Australia: Merger Control

Key points

Australia’s merger control regime is contained in the Competition and Consumer Act 2010 (Cth) (the CCA), and is vigorously administered by the Australian Competition and Consumer Commission.

The CCA prohibits direct and indirect acquisitions of shares or assets that would or would be likely to have the effect of substantially lessening competition in a market in Australia, or a state, territory or region of Australia.

The CCA also applies to offshore acquisitions of shares where the acquisition would result in a change of control of an Australian subsidiary and the change of control of the Australian subsidiary would be likely to substantially lessen competition in Australia and would not be offset by public benefits.

In the 2011–2012 financial year, the ACCC assessed 340 acquisitions. Of these, 250 were assessed without requiring a public review, while 90 underwent a public or confidential review. Of the 90 reviewed, the ACCC did not oppose 60, publicly opposed one and accepted remedies in three. The ACCC issued summonses to compel the production of information or documents (or both) and to cross-examine individuals under oath (usually about the counterfactual scenario or the basis of an objection to an acquisition) in a small number of its assessments.

The ACCC finalised its review of a number of complex cases in 2012. In a number of instances, particularly where remedies were offered by the parties to address concerns raised by the ACCC, the timeline for these reviews stretched beyond six months. In part, this has been attributed to the Federal Court of Australia’s decision in November 2011 to reject the ACCC’s application for an injunction to prevent Metcash’s acquisition of Franklins, a ruling which prompted the ACCC to be more rigorous in gathering evidence to support its theories of harm. The ACCC also appears keen to increase levels of transparency and engagement with parties throughout the review process, but acknowledges that this may also create delays. Despite its stated goal of greater transparency, there is still no provision under the ACCC’s informal review process for parties to have access to the ACCC’s file.

There also seems to be a trend towards the ACCC raising concerns on the basis of less typical theories of harm. For instance, in FOXTEL’s acquisition of Austar (in the subscription television services sector), despite no material overlap between the parties’ activities (since they provided subscription television services in different geographic areas), the ACCC identified concerns on the basis of a loss of likely future competition between the parties. The case was resolved after a nine-month review with remedies restricting FOXTEL’s ability to acquire certain content rights on an exclusive basis.

In non-complex cases, the ACCC has committed to reducing review periods, and a significant number of cases in 2011–2012 were cleared without a public review in less than two weeks. Australia’s merger control merger regime is not subject to turnover thresholds and does not contain a mandatory notification procedure. Rather, the ACCC’s policy is to further investigate proposed acquisitions that would be likely to result in:

• the acquirer having a market share of 20 per cent or more; and
• the products of the merger parties being either economic substitutes or complements.

Where a proposed merger would be likely to substantially lessen competition in Australia and the parties proceed with the merger without first having obtained clearance from the ACCC, they bear the risk that the ACCC will seek an injunction, or orders for divestiture or to void the acquisition, civil pecuniary penalties of up to A$10 million in the case of corporations and up to A$500,000 for individuals involved in the breach, orders disqualifying individuals from holding management positions, and orders for legal costs.

The practical effect of the ACCC’s enforcement powers is that Australia has a much-used voluntary notification procedure for mergers.

An acquirer of shares or assets may notify the ACCC of their proposed acquisition as a matter of courtesy, or seek informal or formal clearance for their proposed acquisition from the ACCC, or (based on public benefits) apply to the Australian Competition Tribunal for authorisation of their proposed acquisition. The most common procedures are notification as a matter of courtesy and applications for informal clearance.

There have been no applications for formal clearance in Australia to date. However, the formal clearance process may be used in Australia in the future, especially where the acquirer is expecting complaints and desires greater transparency around the identity of the complainants and nature of the complaints than is allowed under the informal clearance procedure. There have been no applications for authorisation of a merger in Australia since 2002.

Applicable legislation

Sections 50 and 50A of the CCA regulate acquisitions of shares or assets.

Section 50 of the CCA

Section 50 prohibits direct and indirect acquisitions of shares or assets by persons or corporations that would, or would be likely to have the effect of substantially lessening competition in a market in Australia, or a state, or a territory, or a region of Australia.

