Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Merger Control volume discussing topics including enforcement priorities, evidence review and notable cases within key jurisdictions worldwide.
1 What have been the key developments in the past year or so in merger control in your jurisdiction?
The past year has been an interesting one for Australian merger control and has seen merger activity levels comparable to the previous period despite the impact of the covid-19 pandemic. The Australian Competition and Consumer Commission (ACCC) has continued to accept new notifications for mergers and has completed its assessment of a number of complex, high-profile mergers during Australia’s lockdowns. The ACCC has also continued to advocate for, and seek, increased penalties and sanctions for breaches of Australia’s competition laws. The ACCC remains an active (and proactive) regulator.
In the context of merger activity levels, ACCC Chairman Rod Sims commented in August 2018 that ‘while the number of mergers we are assessing each year has tended to be relatively stable, the complexity and contentiousness of the relatively small number of transactions that now go to public review continues to trend upwards’. Already in 2020, the ACCC has completed reviews of several complex multinational transactions where it required divestiture undertakings, such as Elanco’s acquisition of Bayer’s animal health business and Asahi Group Holdings Ltd’s acquisition of Carlton & United Breweries, both of which Gilbert + Tobin acted on. The ACCC is also currently reviewing Google’s proposed acquisition of Fitbit Inc, and has pushed its proposed decision date back to December 2020 to allow for coordination with foreign competition agencies, principally the European Commission.
Merger parties have two options for assessment by the ACCC: informal clearance or the merger authorisation under section 88 of the Competition and Consumer Act 2010 (CCA) that was introduced in late 2017.
If merger parties seek informal clearance from the ACCC, the ACCC will provide its view on whether an acquisition is likely to substantially lessen competition in any market. The ACCC attempts to deal with matters considered under the informal clearance system expeditiously, and will clear acquisitions on a ‘pre-assessment’ basis when it considers that they do not require a detailed review given the low risk that competition concerns will arise. This process is informal and not determined by the CCA, though it is conducted according to guidelines and time frames established and published by the ACCC.
The merger authorisation process provides an alternative approval option to the informal merger clearance process. Authorisation may be granted where the acquisition will not be likely to substantially lessen competition (a competition test) or, alternatively, is likely to result in public benefits which outweigh any detriments (a net public benefit test). If an authorisation is granted, the authorised parties will be able to acquire the relevant shares or assets without risk of the ACCC or third parties taking legal action for a contravention of section 50 of the CCA. There is a 90-day statutory time frame for the ACCC to determine a merger authorisation. The time frame can be extended with agreement from the applicant.
Since the amendments to the CCA came into effect, the ACCC has received two applications for merger authorisation:
- On 29 April 2019 AP Eagers Limited, a supplier of new and used cars, trucks and buses, as well as associated products and services, applied for authorisation of its proposed acquisition of all of the shares of Automotive Holdings Group Limited that it did not already own. The ACCC granted authorisation on 25 July 2019 after AP Eagers offered it a court-enforceable undertaking to divest its existing new car retailing dealerships and related business sites in a particular geographic area where the ACCC had raised concerns that the proposed acquisition was likely to substantially lessen competition in the retail supply of new cars.
- On 14 January 2020 Gumtree AU Pty Ltd applied for authorisation for its proposed acquisition of Cox Australia Media Solutions. Both parties supplied online automotive classified advertising to private sellers and dealers, and online display advertising on digital automotive content providers. The ACCC granted authorisation on 30 April 2020.
So far, the existing informal merger clearance regime has remained the most widely used process, and it is likely to remain as such in the future. The previous option of applying directly to the Tribunal for merger authorisation was being increasingly and successfully used, as the Tribunal was seen as a viable alternative to the ACCC with a distinct approach and perspective. The authorisation option now allows merger parties to present a public benefits case directly to the ACCC instead of the quasi-judicial process of the Australian Competition Tribunal, which may be viewed as a positive change. In addition, the relatively short length of the authorisation process and the resulting timing certainty may also make it an attractive option for the right cases. Notably, in both authorisation decisions so far, the ACCC found that the proposed acquisition was not likely to substantially lessen competition (taking into account a divestiture undertaking offered in AP Eagers). A decision on the public benefits that would result from the transactions was therefore not necessary in either case.
Australia’s foreign investment review processes have intensified amid the covid-19 pandemic. The monetary threshold for notification of a foreign investment to the Foreign Investment Review Board (FIRB) has been temporarily reduced to A$0 (previously A$275 million in most sectors). Separately, although on 21 February 2020 the ACCC announced that it would not oppose the proposed acquisition of Lion Dairy & Drinks Pty Ltd (currently owned by Kirin) by Hong Kong listed China Mengniu Dairy Company, in August 2020 China Mengniu abandoned the proposed acquisition, after the Treasurer communicated his preliminary view to China Mengniu that he would block the transaction on national interest grounds.
