Foreign direct investment (FDI) accounted for $36.6 billion of investments in Australia in 2021.1 With prominent levels of M&A activity,2 private equity and investment funds are increasingly in the spotlight from antitrust regulators around the globe. This is not an altogether new focus.3 However, antitrust regulators are increasingly highlighting the need to explore in further detail the effects of a portfolio of investments across an industry and the extent to which multiple minority interests has the potential to hinder effective competition. Understanding, and planning for, these particular considerations assists with shaping the deal, will inform the clearance strategy and, ultimately, mitigate clearance risk.
The state of regulatory clearance in Australia
"We are aware that the minority interests of private equity and managed fund investors in competing firms are attracting close interest around the world. This is an area in which we will continue to engage closely with fellow international regulators."4
Australia is, by legislative requirement, a non-mandatory competition merger notification jurisdiction. However, for those intimate with the operations of the Australian competition regulator – the Australian Competition and Consumer Commission (ACCC), notification is better considered as quasi-mandatory, reflecting the proactive approach of the ACCC to unilaterally considering acquisitions of interest. The ACCC's awareness of transactions can occur through the media, its global competition regulator networks or, where FDI approval is required, through notification from the Foreign Investment Review Board (FIRB).
When assessing a proposed acquisition, the legislative prohibition in Australia is on an acquisition of shares or assets where the effect or likely effect is a substantial lessening of competition.5 Whether there is ultimately a substantial lessening of competition will depend on the "market" in which the transaction is considered, and this may be a point of contention between the ACCC and the parties in a clearance review.
The ultimate arbiter of whether a proposed acquisition would be likely to have the effect of substantially lessening competition is the court. Although not currently the final decision maker,6 the ACCC's views on whether a transaction will have an anticompetitive effect is usually taken as authoritative. The deal timelines, conditions precedent to closing and appetite for the parties to disregard the ACCC's view and proceed in any event, may invoke the ACCC to seek an injunction from the court to prevent the transaction from completing until the matter is heard. Understanding the ACCC interplay from the outset will inform the parties approach to any potential regulatory risk.
Although Australia is not currently subject to a suspensory notification regime, for transactions of interest the ACCC may seek an undertaking from the parties not to complete a transaction until the ACCC has finalised its review. This may have implications for the timing of a deal, supporting an approach that early consideration of the competitive effects of an acquisition in Australia should be the preferred course.
Foreign direct investment approval and the competition interplay
The FIRB is the government body responsible for assessing and making a recommendation to the Australia Treasurer on whether a FDI would be contrary to the national interest and national security of Australia.7 Assessment of the national interest includes analysis of the whether a proposed investment will be adverse to effective competition. In this regard, the FIRB highlights:
"The Government favours diversity of ownership within Australian industries and sectors to promote healthy competition. The Government considers whether a proposed investment may result in an investor gaining control over market pricing and production of a good or service in Australia…[and] may also consider the impact that a proposed investment has on the make-up of the relevant global industry, particularly where concentration could lead to distortions to competitive market outcomes".
Through FIRB's mandatory approval process, the FIRB will consult with other relevant government agencies, including the ACCC. Our experience has been that the views of government agencies are critical to the FIRB making its recommendation to the Treasurer.8 The net effect, visibility by the ACCC into significant investments in Australia that consolidate ownership in a particular sector, shifting the non-mandatory competition clearance regime to one where the ACCC will be made aware of the transaction thereby invoking a competition clearance assessment.
As a result, a steadfast position not to make a non-mandatory approach for competition clearance in Australia should be adopted with caution. Where the FIRB assessment process is inextricably linked with the competition regulator's consideration of the competitive effects of the transaction, an assessment of the investment, the industry, the acquirer's other interests and current trends should ultimately inform the appropriate strategy.
Multiple holdings in an industry
Competition regulators are generally tasked with considering the "likely" effect of a transaction on competition. This assessment is informed by past and current conduct in an industry, as well as consideration of internal documents of the parties and their competitors as to what is likely to happen to competition post-acquisition. For a merger between competing businesses, the effect is more readily ascertainable. However, with increasing consolidation and investors holding multiple shareholdings (including minority interests), regulators are looking closely at the extent of influence and control by an entity across an industry and the subsequent competitive effect on markets, and industries more broadly, in the longer term.
