Today marks the 20th anniversary of the introduction of the substantial lessening of competition test (SLC Test) as the standard for merger review under Australian competition law. The test, which came into force on 21 January 1993, replaced the dominance threshold formerly applied to mergers1 under s 50 of the then Trade Practices Act 1974 (Cth) (TPA) (now the Competition and Consumer Act 2010 (Cth) (CCA)). At the same time, a new provision, s 87B, was inserted into the Act, authorising the then Trade Practices Commission (TPC), now the Australian Competition and Consumer Commission (ACCC), to accept court enforceable undertakings in merger and other matters.
These changes fundamentally altered the merger review process, leading to the development of the voluntary notification and informal clearance procedures used today. The move to an SLC Test lowered the threshold under s 50, increasing the number of transactions that potentially breach the prohibition and so fall within the scope of the ACCC’s pre-merger review process. This resulted in the ACCC publishing for the first time Merger Guidelines, which set out the analytical and procedural framework the ACCC would apply to review mergers and establishing the informal merger clearance process under which the parties to a proposed transaction may voluntarily apply to the ACCC to obtain its informal view as to whether the transaction is likely to substantially lessen competition in breach of s 50.
History of the SLC Test
The adoption of the SLC Test in 1993 followed more than two decades of debate among government, business and consumer groups as to the need for, and appropriate scope of, merger regulation. The original version of the TPA, enacted in 1974, had applied an SLC Test to mergers. However, in 1977, in response to concerns that the SLC Test may prevent mergers required to enable Australian businesses to achieve economies of scale and improve their international competitiveness, the test was replaced with a market dominance test. Under this test, acquisitions were only prohibited if they created, or substantially strengthened, a position of dominance in a market.
Debate regarding the merger test continued throughout the 1980s and into the 1990s. In 1989, the Griffith Committee considered a proposal to reintroduce the SLC Test. While noting the potential benefits of the test in terms of facilitating greater scrutiny of mergers, the Committee recommended retention of the dominance standard finding that there was insufficient evidence to justify a change. However, in 1991, following submissions from the then TPC and its Chairman Professor Allan Fels, the Cooney Committee recommended a return to the SLC standard. Significant transactions which were able to proceed under the dominance test, such as the Coles/Myer merger and the Dulux/British Paints acquisition were seen as examples to support the need for an SLC Test.
The recommendation of the Cooney Committee was implemented through the Trade Practices Legislation Amendment Act 1992 (Cth) (1992 Act). The 1992 Act amended s 50(1) of the then TPA to prohibit acquisitions of shares or assets that have the effect, or likely effect, of substantially lessening competition. The Act also introduced a new s 50(3), setting out a non-exhaustive list of factors to be taken into account in determining whether an acquisition substantially lessens competition – drawing on the approach under the Canadian Competition Act.
The Cooney Committee also recommended a mandatory formal notification regime for mergers. However, this was never implemented, and instead the informal merger clearance process has become the standard. Australia remains one of few competition law jurisdictions in the world to use a voluntary informal clearance regime – a regime which has proved to be generally quick and effective, particularly when compared to the formal notification regimes in other countries.
While substantive changes have not been made to s 50(1) since the 1992 Act, there has from time to time been controversy in relation to the merger review process. In 2002, in the course of its review of the competition provisions of the then TPA, the Dawson Committee received numerous submissions calling for changes to the merger test and the merger clearance process, including some recommending a return to the dominance standard and others calling for a formal clearance regime with clear appeal mechanisms. Proposals for a return to the dominance standard were rejected by the Dawson Committee which recommended retention of the SLC Test, which appears now to be widely accepted. There were changes to the merger review process, with the introduction of a formal clearance process, with a right of appeal to the Australian Competition Tribunal, and the inclusion of an additional mechanism for direct application to the Tribunal for authorisation on public benefit grounds (neither mechanism has been used to date).
Section 87B Enforceable Undertakings
The 1992 Act also introduced a new s 87B, giving the then TPC power to accept written undertakings and enforce those undertakings in the Federal Court. In the merger context, these undertakings may be structural or behavioural.
Prior to the introduction of s 87B, the Commission had accepted contractual undertakings or deeds in merger cases. However, there was significant uncertainty as to the Commission’s power to enforce such undertakings, particularly after a transaction had been completed. Given this, both the Griffiths and Cooney Committees recommended that the TPA be amended to provide remedies in respect of undertakings entered into as part of the merger consultation process, thereby establishing an enforceable mechanism to deal with conditional merger clearances.
Today, competition issues in relation to a merger are routinely resolved through enforceable undertakings. The ACCC has typically adopted the position that it would require “structural undertakings” to resolve any competition concerns, which principally means divestiture undertakings. In general, the ACCC has been reluctant to accept what it calls “behavioural” undertakings, that is undertakings which simply regulate the conduct of the merging parties. However, there are a number of important mergers where the ACCC has accepted behavioural undertakings including in relation to the CBA/Colonial (2000) and more recently Foxtel/Austar (2012).
Interpretation of the SLC standard
Relatively few court cases have been brought under s 50. Consequently there has been little judicial guidance as to the interpretation of the SLC standard in s 50.
