Introduction to merger control in Australia
In Australia, section 50 of the Competition and Consumer Act 2010 (Cth) (CCA) prohibits the acquisition of shares or assets that would have the effect, or likely effect, of substantially lessening competition in a market.
Unlike some other jurisdictions, in Australia there is no mandatory threshold for notifying transactions to the Australian Competition and Consumer Commission (ACCC). Although notification is voluntary, the ACCC can take action to prevent or unwind a transaction that contravenes section 50. The ACCC can also seek civil penalties for a contravention of section 50.
If you are considering engaging in, or advising on, a merger that may affect competition in a market in Australia, it is important that you understand the merger process, how to engage with the ACCC appropriately and current insights into the merger review regime.
Should I notify my transaction in Australia?
While there is no mandatory requirement to notify a transaction, the ACCC encourages you to notify if:
- the products of the merger parties are either substitutes or complements; and
- the merged firm will have a post merger market share of more than 20% in the relevant market(s).
A key consideration in this analysis is the appropriate market definition (i.e. what is the relevant market within which the transaction will occur?). If there are reasonable grounds to consider that the transaction has the potential to raise competition concerns or issues in Australia, it is generally prudent to notify the ACCC of the transaction.
Is the transaction occurring in an industry of interest?
The ACCC may indicate that activity by a certain firm or within a certain industry should be notified, for example, in the Chairman’s annual speech on the ACCC’s compliance and enforcement priorities for the upcoming year. If the proposed transaction falls into that category, it is generally advisable to notify the transaction to the ACCC.
Can the ACCC review a transaction without it being notified by the parties?
Even if a transaction is not notified to the ACCC by the parties involved, the ACCC can, and does, investigate transactions it is informed of through other means. For example, a transaction may come to the ACCC’s attention through the Foreign Investment Review Board, other Australian or international regulators, competitors, suppliers, customers or the media. The ACCC can also investigate transactions that have already been completed.
What happens if I don’t notify?
If a transaction proceeds without notice to the ACCC and the ACCC forms a view that competition issues are likely to arise, there is a risk that the ACCC may take action to prevent or unwind the transaction. Remedies available to the ACCC include injunctions, divestiture (i.e. after the transaction has completed) and penalties of up to $10 million for companies per contravention of the CCA and $500,000 for individuals ‘knowingly concerned’ in the contravention.
What will the ACCC consider when reviewing a merger?
Although there are certain statutory factors which the ACCC will consider when reviewing a merger, the ACCC is not limited by these and will take a bespoke approach to each transaction using its sophisticated internal analytic capacity which includes analysis by economists and lawyers. The ACCC’s consideration will be guided by, among other factors, issues that arise in market inquiries, the complex relationship between different factors in the transaction, and issues that emerge from economic analysis of the specific market(s) involved. The merger assessment is conducted on a forward-looking basis, comparing the future if the transaction proceeds (the factual) and the future without the transaction (the counterfactual). In this way, the assessment is dynamic, and assessing the relative importance of factors and how they may change in the future adds to the complexity and nuance of the merger assessment by the ACCC.
Concentration and market shares
The ACCC assesses market concentration by identifying market shares of the merging parties and their competitors, and considering whether current market shares are likely to reflect future market share patterns. The ACCC also typically uses quantitative measures of market concentration based on market share data (for example the Herfindahl-Hirschman Index, or HHI) to help to consider whether the merger will raise competition concerns which require more extensive analysis. For example, the ACCC states that it will generally be less likely to identify horizontal competition concerns when the post-merger HHI is less than 2000, or greater than 2000 with a delta of less than 100.
Considering the degree of concentration and relative shares in a market can provide insight into factors affecting competition, including current constraints on the merger parties and the ability of new entrants and small competitors to enter and expand.
Barriers to entry and expansion
The ACCC is unlikely to conclude that a transaction will result in a substantial lessening of competition if there is a high likelihood of timely and sufficient entry and expansion in relevant markets post-transaction, and the merged firm is unlikely to have market power either pre- or post-transaction. This is because the entry of new firms into a market (or expansion of existing firms) can provide an important source of competitive constraint on incumbents.
