This article was written by Caroline Coops, Helena Kanton and Kat Armstrong.
The ACCC has just unveiled its long-awaited merger reform proposals.
Speaking at the Law Council of Australia Competition Law Workshop this morning, Rod Sims, ACCC Chairman, laid out for the first time the ACCC’s proposal for comprehensive changes to Australia’s merger regime.
Earlier this week we reported on the background to the current reform debate and possible reform proposals that we predicted were in the wings.
Virtually all of our predictions have come to pass, with no aspect of the current regime remaining untouched.
Importantly, Rod Sims framed these proposals as the ‘start of a debate’ in relation to merger reforms. He confirmed that there is no current intention to put these proposals to Government until after the election. As a result, ‘this is not the end of the discussion, but the beginning of the discussion.’
Even so, these proposed reforms are the most sweeping changes ever proposed to the merger competition test and the ACCC’s clearance regime. They propose revolution – not evolution – of the approach to mergers in Australia.
The economic impact of the proposals should not be underestimated, and needs to be fully tested before the debate takes a life of its own.
1 A mindset change – through sweeping reforms
Rod Sims today stated that there needs to be a ‘mindset change’ for merger review in Australia.
In his view ‘our economy would be better served by more companies deciding to compete rather than to acquire’ and the question should be ‘why the acquisition should be allowed on competition grounds’.
With this in mind, Sims kicked off what he framed as the start of a ‘key debate’ on merger reforms. In doing so, he made clear that the ACCC is not proposing changes because it is ‘worried about losing court cases’ but because it has ‘serious concerns about the level of competition in our economy and our ability under the current law to prevent future consolidation via anti-competitive acquisitions’.
He confirmed the ACCC’s view that Australia’s merger regime is ‘out of step’ with international jurisdictions, including because there is no mandatory requirement to notify the ACCC. He also pointed to ‘flaws’ in the way the merger law is applied, stating:
Based on past experience, 1-2% of acquisitions considered by the ACCC are likely to be contentious and may ultimately be opposed. While small in number, the impact of being unable to prevent anti-competitive acquisitions proceeding can be very significant.
In particular, Sims said that changes are ‘necessary to ensure the focus is on the competition that will be lost if the merger proceeds, and on the impact of the merger on structural conditions for competition in the relevant market’. In the ACCC’s view, the substantive merger test requires reform and, without action, ‘market power in Australia will become further entrenched; and will certainly not be reduced.’
Sims identified the problems resulting from increased market power as being:
- competitive impacts on small businesses;
- little control over how data is being used in digital markets;
- its contribution to economic inequality and undermining trust in markets; and
- reducing efficacy of macroeconomic policy.
Finally, on digital platforms, Sims reiterated the ACCC’s existing concerns regarding the growth of digital platforms where ‘a strategy of acquiring nascent rivals can, and likely is, being used to protect positions of very substantial and long-lasting market power.’
We’ve summarised the ACCC’s proposals below and what they could mean for mergers in the future if implemented.
2 Summary of reforms proposed today by the ACCC
The ACCC proposes that the current merger regime be changed in the following ways:
- A new single formal clearance regime. The ACCC proposes to abolish the existing long standing informal merger review process and introduce a new single formal approval process. This formal process would have mandatory notification thresholds, and notified acquisitions would be prohibited from completing without approval. The ACCC also proposes to retain a ‘call-in’ power to review problematic mergers that do not meet the mandatory thresholds.
- Change to the legal test and the merger factors. While the ACCC wants to keep the substantial lessening of competition test, its proposal is to:
- make changes to the merger factors in section 50(3);
- introduce a statutory definition of ‘likely’;
- introduce a provision under which acquisitions would be deemed to have the effect of substantially lessening competition where one party has substantial market power and, as a result of the acquisition, this position ‘would be likely to be entrenched, materially increased or materially extended’; and
- introduce amendments to ensure that the competitive effects of collateral agreements can be considered alongside any merger assessment under section 50.
- A specific and separate test for acquisitions by large digital platforms. In a major departure from industry-wide regulation, the ACCC proposes that a tailored and separate merger test apply to (yet to be) identified large digital companies, which may include the mandatory notification thresholds being lowered.
