27 November 2008
Key Points:
The merger notification threshold has been simplified to encourage increased notifications.
Following the release of draft revised merger guidelines earlier this year, the Australian Competition and Consumer Commission (ACCC) has now published final revised merger guidelines, setting out the legal and economic framework the ACCC will adopt when assessing whether an acquisition has the effect, or likely effect, of substantially lessening competition in a market in Australia.
Unlike many other countries, notification of an acquisition to the ACCC is not required by law. As a result, merger parties pay close attention to the Guidelines in deciding whether an acquisition is likely to require ACCC approval.
Notification threshold changed - again
Compared to the draft revised merger guidelines, the criteria that merger parties need to consider before making the decision of whether to approach the ACCC have been significantly shortened and simplified.
The Guidelines encourage merger parties to notify the ACCC "well in advance" of completing a merger where both of the following apply:
The 20 percent figure is based on an analysis of the market shares of the merged firm in matters where the ACCC released a statement of issues identifying potential competition concerns.[1]
Clearly, to apply the new test, merger parties and their advisers will need access to some reliable market share data for all relevant markets where the merger parties overlap or could be considered "complements" in the sense discussed in the Guidelines.
A simpler but wider net?
The new notification threshold is much simpler than the five criteria put forward earlier this year (which have been retained elsewhere in the Guidelines). It is likely to see many more transactions notified to the ACCC for review, as a large proportion of mergers across a broad range of Australian industries will result in a post-merger market share of 20 percent (either based on sales by volume, sales by value etc).
By international standards this is a relatively low threshold.
While the new notification threshold bears some resemblance to the market share threshold (CR4) used in the 1999 Guidelines, these Guidelines emphasise that the new notification thresholds are "indicative only" and not a "safe harbour". It is intended to provide a starting point for identifying those mergers that may raise competition concerns and require further investigation.
Notification threshold versus concentration threshold
The Guidelines make an important distinction between the "notification threshold" and the "concentration threshold". This distinction has been made so that the merger parties do not confuse the new notification threshold with the HHI concentration thresholds used by the ACCC.
The HHI is the sum of the squares of the market shares of the parties - eg where a firm with a 30 percent share buys a firm with a 10 percent share, the calculation is [30 x 30] + [10 x 10] = 1000.
Mergers which meet the 20 percent notification threshold should be notified to the ACCC regardless of whether the merger would fall within the HHI concentration thresholds.
In general, the ACCC had adopted a view that horizontal competition concerns will be "less likely to arise" when the post-merger HHI is:
While the HHI thresholds provide some further guidance as to the likelihood of an acquisition raising competition concerns, and improve upon the draft revised merger guidelines, a post-merger HHI which falls within the above thresholds will not necessarily be conclusive of whether or not a merger will be likely to result in a substantial lessening of competition.
A merger which falls outside these thresholds may still raise competition concerns if:
These two factors have been borrowed from the list of notification criteria proposed in the draft revised merger guidelines. While these factors no longer form part of a decision about whether to approach the ACCC to notify it of an acquisition, as we've previously noted, the interpretation and application of these factors is likely to be less than straightforward.
Key features of the ACCC's approach
Apart from the change to the notification threshold for mergers, the Guidelines are substantially the same those put forward earlier this year in February (which we reported on here). Briefly, the Guidelines confirm:
Confidential notifications
Consistent with the draft revised merger guidelines, the Guidelines encourage merger parties to come forward on a "confidential and informal basis" as soon as there is a real likelihood that the merger may proceed to discuss competition issues and options for having the matter considered. No explanation is provided for this.
As we reported earlier this year, even if merger parties approach the ACCC on a "confidential and informal basis" the ACCC will normally not issue a decision regarding the likely competition effects of an acquisition until public market inquiries with customers, suppliers and other stakeholders are completed.
More reform on the way - creeping acquisitions?
If the ACCC's current proposal for a "creeping acquisition" law is adopted by the Federal Government and passed by Parliament, the Guidelines will need to be significantly amended.
The ACCC is seeking additional powers to block acquisitions where the effects of an acquisition cannot be shown to substantially lessen competition but that some lessening of competition might result. The ACCC has proposed that firms which possess a substantial degree of power in a market should not be able to undertake any acquisitions, no matter how small, if it might lessen competition - that is, where the reduction in competition might be slight and less than substantial.
[1] A statement of issues is released by the ACCC where, after an initial assessment of information provided by the merger parties and market inquiries, the ACCC believes that a further detailed assessment of the competition effects of the merger is required.
