INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION10

A MOVE TOWARDS NEW MERGER CLEARANCE PROCESSES

It is a fascinating time for merger review in Australia. The Australian Competition and Consumer Commission (ACCC) has been

handling an ever-growing caseload of mergers and come in for criticism in recent Australian Competition Tribunal decisions. In September, the Federal Government released an Exposure Draft of amendments to the competition law to implement key recommendations of an independent enquiry (Harper Review). Changes to the merger clearance procedures are set to deliver more authority to the ACCC, positioning it as first instance decision-maker for all mergers. Yet Rod Sims, Chairman of the ACCC, has his eye on an even greater change: he has suggested effectively flipping the burden on merging businesses to show that an increase in concentration would not damage competition.

Merger clearance strategy is critical for businesses negotiating large or complex transactions. Complexity can arise from the industry structure and its competitive dynamics, or the intricacies of the deal. There may be multiple potential acquirers in a bid process, or the transaction may be the Australian component of a much larger global deal. Businesses must assess the risk of ACCC intervention and likelihood of success, and weigh up various factors – including time constraints, cost, confidentiality, and availability of documents and evidence. Understanding the options is an important first step.

The current state of play

The Competition and Consumer Act 2010 (Cth) (CCA) prohibits mergers which would be likely to substantially lessen competition in a market in Australia, known as the ‘substantial lessening of competition (SLC) test’. That yardstick has been in place since the early 1990s and is in line with many overseas jurisdictions.

Businesses wishing to pursue a merger which could have some impact on competition have several options. Each has its benefits and disadvantages, providing different levels of certainty and timeliness.

• In most cases, parties seek informal clearance from the ACCC. The result is an informal statement that the regulator does not intend to oppose the transaction, or that it opposes the transaction because it fails the SLC test.

• The formal merger review process has never been used since its introduction in 2007. If the ACCC refuses clearance, parties can take the matter to the Australian Competition Tribunal (the ‘Tribunal’) for review.

• The third option is to seek authorisation directly from the Tribunal on the basis that the deal will result in public benefits which outweigh any detriments. This avenue has now been used twice – most recently in July in a successful application for the acquisition of a marine freight business.

• A party may seek a declaration from the Federal Court that the proposed merger will not substantially lessen competition, an approach only rarely used.

Changes proposed

The Harper Review Panel (the ‘Panel’) recommended that the informal clearance process be retained, improved by consultation with business representatives aimed at more timely decisions. The Panel also recommended that the formal merger approval process be combined with the Tribunal authorisation process. It suggested improving the process by removing unnecessary deterrents and making the ACCC investigator and first-instance decision-maker in all cases, with the Tribunal as the review body.

The Government’s draft legislation would implement the Harper model:• A business will be able to apply to

the ACCC for a merger authorisation through a process which is intended to be less prescriptive than formal clearance, but the ACCC will still set the information requirements.

• The ACCC must make a decision within strict timeframes, and will have the power to authorise the merger applying either

A move towards new merger clearance processes

AUSTRALIA

Caitlin DaviesMinterEllison Australasia Competition Group

ANTITRUST NEWSLETTER DECEMBER 2016 11

A MOVE TOWARDS NEW MERGER CLEARANCE PROCESSES

the SLC or the public benefits test. • If the parties are dissatisfied with the ACCC’s

decision, they may apply to the Tribunal for merits review. The Tribunal may have regard only to limited material: essentially the documents which were before the ACCC. Its review will also be subject to strict timeframes.

A fused authorisation process, where the ACCC makes an initial decision reviewable by the Tribunal, may not appear to be as material a change as it is. In two recent Tribunal decisions, AGL-MacGen and Sea Swift-Toll, the ACCC had refused informal merger clearance so the parties went to the Tribunal successfully seeking an authorisation. Critically, however, the Tribunal currently bases its decision on different grounds. Its job is to weigh up public benefits and detriments, so it considers evidence not relevant to an SLC assessment.

Still, detriment to competition is an important consideration for the Tribunal in applying the public benefits test. In Sea Swift, the Tribunal found not only that there was no SLC but very limited competitive detriment, caused by one issue which was neatly resolvable by an undertaking. In both MacGen and Sea Swift, the Tribunal emphasised the importance of making decisions based in real-world fact and rejected ACCC theories of harm which it considered were based on unsubstantiated speculation.

Combining the formal clearance and authorisation processes is not a simple streamlining exercise – it will have real impact. The changes would make the ACCC the first port of call for all mergers, removing the ‘direct to Tribunal’ route which has in recent years emerged as a useful alternative in some complex mergers. Currently, the Tribunal process gives parties an alternative decision-maker – useful where they may have reached an intractable difference of opinion with the ACCC.

Commentators have also raised concern that the changes would significantly dial back the Tribunal’s ability to conduct a full and unfettered review. The Tribunal will have very limited scope to seek additional information and parties will be unable to put all relevant evidence, cross-examine witnesses and make new submissions. Without relaxing that scope, there is a real risk that businesses will be deterred from using the new process and have recourse only to the Federal Court.

ACCC Chair’s recent call for change

At the RBB Economics Conference in Sydney on 27 October 2016, ACCC Chair, Rod Sims delivered a keynote address suggesting that, as Australia’s economy is becoming more concentrated, the ACCC should take a more sceptical approach to mergers that increase concentration. He advocated applying the ‘standard economic wisdom’ that ‘mergers resulting in high levels of concentration in markets with substantial barriers to entry will usually reduce competition and cause harm to consumers and our economy’. Accordingly, he suggested that merger proponents should bear the onus of establishing a ‘clear and convincing economic and evidence based explanation’ to the contrary. This could replace the SLC test with a United States-style ‘rebuttable presumption’ that mergers in concentrated markets should be barred.

Sims’s proposal would drastically change the process and the prospects for major merger proponents. It would allow the ACCC to sit back and require parties to prove that a deal would not damage competition, effectively reversing the existing role of the regulator. That novel approach, combined with the Exposure Draft procedural changes, would risk turning the ACCC into judge, jury and executioner, and deterring businesses from pursuing borderline or even potentially pro-competitive transactions.

Conclusion

While it is likely that the Government will proceed with Harper’s recommendation to make the ACCC the first instance decision-maker to authorise mergers based on both the SLC and public benefits tests, it remains to be seen whether the Government will soften the drafting to preserve crucial Tribunal independence in reviewing ACCC decisions. The impact of those amendments, however, pale in comparison to the potential risk of Sims’s mooted change to the legal test which would force businesses to do the regulator’s legwork based on a questionable assumption that all concentrations are damaging to consumers.