On 20 April 2021, the Australian Competition and Consumer Commission (ACCC), UK Competition and Markets Authority (CMA) and German Bundeskartellamt ("Federal Cartels Office") published a joint statement on merger control enforcement to:
"highlight to businesses, advisers, courts and governments that there is a common understanding across competition agencies on the need for rigorous and effective merger enforcement."
The key message of the joint statement is:
"competition agencies have an opportunity to reassess their approach so that a degree of uncertainty about future developments in the relevant markets does not lead, by default, to a clearance decision. In practice, this may mean intervening in a merger to seek remedies to maintain competition or, where that is not possible, prohibiting the merger."
Framed as a call to action as much as a plan for their own jurisdictions, the joint statement urges regulators to challenge the presumption that mergers are generally efficiency-enhancing, and that mergers should only be restrained where there is serious economic detriment.
It also places strong and effective merger control as a centrepiece of each country's economic recovery from the COVID-19 pandemic: the position put by the regulators in the joint statement is that rather than relaxing merger control, restraining more mergers will actually enhance economic recovery by ensuring that the structure of markets and competition within them remains sound over the longer term.
This theme is consistent with emerging perspectives in other jurisdictions such as the United States, where the recent change in the Administration is expected to bring greater focus towards merger assessments that ensure markets retain structural integrity.
For Australia, the UK and Germany, the joint statement means that merging parties should expect competition authorities to take more time to assess even small acquisitions as well as scrutinise benefits claimed to arise from mergers with scepticism and to err toward restraining mergers where their competitive impact is uncertain, rather than risk long-term structural change and loss of rivalry (which cannot be undone once a merger is approved). Flowing from this, merger parties should prepare for ACCC reviews of complex mergers to be protracted.
In Australia, this narrative is already familiar, with the ACCC actively critical of what it views as a high threshold to prove that a merger is likely to reduce future competition when compared to the likely market outcome if the transaction is blocked. This comparison is referred to as the 'forward looking counterfactual test' under Australian merger laws. The ACCC has suffered a string of high-profile losses in merger litigation cases in Pacific National/Aurizon (2020/1), Vodafone/TPG (2020), and Tatts/Tabcorp (2017).
Impetus for a shift in enforcement strategy
The statement is a direct response by the authorities to three key issues.
First, the complexity of applying their respective forward-looking merger control regimes, which require the authorities assessing the merger to form a view on likely future market structure and competition with and without the merger (the "counterfactual"). In Australia, the ACCC has not won a contested merger case in nearly two decades, and ACCC Chair Rod Sims has increasingly been a vocal critic of the focus on the counterfactual, which he says "in many cases risks overlooking the likely anticompetitive effects of the merger itself … insufficient weight is placed on the risks to competition … [with] the net result that our merger control regime is skewed towards clearance".
Second, the added complexity of this task in light of "a marked increase in the number of merger reviews involving dynamic and fast-paced markets".
Third, a clear role for antitrust in the path to economic recovery out of COVID-19. The thrust of the joint statement is that the authorities see effective merger control – ie. merger control which blocks "problematic" mergers, thereby preserving competition and promoting innovation and investment, as opposed to merger control which permits acquisitions on the basis of efficiencies – as the ticket out of economic malaise.
The joint statement comes as the CMA in particular finds itself charting a new course in the post-Brexit landscape, with UK national merger control law now applying in parallel with EU rules, which means the CMA can conduct investigations in parallel with the European Commission. It also occurs at a time where the CMA is blocking about 70% of deals which reach a "Phase 2" in depth assessment, and calling for retrospective review of merger decisions to test whether the claimed benefits in fact eventuated and previous merger decisions over the past decade were decided correctly.
Key elements of the joint statement
The joint statement charts the various challenges facing international merger control against the backdrop that "ineffective merger control that does not properly scrutinise mergers can cause long-term negative consequences for businesses and end consumers".
First and foremost among these is the inherent uncertainty in the "forward looking counterfactual test" which requires predictions to be made about the future, and where the authority bears the onus of proof.
The joint statement warns against uncertainty being the reason that mergers are cleared:
"… uncertainty as to the future should not necessarily mean that potentially anticompetitive mergers are cleared because of that uncertainty: a seemingly small transaction can cause a competitive market to tip in an anticompetitive direction …
When faced with uncertainty, it is therefore important that competition agencies are willing to challenge the presumption often promoted by merging firms and their advisers that mergers are generally efficiency-enhancing and should only be restrained where there is certainty that serious detriment will result."
The joint statement also stresses:
- that weakened economic conditions should not lead to a relaxation of the standards for merger assessment, such as focusing on short-term market features, a greater willingness to accept "failing firm" arguments, or giving greater weight to speculative claims about the impact of the pandemic;
- the challenges posed by mergers in fast-paced dynamic markets which "involve hundreds of products or services in related markets";
- the potential for competitive harm to arise from transactions involving "acquisitive tech giants with activities across multiple current or future markets";
- the harm to consumers which may arise from incumbents seeking to protect their market position by acquiring smaller firms or potential entrants in adjacent markets; and
- it is preferable that remedies are structural not behavioural.
What's next for Australia?
The forward looking counterfactual assessment is central to the way in which the Courts have interpreted the substantial lessening of competition legal test as well as the ACCC's own Merger Guidelines. Without a change to the law, it will be difficult for the ACCC to do away with a counterfactual assessment. The ACCC has already signalled merger reform as an area of focus in 2021, and market participants should expect the ACCC to push the Australian Treasury to announce publicly its proposals for change to Australia's merger laws and framework in the middle of 2021. We'll need to wait and see whether this takes the form of a discussion paper, further direct lobbying of Government or, even, exposure draft legislation for comment from interested stakeholders.
When addressing merger control reform, Mr Sims has stated that the regime needs to be more "fit for purpose". What exactly is meant by this phrase has not been specified. Whatever the exact details of the proposed changes, market participants should expect that the ACCC will seek to remove what it sees as a "bias towards clearance" which requires "rebalancing" the approach to merger control – for example, through the introduction of rebuttable presumptions to shift the onus of proof to the merger parties to show that the merger is not anti-competitive (something Mr Sims has toyed with in the past), amending the merger factors in section 50(3) to put greater emphasis on potential competition being lost, barriers to entry being raised or competitors being foreclosed as a result of the transaction, and, possibly, special rules for mergers in certain sectors such as so-called "digital mergers".
Regardless, what is clear is that the ACCC wants its merger review focus to be on what competition may be lost as a result of a merger rather than predicting an uncertain world, and wants courts to do the same.