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Trends and climate
How would you describe the current merger control climate, including any trends in particular industry sectors?
In recent times there have been developments at both ends of the complexity scale. For complex mergers in concentrated industries (eg, resources, health, manufacturing and pharmaceuticals), there are more avenues for seeking clearance and approval. For simpler mergers, there are also new processes which are increasingly flexible and allow decisions to be made in relatively shorter periods. Some particular developments and trends in Australia include the following:
- The first merger authorised by the Australian Competition Tribunal occurred in 2014 (ie, AGL’s acquisition of Macquarie Generation). While the option for authorisation by the tribunal has been available since 2007, it had never been used before, in part because of concerns about uncertainty and cost. This decision has helped to mitigate these concerns, making it more likely that other mergers will opt for a tribunal review in the future.
- The Australian Competition and Consumer Commission continues to closely scrutinise sectors that it considers to be concentrated – in particular, mergers which it perceives may result in fewer than three key competitors. When looking to undertake complex mergers in these sectors, businesses should carefully consider the regulatory risk, including appropriately managing the commercial timing of the transaction and commission engagement.
- The commission pre-assessed a substantial number of mergers, continuing a strong trend to use this expedited clearance process. The pre-assessment process allows the commission to review transactions quickly and efficiently on the basis of a preliminary assessment and – depending on the circumstances – provide businesses with certainty early in the process.
- For mergers that are subject to the informal clearance process, uncertainty over the length of time needed to complete the review continues to be an issue. In this context, the Competition Policy Review’s final report suggests that the commission should further consult with business to deliver more timely decisions under the informal clearance process.
Are there are any proposals to reform or amend the existing merger control regime?
On December 4 2013 the prime minister and the minister for small businesses announced a review of competition policy (the Harper Review). The final report that responded to the review was provided to government on March 31 2015.
In its final report, the Competition Policy Review recommends that formal Australian Competition and Consumer Commission clearance and Australian Competition Tribunal authorisation processes be streamlined into a single formal process, allowing the commission to approve a merger under either:
- the substantial lessening of competition test; or
- the public benefit test currently limited to authorisations.
These changes could make the formal processes more attractive, but would remove the option of a direct application to the tribunal for authorisation, thus also removing a useful alternative to informal clearance by the commission.
Legislation, triggers and thresholds
Legislation and authority
What legislation applies to the control of mergers?
Merger regulation in Australia is predominantly governed by the Competition and Consumer Act 2010 (Cth) – the terms ‘merger’ and ‘acquisition’ are used interchangeably in this chapter. The main provision is Section 50, which provides that a corporation must not directly or indirectly acquire shares or assets of a corporation or person if the acquisition would have the effect, or likely effect, of substantially lessening competition in any market in Australia. This is broad enough to cover foreign-to-foreign transactions. Section 50(A) of the act also allows the Australian Competition Tribunal to make a declaration preventing foreign corporations from carrying out business in Australia where a transaction between two parties outside Australia has the effect of substantially lessening competition in an Australian market.
Other legislation may be relevant in specific circumstances:
- The Foreign Acquisitions and Takeovers Act 1975 (Cth) regulates foreign persons seeking to undertake investment in Australia, which includes mergers involving foreign entities. It provides for compulsory notification of acquisitions above specified monetary thresholds. The Foreign Investment Review Board considers whether such investment is contrary to the national interest, which includes considering the effect on competition.
- Mergers involving authorised deposit-taking institutions and insurance companies are subject to the Financial Sector (Shareholdings) Act 1998 (Cth) and the Insurance Acquisitions and Takeovers Act 1991 (Cth).
What is the relevant authority?
Part II of the Competition and Consumer Act 2010 (Cth) establishes the Australian Competition and Consumer Commission. The commission is the main enforcing body responsible for ensuring compliance with the act. With respect to acquisitions under Section 50, the commission is responsible for the following:
- reviewing transactions on an informal and formal basis to determine whether they would result in a substantial lessening of competition. Informal merger review provides merger parties with the commission’s view as to whether it would oppose the transaction under Section 50. On the other hand, formal clearance confers protection from the application of Section 50 to the transaction. Since the introduction of the formal merger clearance process in 2006, there have been no applications for formal clearance;
- assisting the Australian Competition Tribunal in any formal merger clearance or authorisation;
- investigating acquisitions to determine whether the transaction substantially lessens competition in contravention of Section 50; and
- enforcing any contraventions of Section 50 in court (civilly) by seeking injunctions and other remedies.
