Having long held concerns about the adequacy of Australia’s current merger regime, ACCC Chair Rod Sims recently floated the ACCC’s ideas for merger reform.
Whilst acknowledging these proposals to be a “debate starter”, if the ACCC gets its way, some truly ground-breaking changes will be made to the merger clearance regime in Australia. The ACCC Chair says this is essential to ensure an “open, innovative and competitive economy” where companies are encouraged to “compete rather than acquire”. The flip side of this is the introduction of a system that will be stacked against mergers, with the reforms significantly raising the bar for merger parties to clear. This has the potential to block pro-competitive or competitively neutral mergers and will significantly add to the regulatory burden on merger parties and no doubt their legal costs.
Is the current system really so broken to support such wholesale reform? Here are our views.
Current merger regime not “fit for purpose” – ACCC Chair, Rod Sims
In his speech at the Law Council of Australia’s Competition and Consumer Workshop in August 2021, Rod Sims identified four key reasons why the current merger regime is failing to protect competition and is “out of step” with other countries:
- currently, there is no requirement for mergers to be cleared by the ACCC and the ACCC does not “approve” mergers as such. Instead, there is a “merger enforcement” model which means merger parties can effectively choose whether they want to engage with the ACCC about a merger or roll the dice. There is nothing to stop merger parties from closing deals without first getting the green light from the ACCC and the ACCC notes this is a growing trend. The ACCC can only stop an anti-competitive merger by going to the Federal Court and proving on the balance of probabilities that the future anti-competitive effects of the merger are a real commercial likelihood (in breach of section 50 of the Competition and Consumer Act 2010 (Cth)(CCA));
- there is insufficient focus on preserving structural conditions necessary for competition, with the current emphasis on the likely counterfactual (the state of competition without the merger) rather than the competition that will be lost if a merger proceeds;
- the merger control regime is “skewed towards clearance”. The focus of the current regime is on “why not allow this acquisition” and this should be turned on its head and the onus placed on merger parties to convince the ACCC (or a review body) “why the acquisition should be allowed on competition grounds”;
- there is a gap in our merger laws which currently allow large digital platforms to swallow up disruptors or emerging rivals to nip competition in the bud.
ACCC’s suggested fix – wholesale merger reforms to bring about a “mindset change”
The ACCC is proposing some fundamental changes to our merger regime, across three broad areas, to “shift the dial”:
1. New formal merger review process
The ACCC is proposing a single new formal approval process. In the ACCC’s opinion, this single regime will simplify matters, prevent forum shopping and reflect international best practice. It will entail a mandatory and suspensory system with the following components:
- The ACCC will run the only formal merger review process, with mergers to be assessed on the basis of the “substantial lessening of competition” test alone. Merger parties will need to satisfy the ACCC that their proposed merger is not likely to have an anti-competitive effect. The current authorisation test that allows mergers to be cleared based on the public benefit outweighing the anti-competitive detriment will be removed.
- A mandatory clearance requirement will be introduced for mergers above prescribed thresholds and these notified mergers will be prohibited from completing without ACCC approval. Notification thresholds are yet to be determined but the ACCC concedes they will need careful consideration so the ACCC only assesses mergers that are most likely to cause competition concerns and the regime isn’t overly burdensome for business “across the board”.
- A “simple and quick process” (a notification waiver) will be available for the notification of above-threshold mergers that do not raise serious competition concerns, allowing these mergers to proceed without undergoing a full merger review.
- Below-threshold mergers will be able to proceed without notification or clearance but parties will still be able to request clearance from the ACCC based on the current pre-assessment process.
- The ACCC will have “call-in” powers for below-threshold mergers that potentially raise competition concerns. The ACCC feels this will discourage parties from structuring transactions in a way to avoid notification. The ACCC has not indicated how long these call-in powers will last for so we wait for further information about this.
- Information in initial ACCC applications will be all important and merger parties will need to provide their best information up-front as they will be barred from providing fresh evidence in support should they need the Australian Competition Tribunal to review their merger (unless subsequent events have occurred).
- The ACCC decision’s will be subject to a limited merits review by Tribunal. This will effectively mean the ACCC’s decision making power will be largely unchecked as merger parties will be prevented from seeking declaratory relief from the Federal Court that a merger does not contravene section 50 CCA. The rules on evidence will also significantly limit the evidence that parties can seek to rely on in any review and will limit reviews to documents only, ruling out the sort of evidence currently used in merger litigation.
