Update: On 27 August, the ACCC unveiled its merger reform proposals. Read our latest report.

With the current mergers test squarely on the ACCC’s reform agenda, we examine the background to the current debate and ask whether it is the substantive legal test or the merger review process that is in the crosshairs.  The ACCC is expected to release its reform proposals towards the end of August 2021 – get up to speed with this deep dive guide and stay tuned for our updates.

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Snapshot

Remind me – what’s the current test?

What issues does the ACCC have with the current test?

What reform proposals has the ACCC put forward so far?

What other reform proposals could be put forward?

Remind me – what’s the current notification regime?

What might a mandatory notification regime look like?

What’s the merger notification position overseas?

Snapshot

The ACCC has experienced difficulties in persuading Courts and the Australian Competition Tribunal (Tribunal) that mergers it has sought to oppose would have the effect, or be likely to have the effect, of substantially lessening competition in breach of section 50 of the Competition and Consumer Act (CCA).

The current ACCC Chairman, Rod Sims, nailed his colours to the mast declaring in May 2019 that ‘it is clear there is a problem with the merger regime in Australia[1] because the ACCC wins cases in other areas, but not in merger matters. 

The concerns raised by the ACCC include:

  • the Federal Court’s acceptance of ‘self-serving’ evidence from merger parties;
  • an overemphasis on the counterfactual (being the future state of competition without the merger) when assessing whether a merger would substantially lessen competition; and
  • difficulties in identifying and blocking ‘killer acquisitions’ by large technology companies.

Possible reforms that could flow from these concerns include:

  • amendments to s 50(3) to address large companies acquiring nascent competitors, and to require express consideration of the nature and significance of any data and technology assets being acquired;
  • mandating notification of acquisitions by ‘large digital platforms’ – and potentially the introduction of some broader form of a mandatory and suspensory regime in light of the ACCC’s comments that the current lack of a mandatory pre-merger notification requirement in Australia is out of step with the rest of the world;
  • relying only on evidence from merger parties that pre-dates the proposed acquisition;
  • introducing a ‘rebuttable presumption’ that certain types of acquisitions will substantially lessen competition; and/or
  • abandoning the counterfactual assessment, and replacing it with a requirement to assess the impacts of mergers as against the current ‘status quo’.

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Remind me – what’s the current test?

The current merger test under section 50(1) of the CCA provides that a corporation must not directly or indirectly acquire shares or assets if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a relevant market. The effect of the acquisition must be tested against evidence or established facts, and is not shown by reference to assumptions or independent events.[2]

In considering the effect of an acquisition, it is necessary to consider the ‘commercial likelihoods’ relevant to the proposed acquisition, so that the test is applied at a level which is commercially relevant or meaningful.[3] In particular, the threshold must not be set so low ‘as effectively to expose acquiring corporations to a finding of contravention simply on the basis of possibilities, however plausible they may seem, generated by economic theory alone’.[4]

Further, competition must be lessened in a manner that is substantial. The lessening of competition must be ‘substantial in the sense of meaningful or relevant to the competitive process’.[5]

The question of whether an acquisition is likely to have the effect of substantially lessening competition in a market for the purpose of section 50 is determined through application of the future ‘with and without’ test, also known as a comparison between the ‘factual’ and the ‘counterfactual’. This test requires a consideration of the likely state of future competition in the relevant market with the proposed acquisition (the factual), compared to the likely state of future competition in the relevant market without the proposed acquisition (the counterfactual). 

The counterfactual is the pragmatic and commercial assessment of what is likely to occur in the absence of the proposed acquisition. It is not an artificial market design concept or something theoretically considered as an alternative.[6]

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What issues does the ACCC have with the current test?

At the highest level, the ACCC has expressed the view that there is ‘definitely a problem’ with market concentration in Australia, and that Australia’s merger regime is not adequately addressing or preventing it.[7] At the Law Council of Australia Competition Law Workshop in August 2019, Rod Sims suggested that Australia’s competition law is in need of reform to stop the further concentration of market power, and that there is ‘growing community expectation that the ACCC should oppose more acquisitions as the consequences of market power from increased concentration are exposed’.[8]

Sims has also drawn attention to the merger regime in Australia being different to that of overseas jurisdictions, potentially foreshadowing reforms to bring Australia’s regime in line with international merger regimes. In his address to the International Competition Network (ICN) Merger Workshop in February 2020, Sims also flagged that the ACCC was ‘actively look to competition authorities in other jurisdictions for ideas as we continue to explore improvements in our system’.

Against this backdrop, Sims has confirmed that the ACCC will put forward proposals to the Federal Government to change Australia’s merger regime in 2021, stating that existing ‘merger laws are probably letting us down’.[9]

But how?

The court’s acceptance of ‘self-serving’ evidence from merger parties

The ACCC has emphasised that the informal merger process relies on full and frank voluntary disclosure by the merger parties, but submissions consistently ‘underplay the degree of overlap and market dynamics, in some cases to the extent of being potentially misleading’[10] This in turn is seen to undermine the informal review process and lead to delays. 

