Proposed Competition Law reforms a backwards step for Australian M&A

By Michael Corrigan

03 Aug 2017

Reinstating the ACCC's monopoly in merger approvals could see a return to pre-2007 days when the ACCC clearance process was the only practical option for parties to seek a merger approval.

On 22 June 2017, the Australian Competition Tribunal granted authorisation to Tabcorp to merge with Tatts Group Limited.

Two applications have been filed to seek judicial review of the decision and will be heard later in August.

But pending those applications it is worth reflecting on the direct process which enabled the parties to apply directly to the Tribunal. There is a Bill before Federal Parliament which seeks to abolish that avenue and require parties to apply first to the ACCC. And that Bill is a backward step for Australia's M&A sector.

In the Tatts/Tabcorp matter Tabcorp initially sought informal clearance from the ACCC before deciding to opt for the Tribunal hearing rather than wait for a final ACCC decision - and from the Tribunal hearing it became clear that the ACCC opposed the merger.

Applications to the Tribunal are rare. Since the avenue was opened up in 2007, the Tribunal has heard only three merger applications - AGL/MacGen; Seaswift and now Tabcorp/Tatts - all of which were successful, despite ACCC opposition.

Although these cases are somewhat rare, the ability of parties to seek a direct approval by the Tribunal is an important alternative to the ACCC's process. The ACCC informal clearance system has its limitations because it is so informal - especially in relation to accessing third party information although the ACCC has worked hard to improve its transparency over recent years.

The Competition and Consumer Amendment (Competition Policy Reform) Bill 2017 (Reform Bill) seeks to remove the right of direct approach to the Tribunal in merger cases. This follows the recommendation of the Harper Review of National Competition Policy in 2016, which considered that the ACCC should be the first instance decision-maker for merger approvals as it is "better suited to investigation".

In seeking to reinstate the ACCC's monopoly in merger approvals the Reform Bill could, if passed, see a return to pre-2007 days when the ACCC clearance process was the only option in practical terms for parties to seek a merger approval.

But prior to 2007 the ACCC merger process attracted significant controversy over a lack of transparency and of access to relevant information. These concerns were recognised in the Dawson Review which recommended the direct right to apply to the Tribunal. the Harper Recommendations don’t seem to address the Dawson Committees reasons.

Of particular concern is the Reform Bill's proposal to confine the scope of the Tribunal's ability to review ACCC decisions. Under the Reform Bill, and unlike the present regime, if a party wishes to appeal an ACCC decision to the Tribunal, Harper recommended that the applicant be limited in its ability to put new evidence before the Tribunal that was not before the ACCC. This was on the basis that to allow otherwise "would likely dampen the incentive to put all relevant material to the ACCC".

That was based on a concern that other Tribunal reviews of regulatory pricing decisions (such as gas and electricity pricing) had allegedly been the subject of gaming the system by the parties deliberately not putting all relevant material before the ACCC but then appealing and presenting a largely new case to the Tribunal. As a consequence in regulatory appeals so-called "limited merits" appeals have been introduced.

But, accepting that gaming should not be permitted, there is a difference with merger cases that may have escaped Harper's attention. In a merger case, speed of meeting conditions is key - and the need to get decisions made quickly will invariably trump tactics of deliberately holding back information, pending an appeal.

Few merger parties have the luxury of a drawn out, two-stage approval process through the ACCC and then on appeal to the Tribunal. Mergers usually attract rival bidders. Merger parties which are subject to competition clearance often face the risk of being eliminated by the process rather than the merits, if the clearance processes are protracted and uncertain.

The Reform Bill does not seem to recognise the importance of fast track processes in merger cases.

In the Tabcorp/Tatts case, the decision was handed down in a little over three months. Significant new evidence emerged from third parties during the Tribunal application that was not available to the parties at the time of the ACCC clearance process. That evidence was important in assessing the competitive strengths of participants in the relevant markets, and as such, evaluating the merits of the proposal.

The strategic plans of competitors are invariably relevant in a merger review. But getting access to that material is never easy - no competitor will reveal its strategy to a rival unless compelled to do so, and then only on stringent confidentiality terms.

Under the ACCC clearance process, the merger parties cannot compel a third party to disclose information, including internal insights and future strategies, that may be relevant to the evaluation of the merger proposal. The Tribunal on the other hand, can require the production of such material.

Yet, under the Reform Bill, the Tribunal's power to call for and have regard to evidence of that kind will be largely removed. It will only be able to consider new information that postdates the ACCC's decision, or material that refers to or clarifies the evidence and submissions that were before the ACCC. Third party material may not be before the ACCC in a first instance review.

In a typical authorisation process, like a merger clearance, the ACCC is generally reactive to what is put before it. It does not require strategic or other information from third parties to be compulsorily produced, although it may invite them to do so.

The ACCC may require the merger parties to produce relevant internal documents - but that will only give an insight into the merger parties' thinking and not the strategies and plans of their competitors.

It's not clear how the Reform Bill will overcome this deficiency. As presently framed it will seriously weaken the merger approval process and that’s a poor outcome for Australian corporate transactions.

The author acted for Tatts Group on the Tabcorp Tribunal case. These views are personal.

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