- The review process will be subject to statutory timelines. These timelines are yet to be disclosed by the ACCC and will be material to how the proposed regime will work in practice. It’s also not clear if the timelines will apply to below threshold or call-in mergers.
- The ACCC will publish detailed reasons for its decisions in a significant shift from its current practice, both for clearances and oppositions. This will hopefully improve transparency about the ACCC’s position on issues above and beyond what they currently provide although it remains to be seen what this will entail in practice.
2. Changes to legal test in CCA’s merger provisions
The ACCC is also proposing various changes and clarifications to the legal test in section 50 CCA. This test will remain anchored around the substantial lessening of competition test but the following changes will significantly raise the bar for clearance:
- the merger factors in section 50(3) will be updated to ensure they focus on the competition that will be lost if a merger proceeds, and take into account changes to the structure of markets that are likely to make them less competitive;
- the term “likely” in the current test will be defined so a merger will contravene section 50 where there is “a possibility that is not remote” that it will substantially lessen competition (as opposed to the current case law position which requires there to be a “real chance” or “real commercial likelihood” which is a higher standard of likelihood). This will align with the cartel provisions and will lower the current bar for establishing that a merger is prohibited;
- a deeming provision will be introduced which will automatically deem mergers to have an anti-competitive effect where a merger party has substantial market power and, as a result of the merger, its position is likely to be “entrenched, materially increased or materially extended”. This means the focus in clearing these types of mergers will be on the structural conditions for competition rather than its effect on competition. What constitutes “substantial market power” will need to be clear given the consequences for the notification requirements where this threshold is met. The ACCC and merger parties may also not see eye to eye on this too;
- the onus of proof will be reversed so the ACCC will need to be satisfied by the merger parties that a proposed acquisition is not likely to have an anti-competitive effect, as opposed to the ACCC bearing the burden of proof in demonstrating that an acquisition is likely to be anti-competitive;
- collateral agreements between merger parties will be considered by the ACCC in merger reviews. This is designed to “stop parties taking steps to change the counterfactual or take advantage of the current anti-overlap provisions in order to get anti-competitive mergers cleared”.
3. New test for mergers by large digital platforms
The ACCC is also proposing a specific test for mergers by large digital platforms to address what the ACCC perceives to be a gap in the law which allows the tech giants to swallow up “nascent rivals”. Further details will be announced by the ACCC about this in September 2022.
What will the proposed reforms mean for mergers?
If these suggested reforms get passed into law, there will be a quantum shift in the way mergers are regulated in Australia. It will no longer be the case that only anti-competitive mergers are prohibited. Rather, mergers will be effectively blocked where they are above the set thresholds and have not received ACCC clearance. Merger parties will also have the burden of demonstrating that there is no possibility that the future effect of a merger will be to substantially lessen competition, which is a substantially lower standard of likelihood than is currently the case. Added to this, some mergers where a party has substantial market power, will be assumed to be anti-competitive at the outset.
This will stack the system against mergers being cleared. Admittedly, it’s not yet clear what sort of thresholds the ACCC has in mind that will trigger compulsory notification and the clearance of mergers, but it seems clear that the reforms will significantly increase the ACCC’s power to block deals. The ACCC, as the one-stop merger review body, will also be subject to far less oversight which is potentially problematic.
It’s hard to see how this will not make some deals which are arguably pro-competitive or competitively neutral far harder to get across the line in Australia. The knock-on is that the cost of obtaining a merger clearance is likely to increase out of sight, when the ACCC freely admits that only a small subset of mergers in fact give rise to significant competition concerns. Is the current system so broken to justify such far-reaching changes? We’re not convinced.
So, where to from here?
The ACCC has stressed these proposals are intended to kick start vigorous debate from various interest groups about merger reform in Australia. Whilst it is up to the Government to progress these reforms, the far-reaching nature of the ACCC’s reform proposals cannot be overstated. Whilst the jury is out as to where this will land, there is some support for the ACCC in its push for reform including from the likes of former ACCC Chair Allan Fels who agrees that current merger laws are not strong enough. As against this though, the current Federal Treasurer has suggested he’s not keen on greater red tape for business. Regardless, there appears to be broad agreement amongst competition lawyers that these proposed reforms go too far and the current merger regime is more effective than is being argued by the ACCC, despite the court losses it has suffered in recent years.
With the Federal election looming and Rod Sims’ current tenure as ACCC Chair ending in July 2022, we wait with interest to see how this plays out. Let the debate kick off in earnest.