Differences in the approach by overseas regulators have also been highlighted, in particular the fact that US courts ‘usually place little weight on the testimony of merger party executives’ unless supported by documents pre-dating the proposed merger.[11]

This concern was reiterated in comments relating to the ‘bias’ of merger parties during a panel discussion with representatives from the UK’s Competition and Markets Authority (CMA) and Germany’s Bundeskartellamt.[12] Essentially, the contention is that merger parties can never be unbiased as they are focused on getting the deal through, and therefore look at things through a narrow prism.[13]

On 20 April 2021, the ACCC, the CMA and the Bundeskartellamt issued a joint statement regarding the need for strong merger enforcement[14], in which it was noted that ‘agencies, courts and tribunals need to be aware of the risk of accepting the merger firm’s views over those of competitors, customers and consumers simply because the merger firms are more engaged in the merger review process’.[15]

Further, the ACCC noted in the Final Report to the ACCC’s Digital Platform Inquiry (Digital Platform Inquiry Final Report),[16] that ‘the tribunal and the courts appear to give greater weight to evidence from the parties to the transaction’ who the ACCC considers ‘have a vested interest in the acquisition proceeding, rather than from the evidence from third party witnesses’.

An undue overemphasis on the counterfactual – which is too uncertain

The ACCC has said that merger parties and the courts are increasingly focused on what is likely to happen in the future without the acquisition (i.e. the counterfactual), and that this is too challenging to prove in court.[17] Rod Sims has observed that the counterfactual, while a relevant consideration, is ‘open to manipulation’.[18] Regulators can feel like they are ‘on the back foot’ when meeting the challenge of seeking evidence about the unknown future, and making predictions of the future state of competition with the merger, in circumstances where the relevant knowledge rests with the merger parties.[19]

Further, the ACCC believes merger control should ‘focus very strongly on the competition that is lost, rather than getting completely tied up with predicting the future’.[20] It has been suggested that the reason the ACCC has not won a merger case in the courts is because of the requirement to ‘look forward’ in circumstances where the future is inherently uncertain.

In comments to the media after the ACCC’s unsuccessful appeal in ACCC v Pacific National Pty Limited [2020] FCAFC 77, Sims was reported as saying that the ACCC ‘should not have to prove’ who might want to use a freight hub one day and wanted merger laws to focus on a change in market power rather than ‘predicting the future,[21] - being ‘the essential problem with the way the merger laws are being argued and interpreted’.[22]

Further, undue focus on the counterfactual can risk ‘overlooking the likely anticompetitive effects of the merger itself. This is compounded by many of the merger factors listed in s50(3), which can be used to support a merger being cleared.’[23]

Finally, the ACCC has said there is currently not enough weight being placed on the following factors in the assessment of mergers:

  • potential competition being lost;
  • barriers to entry being raised; and
  • competitors being foreclosed,

concluding that the net result is that Australia’s merger control regime is ‘skewed towards clearance’.[24]

The current regime doesn’t adequately deal with ‘killer acquisitions’ or large technology companies

The ACCC has expressed its concern over large companies (especially technology companies and large financial institutions) acquiring smaller nascent businesses that have the potential to one day, grow to be vigorous competitors of the acquirer. 

In the joint statement by the ACCC, the CMA and the Bundeskartellamt[25] it was noted that ‘a seemingly small transaction can cause a competitive market to tip in an anticompetitive direction. For example, an acquisition of a small start-up could in reality be the acquisition of what would have been a major competitive threat to the purchaser in the longer term.’

The joint statement specifically called out difficulties in dealing with mergers by large technology companies, stating that ‘the last decade has seen the rise of acquisitive tech giants with activities across multiple current or future markets. Anticompetitive mergers in these markets can cause significant harm given the increased importance of these products and services and the aggregation of data over time across various services’.[26]

For these reasons, the ACCC’s Digital Platforms Inquiry Final Report recommended Australia’s merger laws should be amended to better account for certain competitive dynamics such as potential competition and the role of data (learn more here).

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What reform proposals has the ACCC put forward so far?

While a formal proposal to reform the merger regime in Australia has not yet been released by the ACCC, the first two recommendations in the Digital Platforms Inquiry Final Report explicitly refer to reforms that the ACCC would like to see to the mergers test. 

There are several other possible reforms that may be put forward, based on the ACCC’s public statements. 

Existing ACCC proposal to expand s 50(3)

Section 50(3) of the CCA provides a list of non-exhaustive factors that must be taken into account when assessing whether an acquisition would have the effect, or be likely to have the effect, of substantially lessening competition. The first recommendation made by the ACCC in the Digital Platforms Inquiry Final Report, handed down in June 2019, was to amend section 50(3) of the CCA to incorporate the following additional merger factors:

(j) the likelihood that the acquisition would result in the removal from the market of a potential competitor;

(k) the nature and significance of assets, including data and technology, being acquired directly or through the body corporate.

