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.
Elizabeth Avery is a partner in Gilbert + Tobin’s competition and regulation group. Her practice includes advising on enforcement litigation and investigations, merger clearances and ongoing strategic and operational advisory work.
Having practised in New York, she brings a breadth and depth of perspectives to her advice, across a broad range of industries. She was the lead lawyer advising Anheuser-Busch InBev NV/SA (ABI) in successfully obtaining unconditional Australian merger clearance for the proposed global merger with SABMiller, the largest beer merger in history and one of the largest corporate takeovers ever.
She has a particular focus on multi-jurisdictional and financial services matters, advising a range of participants on transactions, investigations and strategic initiatives. Elizabeth advised on the Australian Competition and Consumer Commission (ACCC) Inquiry into Residential Mortgage Pricing, the Productivity Commission’s Inquiry into Competition in Financial Services and currently represents K-Line in the first group of criminal cartel prosecutions in Australia.
Matt Rubinstein’s practice focuses on competition, regulatory and general commercial advice. He has advised on structuring and represented clients before regulators in a wide range of industries, including cable television, fixed and mobile telecommunications, internet and broadband data services, magazine printing and publishing, cinema advertising, airline services, pharmaceutical distribution, timber and building materials, insurance and financial services. He has also advised regulators in preparing guidelines and making determinations in the gas and rail industries, and given general competition advice in relation to misuse of market power, horizontal and vertical restraints, misleading conduct and access to essential facilities.
Lara Schreiber is a lawyer in Gilbert + Tobin’s competition and regulatory group. She has experience in a broad range of competition, consumer and regulatory matters, including investigations, enforcement action, compliance and regulatory advice. Lara enjoys both national and multi-jurisdictional matters, and has worked across various industries, including fast-moving consumer goods, retail, transport, aviation and financial services. She previously worked as a tipstaff (judicial clerk) to judges on the Supreme Court of New South Wales.
Dilys Teng is a lawyer in Gilbert + Tobin’s competition and regulatory group. She has experience advising on competition, regulatory and consumer law matters. Dilys has extensive enforcement and compliance experience, having worked in the enforcement team of the ACCC and for clients under investigation and in legal proceedings while in private practice. She has experience in a number of industries including oil and gas, port, aviation, FMCG, telecommunications, supermarkets and banking and finance.
GTDT: What have been the key developments in the past year or so in merger control in your jurisdiction?
Elizabeth Avery, Matt Rubinstein, Lara Schreiber and Dilys Teng: The past year has been an interesting one for Australian merger control, and has seen merger activity levels comparable to the previous period. A number of very high-profile mergers have been announced and, more broadly, the merger regulator, the Australian Competition and Consumer Commission (ACCC), has 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, the ACCC Chairman Mr Rod Sims recently commented 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’.
Merger parties have two options for assessment by the ACCC: informal clearance or merger authorisation under section 88 of the Competition and Consumer Act 2010 (CCA).
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 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 that 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.
Until 2017, applications for merger authorisation were heard by the Australian Competition Tribunal (the Tribunal), which considered and approved a small number of acquisitions during that period. In November 2017, the CCA was amended to make the ACCC the first-instance decision maker in relation to merger authorisations.
Since this is a formal process, the ACCC’s decision can be appealed to the Tribunal for merits review. The Tribunal conducts a merits review only having regard to the materials made available to the ACCC, with some limited opportunities to introduce new material.
Reflecting these merger options and the new merger authorisation process, in October 2018 the ACCC released new Merger Authorisation Guidelines. 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.
At the time of writing, since the amendments to the CCA came into effect, the ACCC has received no applications for merger authorisation. The existing informal merger regime is likely to remain the most widely used process. The authorisation option now allows merging parties to present a public benefits case directly to the ACCC without the need to go through the full Tribunal process, which may be viewed as a positive change. However, the previous option of applying directly to the Tribunal 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 past year has seen the ACCC make a number of notable merger decisions, including Nine Entertainment’s merger with Fairfax Media, Cabcharge Australia Limited’s acquisition of Mobile Technologies International Pty Ltd, and Thales SA’s acquisition of Gemalto NV.