The Australian Competition Tribunal is established by Part III of the act. It is responsible for the following:
- granting authorisation for mergers under Part VII of the act. The grant of authorisation provides merger parties with protection from the application of Section 50 of the act. Authorisation is granted for transactions only where there is a public benefit (Section 95AZH); and
- commission review decisions where the parties have lodged a formal merger clearance application. The tribunal has no capability of reviewing the act’s informal merger assessments.
Other relevant authorities include:
- the Foreign Investment Review Board, which enforces the Foreign Acquisitions and Takeovers Act 1975 (Cth). The board advises the commonwealth treasurer, who is responsible for making decisions on whether a transaction involving foreign entities should be allowed to proceed. Where competition considerations are relevant to a particular transaction, the board will consult with the commission; and
- the treasurer and the Treasury, which are responsible for the administration of the Financial Sector (Shareholdings) Act 1998 (Cth) and the Insurance Acquisitions and Takeovers Act 1991 (Cth). However, the treasurer’s powers under the Financial Sector (Shareholdings) Act and the Insurance Acquisitions and Takeovers Act can be, and have been, delegated to the Prudential Regulation Authority.
Transactions caught and thresholds
Under what circumstances is a transaction caught by the legislation?
Section 50 of the Competition and Consumer Act 2010 (Cth) applies to the following:
- transactions that involve the acquisition of shares or assets by any person or corporation. ‘Acquisition’ refers to obtaining any legal or equitable interest in shares or assets (Section 4(4)). Therefore, it includes the lease, exchange, hire or hire purchase and any acquisition of a minority or partial interest in a corporation. However, it does not cover an acquisition by way of charge or licence; and
- transactions that have the effect of substantially lessening competition in any market – defined as a market in Australia. Therefore, the transaction must have an effect on a market in Australia. However, it is not a requirement that the shares or assets be located in Australia (eg, the acquisition of shares in a foreign company which competes in Australia through imports will be caught by Section 50 – TPC v Australian Meat Holdings, (1988) 83 ALR 299 and TPC v Australian Iron & Steel, (1990) 22 FCR 305).
Do thresholds apply to determine when a transaction is caught by the legislation?
There is no compulsory pre-notification requirement for mergers in Australia and hence no compulsory notification thresholds apply to transactions caught by the legislation. However, Australia has developed a practice of seeking informal clearance from the Australian Competition and Consumer Commission for mergers which may raise competition concerns.
In its informal merger guidelines (Merger Guidelines 2008), the commission recommends that certain mergers that may be subject to the Competition and Consumer Act 2010 (Cth) be voluntarily notified. The guidelines encourage parties to notify transactions where:
- the products of the merger parties are either substitutes or complements; and
- the merged firm will have a post-merger market share of greater than 20% in the relevant markets.
However, these notification thresholds are indicative only. Accordingly, the commission may still investigate mergers which do not meet the thresholds and have not been notified, as they may still raise competition concerns. Further, parties should obtain appropriate advice before notifying the commission. Notification is not always appropriate simply because the notification thresholds are met. As the thresholds are relatively low, each transaction needs to be considered on a case-by-case basis before notification is made.
Is it possible to seek informal guidance from the authority on a possible merger from either a jurisdictional or a substantive perspective?
Yes. The Australian Competition and Consumer Commission has an informal merger review policy in place that comprises the commission’s Merger Guidelines 2008 and its Informal Merger Review Process Guidelines 2013. Informal merger review is not underpinned by any legislation; rather, it is a policy that the commission developed over time and detailed in guidelines to allow parties to seek the commission’s view prior to completion of a merger – on either jurisdictional or substantive matters.
Informal merger review can take the following form:
- Pre-assessment – the commission will form a view (based on information provided by the parties) on the risk of a substantial lessening of competition. If the risk is deemed to be low, a confidential or public review is not necessary. This assessment can occur on a confidential or public basis.
- Confidential review – a preliminary confidential view is provided to merger parties on a confidential merger proposal. The commission will form a view (on a qualified basis, given the limited information available to it) that the transaction is unlikely to raise a competition concern, that the commission is not in a position to determine whether competition concerns arise or that the commission has competition concerns.
- Public review – the commission will conduct public market inquiries and make a final decision as to whether it would oppose the transaction if the parties were to complete.
Are foreign-to-foreign mergers caught by the regime? Is a ‘local impact’ test applicable under the legislation?
