TL;DR

Recently, Australia’s competition regulator, the Australian Competition and Consumer Commission (ACCC) proposed a number of reforms to cater for a changing economy that has been profoundly disrupted by COVID, digital platforms and the requirement for a green transition.

Specifically, the proposed mandatory requirement for the ACCC to be notified of mergers above specified thresholds, suspension of transactions without ACCC clearance, and upfront information requirements will make it more difficult for companies to proceed with mergers that ‘may substantially lessen competition’.

More importantly, any transaction that is ‘likely to have the effect of materially extending a position of substantial market power’ runs the risk of getting caught.

And with a subjective ‘call-in’ rule (summarised below) the ACCC can scuttle any deal if it feels so inclined.

Overall, the proposed changes to Australia's merger regime are arguably too wide, uncertain and likely to increase scrutiny and decrease the number of mergers that are approved.

If these reforms become law, I encourage companies embarking on meaningful control change transactions to spend more time in the planning, design and deal construction stage - or you might just want to get your deal done now.

Why merge?

One of the key reasons for entering into a merger or acquisition is to deliver, defend or double-down on strategy. Strategy that would see costs decrease, and customer experience, revenues and barriers to entry increase, and/or competitive positioning improve.

The key is to try and deliver several benefits to deal parties and their stakeholders through the transaction. And in some cases, M&A is used to strengthen the combined balance sheet, particularly during credit/liquidity crunches.

However, many countries have rules against transactions that in the opinion of a central arbiter/regulator ‘substantially lessen competition’ beyond a certain threshold and/or create too much ‘concentration in an industry’.

Recently, the ACCC has said that it needs to overhaul our merger regime so it can properly scrutinise and if necessary, prevent mergers that are ‘likely to substantially increase concentration and lessen competition’.

As a M&A advisor and dealmaker, I’ve been supportive of ensuring we don’t sell the farm off or allow barbarians to storm the gates of our national interest sensitive sectors.

At the same time, I’ve been sceptical of the motivation of the regulator to pursue ‘concentration’ deals because they fall into some arbitrary definition of a ‘today’ industry or landscape.

Why? Because this line of argument is political, not commercial and ignores what an industry might look like in 1, 3 and 5 years into the future (for example) after the responses from old and new competitors can be measured, and after the industry has merged into another or expanded as a result of competition and disruption from technology-based competitors.

Literally every competitive landscape you can think of is now in a state of disruption and that means that concentration and anti-competition risks are going to be less enduring than in the past, no?

Nope, apparently the ACCC sees it differently.

So, what’s in store?

Here are the key takeaways from the proposed regime:

• Move away from voluntary enforcement to mandatory and formal clearances where merger parties must demonstrate to the satisfaction of the ACCC that their transaction is not likely to substantially lessen competition before they can proceed.

• Propose a mandatory requirement for the ACCC to be notified of mergers above specified thresholds, a requirement for transactions to be suspended from completion without ACCC clearance, and upfront information requirements.

• Thresholds to be worked out later but likely to be based on size of proposed transaction, size of target globally and/or within Australia, or a combination.

• If a transaction doesn’t meet the notification threshold, but raises competition ‘concerns’, the ACCC should be able to ‘call-in the transaction and assess it in the formal system’.

• Short review period for straightforward matters and allow longer for more complex reviews.

• Merger parties proposing non-contentious transactions could apply for a notification waiver. ACCC states the overwhelming majority of proposed transactions would be dealt with in this way, like current pre-assessment triaging in the informal regime.

• ACCC, or Australian Competition Tribunal on review, would not clear a merger unless it is satisfied that the transaction is not ‘likely to substantially lessen competition’ and ACCC must be positively satisfied there is ‘no likely substantial lessening of competition’, which is consistent with the current merger authorisation test.

• Merger parties should have the option of subsequently being able to apply for clearance on public benefits grounds if the applicants are not able to first satisfy the ACCC or Tribunal that a transaction can be cleared on competition grounds.

• ACCC says a second stage public benefit clearance option reflects the fact that the majority of mergers are decided on competition grounds without reference to public benefits. 

• The regulator feels that the Australian Competition Tribunal is the appropriate review body for ACCC decisions in the formal regime. The Federal Court would continue to consider applications for declaration and judicial review. The role of the Federal Court in considering merger enforcement matters would also continue for transactions that do not trigger the notification thresholds.

• In relation to Section 50 of the Competition and Consumer Act sets out what is often referred to as the “SLC test” – the prohibition of mergers that are ‘likely to substantially lessen competition’. However, the new proposal to make it clear that the substantial lessening of competition test includes ‘entrenching, materially increasing or materially extending a position of substantial market power’. It says this would be similar to how the European Commission’s merger test is framed and would ensure focus is not just on the incremental change arising from a merger but also the overall ‘enhancement of dominant positions by large firms’ in the market.

• ACCC says the new regime will assist with addressing concerns about creeping acquisitions – ‘the accretion of market power through a strategy of small serial acquisitions that may not amount to a substantial lessening of competition on their own’. The regulator sees this as an issue across the economy, and of particular concern in digital platform markets.

• Merger factors in SLC test to be updated by adding:

  • the loss of actual or ‘potential’ competitive rivalry;

  • increased access to, or control of data, technology or other significant assets;

  • whether the acquisition is part of a series of relevant acquisitions, and

  • whether the acquisition entrenches or extends a position of substantial market power.

• ACCC says many of the harms caused by digital platforms cannot be adequately addressed by Australia’s current laws and has recommended a range of new competition measures to combat these practices in its recent Regulatory Reform Report. Most notably, these include service-specific mandatory codes of conduct for designated influential digital platforms.

• A Taskforce within the ACCC is to provide expert input on issues related to sustainability across all the ACCC’s functions, and to help ensure competition and consumer protection issues are front of mind in sustainability-related policy and business decision making. And there is to be close monitoring for illegal ‘collusion’ as the green transition unfolds.

While many commentators will take the political/tactful route and congratulate the ACCC on this shining example of protectionism, I feel that together the entrenchment notion and the four new SLC merger factor tests as well as the arbitrary ‘call-in’ are arguably too wide.

If these reforms become law, the number of mergers that are approved will more than likely decrease. So, if you are embarking on meaningful control change transactions, it would be worth spending more time in the planning, design and deal construction stage - or you might just want to get your deal done now.

I may see you in the market, but even that will likely depend on how we each define it 😉.

Mike