Treasury has released a detailed consultation paper seeking views on whether Australia’s current merger control regime is effective and the available options for reform, drawing extensively on overseas merger control regimes (in particular, in the USA, UK and Europe) and international “best practices” (such as OECD recommendations).
The merger control review will be conducted by the newly established “Competition Taskforce” and is part of a broader review of Australia’s competition policy settings with a view to building a more dynamic and productive economy.
The Taskforce is looking at both, options for improving the merger control process and the substantive test for assessing mergers. The consultation paper canvasses ground-breaking reform options for Australia’s merger control regime, including the introduction of a mandatory pre-merger notification requirement.
The outcome of the consultation will inform the recommendations the Taskforce will be making to the Government as to what (if any) changes should be made to Australia’s merger control regime. The closing date for submissions is 19 January 2024.
This article discusses the key issues raised by the consultation paper.
Reasons for merger control reform
The Government is concerned about the slowing productivity growth in Australia and competition indicators (such as higher levels of concentration) suggesting a deterioration in competition in the Australian market over the last two decades. Against that backdrop, the Taskforce will consider whether the current merger control regime is (still) effective in maintaining competitive market structures and preserving the integrity of markets by preventing anti-competitive mergers.
The ACCC has been raising concerns about the effectiveness of Australia’s merger control regime for quite some time. Recently, the ACCC advocated the introduction of an administrative mandatory merger control regime whereby mergers above certain notification thresholds or “called in” by the ACCC must not be completed unless the ACCC has granted clearance.
To support its push for a mandatory pre-merger notification system, the ACCC argued that the current merger control regime is “skewed towards clearance” in circumstances where there is uncertainty about the possible future market outcomes.
The ACCC has also taken issue with the voluntary nature of the current regime arguing that its effectiveness is undermined by parties failing to notify a transaction or threatening to complete a transaction before the ACCC has concluded its review and/or providing insufficient or inaccurate information to the ACCC.
Options to reform the merger control process
Arguably, the most important issue the Taskforce will need to consider is whether to move from the current voluntary system to a mandatory pre-merger notification system. The Taskforce acknowledges that both systems have advantages and disadvantages. A voluntary system reduces the regulatory burden for benign mergers, but it increases the risk of potentially anti-competitive mergers not being notified. A mandatory system provides certainty to businesses and reduces the risk of potentially anti-competitive mergers not being notified, but it imposes a regulatory burden on parties to mergers that do not raise any competition concerns.
The consultation paper sets out the following three options to replace the current merger control process (but it also invites stakeholders to suggest other potential reform options).
Initial observations on options to reform merger control process
Option 1 does not seem to entirely address the ACCC’s concerns about the effectiveness of the current regime. Notifications would remain voluntary, which means that there would arguably still be an increased risk of potentially anti-competitive mergers evading scrutiny as parties can choose not to notify a merger. This, in turn, could lead to a frequent use of the “calling in” powers by the ACCC, which may result in delays for transactions and create uncertainty for businesses contemplating M&A deals.
A crucial task in designing a mandatory notification system (Options 2 and 3) is setting appropriate and clear notification thresholds. The right balance will need to be struck between the cost of imposing unnecessary regulatory burden on parties by setting the thresholds too low and the risks of potentially anti-competitive mergers evading scrutiny by setting them too high.
The ACCC’s initial proposal was that an acquirer or target turnover threshold of $400 million or global transaction value threshold of $35 million could be appropriate. It has been argued that these thresholds would be too low. In addition, and in accordance with international ‘best practices’, the notification thresholds should include appropriate minimum domestic revenue and/or asset value thresholds to ensure that mergers with no or only de minimis effect in the Australian market are not notifiable.
As part of the mandatory notification options, the Taskforce is considering whether there ought to be a power to “call in” mergers that do not reach the notification thresholds. The Taskforce acknowledges that such a mechanism has the potential to undermine one of the main benefits of a mandatory system, namely to provide certainty for merger parties. One way of minimising these risks would be to limit the “call in” power to specific industry sectors or firms where competition law risks associated with “smaller” mergers have been identified.