There have been a number of interim injunction applications but only two final court determinations on the application of the SLC Test. There has been one private action which did not proceed to a final determination (an application by a NSW power generator, Macquarie Generation in relation to a coal industry acquisition) and one action involving a complaint against the conditions of an ACCC approval (Virgin Blue challenged the ACCC decision to accept certain enforceable undertakings from Qantas in relation to the acquisition of Impulse airlines). Both cases were settled before a final hearing.
The first court challenge applying the new SLC Test was in Trade Practices Commission v Rank Commercial (1994) 123 ALR 551. In this case, the TPC successfully obtained an interim injunction preventing a New Zealand company, Rank, from proceeding with a public offer to acquire Foodland (which had New Zealand assets and was also the independent West Australian grocery wholesaler). The transaction would have seen Coles Myer acquiring the Australian assets of Foodland. The ACCC was successful in obtaining an interim injunction on the basis that the transaction was likely to substantially lessen competition in the wholesale grocery market in Western Australia. Rank did not proceed with its offer.
The first final determination by the Federal Court on the application of the SLC Test to a merger was in Australian Gas Light Company v ACCC (No. 3) (2003) FCA 1525. This is also the only case in which the clearance applicant brought proceedings against an ACCC decision not to provide informal clearance. After being denied informal clearance by the ACCC, AGL sought and obtained a declaration that the acquisition, in which it was part of the purchasing consortium, of the Loy Yang A Power Station in Victoria, would not breach s 50 of the CCA. In this case, then Federal Court judge Justice French concluded a substantial lessening of competition required that the acquisition have a meaningful or relevant impact on the competitive process over time, not merely a short term effect, which was to be assessed by reference to commercial realities and not hypothetical theories. The likelihood of this effect however did not have to be more likely than not, it was sufficient that there was a “real chance” of such an effect.
The only other final Court decision and the only case to go to the Full Federal Court on the application of the SLC Test, is the recent ACCC v Metcash Trading Limited case (2011) FCAFC 151. In that case the ACCC unsuccessfully challenged grocery wholesaler Metcash’s proposed acquisition of the Franklins supermarket business. In addition to its analysis of the competitive constraints imposed by different functional levels of the supply chain, the case was notable for its consideration of, and divergent opinions amongst the judges in relation to, the legal standard to be applied in assessing the likely counterfactual (that is the likely state of competition in the market in the future without the merger). In that case, a question was whether in the counterfactual, another independent party was likely to acquire the Franklins business. Ultimately the Full Court did not need to determine this, as it upheld the decision of Justice Emmett that the acquisition by Metcash would not substantially lessen competition under any relevant counterfactual. The approach to counterfactual analysis remains a key unresolved area of analysis.
ACCC Merger Guidelines have largely filled the gap resulting from the absence of judicial guidance on the application of the SLC Test. The ACCC first published its merger guidelines in draft in 1992, in the lead up to the commencement of the SLC Test in January 1993. The guidelines were revised to incorporate greater procedural guidance in 1996 and again in 1999. The original guidelines reflected the approach to the analysis of competitive effects reflected in the US Department of Justice Horizontal Merger Guidelines in force at that time and included specific safe harbour notification thresholds.
In 2006, the ACCC released the Merger Review Process Guidelines (the process guidelines) as a supplement to the Merger Guidelines, so as to provide an up to date and comprehensive guide to the processes that will be applied by the ACCC to merger reviews. The process guidelines replaced the Guideline for Informal Merger Review originally issued in October 2004.
In 2008 the ACCC released substantially revised guidelines, replacing the safe harbour thresholds with a market share notification threshold of 20%, and including a greater analysis of competitive theories of harm, including a more explicit discussion of unilateral and coordinated effects. These amendments reflected more recent merger guidelines of other jurisdictions, as well as the substantial experience developed by the ACCC over time through its now well-established informal clearance process.
Experience with the ACCC merger clearance regime
Since 1993, the ACCC has reviewed over 3500 mergers, of which no more than 4% have been opposed. The vast majority (over 85%) of transactions have been approved unconditionally. Enforceable s 87B undertakings have been used in about 100 mergers.
Over the 20 years of the SLC Test, there have been many important transactions closely reviewed by the ACCC. In some cases ACCC opposition has been the end of the merger. In others, the merger parties have been able to address ACCC concerns through enforceable undertakings. Some industries in particular have attracted repeated intense scrutiny.
In the petrol industry, the Caltex/Ampol merger was the first case to make use of s 87B undertakings. The ACCC approved a proposal by Caltex and Ampol to merge their petroleum refining and marketing businesses subject to divesture undertakings. Other notable transactions in the petrol sector include the 2009 ACCC opposition to Caltex’s proposed acquisition of Mobil Oil Australia’s retail assets.
In the transport and logistics industry, the 2006 Toll/Patrick acquisition was one of the most complicated transactions reviewed by the ACCC. The ACCC commenced proceedings against transport and logistics company Toll Holdings seeking to restrain its proposed acquisition of the Patrick Corporation. The proceedings were later discontinued after Toll provided extensive undertakings committing, among other things, to divest certain rail assets.