Ex-post merger review
In support of its reform proposals, Sims announced that the ACCC has recently conducted an ex-post reviews of acquisitions - noting that this review captured past acquisitions that the ACCC was ‘uncomfortable with’.
The ACCC will be sharing the key findings of this review ‘in due course’, which Sims described as interesting and ‘troubling in some cases’.
The ACCC also flagged that its ex-post review work will inform its approach to future remedies, noting that it has on occasion had to accept remedies to address concerns about acquisitions (rather than opposing those acquisitions) because of challenges involved in proving the future effect of a transaction.
3 Why the need for change?
The current merger test under section 50(1) of the Competition and Consumer Act 2010 (Cth) (CCA) provides that a corporation must not directly or indirectly acquire shares or assets if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a relevant market.
The ACCC considers that the key challenge for merger control is to distinguish between acquisitions which substantially lessen competition and those that do not.
Rod Sims today outlined four key reasons why the ACCC considers the current test to be problematic:
- The fact that the ACCC needs to go to court and prove that anti-competitive effects are likely, in order to prevent a merger that the ACCC believes is anti-competitive.
- There is an insufficient focus on preserving the structural conditions necessary for competition.
- The Australian merger control regime is ‘skewed towards clearance’.
- There is a ‘gap in the law’ in relation to acquisitions by large digital platforms.
Going to court
The way in which the courts have applied the current test in recent cases has been the subject of criticism by the ACCC in the past. The question of whether an acquisition is likely to have the effect of substantially lessening competition for the purpose of section 50 has been determined through application of the future ‘with and without’ test, also known as a comparison between the ‘factual’ and the ‘counterfactual’. This test requires a consideration of the likely state of future competition in the relevant market with the proposed acquisition (the factual), compared to the likely state of future competition in the relevant market without the proposed acquisition (the counterfactual).
Today, Rod Sims confirmed the ACCC’s view that, in many cases, it is ‘virtually impossible’ for the ACCC to obtain evidence of future anti-competitive effects. Reasons given for this include opponents to the merger not being willing to give evidence in court due to fear of reprisals.
The ACCC also considers that the courts rely too heavily on the evidence of the merger parties and executives. This reflects the ACCC’s statement in the Final Report to the ACCC’s Digital Platform Inquiry (Digital Platform Inquiry Final Report), that ‘the tribunal and the courts appear to give greater weight to evidence from the parties to the transaction’ who the ACCC considers ‘have a vested interest in the acquisition proceeding, rather than from the evidence from third party witnesses’.
Rod Sims highlighted today that this can be difficult to challenge ‘where parties are careful to ensure there are no damaging company documents’.
Differences in the approach by overseas regulators have also been previously pointed to by the ACCC, in particular the fact that US courts ‘usually place little weight on the testimony of merger party executives’ unless supported by documents pre-dating the proposed merger.
The ACCC clearly sees this issue as broader than one that only appears in mergers it opposes. It considers that these issues feed into its decisions not to oppose certain acquisitions. This is because, although the ACCC may have considered that the relevant transaction would have adversely affected structural conditions for competition, it did not consider that it could overcome the ‘challenges in proving requisite effect as interpreted by courts’.
In these cases, the ACCC considers that it has been required to accept remedies rather than opposing the transaction outright.
Insufficient focus on structural conditions and a process ‘skewed towards clearance’
The ACCC has previously said that there is currently not enough weight placed on the potential competition being lost, concluding that the net result is that Australia’s merger control regime is ‘skewed towards clearance’.
Rod Sims confirmed today his view that there is insufficient focus on how a merger will change the structural conditions for competition and that the current test takes away from an assessment on whether there is a ‘commercial incentive to engage in harmful behaviours’.
In the ACCC’s view, this differs to other jurisdictions which take the starting point that an increase in concentration in already concentrated markets have a much greater likelihood of lessening competition. In Rod’s view expressed today ‘there seems undue optimism that new entry will occur or that a small number of large players will compete rather than accommodate one another and make a good profit.’
Further, the ACCC considers the voluntary and non-suspensory nature of the Australian merger notification regime to be out of step with other regimes.
Finally, the ACCC is concerned about what it considers to be ‘a concerning increase in the number of times legal advisers are threatening that their clients will compete transactions before we have finalised our review.’
Acquisitions by large digital platforms
The ACCC considers that there is a gap in Australia’s merger laws in relation to digital platforms, which ‘is significant and growing’.