The ACCC’s decision not to oppose the merger between Nine Entertainment (Nine) and Fairfax Media (Fairfax), following the removal of key cross-media ownership rules from the Broadcasting Services Act 1992, is a notable development in Australia’s media landscape and demonstrates the impact of digital media on traditional publishing businesses. Fairfax, Australia’s oldest newspaper company, was acquired by the national television network Nine Entertainment. The key issues examined by the ACCC in assessing the merger were whether the merger would substantially lessen competition in the creation and provision of Australian news and non-news content, the supply of advertising opportunities and the acquisition of media content. Ultimately, the ACCC concluded that, while the merging parties competed to some degree, given the dynamic nature of their industries and the established and emerging alternatives that would remain, the merger was not likely to substantially lessen competition in any market in breach of the CCA.
GTDT: What lessons can be learned from recent cases to help merger parties manage the review process and allay authority concerns at an early stage?
EA, MR, LS & DT: 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 clearance.
ACCC statistics indicate that in 2017–2018, the ACCC considered 281 mergers. Of these, 252 were assessed as not requiring a public or confidential review (pre-assessed), 28 mergers were subject to a public review and one matter was subject to a confidential review. Around 90 per cent of mergers considered under the informal review process were finalised by pre-assessment. The ACCC unconditionally cleared 59 per cent of mergers that went through to a public or confidential review. This clearance rate increases to 96 per cent when all mergers (including pre-assessments) are included. In 10 matters, the ACCC used its formal information-gathering powers under section 155 of the CCA.
The 10 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 be closely and thoroughly examined by the ACCC.
In the past year, the ACCC 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 related complexity of publicly reviewed matters 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 1 reviews in eight weeks and less or 90 per cent of Phase 2 reviews in 20 weeks or less. It only achieved 45 per cent and 71 per cent respectively.
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 able 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 initially 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, formal authorisation may be the most appropriate option.
GTDT: What do recent cases tell us about the enforcement priorities of the authorities in your jurisdiction?
EA, MR, LS & DT: 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 also received increased budgetary resources to underpin its competition investigations. Additionally, the ACCC will maintain a special focus on how data, algorithms and digital platforms may impact on a merger.
The ACCC’s focus on cartel conduct prosecutions recently overlapped with merger control in Australia’s first proceedings in relation to ‘gun-jumping’, that is, combining or coordinating the merging parties’ operations before merger completion. The ACCC instituted proceedings in the Federal Court against Cryosite Limited (Cryosite) for cartel conduct in relation to its asset sale agreement with Cell Care Australia Pty Ltd (Cell Care). That agreement required Cryosite to refer all customer enquiries to Cell Care after the agreement was signed but before the acquisition was completed. The Federal Court ultimately ordered Cryosite to pay A$1.05 million in civil penalties.
GTDT: Have there been any developments in the kinds of evidence that the authorities in your jurisdiction review in assessing mergers?
EA, MR, LS & DT: In a speech delivered in August 2017, ACCC Chairman Rod Sims announced that ‘for that small number of contentious mergers, . . . we are gathering substantially more evidence’. This position has seemingly become the reality, and the ACCC has increasingly sought to use its statutory information-gathering powers including obtaining evidence from persons under oath.
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 2017–2018, the ACCC more than doubled the number of notices that it issued (89) compared to the prior year (44). However, formal notices were only issued in relation to 10 merger matters, suggesting that the ACCC only considers the need for increased evidence (to form a decision) in a small number of mergers.
Such matters have involved notices for information as well as requests for documents and importantly also oral examinations. The in-person examinations allow the ACCC to completely test lines of inquiry with key stakeholders, including the executives of the merger parties, under oath.
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. For example, the ACCC’s 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.
On the ACCC’s staffing front, it is also interesting to note that the ACCC has proactively sought to increase connections with other overseas competition regulators, particularly in relation to their approach to evidence-gathering and review. This has occurred via staff secondments and exchanges between the regulators. ACCC staff have also undergone training provided by the EU’s Director-General for Competition, and the Department of Justice (United States). Mr Sims has publicly commented that there are proposals for his staff to be trained by the Federal Trade Commission (United States) in 2019.
GTDT: Talk us through any notable deals that have been prohibited, cleared subject to conditions or referred for in-depth review in the past year.