The Federal Government has noted that it is undertaking public consultation in relation to this recommendation.[27]

This recommendation was made in light of the ACCC’s concerns around the acquisition of nascent competitors by dominant firms and the importance of data in digital markets, and the extent to which mergers allow large platform to further increase its competitive advantage.[28]

If this change was incorporated into law, it would also address the ACCC’s concern that the current regime does not place enough weight on the ‘potential competition being lost’ as it expressly would require consideration of whether the target company may be a potential competitor of the acquirers in the future. 

Existing ACCC proposal to make notification mandatory for some businesses

The second recommendation in the Digital Platforms Inquiry Final Report would require large digital platforms to agree to a notification protocol to provide advance notice to the ACCC of any proposed acquisitions that potentially impact competition in Australia. 

Such protocols would be agreed between the ACCC and each relevant business and would specify the types of acquisitions requiring notification, any applicable minimum transaction value, and the minimum advance notification period prior to completion of the proposed transaction to enable the ACCC to assess the proposed acquisition. 

This recommendation was made in light of the ACCC’s view that ‘strategic acquisitions contributed to Google’s and Facebook’s market powers in the relevant markets’ and the ‘sizeable effects on competition’ that it considers past acquisitions have had.[29]

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What other reform proposals could be put forward?

Possible proposal to introduce a mandatory and suspensory notification process

More generally, Rod Sims has suggested that mandatory and suspensory notification regimes are appealing to the ACCC. In his view, Australia’s informal and voluntary merger notification process has challenges including that:

  • the parties do not have minimum notification requirements; and
  • transactions are not suspended pending ACCC approval, meaning companies can threaten to complete at various points during the ACCC’s investigation.[30]

We can see the potential for the ACCC to agitate for the introduction of some form of mandatory and suspensory regime that is broader than one limited to digital platforms. A talking point for the ACCC has been whether the lack of mandatory pre-merger notification is out of step with the rest of the world.[31]

In the UK, the Digital Markets Taskforce has recently recommended a specific merger control regime for digital platforms with strategic market status, including a mandatory and suspensory regime and lowering of the standard of proof from the current balance of probabilities to a ‘realistic prospect’ that a transaction would substantially lessen competition.[32] Sims has commented that it is ‘interesting to see the UK considering a move from a voluntary to a compulsory notification system, albeit with high notification thresholds’.[33]

The recommendation in the Digital Platforms Inquiry Final Report to introduce quasi-mandatory notification for some technology businesses may be an indication that the ACCC is keen to expand this requirement into other industries and business. At the ICN Merger Workshop in 2020, Sims commented that the ACCC is looking at its international counterparts and sees Australia’s voluntary and informal merger clearance process as ‘out of place’.[34]

It seems that the ACCC is positioning mandatory notification of proposed acquisitions as a positive step towards addressing some of its concerns with the merger regime as a whole and may consider proposing some elements of such a system to reform Australia’s merger regime. We discuss what a mandatory and suspensory regime could look like in more detail here.

Possible proposal not to rely on evidence from merger parties that post-dates the proposed acquisition

A repeated concern of the ACCC is that merger parties use ‘self-serving’ evidence of facts subsequent to contemplating or proposing the relevant merger. This may lead the ACCC to propose a legislative change that only allows the court to give very little, if any, weight to such evidence. 

Rod Sims has commented that one of the key areas of difference between Australia’s regime and overseas jurisdictions which the ACCC is keeping its eye on is ‘the weight given by the courts to information created after the deal was agreed because of the inherent bias and unreliability of that information’.[35]

In this context, the ACCC may seek to propose reforms that only allow the court to place weight on the evidence of the merger parties and their executives that is supported by documents that pre-date the announcement of the proposed merger.

Possible proposal to reverse the onus of proof, or introduce a rebuttable presumption

In raising concerns about the current approach to merger law in his address to the RBB Economics Forum in November 2019,[36] Rod Sims noted various options that could be considered, informed by overseas approaches. These included changing the onus of proof or introducing structural presumptions about certain mergers. Reforms of this nature would aim to address the ACCC’s concerns that the evidentiary burden is too high for it to prove its case before the courts.

A reversal of the onus of proof would mean that the merging parties would have to prove that the proposed acquisition would not have the effect, or be likely to have the effect, of substantially lessening competition. The UK’s Digital Markets Taskforce did not recommend to the CMA that a reversal of the onus of proof be introduced as it would be difficult for merger parties to meet this burden in the vast majority of cases.[37] Further, Australian commentators have noted that reversing the onus would not have changed the outcome of the contested merger cases as the merger parties had the burden of proof in the majority of these cases anyway.[38]

In relation to introducing a rebuttable presumption, the Digital Platforms Inquiry Final Report specifically noted that the ACCC considers that it may be worthwhile to consider whether a rebuttable presumption, in some form, should apply in Australia.[39] The report cited the benefit of such a presumption is that it makes it clear to the court in contested cases that, without clear and convincing evidence put by the merger parties, the starting point for the court is that the acquisition will substantially lessen competition.