The banking, financial services and insurance sectors have seen frequent ACCC merger reviews. Perhaps the largest corporate transaction to be reviewed by the ACCC was the Westpac/St George acquisition. After expressing initial concerns, the ACCC announced in August 2008 that it would not oppose the proposed acquisition of St George Bank by Westpac Banking Corporation.
On the other hand, in 2010, the ACCC reviewed competing proposals by National Australia Bank (NAB) and AMP to acquire the Australian businesses of AXA Asia Pacific Holdings (AXA). On 19 April 2010, the ACCC announced that it had cleared AMP’s proposed acquisition of AXA. However, the ACCC, after extensive review of proposed enforceable undertakings, opposed NAB’s acquisition, citing concerns that the transaction would substantially lessen competition in the market for retail investment platforms.
Other important transactions in these sectors reviewed by the ACCC include: CBA/BankWest (approved 2009); NAB/Challenger Financial Services Group (approved 2009); Suncorp Metway/Promina (approved 2006); Australian Stock Exchange/ Sydney Futures Exchange (opposed in 1999 and approved 2006); CBA/Colonial (approved with undertakings in 2000); Westpac/Challenge Bank (approved 1995).
Other sectors which have been the subject of frequent review, are the media and telecommunications sectors. The ACCC has closely monitored acquisitions by Australia’s leading subscription television service provider, Foxtel. In 1996, and again in 1998, the ACCC opposed Foxtel’s proposed acquisition of the competing pay TV provider, Australis, which ultimately failed. In 2011 the ACCC approved the Foxtel /Austar acquisition. After a review lasting almost 12 months, the ACCC announced that it had cleared the transaction subject to substantial undertakings from Foxtel.
Another important telecommunications sector decision was the decision in 2003 by the ACCC not to oppose the proposed merger of Vodafone and Hutchsion 3G’s Australian mobile operations. In concluding that the proposed merger was unlikely to substantially lessen competition, the ACCC noted that, absent the merger, the parties were unlikely to be able to make network investments required to provide competitive data services and sustain price competition in the long term.
After a spate of mergers in the radio sector in the 1990’s the ACCC published guidelines on its approach to assessing competition in the radio sector. These guidelines were subsequently overtaken by a broader set of guidelines on media mergers published by the ACCC in 2010 in response to the 2006 Federal Government discussion paper on media reform. In practice, the ACCC has opposed very few transactions in the media sector.
A notable exception was the 2012 decision by the ACCC to oppose the proposed acquisition by Seven Group Holdings of the balance of shares in Consolidated Media Holdings (CMH). The ACCC concluded that the proposed acquisition was likely to result in a substantial lessening of competition in the market for free to air television services, as it would lead to Seven having substantial interests in a major free to air network and the largest subscription television company in Australia, as well as a 50% shareholding in the company involved in the acquisition of the rights to the majority of Australian sports that are broadcast by Foxtel.
Another significant area of ACCC merger activity is reviewing the domestic competition effect of international transactions. The ACCC has reviewed numerous international transactions, including Oracle/PeopleSoft (originally opposed, but approved 2004 following a US Court decision); Pfizer/Wyeth (approved 2009 with undertakings); and more recently the acquisition by Vivendi and Universal Music of the recorded music business of the EMI Group (approved 2012), and Nestlé’s acquisition of the Pfizer Infant Nutrition business (not opposed in 2012, but on the basis of a licensing/rebranding remedy that essentially constituted divestiture, by excluding Nestlé from operating under the Pfizer brand in the market for a 20 year period).
Perhaps the most significant international transactions reviewed by the ACCC were the two BHP/Rio transactions, firstly the proposed merger (approved 2008) and then the proposed iron ore joint venture (withdrawn 2010). While ultimately the joint venture did not proceed, citing regulatory hurdles as a key reason, it is notable that the ACCC Statement of Issues released in 2010 is the one of the few only public assessments issued by any competition authority in relation to the joint venture. Notably, the ACCC Statement of Issues identified material competition issues in the global seaborne and the national (Australian) markets for the supply of iron ore lump and iron ore fines. (The German Cartels Office also publicly opposed the transaction and subsequently published its reasons).
The ACCC merger clearance process has been a central part of Australian corporate life for 20 years. While along the way there has been controversy as to ACCC process and ACCC decisions, the ACCC process has evolved and developed over time to become a largely well understood, accepted and practical way to obtain pre-clearance for important transactions.
Looking forward, it is likely that the process will continue to evolve, and it is unlikely that there will be large changes in substantive approach or process. Having said that, it is the case that there are still unresolved areas, in particular in relation to counterfactual analysis and the reliability and robustness of coordinated effects analysis. These are areas which are likely to benefit from both judicial or tribunal consideration, as well as greater discussion by the ACCC, legal and economic practitioners and academics.
At some point in time, we can expect that the formal clearance options and the ability to apply directly to the Tribunal for authorisation of a merger will be used. These will be significant developments, but in the meantime, these procedural options provide a significant discipline on the ACCC’s informal clearance process.