The assessment by the competition regulator extends beyond the initial competitive effects of M&A. There is a growing focus on the "extent to which concerns are raised about control and influence across competing businesses and the risk of concerted practices".9 The risk of coordination through cross directorships, even as a result of minority interests, or the extent to which holdings of multiple entities, increases the risk of coordination in a market, ultimately affecting unilateral competition. Regulators are wanting to understand the rights of a shareholder, the extent to which they can influence or control the operations of the business and their access to data and information that has the potential to diminish effective competition.
The ACCC has specifically highlighted its thinking is this regard, noting that "these are not issues that are unique to the ACCC", asking the following:
"do such holdings across competing companies have a chilling effect on company decision-making and their incentives to compete? Do they create financial incentives that distort and dampen competition?"10
If there is a risk that the answers to these questions are in the affirmative, the outcome will be an in-depth process by the ACCC to assess the extent of the risk that the transaction will be "likely" to substantially lessen competition.
The ACCC has not provided any guidance on the circumstances under which it will be comfortable that competition risks can be managed across multiple investments, and generally will not accept behavioral only undertakings (e.g. a commitment not to share competitively sensitive information between investments) to remedy concerns. However, approaching the ACCC at the outset with structural boundaries (e.g. ring-fenced operations) to address potential concerns, shifts the onus onto the ACCC to determine why the proposed structures are inadequate and how this translates into a substantial lessening of competition.
Focus into the future
It is clear that antitrust regulators globally are looking beyond the current risk of consolidation, to the effects of future coordination dampening competitive tension, in the long term. In highly concentrated markets, multiple minority, early stage investments in projects that form part of the future infrastructure of the Australian economy, are not only in the sights of the FIRB, but the ACCC. Assessing the competition implications of foundational holdings when projects complete, has become a point of consideration. For example, what will the market look like in five years' time with foundational investors holding interests across competing assets? What are the rights that even minority interests provide – veto rights, significant influence and a first right of refusal to increase shareholdings? What will this mean when early stage investment projects complete and shareholders have detailed access to information across multiple, competing operations?
The focus on minority interests and private equity investment does not mean that transactions will ultimately be problematic or approval will not be granted, as the ACCC still needs to show that the current transaction will substantially lessen competition. However, early consideration of the antitrust clearance interplay, along with FDI, will help shape any required clearance – whether sought from, or unilaterally initiated by the ACCC. It can also inform the appropriate investment vehicle, the directors on the board, and the structure of information flows. Ultimately, preparedness for an ACCC assessment from the outset will help inform the strategy to completion.
2 Australia experienced FDI in the first quarter of 2022 of $58.5 billion – https://firb.gov.au/keynote-address-afr-infrastructure-summit-21-november-2022
3 See https://www.whitecase.com/insight-our-thinking/private-equity-and-merger-control-increasing-buyer-scrutiny
4 Ms Gina Cass-Gottlieb, Chair Australia Competition and Consumer Commission, 49th Annual Conference on International Antitrust Law and Policy conference, 16 September 2022, https://www.accc.gov.au/speech/keynote-remarks-to-international-antitrust-law-and-policy-conference
5 Section 50 of the Competition and Consumer Act 2010 (Cth).
6 Noting that the ACCC is currently advocating for changes to the Australian merger regime, which has the potential to alter the current position.
7 Monetary notification thresholds vary by industry or asset, investor type and investor country of origin.
8 Although the FIRB indicates in its guidance note on Australia’s Foreign Investment Policy, 14 January 2022, p.8, that the ACCC operates a separate assessment - https://firb.gov.au/sites/firb.gov.au/files/2022-01/Australias_Foreign_Investment_Policy-20220114.pdf
9 Ms Gina Cass-Gottlieb, Chair Australia Competition and Consumer Commission, 49th Annual Conference on International Antitrust Law and Policy conference, 16 September 2022, https://www.accc.gov.au/speech/keynote-remarks-to-international-antitrust-law-and-policy-conference
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