The ACCC first raised the idea of a US-style rebuttable presumption in 2016, with Rod Sims asking the RBB Economics Conference[40] ‘do we need to consider something similar to the approach adopted by US courts where once markets are defined and the merger is likely to result in a significant increase in concentration, there exists a “rebuttable presumption” that the merger should not proceed absent evidence to the contrary?’

Rod Sims also commented in August 2019[41] that the US courts’ reliance on the rebuttable presumption has them ‘starting with the basic premise that increased concentration will cause a lessening of competition’ – a starting point that he does not believe is reflected in Australia.

This was later reflected in his address to the ICN Merger Workshop in February 2020, in which he commented that one aspect of overseas jurisdictions that the ACCC has its eye on is that ‘in some jurisdictions, the approach taken by courts is to allow hearings to begin based on the premise that increased concentration will cause a lessening of competition’.[42]

In the US, the Competition and Antitrust Law Enforcement Reform Bill 2021 introduced in February 2021[43] would prohibit acquisitions that ‘create an appreciable risk of materially lessening competition’. This Bill would have the effect of raising a rebuttable presumption that there is a ‘appreciable risk’ where:

  • there is a significant increase in market concentration; or
  • one party has more than 50% market share or otherwise has significant market power acquires a competitor or a company that has a “reasonable probability” of becoming a competitor in the relevant market; or
  • the acquirer is buying an entity that “prevents, limits, or disrupts coordinated interaction among competitors in a relevant market”; or
  • the acquisition would enable the “acquiring person to unilaterally and profitably exercise market power” or “materially increases the probability of coordinated interaction among competitors”; or
  • where the acquisition exceeds $5 billion (or $50 million if the acquirer is valued at over $100 billion).

This raises the prospect of the ACCC seeking merger reforms along similar lines – being a US-style rebuttable presumption for some merger cases, while leaving the suggestion of a reversal of the onus of proof alone.

Possible proposal to replace the counterfactual test with a ‘status quo test’ through legislative reform 

Beyond the process reforms the ACCC have expressly proposed, the ACCC may also go further and seek legislative change to the nature of the section 50 test, to move away from assessing the comparative state of competition as against the counterfactual, to making that assessment as against the current ‘status quo’. 

In the panel discussion with the CMA and the Bundeskartellamt, Rod Sims commented that there is excessive focus on the counterfactual, and not as much focus on what competition has been lost. 

Some of this commentary could be interpreted as indicating that the ACCC thinks the counterfactual test is no longer fit for purpose as a merger control test. Instead of the focus being on an analysis of the future state of competition ‘with and without’ the proposed acquisition, the ACCC may take the view that the focus should be on the extent of competition lost and the likely effect of the merger itself (and the counterfactual should only be a tool to assist the analysis).

A ‘status quo’ test would shift the focus toward whether a transaction would reduce current competitive activity (i.e. what competition is being ‘lost’).

Such a test would be aimed at addressing the ACCC’s concerns that it is too difficult to prove and predict what will happen in the future by shifting the focus to the effect that the proposed acquisition would have on competition as measured against the status quo.

Case study

Would a change to a ‘status quo’ test make much difference in cases decided to date?

We query whether a change to this effect would have resulted in a different result in contested merger cases such as Vodafone Hutchinson Australia Pty Ltd v ACCC [2020] FCA 117 (Vodafone/TPG).

In that case, Vodafone and TPG announced their plans to merge in August 2018. The ACCC opposed the merger in May 2019 on the basis that the merger would substantially lessen competition in the retail mobile market. The parties challenged this in the Federal Court and were successful in obtaining a declaration that allowed the merger to proceed. On 5 March 2020, the ACCC announced it would not appeal the decision.

ACCC’s case

The ACCC’s case was essentially that:

  • without the merger, there was a real chance that TPG would roll-out a fourth mobile network (in 2017, TPG announced that it would roll-out a mobile network, however it had abandoned these plans in 2019);
  • Vodafone would respond to TPG’s aggressive competitive behaviours by adjusting its retail mobile prices; and
  • the response of Vodafone would, in turn, lead to a competitive response by the incumbents, Telstra and Optus.

Merger parties’ case

The merging parties argued that:

  • TPG was not going to re-adopt its past plans to build a mobile network;
  • if TPG did roll-out a mobile network it would not be able to compete effectively with other mobile network operators (MNO); and
  • the merger would be pro-competitive.

Outcome and comments on the counterfactual test

Justice Middleton found that:

the issue of whether TPG would enter as an MNO is one element of the counterfactual, although, as this issue has been presented to the Court, a significant element. However, it should not be taken for granted that a world with TPG as a fourth MNO is substantially more competitive than a world with Vodafone and TPG merged. In fact Vodafone contended that this will not be the case, and that a world with TPG as a fourth MNO will not be substantially more competitive (and indeed will be less competitive) than a world with the merger. This is a matter legally relevant to this Court’s enquiry in these proceedings.