Yes, foreign-to-foreign mergers are potentially caught by the regime under Section 50 or 50(A) of the Competition and Consumer Act 2010 (Cth) if a merger has the effect or likely effect of substantially lessening competition in a market in Australia (ie, the merger must have some local impact to be caught).
The local impact test for foreign-to-foreign mergers is assessed on the same basis as the substantive test (ie, whether the merger has the effect of substantially lessening competition in any market in Australia). Typically, this can include transactions between two foreign entities:
- that have subsidiaries in Australia which compete (ie, the transaction occurs overseas, but there will be a follow-on local impact due to the change in control);
- that compete by way of imports into Australia; or
- where the acquirer carries out business in Australia even though it has no operations there.
What types of joint venture are caught by the legislation?
Joint ventures which satisfy the criteria in Section 50 of the Competition and Consumer Act 2010 (Cth) are caught by the legislation (ie, joint ventures that involve the acquisition of any shares or assets and have the effect of substantially lessening competition in any market in Australia). Joint ventures are also subject to other prohibitions in the act (eg, the cartel prohibitions).
Process and timing
Is the notification process voluntary or mandatory?
It is voluntary to notify and/or seek informal or formal clearance from the Australian Competition and Consumer Commission. Merger parties are not legally required to notify the commission of a merger and have the option of proceeding with a merger without seeking regulatory approval.
However, this does not prevent the commission from investigating a merger before or after the transaction has taken place and commencing legal action if necessary. It also does not prevent the commission from investigating a merger if it becomes aware of it independently of the merger parties. Accordingly, while notification is voluntary, it is important to seek appropriate competition advice to avoid the risk of commission merger enforcement action (or extended investigation) and incurring unduly burdensome costs by notifying transactions that are unlikely to substantially lessen competition. The merger risk for each transaction needs to be considered on a case-by-case basis.
What timing requirements apply when filing a notification?
As notification is voluntary, there are no timing requirements to submit notification to the Australian Competition and Consumer Commission. However, if a merger party plans to notify the commission (or the Australian Competition Tribunal), the following guidelines should be taken into account:
- Informal merger review – a party seeking informal merger clearance from the commission should consider the Informal Merger Review Process Guidelines 2013 timetable, which indicates a period of:
- two weeks for merger pre-assessment (if simple);
- two to four weeks for confidential review; and
- approximately two to six months for a full public review (depending on complexity).
- Formal merger clearance – a party seeking formal merger clearance from the commission (under Section 95(AC) of the Competition and Consumer Act 2010 (Cth)) must provide a legally enforceable undertaking not to complete the transaction while the commission is considering the application. The commission has 40 days from the date of receiving a valid application to review it. If no decision is made within this period, the commission is taken to have refused the application (though there is scope to extend this timeline). Merger parties may then appeal to the tribunal if the decision is negative. A denial of formal merger clearance does not preclude parties from completing transactions at their own risk. It is a statement that Section 50 will continue to apply to the transaction. To date, no application for formal merger clearance has been made.
- Authorisation – a party seeking merger authorisation from the tribunal must allow a statutory timeframe of three months, with the potential for a further extension of three months for the review. Merger parties must provide an undertaking that they will not complete the transaction during this time. If the tribunal does not determine the application within the timeframe above, it is taken to have refused authorisation.
What form should the notification take? What content is required?
For informal merger clearance, there is no specific form which a notification should take. This will vary on a case-by-case basis. Typically, notifications take the form of a letter and an accompanying submission explaining the competitive impact of a merger (eg, why the proposed transaction would not result in a substantial lessening of competition).
The information contained in the submission will also vary on a case-by-case basis. The submission will typically address the relevant merger factors outlined in Section 50(3) of the Competition and Consumer Act 2010 (Cth), which include:
- the actual and potential level of import competition in the market;
- the height of barriers to entry;
- the level of concentration;
- the countervailing power;
- the likelihood that the acquirer will be able to significantly and sustainably increase prices or profit margins post-transaction;
- the likelihood of removal of a vigorous and effective competitor; and
- the nature and extent of vertical integration.
The Merger Guidelines 2008 outline the Australian Competition and Consumer Commission’s approach and application of the above factors.
The Informal Merger Review Process Guidelines 2013 outline additional information that the commission may require in an informal notification, including:
- information about the parties to the transaction;
- details of the proposed transaction; and
- details of the Australian business operations, interests and assets of the acquirer and target.
Specific forms exist for the application of formal merger clearance (Form O, Application for Merger Clearance) and merger authorisation (Form S, Application to Tribunal for Merger Authorisation).