Under the CCA, a corporation is defined to include a foreign corporation registered in Australia, a trading or financial corporation formed within the limits of Australia, a body corporate incorporated in Australia, or the holding company of a corporation.¹

The CCA defines ‘acquisition’ to include the acquisition of any legal or equitable interest in an asset or shares, and has been held to include the creation of interests such as an option over shares, as this constitutes the conveyance of an equitable interest in the shares.²

Section 50A of the CCA

Section 50A applies to offshore acquisitions of shares where the acquisition would result in a change in control of an Australian subsidiary, and the acquisition would be likely to have the effect of substantially lessening competition in Australia, and the acquisition would not be likely to result in a countervailing public benefit. If the elements of section 50A are satisfied, the Australian subsidiary (ie, the target’s subsidiary) can be prevented from carrying on business in the affected Australian markets.

Non-overlap provision

Section 50A is subject to a non-overlap provision, which states that where an acquisition is subject to sections 50 and 50A, the acquisition shall be subject to section 50. The combination of the non-overlap provision, the broad scope of section 50 and the approach the ACCC adopts in relation to offshore acquisitions that result in a change of control of an Australian subsidiary that would be likely to substantially lessen competition in a market in Australia mean that, in practice, there are very limited circumstances where section 50A will apply. Accordingly, the focus of merger control in Australia is the application of section 50.

Extra-territorial operation

Section 5(1) of the CCA extends section 50 to conduct outside Australia engaged in by Australian citizens or residents, as well as corporations carrying on business in Australia and foreign corporations that are registered in Australia. The section allows the prohibition on acquisitions that are likely to have the effect of substantially lessening competition in Australia to apply to transactions that occur offshore.³

Unlike section 50, section 50A does not require the acquirer to have a direct territorial nexus with Australia and would apply to acquirers that are not incorporated in Australia, or carrying on business in Australia or registered as foreign corporations in Australia who are proposing to engage in a foreign-to-foreign acquisition that results in a change of control of an Australian subsidiary.

Remedies

Injunctions and civil pecuniary penalties

Only the ACCC has the power to seek an injunction to prevent completion of a proposed merger and to seek civil pecuniary penalties for mergers that result in breaches of the CCA. This is a deliberate policy position in Australia, which is primarily intended to prevent the competition laws from being used to frustrate a transaction for strategic commercial purposes by private entities (such as the merger parties’ rivals).

Declarations

Third parties with a sufficient interest in a proposed merger have the ability to seek a declaration from the Federal Court that the merger would result in a breach of section 50 of the CCA. If the Court were to grant the declaration, the effect would be akin to an order to injunct a merger from completing.

Divestiture

The ACCC and third parties may apply to the Federal Court of Australia for orders for divestiture and to void acquisitions ab initio, but they must do so within three years of completion of an acquisition.

Enforceable undertakings

Where the ACCC has concerns about the competitive effects of a merger, it may be possible for the parties to negotiate with the ACCC to accept court-enforceable undertakings pursuant to section 87B of the CCA.⁴ The Commission has typically accepted undertakings in the context of mergers:⁵

• to ensure that an acquisition is not completed until the ACCC has had the opportunity to conduct the appropriate market inquiries; or
• to remove or mitigate potential anti-competitive effects of the merger.

Once the ACCC accepts section 87B undertakings, the undertakings are placed on a public register, subject to limited rights to claim confidentiality.

The ACCC’s policy is to require divestiture of shares or assets made to remove or mitigate the anti-competitive effects of mergers, before or at the time of completion of the headline transaction. Exceptions to the policy are rare but possible.

The test – likely to substantially lessen competition

Section 50(3) of the CCA contains a non-exhaustive list of factors that must be considered when determining whether an acquisition would be likely to have the effect of substantially lessening competition in a market. The factors are as follows:

Market concentration

This factor requires assessment of the changes in market concentration that would be caused by the merger.

The ACCC’s policy is to further investigate proposed acquisitions that would be likely to result in:

• the acquirer having a market share of 20 per cent or more; and
• the products of the merger parties being either economic substitutes or complements.