The Court also accepted that there were technical shortcomings in TPG’s mobile network designs which would result in capacity and coverage issues and low-quality service for its customers, and a lack lustre competitive presence against other MNOs. Justice Middleton relied on expert evidence: 

that the type of service that TPG could supply using [the expert’s] alternative network design would be inferior to the service provided by Telstra, Optus, and Vodafone. TPG could not compete on quality with the incumbent MNOs in this counterfactual and could realistically only compete on price. In the absence of any evidence that TPG could effectively compete on price as a new MNO, and price alone, TPG would not be a meaningful competitor to the incumbent MNOs in that counterfactual.[44]

Justice Middleton found that:

the other variable to consider with regard to the counterfactual world in which TPG enters as a fourth MNO is time: the retail mobile market does not stand still, commercial offerings evolve and improve, and new technologies are introduced and adopted by consumers.

Further, the retail mobile market, an aggressively competitive market, had evolved rapidly from when TPG first announced its plans to build a mobile network in 2017. TPG would no longer be an ‘effective disruptor’, in a market that was heading to 5G, because of the equipment impediments it would face in building a 5G network and the lower costs/higher data inclusions MNOs now offered.

His Honour concluded that TPG’s entry as a fourth MNO in the ACCC’s posited counterfactual could not be imminent and would likely be ‘many months from now’. His Honour relied on the evidence of TPG’s CEO Mr Teoh who said that he would not change his mind about his decision not to roll-out a mobile network, and therefore concluded that if Mr Teoh was to change his mind, it would take time and careful consideration before potential entry.[45] His Honour also concluded, on the evidence, that Vodafone was facing financial difficulties that meant that absent the merger, Vodafone wouldn’t be able to invest in and grow its business.[46]

Justice Middleton referred to Justice Beach’s judgment in Pacific National, in particular Justice Beach’s rejection of the proposition that it was appropriate to assess the counterfactual as a discrete query,[47] and the statement that “the subject of the likelihood or real chance is singular in the sense that s 50 refers to the likely effect of substantially lessening competition and thus ultimately poses one question involving one evaluative judgment”.[48]

Further, Justice Middleton quoted Beach J’s statement that:

the ACCC does not necessarily need to prove its counterfactual on the balance of probabilities. But the magnitude of any real chance that it demonstrates in respect of the alleged future states will practically and ultimately affect the magnitude of the real chance that it is able to demonstrate in respect of the alleged effects on competition and whether that rises to the requisite level of a likely effect of substantially lessening competition…[49]

His Honour expressly acknowledged that it is difficult to predict business decisions, and there is a further added difficulty when statements of business intentions are made by merger parties that may try to establish a more favourable counterfactual. He said:

I stress I am very aware of the care that must be taken in accepting self-serving statements by interested parties and industry participants. The overall circumstances of the case will provide more reliable guidance than would oral evidence on the part of interested parties. However, the Court does not ignore that evidence, particularly when it is supported by reasons and otherwise credible.[50]

Would the case have been decided differently if the Court used a ‘status quo test’?

No.

In this case, the ACCC’s theory of harm turned on whether or not TPG would enter the market as an MNO. The Court rejected the ACCC's core contention that, without the merger, there was a ‘real chance’ that in the near term TPG would roll out a mobile network in competition with Vodafone.

In the face of direct evidence from the business that it had abandoned its plans to enter the market as an MNO, the ACCC would have had just as much difficulty framing the merging as a ‘loss’ of competition as against the then current status quo, as competition from TPG never existed (therefore it could not be lost). There was evidence to suggest that it was not going to come into existence in the future (unless, as Justice Middleton pointed out, Mr Teoh and Vodafone changed their minds). Therefore, a reframing of the legal test would not have resulted in a different outcome. 

If the court was also asked whether the merger would worsen conditions for future competition, the answer is also likely to have been ‘no’ as there was evidence that a merger between TPG and Vodafone would enable Vodafone to compete more vigorously with Telstra and Optus.

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Remind me – what’s the current notification regime?

Voluntary regime for merger clearance

Merger parties currently have two pathways available for review of a proposed merger by the ACCC:

  • informal merger clearance – where the ACCC assesses the merger on an informal basis applying a substantial lessening of competition test;[51] and
  • merger authorisation – where applicants apply to the ACCC for formal authorisation for a proposed acquisition which will be granted if the ACCC is satisfied that either the proposed acquisition would not be likely to substantially lessen competition or the likely public benefit from the proposed acquisition outweighs the likely public detriment.[52]

Australia’s merger control regime is not subject to jurisdictional thresholds as notification is voluntary. However the ACCC encourages merger parties to approach the ACCC where it has indicated to a firm or industry that notification of mergers by that firm or in that industry would be advisable.

The ACCC also encourages merger parties to apply for clearance where both of the following apply:

  • the merger parties supply goods or services which are substitutes or complements; and
  • the merged entity will have a post-merger market share of above 20%.[53]

This notification ‘threshold’ is indicative only and is intended to provide businesses with a starting point for deciding whether their merger will raise competition issues with the ACCC. However, if parties do not notify the ACCC of the merger, the ACCC can use its formal information gathering powers or seek injunctive relief in the Federal Court (e.g. to prevent the parties from completing), if it believes that the acquisition will substantially lessen competition. The ACCC has these powers in relation to any acquisition, regardless of the size of the parties or the transaction.

