ACCC wants significant merger reform: what does this mean for your upcoming deal?

Still concerned about its recent losses in the Federal Court in TPG/Vodafone and Pacific National/Aurizon and in light of growing fears about the anti-competitive effects of acquisitions in highly concentrated sectors or by large companies (especially digital platforms), the ACCC has announced its much anticipated proposals for merger reform.

While the ACCC has indicated that its proposals seek to “begin a key debate”, it is important that you know what the key proposals are, what they mean, when they could come into effect and what they mean for your upcoming deals.

What are the key proposals?

A compulsory merger clearance regime based on thresholds

The ACCC wants to abolish the current voluntary informal clearance process (and merger authorisation process) and replace them with a single regime that requires parties to compulsorily obtain clearance for transactions that meet certain monetary thresholds. Transactions meeting the thresholds will be prohibited unless they have obtained ACCC clearance.

The ACCC is yet to propose the type or level of threshold that may apply but this is likely to be the value of the transaction and/or the separate or combined revenues of the parties to the transactions.

For transactions that:

• raise competition concerns and meet the thresholds, similar clearance processes will apply as is currently the case, namely: pre-assessment, phase 1 and phase 2;
• raise competition concerns but do not meet the thresholds, the ACCC can nevertheless require them to obtain clearance as part of the new regime;
• meet the thresholds but are unlikely to raise competition concerns, the parties can obtain an exemption or “notification waiver” from the clearance process; and
• do not meet the thresholds and are unlikely to raise competition concerns, pre-assessment clearance will still be an option but not mandated.

The ACCC proposes to publish its reasons for clearing or not clearing a transaction and appeals will only comprise a limited merits review before the Australian Competition Tribunal (rather than having the ability to purse, or force the ACCC to pursue, court action). 

It is unclear, at this stage, what role “public benefits” would play in the new proposal and whether complaints made by third parties would be more transparent.

Changes to the merger factors that must be considered in assessing transactions

The ACCC believes that the current merger factors required to be considered in determining whether a transaction substantially lessens competition “favour” clearance by focussing on the ability of future market forces to constrain the merged entity.

As a result, the ACCC wants these factors to focus on whether a transaction changes the structure of the market and result in the merger entity having the ability and incentive to increase price and reduce output, post-acquisition. The ACCC also wants to consider additional agreements between parties that accompany a transaction as part of the merger review process.

The ACCC believes these changes will enable a more balanced and rigorous approach that will prevent transactions that would otherwise harm the Australian public.

Acquisitions by parties that have substantial market power

The ACCC considers that acquisitions by parties with substantial market power are more likely to have the effect of substantially lessening competition resulting in severe and long lasting negative effects on the economy.

Accordingly, the ACCC wants acquisitions to be deemed to substantially lessen competition in breach of the law where one party has substantial market power and the acquisition is likely to entrench, materially increase or materially extend its market power.

It is presumed this deeming provision will be rebuttable through providing evidence under the new clearance process.

A bespoke regime for digital platforms and data players

The ACCC considers that the competition concerns raised by digital platforms will not be addressed by the above proposals to the merger review process.

As a result, it proposes a tailored merger test for digital markets, comprising a lower threshold for establishing competitive harm and paying greater attention to the possibility that a merger would remove a potential future competitor from the market.

Following the lead of the UK and EU, the ACCC also proposes that a new merger test specifically address acquisitions which leverage existing dominance and/or the control of data into market power in adjacent markets.

Does this come as a surprise?

The calls for significant change to the merger review process are not a surprise.

For several years, the ACCC has highlighted the difficulties it has faced in proving that a transaction substantially lessens competition through the court process. It must overcome high evidentiary burdens about the future state of the market and courts have been more willing to accept evidence of executives even if that evidence may be self-serving. 

On top of this, the ACCC has:

• continually expressed its concerns about the anti-competitive effects of Australia’s increasingly concentrated sectors and acquisitions by large players of nascent competitors especially in the digital and data space; and
• recently conducted post-merger review studies about pricing and services in sectors where it sought to block a major transaction. While the results of these studies have not been made public at this stage, we expect they will support the ACCC’s calls for significant merger reform by showing prices have increased in those sectors.

Will it actually eventuate and if so, when?

