensory, such that merger parties would be prevented from completing their transaction for a specified period while the ACCC conducts its review, how should that suspensory rule should be implemented? For example, can the ACCC refuse to commence a review until parties undertake not to complete for a period, or should merger parties be legislatively prohibited from completing a transaction for a specified time?  Other issues include when the suspensory period should commence, how long the suspension period should be and what flexibilities should exist for extensions.  Importantly, Treasury is seeking views on what should occur once the suspensory period ends:  whether a merger should be deemed approved or denied.

Decision-making

• Key decision maker: Who should the relevant decision-maker should be?
  • Broadly, a shift to the ACCC’s proposed administrative model (Option 3) means the ACCC will become the key decision-maker in all circumstances.  The ACCC’s decision would be reviewable by the Competition Tribunal, but the Federal Court’s role would be diminished significantly to judicial review only.
  • Under a judicial enforcement model with modifications, the Federal Court would continue to be the ultimate decision-maker.  The ACCC and Tribunal may continue to have some decision-making role, depending on the modifications.  For example, under Option 1 the ACCC would continue to have an administrative decision-making role for parties voluntarily seeking formal clearance, with its decision reviewable by the Competition Tribunal, although the Federal Court would be the ultimate decision-maker for contested mergers (i.e., if parties disagreed with the ACCC and Tribunal and wished to proceed with the transaction).  Even under Option 2, the ACCC will informally be the relevant decision-maker in most cases (i.e., because most mergers are not contested) and it may have a similar administrative decision-making role if the current merger authorisation process remains available.
• Procedural fairness: If there is to be an administrative decision-making function in the re-designed merger control regime, what are the appropriate procedural fairness mechanisms?  Considerations include whether notifications should be made public, what opportunities parties should have to respond to any ACCC concerns, whether merger parties (and potential third parties) would have the right to access the information the ACCC relied on to make its decisions (e.g., third party submissions, economic reports), whether the ACCC is required to publish reasons, the applicable timeframes for review and what confidentiality protections should be available.
• Review of administrative decisions: Where the ACCC makes an administrative decision, what review rights (specifically merits review rights) should be afforded to merger parties?  Currently, ACCC merger authorisation decisions are only subject to a limited merits review, where the Competition Tribunal is restricted to considering materials that were given to the ACCC, with few exceptions.  We’ve previously considered the challenges with a limited merits review process in our analysis of the ACCC’s merger reform proposals.

Merger test

• Likely to SLC vs satisfaction test: The Treasury is seeking views on the relevant merger test that should be applied. Currently, mergers are only prohibited if they have the likely effect of SLC and it is up to the ACCC to prove this to the relevant evidentiary threshold. Only when the ACCC is asked to grant merger authorisation do the parties need to satisfy the ACCC that the merger will be unlikely to SLC or that there will be a net public benefit.  The ACCC’s proposal to shift to an administrative regime (Option 3) would result in all notifiable mergers being subjected to the ‘satisfaction test’ (i.e., evidentiary burden falls on merger parties to prove the negative). This seems like an onerous threshold to meet in a context where it is accepted that most mergers are benign.  However, under a modified judicial enforcement model the satisfaction test would only apply where parties are seeking formal ACCC clearance (Option 2) or merger authorisation (Option 2, if retained), but the ACCC would ultimately need to prove a transaction is likely to SLC to prevent a merger from proceeding.  We’ve previously considered the potentially significant implications of reversing the onus of proof under the ‘satisfaction test’ in our analysis of the ACCC’s merger reform proposals.
• Entrench, materially increase or materially extend a position of substantial market power: The Treasury is seeking views on the ACCC’s proposal that the “substantially lessen competition” component of the merger test be amended or expanded to include mergers that “entrench, materially increase or materially extend a position of substantial market power”.  Issues for consideration include whether the current merger test actually impedes the ACCC from challenging certain anti-competitive mergers or whether the proposal might discourage innovation or have some other unintended consequence.  We’ve previously considered that this is unlikely to have any practical implication in our analysis of the ACCC’s merger reform proposals.
• Expanding the ‘merger factors’: The Treasury is seeking views on the ACCC’s proposal to expand the list of factors currently set out in section 50(3) of the CCA, including explicit reference to changes in market structure (i.e., the height of barriers to entry and any increase in such heights as a result of the merger), whether the acquisition is part of a series of acquisitions, the likelihood the acquisition would remove a potential competitor, and the nature and significance of assets to be acquired (e.g., data and technology assets).  Again, we’ve previously considered that expanding the merger factors list is unlikely to have any practical implication in our analysis of the ACCC’s merger reform proposals.
• Public benefits: The Treasury is seeking views on whether merger authorisation should be retained or abolished, and if abolished, whether a public benefit test should be retained (and at what stage can it be considered).

Other issues

Other issues being considered by the Treasury as part of this consultation are:

• Should related or ancillary agreements should be considered when assessing the effects of a merger on competition under section 50 of the CCA?
• Can there be any improvements or streaming to the processes for and interactions between FIRB and ACCC merger filings?  Any changes to the current merger regime would need to be able to work effectively with the foreign investment framework.
• Should common ownership of minority interests in competing firms and interlocking directorates be included as another factor when assessing mergers?
• Should there be a significance threshold for joint ventures and minority acquisitions in section 50?

Next steps

Treasury has asked for submissions to be provided by 19 January 2024 and we understand the Competition Taskforce will be providing advice to the Treasurer in late January or early February 2024 on the various options.

G+T will be closely monitoring this area and will keep you updated of any developments the Competition Taskforce’s merger reform consultation process.