Is there a pre-notification process before formal notification, and if so, what does this involve?
Notification of a transaction to the Australian Competition and Consumer Commission is voluntary. Further, formal merger clearance is an untried process in Australia. Typically, if merger parties require the commission’s view concerning a transaction, they will approach the commission for informal merger clearance.
There are a number of preliminary steps available to a party before the commission commences a full and public merger review, including:
- meeting informally with the commission prior to an application for clearance being made;
- seeking pre-assessment from the commission (ie, a preliminary assessment on the papers); and
- seeking a confidential review.
Can a merger be implemented before clearance is obtained?
Yes. Parties are not required to obtain clearance from the Australian Competition and Consumer Commission before proceeding to complete a merger. However, merger parties that complete transactions prior to obtaining clearance do so at their own risk in the event that the commission seeks to investigate or commence proceedings.
The commission may also independently investigate and review a merger before it is completed. In some circumstances, if the commission is of the view that there may be competition concerns (but has not completed its review), it may seek an undertaking from the merger parties that they will not complete the transaction until the commission completes its review. If the parties do not provide that undertaking, it is open to the commission to seek an injunction in court to prevent the parties from completing.
Guidance from authorities
What guidance is available from the authorities?
The Australian Competition and Consumer Commission provides guidance regarding its merger review process in the following publications:
- Merger Guidelines 2008;
- Informal Merger Review Process Guidelines 2013; and
- Formal Merger Review Process Guidelines 2008.
What fees are payable to the authority for filing a notification?
There is no fee for lodging an application for informal clearance with the Australian Competition and Consumer Commission. The filing fee for formal merger clearance with the commission or merger authorisation with the Australian Competition Tribunal is A$25,000.
Publicity and confidentiality
What provisions apply regarding publicity and confidentiality?
The Australian Competition and Consumer Commission will accept information provided by the merger parties and third parties on a confidential basis if that information is commercially sensitive or confidential in nature. It will do so on the basis that:
- there is no restriction on the internal use, including future use, that the commission may make of confidential information consistent with its statutory functions; and
- confidential information may be disclosed to the commission’s external advisers and consultants on the condition that each adviser or consultant will be informed of the obligation to treat the information as confidential.
The commission may disclose confidential information to third parties in addition to its external advisers and consultants if compelled by law – Section 155(A)(A)(A) of the Competition and Consumer Act 2010 (Cth) outlines circumstances in which the commission may be compelled to produce information – including disclosure to a minister or royal commission.
While the commission will not ordinarily publicly disclose the submissions it receives during a review, it is important that confidential parts of submissions provided to it be clearly identified as such.
Are there any penalties for failing to notify a merger?
No. Notification of a merger is voluntary.
Procedure and test
Procedure and timetable
What procedures are followed by the authority? What is the timetable for the merger investigation?
The procedure and timetable for a merger investigation is generally as follows:
- When the Australian Competition and Consumer Commission is notified or becomes aware of a merger, it will decide whether to review the matter or to pre-assess it without conducting market inquiries. Pre-assessment takes approximately two weeks.
- If the matter is confidential, the commission can conduct a confidential review at the request of the parties. If possible, the commission will provide a conditional and confidential view to the acquirer. A confidential review takes an additional two to four weeks in addition to the pre-assessment period.
- If the matter is not confidential and the commission determines that a review is necessary, it will commence a public review. An indicative timetable is set and market inquiries commence. Following market inquiries, the commission advises merger parties of issues and/or concerns arising from the public inquiries and provides an opportunity for a response. After receiving a response from the merger parties, the commission publishes a proposed decision date and announces either its findings (a final decision not to oppose) or a statement of issues. The public review up to this point is typically six to 12 weeks after pre-assessment.
- If a statement of issues is published, a further round of public consultation and submission takes place. This can take a further six to 12 weeks after the statement of issues is published, after which a final decision will be announced.
The commission has the ability to stop the clock when seeking further information from the merger parties. Hence, timelines are typically indicative only and in practice can be extended.
What obligations are imposed on the parties during the process?
In terms of obligations to furnish information, the Australian Competition and Consumer Commission will typically request that merger parties provide it with information on a voluntary basis. Parties can choose whether to provide this information. However, it is an offence to knowingly provide false information or mislead the commission. The commission has powers to compel the parties to answer questions, produce documents and attend an examination under Section 155 of the Competition and Consumer Act 2010 (Cth).