In some cases, the ACCC uses the Herfindahl-Hirschman Index (HHI) as a ‘preliminary indicator’ to assess the likelihood that a merger may pose competition concerns. The ACCC is less likely to examine mergers that produce:

• an HHI of less than 2,000; or
• an HHI of more than 2,000, but with a pre- and post-merger difference (or ‘delta’) of less than 100.⁶

Barriers to entry

This factor requires assessment of the relative height of any barriers to entry and expansion. A barrier to entry may include any feature of a market that prevents, limits or discourages new entry (such as an extensive regulatory approval process), or otherwise places new entrants at a competitive disadvantage (such as high sunk costs, or where existing participants enjoy entrenched vertical relationships), or that impedes expansion.

In assessing the height of barriers to entry, the ACCC takes the view that new entry ‘must be timely, likely and sufficient in scope and nature to be effective’.⁷

Degree of countervailing power

This factor requires assessment of the extent to which customers have the capacity to impose demand-side constraints on the merged firm. For countervailing power to be an effective constraint, the ACCC has made clear that it is not sufficient merely for the relevant market to have commercially and/or financially substantial customers. Rather, the customers must have the ability to bypass firms, or to credibly threaten to do so.⁸

The degree of vertical integration

This factor requires consideration of whether or not the merged firm may be able to take advantage of any vertical integration in a way that would enable it to use its market power at one stage of the production process to foreclose access by rivals in upstream or downstream markets to a key input, thereby limiting the competitive capabilities of those rivals.

Removal of a vigorous and effective competitor

This is an important factor in the ACCC’s assessment of proposed mergers. A firm without a substantial market share may still be considered a vigorous and effective competitor if it behaves in a manner that is in some way ‘maverick’, such as by being a price leader or innovator. Such participants often act in a way that makes their commercial strategy less predictable than that of other firms. The acquisition of such a firm by a competitor may have greater risk of substantially lessening competition, by virtue of the fact that it removes a key competitive constraint from the acquirer, and may also mean that the post-merger market is more susceptible to coordinated conduct.⁹

In contrast, if it can be demonstrated that the target firm is not the closest or most vigorous competitor to the acquirer, this can assist in arguments that the merger will not substantially lessen competition because the constraints on the merged firm presented by other competitors will remain in place in the future market.

Acquirer’s ability to significantly and sustainably increase prices or profit margins

This factor is directed at assessing whether the acquisition itself will give the merged firm the ability to increase prices or profit margins. Factors that may allow such price increases but that arise independently of the acquisition (such as an increase in global commodity prices, for example) are not relevant to the assessment of the effect of the acquisition on competition in the relevant markets.

Availability of substitutes

The alternative sources of supply that customers could look to, as a means of constraining the merged firm in a post-acquisition environment, is also a factor. This could include functionally differentiated products that consumers are able to switch to in preference to those supplied by the merged entity, in the event of any attempt to increase its prices post-acquisition.

Dynamic characteristics of the market: growth, innovation and product development

This factor allows weight to be given to matters such as the expected level of growth (or contraction) in the size of the market in real terms, the likelihood of technological innovation and the potential for the evolution of dynamic factors on both the demand side (such as customer preferences) and the supply side (such as transport and logistical matters).

The ACCC requires any assessment under this factor to be supported by ‘robust evidence’ (rather than mere speculation), so demonstrable market characteristics and trends are likely to be of assistance in assessing the competitive impact of a merger. For example, the ACCC acknowledges that a market characterised by rapid product innovation may be less stable, and therefore any increases in market power gained via a merger may be only transitory.¹⁰

Import competition

This factor requires assessment of the level of actual and potential competition from foreign firms into Australia. Import competition (or the potential for it) is considered by the ACCC as having the potential to constrain domestic firms from acting both unilaterally or in a coordinated fashion. The ACCC has stated that it considers this will be more likely in situations where, among other things, independent imports have comprised at least 10 per cent of total sales in the relevant market for each of the previous three years.¹¹

Coordinated effects

This factor primarily involves asking whether the remaining firms in a market would have the incentives and ability to compete less vigorously. Key indicators that the ACCC typically looks for include whether the market is sufficiently concentrated, stable and transparent (particularly in terms of pricing information), such that it would be possible for competitor firms to be able to achieve an effective level of coordination.