2 What lessons can be learned from recent cases to help merger parties manage the review process and allay authority concerns at an early stage?
In line with previous years (and notwithstanding the new option of a merger authorisation process), for the vast majority of merger transactions, the ACCC’s informal (and voluntary) merger clearance regime remains a flexible, convenient and relatively effective process for obtaining merger approval.
ACCC statistics indicate that in 2018–2019, the ACCC considered 331 mergers (an increase of 17 per cent from 2017–2018). Of these, 305 were assessed as not requiring a public or confidential review (pre-assessed), 25 mergers were subject to a public review and one matter was subject to a confidential review. Ninety-two per cent of mergers considered under the informal review process were finalised by pre-assessment. The ACCC unconditionally cleared 68 per cent of mergers which went through to a public or confidential review. This clearance rate increases to 98 per cent when all mergers (including pre-assessments) are included. In nine matters, the ACCC used its formal information-gathering powers under section 155 of the CCA.
The eight per cent of mergers that underwent a public review were the more contentious and potentially complex matters. A number of these involve concentrated markets where the competition concerns are likely to be higher and it would be expected that these transactions would be closely and thoroughly examined by the ACCC.
The ACCC has emphasised that it has used and will continue to use its compulsory information-gathering powers in merger investigations where it feels that the circumstances necessitate greater evidence collection and review in order to arrive at a decision.
The greater use of these powers and the related complexity of publicly reviewed matters have led to an increase in average review length. The ACCC has also recognised that it did not meet its own targets of completing 50 per cent of Phase I reviews in eight weeks or less and 90 per cent of Phase II reviews in 20 weeks or less. It only achieved 41 per cent and 88 per cent respectively, although the 88 per cent figure is an improvement on the 2017–2018 result of 71 per cent.
Based on merger activity last year, practitioners should recognise the continuing importance of identifying the most appropriate clearance strategy and process in light of an analysis of the facts. This allows for strategy and process to be factored into negotiating transaction terms and helps to minimise any delays. If a transaction is likely to be uncontentious, pre-assessment can be used as a quicker merger clearance option. If the transaction presents issues with some complexity, but public enquiries are likely to reveal that there are no concerns, then it may well be more beneficial to seek a public assessment in the first instance, rather than potentially increase the time for clearance by adding pre-assessment and public assessment to the overall deal timetable. Where there may be serious competition concerns but offsetting public benefits are identified, or if the merger parties require the certainty of a statutory time frame, formal authorisation may be the most appropriate option.
3 What do recent cases tell us about the enforcement priorities of the authorities in your jurisdiction?
In respect of mergers, the ACCC’s stated priority is to assess and review mergers to prevent structural changes in markets that substantially lessen competition. The ACCC pays particular attention to transactions involving concentrated markets and proposed acquisitions arising through privatisation of public sector assets.
The ACCC has continued to accept and review applications for merger review throughout the covid-19 pandemic. At the beginning of the crisis, on 30 March 2020, ACCC Chair Rod Sims stated: ‘Do not expect a different, or lenient approach to merger assessments during this crisis. Our objective will be to protect the competitive structure of the economy, and not to see anti-competitive increases in market power, or the rise of so-called “national champions”.’ The ACCC has also granted a number of interim and formal authorisations of conduct that might otherwise raise concerns under the restrictive trade practices prohibitions contained in the CCA ‘to ensure the economy is able to function and provide essential goods, services, medicines and medical equipment, and hardship relief during the covid-19 pandemic.’
The past year has also seen a number of interesting developments in Australian merger control. For example, the ACCC is increasingly interested in data as a source of market power. Its final report for its Digital Platforms Inquiry stated in June 2019 that ‘[t]he ACCC considers that the role of data in future markets is likely to be significant and will be an important factor to be taken into account in assessing the likely competitive effect of relevant mergers and acquisitions’. It also recommended changing section 50(3) of the CCA to include ‘the nature and significance of assets, including data and technology, being acquired directly or through the body corporate’ in the list of factors taken into account when assessing whether a merger would substantially lessen competition in a market.
