Australia: Merger Control
Australia’s merger control regime is contained in the Competition and Consumer Act 2010 (Cth) (CCA), and is vigorously administered by the Australian Competition and Consumer Commission (ACCC), which administers the merger control regime pursuant to its Merger Guidelines and its Informal Merger Review Process Guidelines. The Process Guidelines were updated in September 2013 to reflect recent developments in the ACCC’s approach to informal clearances and to improve the efficiency and transparency of the ACCC’s informal review process.
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 has a limited degree of extraterritorial operation, including the fact that it applies to offshore acquisitions of shares where the acquisition would result in a change of control of an Australian subsidiary, and such change would be likely to substantially lessen competition in Australia and would not be offset by public benefits.
In the 2012–2013 financial year, the ACCC assessed 289 acquisitions, down from 340 in the previous year. Of the 289 acquisitions, 213 were assessed without market inquiries, with the remaining 76 being subject to a confidential review or public market inquiries. Of those 76, 55 were not opposed, six were allowed to proceed based on court-enforceable undertakings or variations to existing undertakings, and six were publicly opposed. The following cases were opposed:
- Woolworths Limited and Lowe’s Companies Inc’s proposed acquisition of G Gay & Co hardware stores;
- Seven Group Holdings Limited’s proposed acquisition of Consolidated Media Holdings Limited in the media industry;
- Sonic Healthcare Limited’s proposed acquisition of Healthscope Limited’s pathology businesses in the Queensland and Western Australia;
- Carsales.com Limited’s proposed acquisition of interests associated with the Trading Post brand in the advertising industry;
- Woolworths Limited’s proposed acquisition of a supermarket site at Glenmore Ridge Village Centre; and
- H J Heinz Company Australia Limited’s proposed acquisition of Rafferty’s Garden Pty Ltd infant food business.
The ACCC accepted remedies in the form of court enforceable undertakings in the following cases (the last three were resolved following the end of the 2013 financial year):
- APA Group’s proposed acquisition of Hastings Diversified Utilities Fund in the natural gas transmission industry (APA Group undertook to divest a pipeline asset);
- Nestlé’s proposed acquisition of Pfizer Nutrition from Pfizer Inc in the infrant nutrition industry (Nestlé undertook to license Pfizer Nutrition’s Australian infant nutrition brand portfolio to an independent purchaser approved by the ACCC);
- Baxter International Inc’s proposed acquisition of Gambro AB in the health-care industry (Baxter undertook to divest its global continuous renal replacement therapy business);
- Westfield Group and Westfield Retail Trust’s proposed acquisition of Karrinyup Shopping Centre in the shopping centre industry (Westfield undertook to divest a shopping centre in the same region as the shopping centre to be acquired); and
- Perpetual Limited’s proposed acquisition of The Trust Company Limited in the financial services industry (Perpetual undertook to divest its interest in an entity that the proposed acquisition would have caused it to acquire an interest in).
These recent cases illustrate the ACCC’s increased scrutiny of acquisitions by Australia’s major supermarket chains (Woolworths and Coles), including a willingness to oppose an acquisition by a major supermarket chain (Woolworths) of a greenfield supermarket site. The cases also illustrate the ACCC’s willingness to define narrow local geographic markets for the purposes of carrying out its competitive analyses.
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.
In 2013, the ACCC subjected approximately 13 cases to two rounds of market inquiries. In approximately 10 of those cases, the ACCC published a Statement of Issues at the commencement of its second round of market inquiries. In 2013, in approximately eight cases, the timeline for the review was six months or more. 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. In one case, the ACCC expressed concerns about the applicant’s repeated requests to ‘stop the clock’ to delay the ACCC’s decision. 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.
In non-complex cases, the ACCC has committed to reducing review periods, and a significant number of cases in 2012–2013 were cleared without a public review in less than two weeks.
Australia’s merger control 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 a market 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. They also bear the risk of civil pecuniary penalties of up to the greater of A$10 million; three times the gain or (where the gain cannot be ascertained) 10 per cent of the corporate group’s annual turnover attributable to Australia, in the case of corporations; and up to A$500,000 for individuals involved in the breach, as well as 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 application 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 also desires greater transparency around the identity of the complainants and nature of the complaints than is allowed under the informal clearance procedure.
On 29 November 2013, Murray Goulburn submitted an application to the Australian Competition Tribunal for authorisation of its proposed takeover of Warrnambool Cheese and Butter (in the dairy sector), which is the first application for authorisation of a merger in Australia since 2002. The test for an authorisation of a merger is whether the proposed merger would give rise to net public benefits that outweigh any public detriments. By contrast, the test for informal clearance or formal clearance is whether the proposed merger would be likely to substantially lessen competition in a market in Australia.
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, territory or 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 a options 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, 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.
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 on the application of section 50.
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.
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 by private entities to frustrate a transaction for strategic commercial purposes (such as the merger parties’ rivals).
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.
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.
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 ACCC 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.
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 support 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) 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
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
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 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 orders for divestiture or to void the acquisition, the imposition of civil pecuniary penalties, or 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 regulation 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.
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 the FIRB seeking the ACCC’s views or to avoid a ‘please explain’ letter from the ACCC after the acquisition is announced.
The ACCC informal approval process is governed by the Informal Merger Review Process Guidelines (September 2013), 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 generally proceed with a public review (which will include market inquiries), unless the ACCC has decided to ‘pre-assess’ the merger without conducting 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 at the end of this chapter.12
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 and 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 time frames that apply, merger authorisations are rarely sought.
The authorisation process is public and transparent.
The Federal Court may review decisions of the Australian Competition Tribunal to authorise or to decline to authorise a merger.
On 29 November 2013, Murray Goulburn submitted an application to the Tribunal for authorisation of its proposed takeover of Warrnambool Cheese and Butter (in the dairy sector), which is the first application for authorisation of a merger in Australia since 2002.
- See the definitions of these in sections 4 and 4A(4) of the CCA.
- TPC v Arnotts Ltd (1990) ATPR paragraph 41-062.
- TPC v Australian Iron and Steel Pty Ltd (1990) 22 FCR 305.
- Section 87B of the CCA 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)’.
- Non-confidential aspects of section 87B undertakings are usually publicly disclosed in an ‘Undertakings Register’ on the ACCC website.
- ACCC: Merger Guidelines (November 2008) [7.14].
- ACCC: Merger Guidelines (November 2008) [7.19].
- ACCC: Merger Guidelines (November 2008) [7.50] – [7.51].
- ACCC: Merger Guidelines (November 2008) [7.56] – [7.57].
- ACCC: Merger Guidelines (November 2008) [7.53] – [7.55].
- ACCC: Merger Guidelines (November 2008) [7.35].
- ACCC: Informal Merger Review Process Guidelines (September 2013), page 4.