The ACCC will appeal against the Federal Court's rejection of its attempt to block Metcash's acquisition of the Franklins supermarket business.
The outcome of the appeal is likely to have a major impact on the ACCC's approach to future mergers and acquisitions. If Justice Emmett's view of the correct test is upheld, the ACCC could face a much tougher challenge in the future in its consideration of the competition aspects of mergers.
What will the ACCC base its appeal on?
The ACCC has identified two key grounds of appeal:
the Court erred in its approach to market definition by failing to identify a relevant market for the wholesale supply of packaged groceries to independent retailers; and
the considerable weight given by the Court to the stated preferences and intentions of the seller establishes an onerous test that "would make it an unrealistic task for the ACCC in future matters to establish what is likely to happen in the market if a merger doesn't proceed".
According to ACCC Chairman Rod Sims, "If this judgment goes unchallenged it may entrench the principle that the intentions and preferences of the seller are critical to deciding how likely it is that alternative buyers will have a real chance of success".
In the ACCC's view, this cannot be the correct approach to establishing what would happen in the absence of the proposed transaction (that is, the counterfactual).
Why is the counterfactual so significant in merger analysis?
We are not surprised at the ACCC's decision to appeal on the second ground concerning the applicable test for the likelihood of the counterfactual occurring.
The counterfactual is the benchmark against which a merger proposal is judged by the ACCC. The ACCC must identify the future state of the market without the acquisition and compare that to the future state of the market with the acquisition. It is on this basis that the ACCC undertakes its competition assessment.
In the decision under appeal, Justice Emmett concluded that the ACCC must establish on the balance of probabilities "what the future state of the market will be, both with and without the proposed acquisition. That is, the Commission must satisfy the Court that its counterfactual is more probable than any competing hypothesis advanced to suggest that there is no real chance of competition being substantially lessened as a result of the acquisition".
This sets a high burden for the ACCC that could have significant implications for future section 50 merger analyses.
What does this decision mean for future ACCC merger decisions?
If Justice Emmett's approach is not overturned on appeal, the ACCC will likely bear a due diligence-style burden to block a merger on the basis of a potential alternative bidder with fewer competition concerns:
- the balance of probabilities test would likely require the ACCC to identify credible evidence that the vendor would be willing to sell to the alternative bidder;
- this would likely require the ACCC to at least gather evidence of the alternative bidder's financial and operational capability and specifically consider the vendor's stated intentions; and
- the ACCC would also be required to consider whether the alternative bidder would then be likely to acquire the target and run it in a way that would offer significantly greater competition.
This is an evidential burden significantly beyond that required of the ACCC in establishing its counterfactual as a "real chance" or a "commercial likelihood" (as per the real chance test contemplated by Justice French in the AGL case).
The appeal issue – determining the 'counterfactual' to the merger proposal
The ACCC argues that the correct test is whether a counterfactual is "sufficiently credible to be more than a mere possibility, and to assess the likelihood of a substantial lessening of competition on the basis of that counterfactual".
If a real chance of a substantial lessening of competition is the test (consistent with authority and as accepted by Justice Emmett), it seems to us that adopting a balance of probabilities test for identifying the relevant counterfactual in the first place is inconsistent with the relevant thresholds applicable to the overall competition analysis.
On the other hand, Justice Emmett did consider the ACCC's argument that the ACCC need only establish a real chance that one of its counterfactuals would come to pass. Yet, even on that lower test, he was not persuaded that there was a real chance that the counterfactuals contended for by the ACCC would come to pass if the Metcash acquisition did not proceed.
The ACCC may therefore run into difficulties on the facts of the case, because Justice Emmett found that the rival bidders for Metcash faced so many difficulties that it was only a matter of speculation that they would deliver an offer which Franklins' owners would be likely to accept.
It would nevertheless remain open for the Full Court, even if it dismisses the ACCC's appeal, to comment on the test as formulated by Justice Emmett. Any such comments would be significant for future merger analyses (even if not for the Metcash proceedings themselves).
You might also be interested in ...