Significant changes to Australia's merger control regime took effect in November 2017. This note updates you on these changes to assist with multi-jurisdictional merger control planning.
Merger control in Australia
Australia's informal merger clearance process is used in almost all mergers where approval is sought from the ACCC. This process is voluntary and non-suspensory. This means that merger parties may complete a proposed acquisition without first obtaining any competition approval from the Australian Competition and Consumer Commission (ACCC) or the Federal Court of Australia.
It is also possible to seek merger authorisation on public benefits grounds. Under the reforms which took effect in November 2017, the ACCC is now the decision-maker in respect of merger authorisation applications and the process is suspensory; merger parties must give the ACCC a court-enforceable undertaking not to complete the merger while the ACCC is considering the application. ACCC merger authorisation decisions can be reviewed on a limited merits basis in the Australian Competition Tribunal.
Unlike the UK and Europe, there are no minimum turnover or asset thresholds below which a merger does not need to be notified. The primary test is whether any potential acquisition of shares or assets would have the effect, or be likely to have the effect, of substantially lessening competition in any market in Australia. This is the test in section 50 of the Competition and Consumer Act 2010 (CCA).
Foreign Investment Review Board (FIRB) approval
The Australian Government reviews foreign investment proposals on a case-by-case basis, applying a national interest test. Notification requirements vary depending on the nature of the transaction and identity of the foreign investor.
FIRB's practice in applying the national interest test is to ask the ACCC whether a transaction raises any competition concerns and FIRB will not issue its approval without first consulting the ACCC. This may trigger an ACCC review of the transaction even if the merger parties have not notified the ACCC. In this way the need for FIRB approval of a transaction operates as a compulsory ACCC merger notification trigger.
What's changed under the recent reforms?
In November 2017, wide-ranging reforms to Australian competition law came into effect. These changes extend beyond merger control. This note addresses the changes to Australian merger control laws only.
With the repeal of the formal merger clearance process (which was never used), the ACCC is now a one-stop shop for merger control under the informal clearance process and in relation to applications for merger authorisation.
The ability to apply for informal merger clearance from the ACCC is unchanged by the reforms and remains wholly intact.
The ACCC will continue to examine whether the proposed acquisition is likely to substantially lessen competition in any market in Australia.
In applying this test, the ACCC will conduct phase 1 and, if necessary, phase 2 public market inquiries. At the end of this process, the ACCC will typically issue a letter indicating either that it does not intend to intervene to stop the proposed merger, or that it intends to intervene and be given notice if the parties proceed to completion because the merger is anti-competitive.
There is no statutory basis for the informal clearance process and it does not provide the parties with any formal, legal or statutory protection. The business community and lawyers accept that the process is an effective way for parties to obtain the ACCC approval of a merger.
The 2017 reforms remove the ability for merger parties to bypass the ACCC informal clearance process and seek merger authorisation on public benefit grounds directly from the Tribunal.
Under the new regime, the ACCC will be permitted to issue a merger authorisation if it is satisfied that either:
- the proposed acquisition would not be likely to substantially lessen competition in any market in Australia; or
- the likely public benefit from the proposed acquisition outweighs the likely public detriment, including any lessening of competition.
When filing an application for merger authorisation, the parties are required to give a court-enforceable undertaking not to complete the proposed acquisition while the ACCC is considering the merger authorisation application. Contrary to the informal merger clearance process, the merger authorisation process is suspensory.
The ACCC will assess both merger authorisation tests in parallel, and the form which needs to be completed by the merger parties requires them to provide information relevant to the ACCC's assessment of the merger under both tests.
If the ACCC grants merger authorisation under either test, that authorisation will confer statutory protection from legal action to the merging parties. There is no power for the ACCC to grant a merger authorisation in relation to a completed merger.
The ACCC is required to publish reasons for its decision to grant or refuse merger authorisation. If the ACCC refuses to grant merger authorisation, (limited) merits review of the ACCC's decision may be sought by application to the Tribunal. That review will be conducted on the basis of the material before the ACCC and the merger parties will general not be permitted to adduce new evidence or expert reports in favour of the merger.
Indicative timeframes under the informal merger clearance process are as follows:
- pre-assessment: 2-4 weeks
- phase 1: 6-12 weeks
- phase 2: further 6-12 weeks.
In more contentious and complex transactions, these timeframes are becoming longer. For example, Brookfield/ Asciano (rail 2015/16) 231 business days and DowDuPont/ Dow Chemical Company (agriculture products 2016/17) 133 business days. Woolworths' sale of over 500 retail fuel stations is another recent example (the ACCC's informal merger clearance process ran for about 10 months during 2017).
The new merger authorisation process requires the ACCC to determine a merger authorisation application within 90 days (a period which the ACCC may extend by agreement with the applicant). If that decision is subject to an application for merits review in the Tribunal, the Tribunal must issue its determination within 90 days (a period which can be extended by a further 30 days if the Tribunal admits more evidence).
The ACCC has stated that it is placing an increasing focus on being litigation ready in merger cases. ACCC Chairman Rod Sims recently stated: "[F]or that small number of contentious mergers, we are necessarily moving towards an approach where we are gathering substantially more evidence so that, if required, we can better assist the Tribunal or Court in any proceeding. This will, of course, also assist our decision making, as we have more information revealed through more documents and data. This will result in an increase in the number of s 155 notices, involving examinations under oath and significant document requests."
