25 February 2004
Key Points:
The ACCC's defeat in the Federal Court may lead to more formality and attention to process in the merger clearance process.
Is AGL's Federal Court triumph the dawn of a new era in competition law ... or a flash in the pan?
It has certainly focussed attention on the informal clearance system that has governed M&A processes for many years. If nothing else, AGL's success in taking on and defeating the ACCC has increased the pressure for significant changes to that system.
In the meantime, it probably means that merger parties are going to face new challenges when negotiating with the ACCC.
Informal system
The key concept in the informal clearance system is informality. The parties to a transaction ask the ACCC if it opposes the transaction on competition grounds. The ACCC considers the matter and announces whether or not it's happy with the deal.
ACCC "approval" is taken as an informal undertaking that the Commission won't later try to have the deal unwound in court. Non-approval is equally informal, and, until the Loy Yang case, was accepted by the parties as the referee's final decision.
Although this sounds rather "clubby", the reality was that taking matters to the next level (seeking a formal authorisation or view from the Federal court) would usually be difficult and time-consuming. One difficulty with authorisation is that a party seeking authorisation must prove that the deal will produce a "public benefit". This requires proof that the deal will improve things for the public - simply maintaining the status quo isn't good enough. In any event, the authorisation process is quite lengthy - a luxury that most commercial deals don't have.
Loy Yang was different, for a number of reasons.
One major factor was the deal itself. It was not a run-of-the-mill acquisition or merger. The owners of the Loy Yang A Power Station had been trying to sell it for some time, under pressure from their financiers. The dynamics of the deregulated electricity market meant that this was not a simple case of a distressed seller looking long and hard for a buyer: Loy Yang's owners had been engaged in lengthy negotiations with several syndicates. Its financiers came to the party by extending the due date for repayment of the $500 million loan that was a major driver of the sale process.
On 3 July 2003 (eight days before the loan extension ran out) it was announced that a syndicate involving AGL had signed an agreement to buy Loy Yang. Within a week, the financiers had granted a four-month extension on the loan to allow the sale process (and a loan restructure) to proceed.
Parallel with the sale negotiations, AGL had been negotiating with the ACCC for an informal clearance for AGL's participation in the acquisition. On 8 September 2003, the ACCC announced that, if the acquisition were completed on its current terms, the ACCC would consider court action against the deal, including an application for divestment.
AGL's immediate response was that, rather than closing the deal and then waiting to see if the ACCC would go to court, it would go to court itself and ask for a declaration that the Loy Yang deal was not anti-competitive. This was the first time that a merger party had taken this course.
The sword of Damocles
AGL's decision to take on the ACCC was vindicated when, in mid-December, the Federal Court formally declared that, subject to undertakings, the Loy Yang acquisition was not anti-competitive.
One important matter emerging from the trial was that the ACCC fought hard against AGL's decision to apply for a declaration from a court (rather than a formal authorisation from the Commission itself). Until now, declarations were generally regarded as the preserve of the ACCC: they were to be used to stop mergers, not to give them the green light.
The ACCC attacked AGL's application on several fronts:
All of these arguments failed.
The Court said that the Pt VII authorisation route was not mandatory (and, even if successful, wouldn't produce a definitive ruling that the merger was not anti-competitive).
The Commission's argument about AGL's alleged unfair advantage appeared to reflect a sense that it was under-prepared. It argued that AGL's application would deprive it of the opportunity to wait and see how the deal affected competition in the industry (a timeframe of three years was mentioned). The Court apparently found this concern difficult to reconcile with the Commission's statements before AGL launched the court action:
"When writing to AGL on 12 June 2003 the ACCC said it had ‘conducted a thorough investigation so as to determine the likely effect of the transaction on both the generation and retail sectors of the electricity supply chain’. ...
In its press release of 8 September 2003, the ACCC was ‘... firmly of the view that the proposed acquisition creates substantial competition concerns which are potentially in breach of s 50 of the Trade Practices Act 1974.’ It stated unequivocally that the acquisition ‘... would lead to a less competitive and less efficient market structure in Victoria and potentially, in the National Electricity Market’."
The Court didn't explicitly rule on the ACCC's argument that AGL should simply have gone ahead with the acquisition. However, its attitude to that argument may be gauged from its comment about the Commission's announcement that, if the deal went ahead, it would consider applying for a divestiture order:
"It is not in the least surprising that AGL would not wish to enter into this major transaction with that sword of Damocles hanging over it and the other members of the consortium. Indeed it is difficult to see how, if the transaction were to proceed in the face of such a threat, the public interest would be served with such uncertainty hanging over the operation of a major public utility."
Implications
The Court emphasised that this was not a run-of-the-mill case.
A key feature was the fact that the court proceedings took only three months. The two key reasons for the Court's facilitating such a speedy trial were:
In other words, there was a clear public interest in settling the matter as quickly as possible. By itself, this distinguishes Loy Yang from many "private sector" transactions. Nevertheless, the fact that the declaration remedy was successfully invoked by a bidder does open the door for this remedy in other deals. If nothing else, it shows that the Commission's views can be successfully challenged in court.
On the other hand, the Loy Yang decision may also have possibly adverse flow-on effects for other mergers and acquisitions.
For example, if the ACCC's public statements overstated the degree of finality it really felt about the anti-competitive effect of the deal, that may be because it didn't expect to have them examined by a court. (In other words, it expected AGL to "play the game".) One immediate effect of Loy Yang, therefore, may be that the ACCC is less willing to expedite its informal clearance procedures or to make definitive statements of its position. This may slow down the process and give a degree of uncertainty to its outcomes.
Longer term, the decision has re-ignited interest in the Dawson Committee proposals for a formal clearance process.
The Federal Government responded to those proposals by announcing that it would introduce a voluntary formal clearance process (running in parallel with the existing informal clearance process). Under that process, the ACCC would be required to make a decision on a merger clearance within 40 days of notification.
The Loy Yang case will probably send the Government back to the drawing board. It will have to decide whether to shut off the court declaration route used by AGL or whether its originally-announced formal clearance process will have to be modified to take account of that option.
Until that it settled, M&A players may face an "informal" clearance procedure that has suddenly become a lot more formalistic.
For further information, please contact Rod Halstead and Michael Corrigan.