Although that change has not yet been legislated, the ACCC can already take these factors into account. Its decision not to oppose the consortium acquisition of the WestConnex toll road was conditional on the purchaser undertaking to provide access to toll road traffic data to third parties. It is also informally reviewing Google’s proposed acquisition of Fitbit Inc. On 18 June 2020 it raised Google’s access to Fitbit’s health and fitness data as an issue that may raise concerns with respect to the supply of data-dependent health services or the supply of data-dependent ad-tech, particularly demand side platform services where it commented that Google has market power underpinned by the considerable data advantages it holds over its rivals. A final decision is expected in December 2020.
The ACCC’s decision to oppose Vodafone’s acquisition of TPG on the basis of a theory of potential competition, by reason of an acquisition of a potential entrant in the supply of retail mobile services in Australia, also reflects the ACCC’s scrutiny of future competitive dynamics, particularly in digital platforms. The Federal Court granted Vodafone a declaration that the merger was not unlawful on the basis of a counterfactual that, without the merger, the evidence suggested that it was extremely unlikely and there was no real chance that TPG would roll out a network or become an effective fourth mobile network operator in Australia, noting also that it was not ‘necessarily the number… but the quality of competition that must be assessed.’ See FCA  117 at 11.
4 Have there been any developments in the kinds of evidence that the authorities in your jurisdiction review in assessing mergers?
In a speech delivered in August 2019, Chair Rod Sims said that the ACCC had stepped up its use of compulsory information-gathering powers to aid in its presentation of evidence to the court, following earlier criticisms of that evidence in some cases. In February 2020 the Chair expanded on the difficulties faced by competition authorities in challenging mergers, where they are ‘seeking evidence about the unknown future world and much of the relevant knowledge and evidence rests with the parties to the transaction.’
The ACCC is now more active in issuing extensive information requests, which can be viewed as intrusive for the recipient, especially in the context of public merger reviews. Compliance with these requests often requires significant resources (both financial and in terms of personnel). The form of what is required under a request varies, but can include notices requiring senior managers to appear to be examined and significant document requests including email archives and extending to offsite backups. In the financial year 2018–2019 the ACCC issued 269 notices across all its investigation activities. However, formal notices were only issued in relation to nine merger matters, suggesting that the ACCC only considers the need for increased evidence to form a decision in a small number of mergers.
The ACCC also has an increased focus on the data held by merging parties and theories of harm related to any increased access to data and will continue to build on its capabilities in the Google/Fitbit merger.
5 Talk us through any notable deals that have been prohibited, cleared subject to conditions or referred for in-depth review in the past year.
According to recent ACCC statistics, of the 25 public reviews and one confidential review which were conducted in 2018–2019:
- the ACCC opposed two mergers outright;
- the ACCC expressed confidential opposition to or concerns about one confidential merger that did not ultimately proceed;
- the ACCC identified issues with one public merger that did not ultimately proceed;
- the ACCC accepted court enforceable undertakings in relation to five mergers to address competition concerns, resulting in those mergers being cleared subject to an undertaking; and
- the ACCC did not oppose 17 mergers which underwent a public informal review.
This year saw relatively high numbers of mergers cleared with undertakings and low numbers of mergers not proceeding, suggesting that parties and the ACCC have preferred to resolve issues through undertakings rather than abandoning acquisitions. Since the last ACCC statistics the ACCC has also accepted undertakings in relation to an additional three informal merger clearances and one merger authorisation.
While most of these undertakings were structural undertakings involving relatively straightforward divestitures, the Transurban/WestConnex decision was a rare example of an approval granted on the basis of purely behavioural undertakings, as well as an example of the ACCC’s growing interest in the competitive impact of data. The Asahi/CUB decision also involved significant behavioural undertakings relating to tap access in pubs, to ensure that the divestiture would result in effective competition.
However, in relation to the Pacific National/Aurizon acquisition, the ACCC refused to accept a behavioural undertaking from Pacific National to provide non-discriminatory access to the Acadia Ridge intermodal terminal. The ACCC instead instituted proceedings to prevent the acquisition. On the last day of the trial, the parties gave a similar and unconditional behavioural undertaking, and the Court found that this was sufficient to prevent the acquisition from substantially lessening competition. On appeal, the Full Federal Court affirmed that decision and the ACCC has sought special leave to appeal to the High Court.
As noted above, the ACCC also opposed the merger of Vodafone Hutchison Australia with TPG Telecom. While the companies were more complementary than competitive in Australia, the ACCC’s concerns related to their plans for the future, and in particular the likelihood that TPG would build a competitive 5G mobile network. Following the ACCC’s decision to oppose, the parties asked the court for a declaration that the merger would not substantially lessen competition, and the court accepted that TPG was no longer likely to build its network. The ACCC expressed concern about the decision but did not appeal it.
