What effect will the Metcash decision have on mergers - and the ACCC? Michael Corrigan explains Metcash's implications to Kate Ritchie from BRR Media.
Beyond Metcash: analysis
Michael Corrigan, Partner, Clayton Utz
Kate Ritchie, BRR Media
Hello and welcome to BRR Legal Brief bringing you the latest legal issues to affect Australian business. I'm Kate Richie and today we are looking at some of the implications following from the ACCC's appeal opposing Metcash's acquisition of Franklins.
Joining me to discuss the case, as well as what it might mean for the ACCC going forward, is Michael Corrigan, a partner in the Competition Group at Clayton Utz. Well Michael of course now we've seen that the ACCC has said that it will not be appealing the Full Federal Court decision. If we look at the case, what was some of the key findings?
The case was about groceries and in particular the wholesale supply of groceries to independent supermarkets. Franklins, a well known supermarket operator, especially in New South Wales, had a small wholesaling business which supplied some independent stores. Metcash's core business is supply of groceries to independent stores.
The ACCC's concerns were that for Metcash to acquire Franklins would reduce down to one the number of those wholesale suppliers, and therefore result in a substantial loss of competition, which is a test under our legislation.
But the court didn't accept the ACCC's findings. The court found there was not likely to be a real loss of competition in the market. Importantly, they looked at the market in a broader sense than the ACCC had suggested. The court really thought the market was as broad as all of the supply of groceries nationally in Australia and included the supermarket chains, who are obviously major competitors, Woolworths and Coles. Within that broader environment the court wasn't satisfied with the ACCC's concerns.
Secondly, there was an issue that came up about the future of the Franklins business. It appeared to be making losses. The really question was "Did it have a future"? Metcash offered to buy it but it appeared there was no other credible buyer, at least satisfactory to the court, that was liable to step up and buy the business if Metcash didn't buy it and keep operating it. So it looked like Franklins was going to leave the market anyway - either be acquired by Metcash, or it might have been broken up by its owner.
And one of the issues that we have seen some commentary on is what the standard of proof will be going forward for the ACCC on what is the likely effect on competition. Can you provide some insights on this?
This is a difficult area and it's a difficult test in our law because the law prohibits those mergers, those acquisitions, which are likely to substantially lessen competition in a market. Likely means in the future and so a lot of debate in this case is over when you try and look into the future and foresee what are going to be the effects if you allow this transaction to proceed. What is the burden of proof? Does the Commission have to show more probably than not there will be a loss of competition? Is it more than 51% chance or, as the Commission would have it, is it enough if you could say, "There's a real chance here. We can't say it definitely will happen but there's a real chance competition might be damaged". That's the Commission's preferred approach.
Now the court didn't ultimately decide that question. They felt it wasn't necessary to rule on it. The reasons is they felt even if you accepted the lower threshold that the Commission favoured, even on the real chance test, they felt the Commission had not really made out its case. So the judges discussed those two alternatives. They made it clear you've got to take a very hardnosed, commercial, realistic view of these questions. It can't just be a theoretical possibility about what may happen in the future.
But as a matter of realistic assessment I think two of the judges on the appeal thought that a real chance test could well be upheld going forward. It's been recognised in the past. One judge disagreed with that approach and he would have pushed for a higher standard. This wasn't resolved and we'll have to wait and see until the next case.
Well given that there is this uncertainty, if we look beyond Metcash, what do you think the likely impact will be on the ACCC's approach going forward?
I think it's a reminder to the ACCC that not too often, but sometimes, their merger decisions can be challenged and in this case their analysis has been comprehensively overturned. Five judges looked at this case in all and none of them really agreed with the ACCC approach. So that's got to be a clear reminder that the ACCC are being careful and ground their approach very much in commercial reality, rather than some other economic theory that perhaps might have been considered.
But, having said that, this is an unusual case because Franklins on the findings didn't have a viable future. Now many merger cases the ACCC look at, you won't say that. The target company will have a future and therefore if it's swallowed up by another company there might be a loss of competition.
So one couldn't too quickly jump to the conclusion that this will change the result in other cases but it is a very serious reminder to the ACCC about the way in which their decisions can be successfully challenged.
Well it certainly has been described as a blow to the ACCC. What about if we look at it from companies' perspective. Do you think they will see it as a positive and perhaps try to challenge ACCC rulings more going forward?
I think some companies may be heartened by the result in Metcash which shows that with the right evidence you can overturn an ACCC decision and you can do it within a 12 month period. But as soon as I say that from my own experience a lot of major corporations would find it difficult to put transactions on hold long enough for the parties to go off to court and have their case heard in court. Metcash and Franklins are prepared to do that but for many other transactions that's a difficult timeframe to deal with if you're trying to keep a business intact while you wait for these decisions. That's why not many of these cases go to court.
But some companies may be heartened that at least if they have the ability to allow that time period to run this will give them a chance to remind the Commission about the importance of commercial realities.
So we might be waiting a long time but hopefully we will find out what does happen the next time the ACCC tries to oppose a merger. Michael thank you so much for your insights today, and we hope viewers that you can join us for our next live Legal Brief.