Competition concerns are more likely where significant barriers exist and, as a consequence, the merged firm has discretion over its pricing and other conduct. A transaction need not increase barriers to entry for it to be considered anti-competitive by the ACCC.
The ACCC will consider whether there is actual or potential direct competition from imported goods or services. The ACCC considers that import competition can provide competitive discipline on the merged entity’s market power, provided the supply of imports is able to respond to competitive signals in a timely and sufficient manner.
The ACCC will consider the availability of substitutes as a potentially sufficient constraint on the merged entity, having regard to the closeness of rivalry between the merger parties and other market participants, and the ability of rivals to expand. This assessment is related to an identification of the relevant product market(s).
The ACCC will consider whether customers have countervailing power, which can weigh against the merged entity’s market power. Countervailing power exists when buyers have special characteristics that enable them to credibly threaten to bypass the merged firm. Examples of firms exercising countervailing power include vertically integrating upstream (‘backwards integration’), establishing importing operations or sponsoring a new entry to compete with the merged entity and other incumbents.
Dynamic characteristics of the market
When analysing the competitive effects of a merger, the ACCC will take into account the changing nature of the market in the future. Dynamic changes may result from a range of factors including market growth, innovation, product differentiation and technological changes.
ACCC will consider changes in the market from three perspectives:
- the extent to which the dynamic features of the market affect the likely competitive impact of the merger;
- the extent to which the dynamic features of the market result in a public benefit or detriment; and
- whether the merger itself impacts on the dynamic features of the market.
Removal of a vigorous and effective competitor
The ACCC considers that vigorous and effective competitors can drive significant aspects of competition, such as pricing, innovation or product development, even though their own market share may be modest. Therefore, if a transaction involves a vigorous and effective competitor or a ‘maverick’, the ACCC will be more likely to consider that the transaction raises competition concerns.
If a merger involves both horizontal and vertical competition issues (for example, because one or more of the merger parties operate at more than one level of the supply chain or each of them operates at a different level), the ACCC will assess the merger based on the combined potential horizontal and vertical impacts on competition.
Ability to increase prices or profit margins
When considering a transaction, the ACCC will assess whether it will give the merged entity a greater ability to increase prices and profit margins. Generally speaking, an increase in price will result in a corresponding increase in profit margins. If the merged entity has the ability to significantly and sustainably increase profit margins, this may also indicate that the transaction is likely to give rise to a substantial lessening of competition or result in public detriments that outweigh public benefits. However, since several factors influence profit margins, the ACCC recognises that increased profitability is not in itself a conclusive indicator of a substantial lessening of competition.
How should I seek clearance or notify the ACCC?
If you choose to notify the ACCC of your proposed transaction, this can be done in a variety of ways. The least formal way of notifying the ACCC of a proposed transaction is by way of courtesy notification (a letter or a phone call). Other ways of notifying a transaction include informal merger clearance or merger authorisation.
The following information is correct as at the date of publication (29 January 2018) and incorporates changes introduced on 6 November 2017 by the Harper reforms.
Informal clearance is the process used for the vast majority of transactions notified to the ACCC. Although the informal clearance process is ‘informal’ in the sense of having no statutory basis, the process is quite structured, has developed through practice and is run in accordance with both substantive and process guidelines. The ACCC will test whether the transaction will have the effect or likely effect of substantially lessening competition in a market.
The key features of informal clearance are as follows:
- informal clearance is a flexible and well-established process;
- informal clearance can be initiated on a confidential basis (although the ACCC is unlikely to provide an unqualified view until public market inquiries have been conducted);
- informal clearance does not prevent third parties from challenging the merger;
- the ACCC’s decision is not legally binding, although if the ACCC opposes a transaction, it will generally request an undertaking that the parties will not complete. If the parties refuse to give such an undertaking they should expect that the ACCC will seek an injunction to prevent the transaction proceeding;
- there is no right of appeal from the ACCC’s decision not to grant informal clearance. However a company may decide to seek ACCC merger authorisation if the informal clearance is unsuccessful or appears to be unsuccessful part way through the process; and
- if a transaction is ‘cleared’, this gives comfort regarding the ACCC’s position. However, the ACCC reserves its rights to reconsider the transaction if it becomes aware of relevant new information.
The ACCC does not charge fees for companies seeking informal clearance.
