A shake-up of Australia's merger control regime is on the horizon – but there is time to influence the changes
What you need to know
- The Treasury has commenced consultation on potential reforms to Australia's merger control rules.
- Although the consultation paper seeks feedback on whether Australia's merger control regime is effective, its focus is on reform options, suggesting changes to the current regime are likely.
- The reform options considered focus on changes to the (1) merger control process; and (2) merger test.
- In relation to the merger control process, three options are canvassed: (1) a voluntary suspensory clearance regime; (2) a mandatory suspensory regime; and (3) a mandatory formal clearance regime (reflecting the ACCC's proposals).
- In relation to the merger test, three options are canvassed: (1) modernising the factors that decision makers must consider when deciding whether mergers substantially lessen competition (SLC); (2) prohibiting mergers that entrench, materially increase or materially extend substantial market power; and (3) allowing consideration of related agreements.
What you need to do
- Consider the impact of the proposed reforms on your business' M&A plans and whether you wish to make a submission to Treasury to influence consideration of the proposed reforms. Submissions are due by 19 January 2024.
- The reform proposals – depending on the option(s) adopted – could have potentially significant impacts on deal viability (particularly for incumbents), timing, review burdens, procedural fairness and appeal rights. For example, more transactions may need to be notified to the ACCC, more transactions may be blocked, and merger parties may confront a more substantial upfront information burden, increasing transaction costs.
Here is our initial take on the proposed reforms.
Proposed merger control process options
The Treasury's Merger Reform consultation paper, released on 20 November, proposes three options for reforming the current merger regime, rather than simply adopting the ACCC's proposals. The key features of these options are summarised below. Our table also includes a snapshot of the current regime (although the consultation paper does not explicitly treat the status quo as a realistic option).
The three options for reforming the merger test could be implemented alone, together or with changes to the merger process.
The case for reform
The long-awaited opening of the consultation follows the ACCC's public advocacy over recent years about the need to reform Australia's merger laws. The consultation paper raises, as one of the reform options, the reforms previously propounded by the ACCC, but also considers additional options.
Currently, section 50 of the Competition and Consumer Act 2010 (Cth) prohibits the acquisition of shares or assets that would have, or be likely to have, the effect of substantially lessening competition (SLC) in a market. In assessing whether a merger is likely to SLC, the ACCC (or Tribunal or Federal Court) compares the likely future state of competition with the merger and without the merger. Australia operates a 'voluntary' system in the sense that there is no penalty for not notifying a merger to the ACCC, but the ACCC has extensive powers, including the ability to take enforcement action if it believes a merger may breach section 50, to prevent the merger from completing, seek penalties and a range of other orders. These act as a powerful incentive to engage with the regulator. Merger parties can obtain 'clearance' for a merger through an informal merger review, a merger authorisation process or through Federal Court proceedings. They also commonly engage with the ACCC as part of the process of obtaining approval from the Foreign Investment Review Board.
The consultation paper discusses many of the ACCC's concerns with the current system. These include:
- The increase in market concentration in advanced economies and evidence that too many anti-competitive mergers have been allowed to proceed. Notably, most of the studies referred to in the paper informing this proposition are from the US and concern US markets, in circumstances where the US is widely regarded as having historically taken a more lax approach to antitrust enforcement than Australia and Europe.
- The ACCC's claimed difficulties with the judicial enforcement model (ie, the need for the ACCC to take legal action and prove an alleged breach of the law in a court on the balance of probabilities) which the ACCC claims means the system is "skewed towards clearance". The ACCC has argued that Courts place too much weight on the evidence of the merger parties' senior executives, with their own vested interested, rather than evidence from third party witnesses (although it could equally be said that third party witnesses may have their own vested interests, such as acquiring a forced divestiture business, and judges are experts at adjudicating the credibility of witnesses).
- The reluctance of third parties to give evidence, due to time, cost and inconvenience. We note, however, that the ACCC has extensive information gathering powers (that merger parties do not have) which it can and does regularly exercise as part of its merger investigation function, and the parties to a court proceeding have the ability to issue subpoenas to third parties.
- The ACCC's concern about merger parties completing or threatening to complete a transaction before the ACCC has finalised its review. The non-suspensory nature of Australia's merger laws differs from many (but not all) overseas jurisdictions, but the ACCC still has the power to seek injunctions preventing the completion of a merger or to conduct post-merger investigations, and it has exercised these powers.
