AP Eagers is the first to take the ACCC’s new merger authorisation process out for a spin. Authorisation is by far the road less travelled. What points will AP Eagers need to drive home to the ACCC? Is it the ACCC’s way or the highway?
A.P. Eagers Limited (AP Eagers) has asked the ACCC to authorise its proposed acquisition of Automotive Holdings Group Limited (AHG). In doing so, it has become the first party to test the new merger authorisation process that came into effect in November 2017. Read what we have said previously about the new process.
AP Eagers and AHG are the two largest automotive retailers in Australia. Both operate car dealerships supplying new and used cars, trucks and buses, and provide associated goods and services such as car repair and servicing, authorised car parts, insurance and finance. They directly compete in several locations including Brisbane, Melbourne, Sydney and the Newcastle/Hunter Valley region of New South Wales.
The process is well underway with the ACCC commencing public consultation and currently seeking submissions from interested parties.
In this post, we canvas the key benefits of formal authorisation and explore why the alternative available to merging parties, informal clearance, has been overwhelmingly preferred despite the existence of formal authorisation option for the past year and a half.
What points will AP Eagers need to drive home?
Under the new process, AP Eagers will need to persuade the ACCC that the merger:
- is not likely to substantially lessen competition; or
- is likely to result in a net public benefit (i.e. that outweighs any lessening of competition).
The road far less travelled
Parties to a merger can apply to the ACCC for informal clearance or, since November 2017, for formal authorisation.
Historically, the informal clearance process has been the overwhelming choice of merging parties. Just in the last financial year, all 281 mergers in 2017-18 that were assessed by the ACCC underwent the informal clearance process. No other party has applied for formal authorisation since the power was transferred to the ACCC to determine applications for authorisation at first instance until now.
It is unsurprising that applying for informal clearance instead of formal authorisation has been the course adopted by parties to a transaction in the overwhelming number of cases. For transactions where it is likely that the ACCC will consider there to be a low risk of a substantial lessening of competition in any market based on information provided by the parties and information on existing files, the ACCC is likely to clear the merger after an initial assessment (pre-assessment) on a confidential basis, usually within about 8 weeks.
In 2017-18, 90% of the mergers reviewed by the ACCC were cleared following confidential pre-assessment.
Further, the informal clearance process is considerably more flexible. Applicants for informal clearance also do not pay a filing fee whereas a fee of $25,000 must be paid under the authorisation process.
For most mergers that are straightforward (in that the ACCC will not have serious competition concerns), informal clearance will be the most efficient avenue given the timing, flexibility and cost-effectiveness of the process.
Where mergers give rise to significant public benefits and for which parties anticipate the ACCC will have serious competition concerns, the choice between informal clearance and formal authorisation is less obvious.
A party may opt for formal authorisation process over informal clearance for reasons including:
- Ability to invoke public benefit arguments
As mentioned earlier, public benefits arising from the proposed merger can be taken into account.
It is possible for the merger to be authorised if AP Eagers can demonstrate significant public benefits (such that it outweighs detriments to the public e.g. the loss of competition) notwithstanding the merger might otherwise contravene the prohibition on acquisitions that have the effect or have the likely effect of substantial lessening competition in the market.
- Timing certainty
The authorisation process must follow formal steps set out in the Competition and Consumer Act 2010 (the Act), including being subject to a 90 day statutory clock although the ACCC may extend the timeline.
There is the theoretical risk that the ACCC can repeatedly extend its review time and applicants will be left with no choice but to agree to those extensions. However, the ACCC has generally been relatively expeditious when assessing applications for authorisation in non-merger contexts.
In practice, this means parties may have their merger cleared in a shorter timeframe than if they had applied for informal clearance.
For more complex clearances e.g. those subject to two rounds of public review, 71% of mergers were finalised within 20 weeks (which would be longer than the 90 day statutory period). For example, the DowDuPont / Dow Chemical Company merger took 133 business days and more recently, Woolworths’ sale of over 500 retail fuel stations to BP took 130 business days.
However, almost half (45%) of mergers that were subject to only one phase of public review during the informal clearance process in 2017-18 took 8 weeks to clear, which is less than the 90 day statutory timeframe applicable to the formal authorisation process.
Accordingly, formal authorisation could be more attractive to time-sensitive parties to a merger which raises significant competition issues that would otherwise require two rounds of public inquiry under the informal clearance process.
- Statutory immunity
While the merger authorisation is in force, the authorised parties will be able to acquire the relevant shares or assets without risk of the ACCC or third parties taking legal action against them for a contravention of section 50 of the Act. Section 50 prohibits the mergers that have the effect or likely effect of substantially lessening competition in any market.
Instead, there is no statutory basis for the informal clearance process and it does not provide the parties with any formal, legal or statutory protection. In practice, it will be exceedingly unlikely that the ACCC and third parties will take legal action for a contravention of section 50 after a merger has been informally cleared by the ACCC. However, it technically offers less robust protection to parties involved in a contentious merger.
The ACCC’s way or the highway?
The ACCC is in the process of assessing AP Eagers’ application.
If unsatisfied with the ACCC’s decision, AP Eagers will be able to appeal to the Australian Competition Tribunal (Tribunal) on the merits of the ACCC’s decision.
AP Eagers could also apply to the Federal Court of Australia for judicial review for errors of law.
Of course, any application to the Tribunal or Federal Court will further delay the final decision and contribute to timing uncertainty. This could be a material consideration for time-sensitive parties.
Checking the rear-view mirror
The new merger authorisation process has restored the ACCC’s ability to consider applications for merger authorisation at the first instance, a power which the ACCC originally enjoyed but which was transferred to the Tribunal in 2007.
Between 1993 and 2007, when the ACCC had been the first-instance decision-maker for merger authorisations, it denied authorisation in six of 13 applications.
It will be interesting to see how the new process unfolds and whether other parties will take the wheel and follow AP Eagers’ lead.