The ACCC’s administrative clearance proposal (Option 3) raises complex issues with regard to its interaction with the prohibition of anti-competitive mergers in section 50 of the Competition and Consumer Act 2010 (Cth) (CCA). In the consultation paper, the Taskforce considers whether section 50 should be retained and, if so, to what extent it would remain applicable. As an example, the Taskforce asks the question whether section 50 should apply for transactions that the ACCC has cleared but where significant competition concerns arose after the transaction completed. The Taskforce also seems to consider whether mergers below the notification thresholds should continue to be subject to section 50.
These issues will require careful consideration. The main benefit of a mandatory notification system is that it provides businesses with certainty as to which mergers need to be notified and hence, are subject to merger control regulation. It would significantly diminish this benefit if mergers that do not meet the notification thresholds or that have already been cleared by the ACCC could still be challenged under section 50.
Options to reform the merger control test
The Taskforce has proposed three options to reform the substantive test for assessing mergers, which all appear to seek to address the concerns raised by the ACCC about the adequacy of the current law in relation to capturing certain types of potentially anti-competitive mergers.
- Option A: Amend merger factors (section 50(3) of the CCA) - Revise and modernise the merger factors to increase the focus on changes to market structure as a result of the merger. The Taskforce lists possible merger factors that could be implemented, including creeping acquisitions, loss of potential competitors, access to or control of data and other significant assets, market power and interlocking directorships. Alternatively, the Taskforce proposes the removal of the merger factors from section 50(3) to “simplify” the test for assessing mergers.
- Option B: Expand the SLC test - Extend the test to include mergers that “entrench, materially increase or materially extend a position of substantial market power”. This proposal seeks to improve the ability to take into account structural features of competition in markets with few participants, high barriers to entry and/or high levels of market concentration, that is, markets that are more vulnerable to the exercise of substantial market power and ensuing long-lasting effects on competition.
- Option C: Add related agreements - Allow consideration of related agreements (for example non-compete agreements or agreements concerning the supply of goods or services, post-merger) in the assessment of a merger’s effects on competition. Like in the EU, any such ancillary agreements would be covered by the clearance decision if they do not raise any competition concerns.
The Taskforce contemplates that these options could be implemented alone, together or alongside other changes to the merger control process.
Initial observations on options to reform merger control test
The Taskforce appears to embrace the concerns raised by the ACCC that there is a risk that anti-competitive acquisitions by large firms are not adequately captured by the current merger control test, such as acquisitions of nascent competitors by dominant firms (including, so-called “killer acquisitions”). The ACCC’s view is supported by regulators in other jurisdictions that have raised similar concerns under their respective merger control rules. The Taskforce notes that the forward-looking test is challenging when assessing the competition effects of acquisitions of nascent firms whose future competitive significance is uncertain at the time of the transaction.
Options A and B also seek to address the ACCC’s long held concerns about “serial or creeping acquisitions” by large firms (i.e., a series of small acquisitions over time such that each acquisition increases market concentration only incrementally and may not raise competition concerns when assessed individually). The reform options seek to move the test from focusing on the incremental change in market share by a single transaction to whether the series of acquisitions increases, enhances or extends market power. Industry sectors where creeping acquisitions have raised concerns in the past include supermarkets, liquor and hardware stores and, more recently, digital platforms.
Finally, the first two reform options seek to address the ACCC’s concerns about large firms expanding into related, emerging or adjacent markets, in particular, with regard to digital platform acquisitions given the evolving nature of the services and changes in consumer habits. The ACCC argues that the current SLC test is unlikely to prevent such acquisitions leading to an expansion of market power.
Foreign investment regulation
The Taskforce emphasises that it would be important to align foreign investment and merger control approval processes if a formal clearance system were to be adopted, noting that a large proportion of mergers considered by the ACCC are subject to mandatory notification and suspension requirements under Australia’s foreign investment framework (almost two-thirds in the FY 2022-23).