Rod Sims confirmed today that, although the ACCC does not consider this gap to be limited to acquisitions in digital markets, it has been ‘amplified’ in these markets due to strategies of ‘acquiring nascent rivals’ to ‘protect very substantial and long-standing market power’.
4 A new single formal regime – and removal of the current informal regime
The ACCC proposes that the current informal merger clearance regime be abolished, and replaced with a new single formal regime. This necessarily means the ACCC’s proposals would see the removal of the ability for mergers to be cleared on the basis of significant ‘public benefits’ (which currently can be considered under the formal authorisation route).
This would involve a mandatory requirement to notify the ACCC of all acquisitions above a certain threshold.
As we predicted in our earlier Alert, the ACCC intends to look to international regimes to determine the form of this proposed process.
While no specific thresholds were put forward, Rod Sims identified that there are two key considerations to take into account in setting these thresholds - being the need to ensure that the ACCC ‘sees the acquisitions [it] needs to’, while at the same time, not imposing significant burden on businesses ‘across the board’.
The ACCC also proposes that notified acquisitions would be prohibited from being completed unless ACCC clearance is granted.
In order to limit the regulatory burden, the ACCC considers there needs to be:
- A way to deal with mergers that are above the thresholds but do not raise concerns.
- For mergers below the thresholds, the ability of merger parties to seek a review under the current pre-assessment process.
- A ‘call in power’ for the ACCC to be able to review any transaction below the thresholds, so as to avoid parties structuring their transactions to avoid the thresholds. These mergers would then be considered under the single formal process. As part of considering how the ACCC’s proposals may be implemented, it will be important to get clarity on how long the ACCC will have to decide to exercise this power.
In a significant change, Rod Sims suggested that the ACCC would ‘publish detailed reasons for its decision to clear, or decline to clear, proposed acquisitions’. These reasons would need to be sufficiently comprehensive to provide necessary transparency, and would need to go beyond the information the ACCC currently publishes publicly under the informal process. The proposal is that the ACCC’s decisions would be subject to limited appeal rights for review by the Tribunal only – which would be a limited merits review. The Tribunal would be limited to considering material that was before the ACCC when it made its decision. This would mean that the Tribunal’s consideration would likely be a review based on documents only – and wouldn't feature witnesses, oral testimony, cross examination or in many cases evdience from third parties like competitors (which are all mainstays of current section 50 litigation).
On this point, Sims said ‘[w]e think the Tribunal, with its composition of a Federal Court judge and economic and business members, provides the most suitable body to review merger decisions. Enabling the Tribunal to review ACCC decisions rather than the Federal Court should also provide a quicker and less costly process.’
5 Changes to the legal test and merger factors
The ACCC put forward several changes aimed at ensuring that the legal test is focused on the competition that is lost by mergers, and changes in the structure of markets.
The proposals are to:
- update the existing merger factors;
- define the term ‘likely’ in the current test;
- include a provision that deems acquisitions to substantially lessen competition where they ‘entrench, materially increase or materially extend positions of substantial market power’; and
- add a new provision to allow agreements between the merger parties to be taken into account in the merger assessment of the likely effect on competition.
Merger factors under s 50(3) of the ACCC
In the ACCC’s view, the current merger factors in section 50(3) of the CCA do not sufficiently focus on the structural changes that will occur after a merger, and the impact on competition that this may have.
Consistent with the ACCC’s recommendations from the Digital Platforms Inquiry Final Report, the ACCC proposes amendments to section 50(3) of the CCA to incorporate the following additional merger factors:
(j) the likelihood that the acquisition would result in the removal from the market of a potential competitor;
(k) the nature and significance of assets, including data and technology, being acquired directly or through the body corporate.
The Federal Government has previously noted that it is undertaking public consultation in relation to this recommendation.
The ACCC proposes that section 50 be amended so that the term ‘likely’ is not interpreted as a ‘real commercial likelihood’ and instead is defined as ‘a possibility that is not remote’.
This would bring the term in line with the definition used in the cartel provisions of the CCA.
This proposal is aimed at addressing the concerns held by the ACCC in relation to the difficulty of convincing the Tribunal and the Federal Court that its counterfactual scenario/theory of harm is more than mere speculation.