6 Do you expect enforcement policy or the merger control rules to change in the near future? If so, what do you predict will be the impact on business?
The Federal Court decisions allowing the Vodafone/TPG and Pacific National/Aurizon mergers were the latest in a series of cases in which the Court and the Australian Competition Tribunal have allowed mergers that the ACCC had opposed. Following those decisions, ACCC Chair Rod Sims expressed concerns about the courts’ approach to mergers and suggested that changes to the merger approval processes may need to be considered. Changes that the ACCC are likely to be evaluating include:
- a rebuttable presumption that mergers that significantly increase concentration in a market should not proceed in the absence of clear and convincing evidence that the acquisition would not result in a substantial lessening of competition; and
- mandatory notification and suspension of acquisitions that meet certain thresholds.
In February 2020, ACCC Chair Rod Sims described Australia’s system as ‘out of place’ next to the formal, mandatory and suspensory regimes in other jurisdictions. These changes would take some flexibility out of Australia’s informal merger clearance process, which remains by far the most frequent route for merger approval. In practice, most mergers that are likely to raise issues are notified to the ACCC and subject to ACCC approval as a condition precedent to completion. In many cases there will also be a de facto presumption that a significant increase in concentration will substantially lessen competition, but the ACCC’s potential change would formalise this presumption.
Consistent with a preference for a mandatory and suspensory regime, from September 2020 the ACCC ceased including its investigations of completed transactions on its public register of informal merger reviews. These investigations had previously been included on the register minus an indicative decision date. This change reinforces the principle that transactions that complete without prior notification to the ACCC are not subject to the informal merger review regime and their investigations are therefore not transparent processes with timeline accountability. Merger parties should think carefully before completing a transaction without notifying the ACCC, as any subsequent investigation would be more akin to an enforcement investigation (which is opaque and not subject to time constraints) than an informal merger review.
During the covid-19 pandemic and recovery period, the ACCC has said that it will concentrate on ensuring that markets remain competitive over the longer term, rather than focusing on the immediate impact of the pandemic. It has authorised temporary coordination between competitors in many affected industries, in part to ensure that competition in these industries can be sustained in the longer term.
Where difficult conditions in affected industries make restructuring or consolidation more likely, the ACCC has signalled that it will not depart from its established approach or lower its threshold for failing or flailing firm arguments. However, the factual matrix informing these decisions may well be relevantly affected by the pandemic.
In the domestic air travel industry, where key competitor Virgin Australia entered voluntary administration as a result of the pandemic, the ACCC has affirmed the need for two full-service domestic airlines going forward, and the Government has directed it to monitor competition in that industry. The ACCC will keep a close eye on both acquisitions and conduct in domestic air travel and doubtless other affected sectors.
Finally, the ACCC will continue to increase its focus on digital platforms and access to data as well as nascent competition in technology industries, testing whether the proposed merger may be likely to stifle any such nascent competition. Its assessment of Google’s proposed acquisition of Fitbit will be significant in illuminating its practical approach to these issues.
The Inside Track
What are the most important skills and qualities needed by an adviser in this area?
Important skills include the ability to quickly grasp industry dynamics and market characteristics (including economic factors), as well as understanding the parties’ businesses and interests; strategic and creative, lateral thinking skills in formulating case strategies; and perseverance, pragmatism and flexibility when responding to unfavourable ACCC positions or requests. In the context of multi-jurisdictional mergers, it is particularly important to understand the interaction of multiple regimes, and how they affect both the process and substantive analysis.
What are the key things for the parties and their advisers to get right for the review process to go smoothly?
It is important that all parties have a thorough understanding of the commercial imperatives of the transaction. Such understanding is critical when making arguments and submissions to the ACCC. Additionally, it is important that the transaction structure and schedule are considered at the time that an appropriate merger clearance strategy is formulated. Not only does this help align commercial interests, but also assists in managing expectations. In the event of an information request from the ACCC, it is also helpful if the parties have relevant information stored in a way which allows it to be accessed in a timely manner.
What were the most interesting or challenging cases you have dealt with in the past year?
This last year has involved a number of challenging cases, many of which are not yet public. One of the most interesting transactions related to Asahi’s acquisition of Australia’s iconic Carlton & United Breweries from AB InBev, which had acquired CUB as part of SABMiller in a deal we also worked on in 2016. The ACCC cleared the deal after accepting undertakings to divest two beer and three cider brands, along with a number of transitional arrangements to help ensure the success of the divested brands. As with the previous merger, we had no trouble finding volunteers for independent market research.