The Harper reforms (in effect from 6 November 2017) changed the process for obtaining formal merger authorisation. The amendments to the merger provisions offer parties the new route of merger authorisation by the ACCC but close the path of obtaining authorisation directly from the Australian Competition Tribunal in the first instance.
Key features of the new merger authorisation process are:
- an application must be made before the contract is entered into, or within 14 days of the contract being made and the grant of authorisation must be expressed as a condition precedent;
- the ACCC is the decision maker at first instance and has the power to authorise a merger if it:
- will not, or is likely not to, substantially lessen competition; or
- is likely to result in a net public benefit (i.e. public benefits that outweigh public detriments);
- a valid application must include detailed information and a completed prescribed form. In addition, the ACCC is empowered to require the production of business and market information;
- the ACCC has 90 days to make a decision regarding a merger authorisation, starting from the day the ACCC receives a valid application.
- if the ACCC does not make a decision within this time it is deemed to have refused the application (however the 90 day time limit can be extended with the consent of the merger parties in writing prior to the expiration of the 90 days);
- decisions of the ACCC are subject to review by the Australian Competition Tribunal under a process that is also governed by strict timelines (90 days to make its decision, extended to 120 days if new information is admitted); and
- the Tribunal will make its decision based upon the materials that were before the ACCC, but will have the discretion to allow or request further evidence that was not available at the time of the ACCC’s decision or to address new circumstances.
- the ACCC is the decision maker at first instance and has the power to authorise a merger if it:
You may wish to consider merger authorisation (rather than informal merger clearance) in circumstances where the transaction may be perceived to raise competition issues but would also give rise to material public benefit. For a merger to be successful under the ACCC merger authorisation regime following an unsuccessful informal merger clearance decision there would need to be strong and verifiable evidence of very significant public benefit(s) to counter the ACCC’s view on that a substantial lessening of competition was likely.
There is an AUD $25,000 fee payable upon filing for authorisation of a merger.
Options for merger clearance, at a glance
|1. Informal merger clearance||Does the acquisition have the effect or likely effect of substantially
lessening competition in any market?
|Pre-assessment: 2-4 weeks
Phase 1 (if no Statement of Issues): 6-12 weeks
Phase 2 (if Statement of Issues): further 6-12 weeks
Allow additional time for s 155 notices and other ‘clock stops’ for additional information requests or negotiation of undertakings
up to 9 months for complex mergers
|Letter of comfort from ACCC saying that it intends to take no action in relation to the proposed merger or acquisition.
Residual possibility of actions brought by third parties, but largely theoretical.
|No appeal rights.
However, could decide to seek ACCC authorisation if informal clearance is unsuccessful or it appears likely to be part way through the process. Would need evidence of strong public benefit to counter the ACCC’s views on lessening of competition.
|2. Merger authorisation||Does the acquisition have the effect or the likely effect of substantially
lessening competition in any market?
Is the acquisition likely to result in a net public benefit (ie that outweighs any lessening of competition).
|90 days statutory time frame.
Parties can agree in writing to extensions of time prior to expiration of 90 days
If parties do not agree to an extension of time and the ACCC has not made a decision, it is deemed to have refused the Application.
There is the theoretical risk that the ACCC can repeatedly extend its review time and Applicants will be left with no choice but to agree to those extensions or else risk a negative decision. However, in other authorisation contexts the ACCC has generally been diligent in complying with statutory time frames. In practice, this means that merger authorisation may give the parties more certainty as to timing and, a shorter time frame, compared with current average time frames for informal merger clearance.
90 days subject to extension
|Immunity from action by the ACCC and third parties in relation to the merger or acquisition, subject to any conditions.||Limited merits review by the Tribunal:
Tribunal can agree to, or request, the admission of additional information that was not available at the time of the ACCC’s decision or to address new circumstances.
90 day time limit.
Time limit extended to 120 days where new information is admitted.
A step-by-step guide to informal clearance
If a transaction is not considered complex, parties may wish to seek pre-assessment. This involves the preparation of a confidential submission setting out:
- the parties;
- the transaction;
- the assets and operations involved;
- the markets involved; and
- reasons why the transaction is unlikely to result in a substantial lessening of competition in any market.