Under the informal clearance process, the ACCC can request that the merger parties provide court-enforceable undertakings under s 87B of the CCA not to complete the transaction until it has finished its review.[54] However, under the merger authorisation process, applicants must provide a s 87B undertaking that they will not complete while the ACCC is considering the application.[55]

Why would this be changed?

The ACCC has indicated that it may be considering whether a formal mandatory and suspensory regime should be introduced in Australia. For example, Rod Sims said in a speech to the International Competition Merger Workshop in 2020 that:

When we look to our international counterparts, the Australian system is out of place next to the formal, mandatory, and suspensory regimes in many jurisdictions … For example, there is no compulsory upfront information requirements, and transactions are not suspended pending ACCC clearance. This latter point can cause us large problems when companies can threaten to complete the acquisition at various points of our investigation, as sometimes happens.’[56]

There has also been a clear indication that the ACCC desires a mandatory and suspensory regime in certain industries. For example, the Digital Platforms Inquiry Final Report[57] recommended that large digital platforms should be made to agree to a notification protocol, to provide mandatory advance notice to the ACCC of any proposed acquisitions potentially impacting competition in Australia. See here for more details.

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What might a mandatory notification regime look like?

Overseas context

Most merger control regimes around the world have some element of mandatory notification requirement. This usually means that a merger filing must be made where certain thresholds (typically based on revenue, market share or assets) are met or exceeded. 

Such regimes are typically both mandatory and suspensory such that a transaction cannot complete prior to clearance by the relevant regulator. In other words, parties who meet certain thresholds must file an application with the competition regulator (the ‘mandatory’ obligation) and filings have the effect of temporarily suspending the proposed deal whilst a decision is made as to its likely effect on competition (the ‘suspensory’ obligation).

However some jurisdictions, including Australia, New Zealand, Singapore, and the UK, have voluntary notification regimes.

Issues that would need to be dealt with in Australia

Implementing a mandatory and suspensory regime would be a significant change to Australia’s merger regime and may require changes to federal legislation. 

If this is the ACCC’s proposed direction, it will no doubt be grappling with how to structure such a regime appropriately, including how to set effective mandatory notification thresholds, how it will retain the right to review mergers that do not meet these notification thresholds, and how the appeal process from its decisions will be handled. 

Options for the ACCC include:

  • A ‘light touch’ approach under which the ACCC releases more detailed guidance to businesses as to when the ACCC expects businesses to notify the ACCC of their mergers. The ACCC could also begin to more frequently request s 87B undertakings to prevent merger parties completing until after the ACCC’s review, so as to move some way towards a quasi-suspensory regime. Taking this approach would enables the ACCC to retain its ability to investigate all mergers, regardless of the size of the transaction or merger parties.
  • Actual changes to the law to introduce a legislated mandatory and suspensory regime. This would require the ACCC to convince the Federal Government that a change to the law of this nature is needed and would require the passage of legislation through Parliament to amend the CCA. While this approach would take longer, it would provide the ACCC with clearer legal powers to take action against merger parties who do not notify the ACCC of their transactions or who complete before an ACCC review is complete. 

What thresholds might there be under a mandatory and suspensory regime?

Looking to overseas jurisdictions for inspiration,[58] thresholds may be set based on:

  • the size of the acquirer (i.e. its assets and global revenue); and
  • the size of the transaction; and
  • the industry the parties operate in.

The thresholds would also need to include some element of a nexus to Australia (e.g. a requirement similar to that in the US that the parties be engaged in US commerce or in activity affecting US commerce).

Some of the factors the ACCC and Government would need to grapple with in setting the appropriate threshold include:

  • Mandatory notification regimes are arguably not designed to allow regulators to intervene in minority or creeping acquisitions due to the prescriptive nature of thresholds. This means that a mandatory and suspensory regime would not necessarily solve the ACCC’s concern over ‘killer acquisitions’ (that is, large companies acquiring nascent business that may grow into be their rigorous competitors one day) as a notification threshold based on turnover or transaction size may not capture these acquisitions unless the threshold was set solely on the basis of the size of the acquirer. However, to avoid notification becoming mandatory for an overwhelming number of mergers, it is likely that any threshold introduced in Australia would need to take into account the size of the transaction as well as the size of the parties. 
  • Whether notification should only be mandatory for certain industries or sectors. Given the worldwide increasing scrutiny of large digital platforms, any mandatory notification regime implemented is likely to target this industry. Other potential industries that may be the subject of such a regime include providers of essential services such as electricity and gas retailers, the airline industry[59] and the transport industry.[60]

Aside from the setting of the thresholds, the ACCC will clearly wish to ensure that it retains broad rights to investigate and oppose any merger, regardless of whether it meets its indicative notification thresholds. This is similar to the approach taken in the US where mergers with a transaction value below US $94 million are not subject to mandatory notification but, the regulator has the power to still investigate and challenge transactions that don’t meet the thresholds, even after they are consummated.

