The Australian Government has commenced consultation on options to reform Australia's merger regime, including a shift to a mandatory suspensory regime. Businesses have until 19 January 2024 to respond to the consultation.
This alert provides an overview of the options for reform of Australia’s merger regime being considered by the Australian Government. Given the substantial changes proposed, companies should consider the impact of the reforms on their M&A activity and whether they wish to make a submission to the consultation to help shape the framework of the reforms.
Introduction
Treasury has released its much anticipated 'Merger Reform consultation paper' proposing three options for reform to Australia's merger control process.
The most impactful change from a process perspective is the proposal to move to a 'mandatory suspensory' regime, in which case, it would be compulsory for transactions satisfying certain financial thresholds to be notified to the Australian Competition & Consumer Commission (ACCC). The merger parties would be precluded from completing their transaction until approval is granted.
The ACCC has been vocal in its support for a mandatory suspensory regime for a number of years claiming that under the current voluntary scheme, merger parties have failed to seek review of potentially anti-competitive transactions, have failed to provide the ACCC with fulsome information or have given the ACCC insufficient time to properly assess the transaction.
Treasury has also proposed options to reform the substantive test for merger clearance, which is likely to result in a higher burden for merger parties to meet.
Companies are well advised to consider the likely impact of the proposals on their ability to execute their M&A activity and to raise their concerns during the consultation period to ensure these are properly reflected in the Government's consideration of the reforms.
Proposed options for reform
Potential changes to the merger control process
The three options for reform to Australia's merger control process under consultation are outlined below:
Option 1 – a voluntary formal clearance regime under which businesses can self-assess whether to notify the ACCC of their transaction. This is the most similar to the status quo, the key difference being that where a business notifies the ACCC, it is then precluded from completing the transaction until clearance has been granted. Clearance under this option also gives the merger parties formal immunity from Court action, which is not available under the current regime. The proposed merger test would require the ACCC to be satisfied that the transaction is not likely to substantially lessen competition and the ACCC's decision would be reviewable by the Australian Competition Tribunal.
Option 2 – a mandatory suspensory regime under which transactions meeting certain financial thresholds would need to be notified and businesses are precluded from completing the transaction until clearance has been granted. Where the ACCC identifies concerns with the transaction, but the parties propose to proceed, the ACCC would need to commence Federal Court proceedings and prove on the balance of probabilities that the proposed transaction is likely to substantially lessen competition.
Option 3 – the ACCC's proposal – a mandatory suspensory regime as in option 2. However under this option the ACCC remains the primary decision maker and will only grant clearance if it is satisfied that the transaction is not likely to substantially lessen competition. The ACCC's decision would be reviewable by the Australian Competition Tribunal.
Table 1: Proposed options for changes to the merger review process
| Current | Option 1 | Option 2 | Option 3 | |
|---|---|---|---|---|
| Notification | Voluntary | Voluntary | Mandatory | Mandatory |
| Decision Maker | ACCC | ACCC | Federal Court | ACCC |
| Test | Whether the merger is likely to SLC | Must be satisfied the merger is not likely to SLC | Whether the merger is likely to SLC | Must be satisfied the merger is not likely to SLC (or net public benefit) |
Treasury is also consulting on whether a net public benefit test should be retained, as is the case under the current merger authorisation process.
Proposed changes to the competition assessment
Treasury's consultation also proposes changes to the merger control test for whether mergers are 'likely to substantially lessen competition'. These are as follows:
Option A – one of the following:
- update the merger factors1 contained in section 50 of the Competition & Consumer Act (2010) (Cth) to include consideration of creeping acquisitions, loss of potential competition, access to or control of data and other significant assets, market power, interlocking directorships;
- amend the merger factors to refer to the changes in market features resulting from a merger, for example the height of barriers to entry; or
- remove the merger factors altogether.
Option B – expand the existing prohibition against mergers that are likely to substantially lessen competition to refer to 'including through entrenching, materially increasing or materially extending a position of substantial market power'. This is targeted at acquisitions by already dominant firms.
Option C – include related agreements as relevant considerations to the assessment.
How will the proposed reforms impact your business?