The ACCC may request information to supplement the information included in the submission. It may also consider undertaking targeted market inquiries. However, if a matter is complex and the ACCC is likely to want to test its concerns with the market, parties may wish to proceed directly to public review (rather than seeking pre-assessment as a preliminary step).
If the ACCC forms the view that the transaction cannot be pre-assessed, it will notify the parties that it intends to consider the transaction under the informal review process. If the transaction is still confidential, the parties can ask the ACCC to conduct a conditional confidential review. Theoretically, the ACCC may approve the merger at this stage. However, since the ACCC has formed the view that pre-assessment could not occur, the most likely outcome is that a public informal review will occur once the transaction is made public.
Public review (market inquiries)
If the ACCC is not able to pre-assess the transaction, it will publish a market inquiries letter and seek submissions from other market participants. An indicative timeline and description of the transaction will be placed on the ACCC’s mergers register on its website.
The ACCC may ask parties to:
- provide customer and supplier contact details;
- provide further information to the ACCC; and
- respond to feedback received through the market inquiries process.
If the ACCC requests further information from the parties and there is a delay in its provision, the ACCC can ‘stop the clock’ (i.e. suspend the timeline until the information is provided).
Based on the information available to the ACCC, the ACCC may decide at this stage not to intervene in relation to the transaction because it does not have unresolved competition concerns. However, should new information come to the ACCC’s attention, or should it become aware that any information upon which it has based its view is incorrect or incomplete, the ACCC reserves the right to reconsider its decision.
Statement of issues
If the ACCC has unresolved competition concerns following the receipt of market feedback, it will publish a Statement of Issues (SOI) and establish a secondary timeline.
Parties may need to:
- address the matters raised in the SOI with additional submissions and information; and
- depending on the nature of the concerns and commercial considerations, consider negotiating a court-enforceable section 87B undertaking to address issues that the ACCC considers cannot be resolved through receiving further information or conducting further market inquiries.
Although undertakings may be offered at an earlier stage, they are typically offered after the ACCC has made clear its areas of preliminary concern. The ACCC will usually conduct public consultation with interested parties in relation to the effectiveness of proposed section 87B undertakings. Undertakings may be behavioural, structural or a combination of both, noting that the ACCC’s preference is for structural undertakings (i.e. involving the merged entity divesting certain assets), and that such divestiture would ideally occur on or before the completion date (a ‘fix it first’ divestiture undertaking). There may be circumstances where, if this does not occur, the ACCC will not find any other remedy acceptable. If a merger is subject to enforceable undertakings, the ACCC will also issue a public competition assessment (PCA).
Cleared or opposed
If a merger is cleared, including if it is not opposed subject to s87B undertakings, the ACCC will publish a brief outline of its decision on the ACCC website. In addition, if a merger is cleared and raises important issues that the ACCC considers should be made public, the ACCC will publish a public competition assessment (PCA) that outlines the basis for reaching its final conclusion.
If a merger is opposed, that is, the ACCC’s competition concerns are unresolved, the ACCC will publish a Public Competition Assessment (PCA).
Following an opposition, parties may wish to:
- reconsider their commercial objectives in relation to the transaction;
- consider legal options;
- consider the content of the PCA once published; and/or
- consider merger authorisation. For a merger to be successful under the ACCC merger authorisation regime following an unsuccessful informal merger clearance there would need to be evidence of strong public benefit(s) to counter the ACCC’s view on the lessening of competition likely to result following the merger.
What is a PCA?
The ACCC will publish a public competition assessment (PCA) that outlines the basis for reaching its final conclusion if:
- a merger is cleared and raises important issues that the ACCC considers should be made public;
- a merger is rejected;
- a merger is subject to enforceable undertakings; or
- the merger parties seek such disclosure.
By publishing PCAs, the ACCC aims to provide the market with a better understanding of the ACCC’s analysis of various markets and associated merger and competition issues. PCAs are also intended to alert the market to the circumstances where the ACCC’s assessment of the competitive conditions in particular markets is changing, or is likely to change, because of developments (e.g. through technological change or previous mergers in those particular markets). The ACCC aims to publish PCAs within 30 business days of making a decision, but where matters are complex this period may be longer.
More information on merger control
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