What appeal rights might there be under a mandatory and suspensory regime?

Under the current informal merger clearance regime, if the ACCC blocks a deal, parties can:

  • seek a declaration from the Federal Court that the deal does not have the effect of substantially lessen competition; or
  • seek to complete and put onus on ACCC to seek an urgent Court injunction to prevent the deal.

Through the formal merger authorisation process, merger parties can appeal to the Tribunal, but have no appeal right from Tribunal decision, other than on errors of law (i.e. not a merits review).

The question of what the appeal rights would be if a legislated mandatory and suspensory regime is introduced is not straightforward. It may be that merger parties would have the right to approach the Federal Court over an ACCC decision to oppose the proposed acquisition, as currently exists under the informal merger process. 

In most overseas jurisdictions, merger parties subjected to a mandatory notification have rights to appeal the decision of the regulator to the courts for a merits review. However, the ACCC has previously indicated that one of the ‘problems’ it sees with the current regime is the approach of the courts to the substantive test (and reliance of ‘self-serving’ evidence in this court process). 

Therefore, it is possible the ACCC would agitate for narrower appeal rights under any mandatory and suspensory regime. However, questions of fairness would be raised if the ACCC seeks to move to a legislated mandatory and suspensory regime (with narrow appeal rights) if certain thresholds are met, while at the same time retaining power to review any merger even if it does not meet its threshold according to the current test (with the current appeal rights).

If under a mandatory and suspensory regime, a party has been forced to notify the ACCC of their transaction and is as a result, forced to accept stricter appeal rights (for example, an appeal to the Tribunal and subsequent appeals being limited to errors of law only), this would appear to create an unfair outcome for those merger parties whose transactions fall within the threshold as compared to parties whose transactions do not, but who are nonetheless subjected to ACCC review either because they chose to voluntary notify, or through the ACCC’s residual powers to investigate.

This could lead to adverse outcomes where those mergers that are subjected to the mandatory thresholds are unfairly beholden to the ACCC’s initial decision even though the same test is being applied to those mergers and to the mergers of parties who voluntary engage with the ACCC.[61] 

Would a mandatory and suspensory regime make any real difference?

Introducing a mandatory and suspensory regime would deal with one major concern of the ACCC: which is the ability of parities to complete (or threaten to complete) even though the ACCC has raised competition concerns. It would also address a related concern of the ACCC only being notified of a transaction shortly prior to completion (which doesn't allow sufficient time for its assessment). 

At present the ACCC can request a s 87B undertaking from merger parties not to complete a transaction while it completes its informal clearance review. However, merger parties are not required to provide such an undertaking. If a mandatory and suspensory regime is introduced, the parties would no longer have the option of completing irrespective of the ACCC’s inquiries.

Otherwise, although it would increase the costs of merger review for the parties, and potentially lead to delays, introducing a broad mandatory and suspensory regime may not materially influence merger review outcomes. This is because:

  • Setting a mandatory threshold is unlikely to prevent the ACCC from reviewing acquisitions of smaller nascent businesses, assuming it also retains a discretion to review any merger of interest. The introduction of an additional merger factor in relation to the removal from the market of a potential competitor would also provide a basis for reviewing mergers of this nature.
  • In terms of the outcomes of hotly contested mergers, it is doubtful that a procedural change alone would comprehensively address the ACCC’s concerns unless there is also a change in the nature of the test under s 50. This is because, as it currently stands, the ACCC disagrees with the court’s handling and interpretation of s 50 in these contested merger cases.
  • A large number of mergers are voluntarily notified to the ACCC in any event under the current voluntary regime, providing the ACCC with the opportunity to investigate and make its assessments as to the likely impact of these mergers on competition.

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What’s the merger notification position overseas?

Key aspects of mandatory and suspensory regimes around the world

In considering reforms to Australia’s merger control regime, the ACCC may take inspiration from those jurisdictions that have mandatory and suspensory regimes already in place, including as to:

  • the thresholds that may apply;
  • whether sector-specific regulation or thresholds may be appropriate;
  • whether the ACCC can retain its power to review mergers that don’t meet the thresholds; and
  • how merger parties will be able to appeal decisions.

Some of the key aspects of mandatory and suspensory regimes around the world are discussed below.

Mandatory thresholds

The ‘mandatory notification’ of mergers refers to the legal requirement to notify the relevant authority of the proposed acquisition. Typically this is required where:

  • the transaction constitutes a ‘merger’ or a ‘concentration’; and
  • two of the parties to the transaction have a certain presence in the relevant jurisdiction, measured by reference to their revenue, market share, or assets.

It is important that these thresholds are appropriately defined to ensure they effectively capture those mergers that are likely to be anti-competitive.

