30 Aug 2021

Radical changes proposed to re-engineer Australian merger clearance process

The Australian Competition and Consumer Commission (ACCC), concerned about increased market power and concentration in industry in Australia, is proposing a radical overhaul to enhance the ACCC's ability to prevent consolidation. First, the ACCC wants a mandatory filing regime of all proposed merger or acquisition transactions above a yet to be defined threshold. Second, the ACCC wants the clearance test to be reframed so that where there is uncertainty about whether a transaction might have an anti-competitive effect, the default position will be denial of clearance. That is a radical change from the current position – namely, that, where it cannot be demonstrated there is a "realistic possibility" or "real chance" that a transaction will have an anticompetitive effect, clearance is granted.

What's behind the proposed changes to the merger clearance regime

The ACCC says that its proposed merger reforms will bring Australia's merger clearance regime into alignment with international models. We say it will add more complexity and cost to clearance processes in Australia and potentially, if all of the ACCC's changes were adopted, could lead to more deals being blocked.

Initial media reports suggest the Treasurer is somewhat lukewarm on the proposals but it is likely debate will continue about these issues for some time.

The ACCC has been vocal in pushing for reform of Australia's merger regime on the basis that Australia's merger control is out of step internationally and not "fit for purpose".

On 27 August 2021, ACCC Chair Rod Sims delivered a speech arguing that the current regime overly favours merger parties by placing too much of an evidentiary burden onto the ACCC to convince the Federal Court to uphold ACCC decisions and block questionable transactions.

The ACCC says that the requirement to prove the likely future state of competition "with and without" the merger to the civil standard of proof presents unacceptable challenges. Third parties likely to be adversely affected by the transaction are often reluctant to provide evidence; executives from merger parties are self-interested and internal documents carefully curated.

The ACCC acknowledges it has not been successful in preventing mergers that it deems problematic – and so is pressing for radical change that it says will bring the Australian regime closer to that seen in other jurisdictions. While the ACCC has said that it is, by proposing regime, intending to start a debate in Australia about change, it is clear that the ACCC proposal has been meticulously thought through – right down to particular wording.

Specifically, the ACCC is looking to have the following changes implemented in Australia:

  • A new formal merger review process, with a mandatory filing regime and a ban on the parties closing the deal until the ACCC has granted clearance which would be the only means by which clearance could be granted;
  • Changes to the mergers test in section 50 of the current law to lower the threshold for deals that can be blocked to cover cases where there is a possibility of competition being reduced; and
  • Reforms to deal with acquisitions by large digital platforms.

A new mandatory merger notification process

The new formal merger review process proposed would introduce mandatory notification of all deals above a defined threshold. A suspensory regime would also be implemented, preventing closing without ACCC clearance as well as a set time period for review.

To complement the thresholds, which the ACCC acknowledges would need to be carefully set, the ACCC is also proposing a "call in" power for those transactions that are "potentially problematic" but which fall below the thresholds. This power would bring these transactions under the formal process and, in the ACCC's view, discourage transactions being structured in ways to avoid notification. The ACCC has not unveiled its preferred time period for the "call in" power to be operative – but has said that the period should be a matter for debate.

The ACCC would like to retain some aspects of the current voluntary merger clearance regime – ie. for acquisitions that fall below the thresholds, merger parties would continue to be able to request ACCC clearance based on the current pre-assessment process. The ACCC is also proposing a "notification waiver" for acquisitions which are above the thresholds but which are unlikely to raise serious competition concerns.

Of significance, while the ACCC would be obligated to provide substantive reasons for its decision to clear, or decline to clear, proposed acquisitions, its decisions would be subject to limited merits review by the Australian Competition Tribunal. That is, the Federal Court would no longer be directly involved in any aspect of the merger clearance process.

The ACCC also proposes that on review of ACCC decisions to block a transaction the Tribunal would only be able to have regard to the material which was before the ACCC when it made its decision. This would ramp up the filing obligations and costs for the merger parties to make sure they provide the ACCC with a fulsome analysis of the competition issues affected by the transaction, because they will be limited on appeal to that material.