In terms of merger review process, the introduction of a 'mandatory suspensory' regime (option 2 or 3), will materially change the way in which parties consider merger clearance in Australia. The new regime is likely to raise the following:
- Transactions which raise no competition concerns may now need to be notified to the ACCC if the financial thresholds are met. While the ACCC has indicated that such transactions would be subject to a 'short form' review this will still add time and cost to an M&A process and require conditionality to be included in a sale agreement.
- Merger parties will be required to submit greater volumes of information to the ACCC upfront. Similarly, the documentary evidence that will be required to positively satisfy the ACCC that a transaction is not likely to lessen competition (options 1 and 3) is expected to be substantially more than what is currently required and akin to the current authorisation process which has seen large volumes of information submitted to the ACCC at the outset, in part as the current system of limited merits review by the Australian Competition Tribunal permits only a consideration of the material available to the ACCC. Treasury is consulting on whether such limited merits review should be retained.
- Longer review timetables, particularly for those with complex competition issues, with merger parties needing to factor in the timing of an appeal and the impact on their financing arrangements.
- A critical point will be the level at which the financial thresholds are set and the number of transactions that are captured by the proposed regime. In an earlier submission to Treasury, the ACCC indicated its preliminary thinking that thresholds based on the parties having revenue of $400 million or a global transaction value of $35 million would be appropriate.
Are the reforms justified?
There are mixed views on whether the proposed reforms are justified. Certainly, the ACCC has advocated strongly for change for some time on the basis that:
- the current system is 'skewed towards clearance where there is uncertainty or a number of possible future outcomes and in light of concerns around the level of concentration in Australia this is no longer appropriate';
- the voluntary system is not as effective as it needs to be due to merger parties failing to notify their mergers, providing insufficient or inaccurate information or threatening to complete their transactions before the ACCC has finalised its review; and
- Australia is out of step with other jurisdictions being one of only three OECD nations without a mandatory merger regime.
Treasury's consultation paper indicates that the reforms will seek to address Australia's declining productivity as a result of 'overall deterioration in competition in Australia since the early 2000s'.2
That said, it is far from clear that under the current voluntary system transactions are avoiding ACCC scrutiny and that the reforms will have any impact on productivity. The ACCC has pointed to only four transactions since 19883 where it took action in respect of an unnotified completed acquisition. The combination of the likely risk of detection (including via a FIRB review), the substantial penalties available to the ACCC and the ACCC’s power to subsequently unwind an acquisition, provide sufficient incentive for merger parties to voluntarily seek review of their transactions through a system that until recently had been viewed as working well for all involved.
At the same time the reforms will likely introduce substantial costs to merger parties, add time to merger reviews where no competitive harm exists and require additional resources on both the part of merger parties and the ACCC.
Significantly, the Productivity Commission's '5 year Productivity Inquiry: Advancing Prosperity Inquiry report'4 concluded that:
Overall, there does not appear to be a strong case for the implementation of a new formal authorisation regime as proposed. Rather, there is likely more value in the ACCC further considering its internal merger review processes; … Whichever the direction of reform, the pursuit of a more functional merger control regime will need to address contemporary and emerging challenges, but should not come at the expense of good principles of regulatory design.
Conclusion
While Treasury's consultation paper has provided a helpful level of detail on the three options under consideration, a number of questions remain including at what level should the financial thresholds in a mandatory regime be set, how will acquisitions of minority interests be dealt with, how resource intensive will the 'short form' procedure that the ACCC has foreshadowed be and what is a manageable timetable for review.
If the length and scale of the recent merger authorisation review processes including ANZ/Suncorp, Brookfield/Origin and Telstra/TPG are a guide, merger control in Australia appears to be transitioning to a new scale of enforcement and it is vital that Treasury's consultation identifies the relevant issues to ensure that whichever model is ultimately chosen is workable and effective.
1 Section 50 of the Competition & Consumer Act (2010) currently sets out 9 factors that are to be taken into account for the purposes of determining whether a transaction is likely to substantially lessen competition.
2 Merger Reform | Treasury.gov.au page 12
3 Merger Reform | Treasury.gov.au page 16
4 Advancing Prosperity - 5-year Productivity Inquiry report - Productivity Commission (pc.gov.au)
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