The International Competition Network (ICN) recommends that regulators should ensure that their merger notification thresholds are:

  • clear and understandable;
  • incorporate appropriate standards ensuring a material nexus to the reviewing jurisdiction;
  • based on objectively quantifiable criteria; and
  • based on information that is readily accessible to the parties to the proposed transaction.[62]

Importantly, in the mandatory regimes we analyse here, the competition regulators also retain the ability to investigate mergers which do not meet the notification thresholds.[63] 

While it may be necessary to consider the assets and revenue of the parties at a global scale, it would also be important to ensure that the merger has a nexus to Australia.[64] For example, in the US, merger notification is only required if either the acquiring or acquired party are engaged in US commerce or in any activity affecting US commerce (and there are a number of exceptions that only mergers with sufficient local nexus are filed).

The threshold for mandatory notification differs between jurisdictions. For example:

  • In the USA, mergers are subject to a “size of the transaction test” as well as a “size of the person test”. This means that parties must notify the US Department of Justice (DOJ) and Federal Trade Commission (FTC) of their merger if the transaction value is between US $94 million and $376 million (as adjusted annually), and the parties meet certain worldwide sales and assets thresholds set. This means that mergers with a transaction value of below US $94 million are not subject to mandatory notification. However, the DOJ and FTC have the power to still investigate and challenge transactions that don’t meet the thresholds, even after they are consummated. In addition, transactions in some industries may require review by both the antitrust agencies and the agency more specifically charged with overseeing the industry (for example, the Federal Communications Commission for telecommunications mergers). A similar threshold regime exists in Canada.
  • In the EU, parties must notify the European Commission if their transaction has a “community dimension”.[65] A concentration has a community dimension where i) the combined aggregate worldwide turnover of all the entities concerned exceeds EUR 5,000 million and ii) the aggregate EU-wide turnover of each of at least two of the entities concerned exceeds EUR 250 million.
  • The UK generally has a voluntary notification regime. However, the recent National Security and Investment (NSI) Act 2021[66] sets the threshold for parties operating in defined fields that the government considers are “sensitive areas of the economy”.[67] In these areas, parties must notify an acquisition of a right or interest in a qualifying entity, if the level of control the acquirer gains results in their shareholding stake or voting rights being higher than 25%, or the acquirer will be able to pass or block resolutions governing the affairs of the entity. Importantly, the mandatory notification regime does not apply to acquisitions of assets, as this regime stems from national security legislation (and not competition legislation), administered by the Investment Security Unit and aimed at preventing acquisitions that could harm the UK’s national security.

Industry specific merger control

In some jurisdictions, the mandatory and suspensory regime applies differently in different sectors.

In the EU, the Merger Regulations are industry-agnostic. However, in the US, federal and state legislation granting authority for oversight of certain industries (banking, communications, transportation, utilities) often includes provisions for merger reviews to be undertaken by the sector-specific regulator. In China, the regulator has recently issued guidelines that encourage merger parties to notify the regulator of proposed mergers in the field of active pharmaceutical ingredients, even where the notification thresholds are not met.

As mentioned above, in the UK, the NSI Act[68] contains a mandatory notification regime, backed up by criminal sanctions, for transactions in sectors thought most likely to raise national security concerns, and a voluntary notification process (underpinned by a "call-in" power) for other transactions that may affect UK national security interests. The 17 mandatory sectors include Artificial Intelligence, data infrastructure, defence, energy, transport, and others.

Simplified procedures

Some jurisdictions have introduced simplified procedures for certain cases that do not raise competition concerns, as this can significantly alleviate the filing burden on companies. For example, the EU’s simplified procedure accounts for around 75% of all cases. Recently, the European Commission reported that the simplified process has been effective in reducing the time and resources spent on many straightforward cases,[69] and the EU Commissioner has said that reforms may be brought in that feature reduced information requirements for the parties, and a speedier review process (in particular by cutting back pre-notification discussions in cases that are ‘so straightforward that there's really nothing to discuss before the merger is filed’.[70]

Failure to notify

In most jurisdictions, a transaction in not permitted to close (or be otherwise implemented) before clearance is obtained.

Significant financial penalties may be imposed for failure to comply with this restriction. For example, in the EU, the European Commission can impose a fine of up to 10% of the aggregate worldwide turnover of each of the parties where they intentionally or negligently fail to notify.[71] In some jurisdictions, such as the US, a failure to notify a reportable transaction may lead to an order to unwind the transaction.

Appeal rights

Generally, merger parties will have the right to appeal the decision of regulators to block the transaction. However whether or not the appeal can be made on the merits, or only on an error of law, differs between jurisdictions.

In the US, a decision to bar a transaction by the Federal District Court can be appealed to the Federal Court of Appeals on its merits and as of right. In the EU, reviewable decisions (including decisions approving or prohibiting a transaction) made by the Commission can be appealed to the General Court for a full analysis of the facts and legal arguments used in the Commission’s decisions. In the final instance, merger decisions can be appealed to the European Court of Justice.

In Canada, an order issued by the Competition Tribunal can be appealed as of right to the Federal Court of Appeal on questions of law and of mixed fact and law, however, leave of the Court is required for appeals on fact alone.

In China, a party who is not satisfied with a decision made by the Anti-monopoly Bureau of the State Administration for Market Regulation (SAMR) must first submit an administrative reconsideration before filing an administrative suit with the court.