Although these proposals are yet to be considered by government and there will be broad consultation before any reforms are made, it seems that some form change is likely.  As the ACCC will actively push these reforms after the next election, we predict some form of change will become law in late 2022 (at the earliest) but more likely in 2023.

This is because the ACCC has been successful not only in effecting major changes to competition law under Chair Rod Sims but also obtaining increased funding from the Government to enforce those changes.  Under Mr Sims’ tenure, the ACCC has criminalised cartel laws and moved to an “effects” test for misuse of market power. The merger reform is the last major modification to the competition law landscape.

It also helps that Australia’s merger review process is the international outlier – while almost every other jurisdiction around the world has a compulsory regime based on thresholds, Australia’s continues to be voluntary with no thresholds.

What does this mean for your upcoming deal?

Rod Sims indicated that “the proposals are intended to shift the dial”. We anticipate the following:

• for the significant majority of transactions, nothing material will change. The ACCC will continue to undertake the same substantive competition analysis but you will need to prepare earlier and more comprehensively than is currently the case;

• clearance for transactions between parties who are close competitors will be more difficult to obtain. Mr Sims would rather these companies “compete rather than to acquire”;
• clearance for acquisitions by parties with substantial market power will become slightly more difficult. These acquisitions will be deemed to breach the law so parties will need to clearly show why the transaction will not entrench, materially increase or materially extend their market power (i.e. why they have no ability or incentive to increase prices, post-acquisition);
• any acquisition by a digital platform or that involves data will be scrutinised very closely.  There are likely to be compulsory, additional processes and hurdles for acquisitions by digital platforms regardless of the size of the target or value of the deal;
• for the 1 or 2 acquisitions each year that raise very significant competition concerns from the ACCC and are likely to be pressed by the parties (i.e. TPG/Vodafone), these deals will become much harder as there is no ability to proceed to court to challenge ACCC clearance decisions; and
• for all transactions requiring ACCC clearance, parties will incur additional costs and time.

What does this mean for your current deal?

While the proposed reforms may still be 12-24 months away, there is no denying that the ACCC is already taking a tougher approach to transactions in highly concentrated sectors and by larger companies. 

Its level of questioning on deals has become more comprehensive and it is very willing to issue compulsory information gathering notices to obtain board papers, emails and other internal documents to test submissions made by the merger parties as well as third party complainants.  Timelines for decisions and costs continue to increase.

Accordingly, we expect that even now, before the reforms come into effect:

• clearance for acquisitions by parties with substantial market power will be difficult to obtain;
• clearance for transactions between parties who are close competitors will be difficult to obtain;
• any acquisition by a digital platform or that involves data will be scrutinised very closely; and
• for all transactions seeking ACCC clearance, parties will incur increased costs and time.

Should you bring forward your deals to maximise the prospects of clearance now by avoiding the new proposals?

While the new proposals represent a significant change to Australia’s merger review process and laws, for the vast majority of transactions nothing will change when it comes to the prospects of securing clearance. That is, it is very unlikely that there is a “window of opportunity” to sneak deals through the ACCC before the new laws come into effect.

However, for those 1 or 2 major transactions that raise very significant competition concerns from the ACCC but are likely to be pressed by the parties, it may be preferable to complete these transactions under the existing framework by going to court. The ACCC has noted the difficulties it faces in challenging these deals in court and has suffered a number of losses as a result.

It may also be preferable for parties with substantial market power to complete key transactions now before any deeming provision makes your acquisition illegal thus reversing the burden of proof for your deal. This is likely to make ACCC clearance for those deals harder under the new regime.

What should you do now?

• Identify the deals in your pipeline and ascertain whether there is any benefit in bring them forward to avoid the new regime, especially if;
  • you have substantial market power; or
  • the deal will raise very significant competition concerns but you are prepared to go to court to obtain a favourable decision.
• Manage the expectations of your Board in relation to current deals – transactions by digital platforms, parties with substantial market power or transactions involving data will be harder to obtain clearance for and will be time consuming and costly.
• Establish appropriate processes for internal documents that may be used as evidence in ACCC clearance processes. This includes training staff to understand when legal privilege may apply to documents (including drafts) and how language should accurately reflect competitive dynamics.
• Consider whether “to compete rather to acquire”. This may become the ACCC’s new mantra to transactions.
• Consider being part of the debate. There will be public consultation on any reforms so we will keep you updated and would be are happy to assist you make any submissions as part of that process.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).