EA, MR, LS & DT: According to recent ACCC statistics, of the 28 public reviews and one confidential review that were conducted in 2017–2018:
- the ACCC opposed outright one merger that underwent a public informal review;
- the ACCC expressed confidential opposition to or concerns about one confidential merger that did not ultimately proceed;
- the ACCC accepted court enforceable undertakings in relation to one merger to address competition concerns, resulting in this merger being cleared subject to an undertaking;
- seven reviews were discontinued because either the transactions did not proceed, or the parties withdrew their request for clearance. In two of these matters the decision by the parties to withdraw came after the ACCC released a statement of issues, identifying issues of concern or issues that may have given rise to concerns;
- the ACCC did not oppose 17 mergers that underwent a public informal review; and
- the ACCC reviewed a request to vary an existing undertaking and a request to waive certain conditions of an existing undertaking previously accepted in relation to two acquisitions to remedy competition concerns.
The recently cleared Thales SA and Gemalto transaction is an interesting example of the ACCC accepting undertakings (and which also reflected the position in other jurisdictions) in order for a merger to get the go-ahead.
On 20 December 2018, the ACCC announced that it had decided not to oppose Thales SA’s proposed acquisition of Gemalto NV after it accepted a court-enforceable undertaking from Thales to divest part of its business. Both companies supplied data security products, including enterprise encryption software and hardware security modules (HSM) in Australia. The ACCC’s investigation focused on the markets for the supply of general purpose (GP) HSMs and payment HSMs.
Thales and Gemalto were each other’s closest competitors and the two largest suppliers of GP HSMs worldwide (including in the Australian market). The ACCC concluded that, without divestiture, the proposed acquisition was likely to substantially lessen competition in the development and sales of GP HSMs in Australia. To remedy these potential competition issues, Thales provided a court-enforceable undertaking to sell its global GP HSM business to an ACCC-approved purchaser. The undertaking was also linked to the commitment made by Thales to the European Commission. Thales announced in February 2019 that it had reached an agreement to divest its GP HSM business to Entrust Datacard.
The ACCC has publicly stated that the prosecution of cartels remains one of its key enforcement priorities.
One of the longer (and ongoing) informal clearance reviews of the past year has been the ACCC’s consideration of the proposed merger of Vodafone Hutchison Australia with TPG Telecom, which commenced in September 2018 and is due to be decided in May 2019. The ACCC’s statement of issues raises concerns about competition in retail and wholesale mobile services and retail broadband services, including the future use of the 5G spectrum. The ACCC has been heavily involved in these areas over the years. While the companies may be seen as more complementary than competitive in Australia, the ACCC’s concerns relate to their plans for the future.
GTDT: 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?
EA, MR, LS & DT: Australia’s federal government has indicated its desire to bolster and extend the reach of the ACCC in its enforcement activities. As such, it is likely that the ACCC will continue to utilise its information gathering powers more readily and particularly in the case of complex or contentious mergers. This position may impact the timing of merger clearance and extend the time taken to review transactions. It remains to be seen whether the new merger authorisation process will be utilised by parties seeking approval.
Additional legal actions against merger-related conduct are also likely to come about – for example, in relation to gun-jumping. Such conduct has been a continuing focus for regulators around the world. The ACCC has publicly stated that the prosecution of cartels remains one of its key enforcement priorities.
The ACCC has also recently undertaken a host of inquiries into various sectors of the Australian economy called the Digital Platforms Inquiry. These include banking, digital platforms and agriculture. As a result of this focus, it is also likely that the specialised knowledge gained by the ACCC in relation to these sectors by virtue of the inquiries, will translate into a special focus on mergers in these sectors. In particular, arising out of the Digital Platforms Inquiry, we expect that the ACCC is going to be particularly focused on access to data as well as nascent competition, testing whether the proposed merger may be likely to stifle any such nascent competition.
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 really important for all parties involved in a merger to 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 the expectations from those involved. In the event of an information request from the ACCC, it is also helpful if the parties have relevant information stored in a way that 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 past year has involved a wide range of interesting and challenging cases, many of which are yet not public. One of the most interesting transactions related to the development of a cruise terminal in Brisbane by the Port of Brisbane. Port of Brisbane sought a long-term ‘take or pay’ commitment to support the development, and offered cruise operator Carnival long-term berthing priority over a certain number of days in exchange. Given the size of the investment, the parties sought ACCC authorisation, which was granted subject to certain conditions, in recognition of the fact that but for the commitments, the new facility would not be built.