The commission may also request undertakings from the merger parties (eg, not to complete). However, the provision of any such undertaking is voluntary.
What role can third parties play in the process?
Third parties are given the opportunity to make submissions and will be consulted by the Australian Competition and Consumer Commission during its public inquiries.
What is the substantive test applied by the authority?
The substantive test is whether a merger or acquisition would have the effect or likely effect of substantially lessening competition in a market. A court must take the following factors into account when determining whether a merger would substantially lessen competition:
- the actual and potential level of import competition in the market;
- the height of barriers to entry;
- the level of concentration;
- the countervailing power;
- the likelihood that the acquirer will be able to significantly and sustainably increase prices or profit margins post transaction;
- the likelihood of removal of a vigorous and effective competitor; and
- the nature and extent of vertical integration.
Whether a merger will substantially lessen competition is a question of fact and will vary on a case-by-case basis.
Does the legislation allow carve-out agreements in order to avoid delaying the global closing?
Yes. However, as there is no compulsory notification and clearance regime in Australia, these carve-out arrangements will typically occur only in circumstances where the Australian Competition and Consumer Commission has concerns that a transaction could potentially lessen competition substantially.
Section 87(B) of the Competition and Consumer Act 2010 (Cth) empowers the commission to accept court-enforceable undertakings to address competition concerns raised by a merger. These undertakings can take a variety of forms, including carving out or holding the assets and business in Australia separately to avoid delaying the global closing. Undertakings can be offered at any stage of the merger review process.
Test for joint ventures
Is a special substantive test applied for joint ventures?
No. The test for joint ventures remains the same as that for mergers.
What are the potential outcomes of the merger investigation? Please include reference to potential remedies, conditions and undertakings.
A merger investigation may result in the Australian Competition and Consumer Commission deciding to oppose or not oppose the merger. If the commission decides not to oppose a merger, the process is concluded. Given the informal nature of the process, such a decision does not result in legal immunity for the merger parties. However, in practice, the commission does not take action against the parties once it has decided not to oppose the merger – unless new information comes to light suggesting that a different conclusion should have been reached.
If the commission decides to oppose a merger and the parties have not yet completed the transaction, potential outcomes include that the parties do not proceed with the merger or wish to complete the merger.
The parties can proceed on the risk that the commission will commence proceedings in court to injunct them or seek pecuniary penalties. In these circumstances, the parties will need to defend the merger in court.
The parties also have the option of seeking authorisation from the Australian Competition Tribunal or seeking formal clearance, after which there would be a right of appeal to the tribunal to review the transaction de novo, by offering undertakings under Section 87(B) of the Competition and Consumer Act 2010 (Cth) which address the commission’s competition concerns. If accepted, the parties can proceed to complete without the risk of court action.
In the event that the parties proceed with a transaction that the commission opposes and the court finds in the commission’s favour, the court may order:
- that the parties pay a pecuniary penalty up to the limit of the greater of A$10 million, three times the value obtained or 10% of annual turnover (Section 76);
- an injunction to prevent the parties completing (Section 81); or
- that the parties divest assets or unwind a transaction (Section 81).
Right of appeal
Is there a right of appeal?
There is no ability to appeal an informal merger review decision by the Australian Competition and Consumer Commission.
Formal merger clearance decisions can be appealed as of right to the Australian Competition Tribunal – in which case there will be a fresh hearing by the tribunal on the merits of the decision. Following a decision by the tribunal, the merger party or the commission has a limited appeal right to the Federal Court for judicial review (ie, the appeal will not involve a fresh hearing of facts and is limited to grounds of an error of law or jurisdiction).
Merger authorisation decisions of the tribunal can be appealed to the Federal Court on the grounds of judicial review only.
Do third parties have a right of appeal?
Third parties that disagree with the Australian Competition and Consumer Commission’s decision not to oppose a merger have an independent statutory right to seek damages and/or a divestiture order to unwind a transaction – but not injunctive relief to prevent the transaction from completing – by application to the court. However, if a third party wishes to appeal a tribunal decision or formal commission clearance, it will need to obtain leave of the court.
What is the time limit for any appeal?
Where the Australian Competition and Consumer Commission informally decides not to oppose a transaction, a party seeking relief in court must do so within six years for damages or three years for divestiture of the day on which the cause of action that relates to the conduct accrued – typically, the date of completion.
An application for review of a formal merger clearance decision by the commission must be made within 14 days.
Law stated date
Correct as of
Please state the date as of which the law stated here is accurate.
May 8 2015.