What this means in practice is an increasing volume of voluntary and compulsory information and document requests issued to the merger parties by the ACCC. Often the scope of these requests is extensive. In many cases they are accompanied by compulsory interviews by counsel and senior ACCC officials of executives and senior management in relation to the material obtained. The time it takes to gather information needs to be factored into commercial timetables.
When is notification recommended?
The ACCC's 2008 Merger Guidelines (currently under revision) indicate that the ACCC expects merger parties to notify it in advance of completion if the products of the merger parties are either substitutes or complements, and the merged firm would have a market share of greater than 20% in any relevant market. This latter threshold is low by international standards and does not represent any hard and fast rule about when a proposed merger should be notified to the ACCC.
The ACCC will be made aware of transactions which are notified to FIRB for foreign investment approval and this may trigger ACCC review of the transaction even if the merger parties have not notified the ACCC of the transaction. As noted above, this is something to consider when determining whether, and at what time, to notify the ACCC.
The ACCC is proactive in relation to high-profile multi-jurisdictional mergers and it is common for the ACCC to write to merger parties to enquire about a proposed transaction which is the subject of rumours in the media. Through this approach the ACCC puts merger parties on notice that the ACCC is monitoring the transaction and/or considers that a review of the transaction is necessary.
Minority interests – does the ACCC apply a "control" or "strategic interests" test?
There is no "control test" or threshold shareholding which triggers the application of Australian merger law and all mergers are potentially reportable.
For the purposes of the ACCC's analysis of whether a merger has the effect of substantially lessening competition, the acquisition by one company of a minority, controlling interest in another company will be treated in the same way as an acquisition of all the shares of the target company. Factors which the ACCC takes into account when considering whether a shareholding and/or other interest is sufficient to deliver control include:
- the ownership distribution of any remaining shares and securities (including pre-emption rights, ordinary and preference shares, special shares, or restrictive covenants or special benefits attaching to shares);
- the distribution of voting rights (including any special voting rights);
- whether other shareholders are active participants at company meetings;
- any contractual or other arrangements between parties, or terms in a company's constitution;
- the rights and influence of any significant debt holders; and/or
- the composition of the board of directors.
For the ACCC, a level of ownership less than a controlling interest may also alter the parties' incentives and may give rise to a substantial lessening of competition. If an acquisition does not deliver control, the ACCC may consider a range of factors to assess the parties' residual incentives:
- inter-company relationships;
- director’s duties;
- the actual ownership share of the minority interest;
- the existence of any contractual or other arrangements that may enhance the influence of the minority interest;
- the size, concentration, dispersion of, or rights attached to, other shareholdings; and/or
- the board representation and voting rights of the minority interests.
How can the ACCC oppose a merger?
For informal clearance applications, the ACCC may issue an objection letter and will still need to apply to the Federal Court for an injunction should the merger parties seek to complete a merger where the ACCC has not provided informal clearance. This can add significant cost and delay to the merger clearance process.
In the case of merger authorisations, the ACCC is required to publish a written decision outlining the basis of its decision. If the decision refuses merger authorisation, it may be subject to an application for (limited) merits review in the Tribunal. Alternatively, the acquirer may apply directly to the Federal Court to seek what is known as a negative declaration that the proposed merger does not have the effect or likely effect of substantially lessening competition ie. does not breach section 50 of the CCA.
Can the ACCC review completed mergers?
Although the merger clearance process in Australia is voluntary, the ACCC may intervene in a completed transaction if it considers that it has or may have the effect or likely effect of substantially lessening competition in a market in Australia.
In recent times, the ACCC has reviewed a number of completed mergers. These have been domestic rather than multi-jurisdictional in nature. In none of those cases has it taken legal action to unwind the merger and seek remedies.
Unlike some overseas regulators, the ACCC itself does not have the power to impose a hold-separate or other type of initial enforcement orders while it is reviewing a completed merger. The ACCC would need to apply to the Federal Court for an injunction.
Do foreign-to-foreign mergers need to be notified?
Parties sometimes seek informal clearance of a foreign-to-foreign merger but there is no legal requirement to do so. Parties may do so where a merger outside Australia involve bodies corporate incorporated or carrying on business in Australia, or where the foreign-to-foreign merger results in a controlling interest being acquired in a corporation which carries on business in Australia, and the merger might have the effect or likely effect of substantially lessening competition.
The new merger control regime also now contains provisions permitting the ACCC to authorise an overseas merger. An "overseas merger authorisation" means a merger authorisation that is not an authorisation for a person to engage in conduct to which section 50 would or might apply" (in which case the application would be a merger authorisation). The default period for the ACCC to determine an application for an overseas merger authorisation is within 30 days of receipt of the application and, if it does not do so, the ACCC will be deemed to have granted the authorisation. As with the process for a merger authorisation, the ACCC may extend this period by agreement with the applicant.
What other changes were made to Australia's competition laws?
In addition to changes to the Australian merger control regime, in November 2017 new prohibitions were also introduced for:
- concerted practices which have the purpose, effect or likely effect of substantially lessening competition; and
- companies with significant market power engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition (the Australian analogue of Europe's "abuse of dominance" in Article 102 of the TFEU).