While theories of competitive harm in merger analysis have always noted the possibility of coordinated effects, the ACCC’s recent focus on this issue is instructive for future transactions, and merger parties should ensure they have considered the potential for such effects to arise as a consequence of their proposed transaction when approaching the ACCC for approval.

The counterfactual

The test employed in the section 50 analysis is described as a ‘future with and without’ test. This test involves an assessment of the likely future state of competition in the relevant market with the proposed acquisition, compared to the likely future state of competition in the relevant market without the acquisition. A consequence of this test is the need for assessment of a counterfactual scenario that involves the acquisition not proceeding (the ‘without’ test).

In the recent Metcash decision, one member of the Full Federal Court of Australia found that the ACCC needed to establish that it was ‘more probable than not’ that one of the ACCC’s counterfactuals would occur if the proposed acquisition did not proceed. However, another member of the Full Court found that the ACCC only needed to establish that there was ‘real chance’ that one of the ACCC’s counterfactuals would occur if the proposed acquisition did not proceed, and the third member of the Court found it unnecessary to determine the question. Until this question is resolved by another case (which may not eventuate for some time), the ACCC is likely to assert that it only needs to be satisfied that there is a ‘real chance’ of the counterfactual materialising. We do not agree with the ACCC’s position and consider that the test should be the harder test of ‘more probable than not’.

In the majority of cases, the status quo would be the most appropriate counterfactual, although this does not mean that future changes to the market that can be reasonably predicted (such as an impending new entrant) cannot be taken into account.

Merger clearance procedures in Australia

Australia’s merger control regime does not contain a mandatory notification procedure.

However, where a proposed merger would be likely to substantially lessen competition in Australia, and the parties proceed with the merger without first having obtained clearance from the ACCC, they bear the risk that the ACCC will seek an injunction, or that there will be orders for divestiture or to void the acquisition, civil pecuniary penalties, and orders for legal costs.

The practical effect of the ACCC’s enforcement powers is that Australia has a much-used voluntary notification procedure for mergers.

In practice, acquirers usually seek clearance from the ACCC in advance of completion if their proposed acquisition would:

• result in the acquirer having a market share of 20 per cent or more;
• remove a vigorous and effective competitor;
• create significant vertical integration issues or conglomerate effects;
• be likely to be referred to the ACCC by other regulators (including, for example, Australia’s Foreign Investment Review Board (FIRB), the Australian Communications and Media Authority, the Australian Securities and Investments Commission and Australia’s prudential agencies); or
• attract public attention or complaints from competitors, suppliers or customers.

The ACCC may, of its own volition, commence inquiries into the merger. This would typically involve the ACCC sending the parties a request for information about the merger.

Four options for gaining merger clearance

There are four options for gaining merger clearance in Australia:

• courtesy notification;
• informal clearance;
• formal (statutory) clearance; or
• authorisation, based on public benefits.

Courtesy approach

Informing the ACCC of a proposed acquisition, as a matter of courtesy, is an abridged form of the informal clearance process.

It is usually used where the acquirer is confident that the ACCC will not identify any substantial issues with their proposed acquisition, and their transaction documents do not contain a condition precedent to closure of the acquisition that requires clearance from the ACCC but the acquirer wishes to avoid delay as a result of FIRB seeking the ACCC’s views or to avoid a ‘please explain’ letter from the ACCC after the acquisition is announced.

Informal clearance

The ACCC informal approval process is governed by the Merger Review Process Guidelines (July 2006), as well as the analytical concepts set out in the 2008 Merger Guidelines.

It is possible to seek confidential informal clearance in circumstances where a merger has yet to be publicly announced. Once an acquisition is in the public domain, however, the ACCC will only proceed with a public review (that will include market inquiries).

There are no prescribed information requirements for a request to the ACCC for an informal merger review and no application fee is payable. However, as the ACCC will not commence a review until it has been provided with sufficient information about the transaction and its possible competitive effects, it is necessary to provide a substantive submission that sets out the reasons why the merger will not be likely to substantially lessen competition in any market, including by reference to the factors in section 50(3).

An informal clearance decision from the ACCC typically takes the form of a non-binding ‘no action’ letter indicating that, on the basis of the information before it, the ACCC does not intend to oppose the transaction.

