When must you report an acquisition of minority shareholdings to the Australian Competition and Consumer Commission (ACCC)? It's a perennial question in Australia, and also a hot topic overseas, with the European Commission recently issuing a public consultation focusing on whether the scope of the EU Merger Regulation should be extended to allow reviews of acquisitions of non-controlling minority shareholdings. This consultation has generated heated debate, with many respondents opposed to an extension of the European Commission's powers.
In this article we'll discuss both the reportability and competitive assessment of acquisitions of minority shareholdings in Australia (in particular, where no "control" over the target entity is acquired).
The legal and policy framework for merger reviews of minority shareholdings
Unlike in the EU, there is no "control test" (or threshold shareholding) that triggers the application of section 50 of the Competition and Consumer Act 2010 (Cth), which governs the merger review of transactions. All acquisitions are therefore potentially reportable to the Australian Competition and Consumer Commission (ACCC). The Act instead focuses on the effect of the relevant acquisition on competition, that is, whether the transaction results in a realistic prospect of a substantial lessening of competition in an Australian market.
For the ACCC, even a level of ownership significantly less than a controlling interest may alter parties' commercial incentives and may serve to substantially lessen competition. Where an acquisition does not deliver control, the ACCC may consider a range of factors in assessing parties' commercial incentives and their ability to influence the target's conduct.
The most important factors are:
The actual ownership share of the minority interest
In Illyria Nominees/Ten Network Holdings (2011), the ACCC considered that the acquisition of around 9% of Ten Network Holdings by Illyria Nominees could alter the incentives of the parties, publicly stating: "[w]hile the recent review of acquisitions of minority interests in [Ten Network Holdings by Illyria Nominees] was discontinued, it was not because we found that those minority shareholders lacked the ability and incentive to change the strategic direction of the company − even if they may not have controlled it outright."
By contrast, in Seven Group Holdings/Prime Media Group (2011), the ACCC considered that Seven's 11.4% shareholding in Prime would not trigger an ability to control or influence Prime's commercial conduct.
The size, concentration, dispersion of, or rights attached to, other shareholdings
In Air New Zealand/Virgin Australia (2013), ANZ sought to increase its interest in Virgin from c.6% to c.26%. The ACCC concluded that ANZ was unlikely to obtain a "material ability to influence" Virgin through the shareholding, because several other large, active shareholders would remain on the register.
The board representation and voting rights of the minority interests
In Airline Partners Australia/Qantas Airways (2007) the ACCC considered that Macquarie would only obtain "limited control" over the acquiring entity of Qantas (APA) from a 14.7% equity stake and the ability to appoint a single director to a Board of 12 persons. However, the ACCC also noted that Macquarie had "a greater level of influence" over the company responsible for the management of Sydney Airport (a key supplier to Qantas and other airlines). Macquarie held an 18% stake in that company and had a right to appoint two out of five directors. The ACCC therefore proceeded to examine competition concerns related to preferential supply by that company to Qantas.
The existence of any contractual or commercial arrangements that could enhance or negate the influence of the minority interest
In Experian Australia Credit Services JV (2011), the ACCC reviewed a transaction pursuant to which six banks each took 4% shareholdings in a joint venture (JV) to provide credit reporting services. Experian Group, a global provider of credit reporting services, held the remaining 76%. The banks were the largest purchasers of credit reporting services and important providers of key credit information to the JV's competitors.
The ACCC considered whether (through the financial institutions' participation in the JV) they would have the ability and/or incentive to restrict the supply of credit information to competitors. Competition risks were discounted, largely because Experian Group would have had no commercial incentive to discriminate in favour of its co-shareholders and it would have held operational control of the JV.
The ACCC may also consider inter-company relationships and directors' duties in making its determinations (see in particular APA/Qantas). However, the Chairman has stated in the past that "it is not sufficient for parties to point to directors’ duties in arguing acquirers of minority interests do not have the ability or incentive to lessen competition."
An evolving attitude to minority acquisitions, but some brightline guidance too
The ACCC's approach to minority acquisitions has evolved somewhat in recent years and this new approach has filtered into the cases analysed above. The ACCC's current Chairman said in the early stages of his term "[w]e will be casting a more critical eye over acquisitions of minority stakes… where we consider competition issues arise. Minority shareholdings can affect both the ability of the acquirer to influence or control the target and the incentives to compete."
The conclusion to draw is that the assessment of the reportability and potential competitive effects of minority acquisitions is fact-specific and must be approached with great caution on a case-by-case basis. However, some brightline guidance as to potential ACCC reactions to acquisitions of minority stakes is below.
Unlikely to be reportable
Seek competition advice where there are specific features of the potential transaction or Australian market which could impact the analysis
Competition advice may be sought where there are specific features of the potential transaction or Australian market which could affect competition or parties' commercial incentives
Competition advice should be sought in the majority of cases
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