This limited review process would eliminate what has been a fruitful underpinning of Federal Court decisions to permit mergers, namely cross examination of both the merging parties' witnesses and those that give evidence for the ACCC. In all recent contested merger cases before the Federal Court, examination of witnesses has produced compelling evidence as to why a merger should be permitted. The ACCC no longer wants this avenue to be available – although it will retain its own right to undertake examination of witnesses as part of its merger clearance process.

Changes to the merger test

Under the proposed formal regime, the applicable test would be whether the ACCC is satisfied the proposed acquisition is not likely to have the effect of substantially lessening of competition. The word "likely" is not defined but has been interpreted in case law to mean, at time of writing, "a real commercial likelihood".

The ACCC proposes that a definition be included in statute and that the threshold be reduced; "likely" should be defined as "a possibility that is not remote". This would, in the ACCC's view, make it clear that, for a breach of the merger law to be established it is not necessary for the ACCC or Tribunal on review to be persuaded on the balance of probabilities that there is a real commercial likelihood of a substantial lessening of competition. All that would be required is a possibility that is not remote. This would firmly move the burden to the parties to show no significant possibility of a loss of competition. That is a substantive change to the existing law and has potential ramifications for other prohibitions of conduct that is likely to substantially lessen competition, such as concerted practices.

The ACCC is also proposing that:

  • the existing merger factors in section 50 be revised to focus on the structural conditions for competition that are changed by the acquisition to the detriment of competition. The precise changes sought have not been notified;
  • an acquisition by an acquirer which has a position of substantial market power be deemed to be problematic if, as a result of the acquisition, that position of substantial market power would be likely to be entrenched, materially increased or materially extended. The precise language of "entrenched, materially increased or materially extended" has been proposed by the ACCC and has no precedent in any other provisions of the existing law; and
  • to the extent that merger parties enter into ancillary agreements as part of their transaction, the competitive effects of such agreements be considered together with the merger as part of the assessment. This amendment is intended to prevent "parties taking steps to change the counterfactual or take advantage of the anti-overlap provisions in order to get anti-competitive mergers cleared".

Digital platforms

The ACCC believes digital platforms are special – and it is not convinced that the proposals outlined above "go far enough to enable us to scrutinise and, if necessary, block certain critical acquisitions by large digital platforms".

Accordingly, the proposal is that special rules would be introduced to regulate acquisitions digital platforms propose including acquisitions of nascent firms. The ACCC has not specified any particular large platforms which would be targeted by this reform at this time.

Further, the ACCC announced that it would also be considering the need for wider sector specific rules to govern the conduct of digital platforms in order to address the competition and consumer concerns present in digital platform markets. That consideration, and the design of any such rules, would be included in the ACCC's Digital Platform Services Inquiry report due to be provided to the Treasurer in September 2022. This review is driven by what the ACCC says is the need for "a multi-pronged approach" to both prevent further entrenchment of market power in digital platform markets and to address the consequences of that power for business users, consumers and competitors.

What if anything happens with the ACCC's proposals?

None of what is set out in this article is set in stone – the ACCC has been clear that it wants to open the debate, and that it expects debate on its proposals.

The decision-maker is also not the ACCC – whether there is any amendment to the law is a matter for Government. The Australian Treasurer, Josh Frydenberg, has already said following Mr Sims' announcements that he does not want to make any changes that increase regulation while attempting to drive economic recovery from COVID-19.

Many proposals put before the ACCC are cleared with little scrutiny and it has never been suggested the vast majority have given rise to issues in the national economy. However the proposal seems to dramatically increase the scrutiny of non-problematic proposals with an associated drag in terms of delay and expense (as is seen overseas where there is mandatory notification and suspensory operation) in order to improve ACCC prospects of blocking those few that it has failed to date to block.

The thinking that sits behind these proposals is plain. It may be driving the thinking of the ACCC when it examines current transactions under the existing informal merger clearance regime. It is likely driving the thinking of the ACCC when it considers the activities of digital platforms and transactions in the digital economy.

So considering a transaction in Australia? If you'd like to understand how this thinking could affect you, please contact us.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.