- The ACCC's concern that merger parties are providing insufficient information upfront to enable the ACCC to properly assess the likely competitive effects of mergers, and occasionally inaccurate information. We note, however, that it is part and parcel of the existing informal merger review process for the ACCC to issue information requests or notices under section 155 of the Competition and Consumer Act 2010 compelling the provision of information and documents, and that it is illegal for merger parties to provide false or misleading information to the ACCC.
- Concerns about 'creeping' or 'serial' acquisitions by large firms, acquisitions of nascent competitors (including so-called 'killer' acquisitions) by large firms, and large firms expanding into related markets through acquisitions. We note, however, that the current section 50 prohibition applies to these types of acquisitions – that is, they are prohibited if they have the likely effect of SLC in a market.
- Acquisitions of minority interests that result in control or influence over a competing firm. We note that the existing laws already apply to acquisitions of minority interests – ie, section 50 applies to the acquisition of even a single share in a company (with the degree of control or influence conferred by the acquisition to be assessed).
- The ACCC's concern that merger parties may not notify it of global mergers in a timely way. Notably section 50 already applies to mergers occurring overseas where they have a competitive effect in Australia and the ACCC has the ability to deploy its existing enforcement tools (eg, issue compulsory information and document notices; seek an injunction in the Federal Court).
The need for reform is not clear-cut, in our view, as there is a lack of comprehensive evidence demonstrating the link between Australia's merger control regime, industry concentration and market outcomes in Australia. The international evidence cited may not be directly applicable to the Australian context, given the differences in market structures, regulatory frameworks and institutional settings. The proposed options for reform have trade-offs and may have unintended consequences, such as imposing unnecessary costs and delays on merger parties and the ACCC, reducing incentives for innovation and investment, undermining the role of the courts and the rule of law, and creating uncertainty and complexity for businesses.
It is imperative that any changes to Australia's merger control regime follow careful and thorough analysis of alleged problems with the current regime, identification of the outcomes sought to be achieved, the effectiveness of the proposed policy response, and the costs and benefits of changes. Given the potentially far-reaching implications for Australia's economy, these are not changes that should be rushed.
What are the key implications of the ACCC's preferred model, if adopted?
We have previously discussed the key implications of the ACCC's proposed reforms (see client alert of 17 April 2023), which are now reflected in option 3 of the merger control process options and each of the merger control test options which are being considered by Treasury. If these reforms are enacted:
- More transactions are likely to need to be notified to the ACCC.
- More transactions are likely to be blocked by the ACCC as a result of the substantive test being enlarged to prohibit mergers that entrench, materially increase or materially extend market power.
- Merger parties will confront a more substantial upfront information burden when engaging with the ACCC – with implications for deal planning and timelines.
- The option to close a deal pending an ACCC review will be removed for those transactions which exceed the merger notification thresholds.
- The onus of proof will be changed under the ACCC clearance regime from that which applies in Federal Court proceedings. The ACCC (or Tribunal on review) will need to be satisfied that a merger is not likely to substantially lessen competition (or net public benefit). Parties will need to satisfy this test in order to obtain ACCC clearance (although it is arguable the ACCC already takes this approach in its informal merger reviews).
- Mergers that do not reach notification thresholds could still be "called in", creating residual risk of regulatory intervention.
Our preliminary observations on Options 1 and 2
Options 1 and 2 would retain the current 'judicial enforcement' model relying on litigation to stop an anti-competitive merger if parties nevertheless decide to proceed.
Option 1 may be challenging for the ACCC, as it would have to grapple with two different tests. In the initial decision, the ACCC would have to be satisfied that the merger will not SLC, in order to approve it. This is akin to the test currently applied in merger authorisations. However, if the ACCC has to bring proceedings (eg if the parties decide to proceed with the merger anyway), the ACCC would need to prove that the merger is likely to SLC.
Option 2 appears closest to the current regime, except that it replaces the existing informal process with mandatory notification. A critical feature of this option would be the notification thresholds – these would need to be carefully calibrated to avoid an excessive number of notifications of transactions, including those that are competitively benign. Unlike for Options 1 and 3, merger parties would not obtain formal immunity from action under section 50 through this process.
It is not clear whether under these options an anti-competitive transaction could nonetheless be cleared on the basis that public benefits from the transaction exceed public detriments (such as the recent Brookfield/Origin and Armaguard/Prosegur transactions). The consultation paper seeks views on whether the existing merger authorisation process (which applies the public benefits test) should be retained but does not discuss how this process would interact with the options proposed.
Options 1 and 2 would have other implications such as potentially significant information burdens and delay to deal timing (depending on the length of the suspensory period).