The informal clearance process is illustrated in the diagram below.¹²

Informal clearence process

Review of informal clearance decisions

The informal merger clearance process does not enjoy any direct appeal mechanism. Where the ACCC declines to grant informal clearance, if the merger parties still wish to proceed they have the option of seeking a declaration from the Federal Court that the merger would not contravene section 50 of the CCA. Such a declaration requires a substantive Federal Court proceeding, which is likely to take at least six months.

It is unclear whether an informal merger clearance from the ACCC is a ‘decision’ susceptible to review under Australian administrative law. To the extent that it is, the relief available to parties would be limited to largely procedural remedies (such as, for example, a review of the decision by the ACCC or the publication of reasons) rather than any substantive relief.

Formal merger clearance

In contrast to the informal clearance process described above, a formal clearance decision granted by the ACCC is binding and confers statutory immunity from proceedings from any third party in relation to the merger.

The formal merger clearance process has the advantage of clear, statutory time frames. The ACCC has 40 business days in which to make a decision from the date of application. This may be extended by agreement with the parties during the initial 40-day time period, or unilaterally by the ACCC for an additional 20 business days. If the ACCC does not formally clear the merger within that time period, it is deemed to have made a decision not to clear the merger.

The ACCC’s decision not to grant a clearance is subject to a limited merits review, essentially ‘on the papers’, before the Australian Competition Tribunal. The tribunal must make its decision within 30 business days or, if it considers the matter complex, within an additional 60 days.

Applications for a formal merger clearance decision must be made on a prescribed form (Form O) that requires merger parties to provide extensive documentary and market information, including any expert economic papers on which the applicant wishes to rely. An application for a formal merger clearance also attracts a fee, currently set at A$25,000.

Subject to any claims for confidentiality, the applicant’s Form O and supporting information will be made publicly available on the ACCC’s online mergers register. Submissions received from interested market participants during the course of the ACCC’s market inquiries will also be published on the ACCC’s mergers register, subject to any claims for confidentiality.

Although the formal process has been available since 2007, it has not yet been used. This is partly because of concerns about the degree to which information in the application will be shared with third parties, the amount of information (including the strict requirements for expert reports, where they are used) required to make the application and the significant filing fee (when compared to the informal process, which does not have a filing fee).

Authorisation – public benefit test

If parties require a greater degree of regulatory certainty, they may consider seeking an authorisation from the Australian Competition Tribunal for their merger.

The tribunal may only grant an authorisation if the merger parties are able to demonstrate that the proposed acquisition will give rise to net public benefits that outweigh any public detriments that flow from any lessening of competition.

The tribunal must make its decision within three months or, if the merger raises complex issues, within six months of the date on which it receives the application for authorisation based on public benefit grounds.

Given the onus of demonstrating that public benefits arising from the merger outweigh any public detriments, as well as the potentially lengthy timeframes that apply, merger authorisations are rarely sought.

The authorisation process is public and transparent.

The Federal Court may review decisions of the tribunal to authorise or to decline to authorise, a merger.

There have been no applications for authorisation of a merger in Australia since 2002.

Notes

1. See the definitions of these in section 4 and 4A(4).
2. TPC v Arnotts Ltd (1990) ATPR paragraph 41-062.
3. TPC v Australian Iron and Steel Pty Ltd (1990) 22 FCR 305.
4. Section 87B provides: ‘The Commission may accept a written undertaking given by a person for the purposes of this section in connection with a matter in relation to which the Commission has a power or function under this Act (other than Part X)’.
5. Non-confidential aspects of section 87B undertakings are usually publicly disclosed in an ‘Undertakings Register’ on the ACCC website.
6. ACCC: Merger Guidelines (November 2008) [7.14].
7. ACCC: Merger Guidelines (November 2008) [7.19].
8. ACCC: Merger Guidelines (November 2008) [7.50] – [7.51].
9. ACCC: Merger Guidelines (November 2008) [7.56] – [7.57].
10. ACCC: Merger Guidelines (November 2008) [7.53] – [7.55].
11. ACCC: Merger Guidelines (November 2008) [7.35].
12. ACCC: Merger Review Process Guidelines (July 2006), page 8.