Deeming certain acquisitions to breach section 50
The ACCC proposes that acquisitions would be deemed to have the effect of substantially lessening competition where one party has substantial market power and, as a result of the acquisition, its position of substantial market power ‘would be likely to be entrenched, materially increased or materially extended.’ Rather than a rebuttable presumption, it appears that the ACCC’s proposal is for an assumption of substantial lessening of competition in certain circumstances. One important question to answer in considering this proposal is how parties will know whether they meet the threshold of having ‘substantial market power’ – and how it will be determined that this threshold has been met if there is not alignment between the parties and the ACCC on this important point.
Rod Sims today stated that, while the substantially lessening of competition test should remain the ‘bedrock’ of the mergers test, acquisitions by companies with substantial market power ought not to be subject to proof of competitive effects – instead, these acquisitions should be deemed to substantially lessen competition.
In Sims’ view, this would assist to preserve competitive market structural conditions and avoid an undue focus on how competition may play out in the future, stating:
Our experience has been that all too often the Courts are taken down an evidentiary rabbit warren in the name of identifying precisely how competition will play out in the future with and without the proposed transaction. Indeed, this is a natural tendency for judges whose role is to systematically establish facts to the requisite standard of proof…
This proposed new provision would, for certain matters, more squarely focus the assessment on preserving the structural conditions for competition in markets most at risk of the exercise of market power.
Sims also noted that, instead of this putting a cap on large firms, he sees it as only applying in certain circumstances and, therefore, as only being used to avoid a relatively limited number of mergers.
Other agreements in merger assessments
Finally, the ACCC proposes an amendment to ensure that the competitive effects of collateral agreements can be considered alongside any merger assessment under section 50.
In the ACCC’s view, ‘this would help to stop parties taking steps to change the counterfactual or take advantage of the anti-overlap provisions in order to get anti-competitive mergers cleared.’
6 A specific test for large digital platforms
In the ACCC’s view, specific changes are needed to deal with acquisitions by large digital platforms when they involve a ‘nascent rival’, as these transactions ‘can have long lasting effects on competition’.
Without naming any specific company, Sims indicated that the ACCC will create a list of targeted companies that will be subject to this ‘more tailored merger test’ and a higher level of scrutiny.
In deciding this list, he indicated that the ACCC will look to the size and scope of the company, whether it holds market power and whether it acts as a ‘gateway’ in terms of ‘controlling how other businesses interact with consumers’.
Sims stated that:
The ACCC has not yet reached a view on the best test to capture anti-competitive acquisitions by these platforms, while also not reducing incentives for innovation and development in the tech sector.
However, at this point, our view is that the probability of competitive harm that needs to be established should be lower than that which applies for acquisitions in the economy more broadly.
Finally, he noted that lower notification thresholds may apply to large digital platforms.
As expected, the ACCC is looking to overseas regimes and, in particular, to the UK’s Digital Task force and its proposed labelling of some large tech companies as having ‘Strategic Market Status’. Sims noted that the proposed Strategic Market Status test would allow regulators to look at whether a company defines the ‘rules of the game’ for businesses in the wider market.
Finally, Sims flagged that specific merger controls are likely to need to sit alongside wider controls over these companies, referring to the reforms to the European Commission’s Digital Markets Act and changes to merger control in Germany. He indicated that further detail will be proposed in the ACCC’s September 2022 interim report of the Digital Platform Services Inquiry.
7 What next?
What next indeed?
These proposed reforms are the most sweeping changes ever proposed to the current mergers test and the ACCC approval regime. They propose revolution - not evolution – of the approach to mergers in Australia. The economic impact of the proposals should not be underestimated, and needs to be fully tested before the debate takes a life of its own.
The ACCC acknowledged that the ‘ball is not in our court’ when it comes to actually effecting merger reform. While the ACCC makes recommendations, Sims emphasised that merger reform policy falls to Treasury, with Government to then potentially progress as proposed reforms as it sees fit.
We encourage all of our clients to be part of this important debate.
Where can I learn more?
See our Alert published earlier this week for more detail on all things mergers including:
- The current merger test and notification regime.
- The issues raised by the ACCC in relation to the current test.
- The ACCC’s previously proposed amendments to the existing merger factors.
- Mandatory and suspensory merger regimes overseas and what one could look like in Australia.