Update on Australian merger reform: draft legislation published for consultation

By Ben Hamilton, Steve Johns and Anne Utecht

Since our last update, Treasury has published its exposure draft of the proposed new laws (Draft Legislation) to amend the Competition and Consumer Act 2010 (Cth) (CCA). The proposed changes are subject to public consultation until 13 August 2024. Assuming the Draft Legislation is passed by Parliament, the amendments will come into effect from 1 January 2026.

Most of the proposed changes are consistent with Treasury’s previously published Merger Reform Paper. However, certain changes are new, including factors to be considered in the substantial lessening of competition test and the level of control the ACCC has over the timeline for merger review.

The potential expansion of the substantial lessening of competition test could not only broaden the scope of mergers that can be challenged but could also impact other provisions subject to the substantial lessening of competition test.

In addition, the much-awaited notification thresholds and fees are not contained in the Draft Legislation. They will instead be subject to separate regulations and determinations by the minister. Given this, the extent of the impact of the proposed amendments – particularly in the case of mid-market and smaller acquisitions – is difficult to determine at this point.

We summarise key elements of the Draft Legislation and expand on some of the issues you need to be aware of.

Key elements of the Draft Legislation

• Mandatory notification with suspensory effect. As expected, notification will be mandatory for certain transactions. Where a transaction is required to be notified to the ACCC, parties will be restricted from completing the transaction until the ACCC makes a determination (or the time for making a determination expires). Non-compliance may result in penalties, a divestiture order or the transaction being void.
• Thresholds and fees not published. The thresholds that will trigger notification and the fees payable are not contained in the Draft Legislation but will be the subject of separate regulations to be published later this year.
• Public register. The ACCC will maintain a public register of notified acquisitions. The information to be contained in the register will be determined later.
• Substantially lessening competition test. The test of ‘substantially lessening competition’ will remain in place but will now specifically consider whether the transaction will create, strengthen or entrench a substantial degree of power in a particular market or any market. Importantly, the changes to the definition of the test will not only impact merger reviews but also other anti-competitive practices under the CCA, including misuse of market power and exclusive dealing.
• Timelines for ACCC review. There are detailed timelines for the ACCC to provide its determination (the shortest one available for an approval of a transaction being 15 business days). If the ACCC does not make a determination within the prescribed period, the parties may proceed to completion of the transaction.
• Review and enforcement. The ACCC’s determinations are generally reviewable (on application by a notifying party that has a sufficient interest), by the ACCC itself (internal review) or by the Australian Competition Tribunal, which can affirm, vary, set aside and remit or remake the original decision. Enforcement actions need to be ordered by the Federal Court.

What transactions will need to be notified?

Thresholds yet to be determined

Acquisitions of shares or assets will need to be notified if they exceed a certain threshold. The thresholds will be determined in regulations and by the minister, and are likely to be linked to the transaction value, but may also include other factors, such as the classes of the parties, assets, the nature of any relevant markets or the parties’ turnover.

Despite some media speculation, Treasury has not officially provided an indication of the thresholds. Consultation will take place later this year and Treasury encourages submissions as to suggested values.

Voluntary notifications will be possible under the proposed amendments.

Exemptions and the ‘control’ criterion

The Draft Legislation provides – among other things – for exemptions to notification where the acquisition does not result in control of the target or in the case of internal restructures and reorganisations.

‘Control’ is presumed where the acquirer has 20% voting power in the target, unless the parties are able to prove there is, in fact, no control. The effect of the control test seems to be that acquisition of minority shareholdings above 20% voting power will fall into the new regime. However, whether a notification will be triggered based on the percentage alone or whether the future thresholds need to be met in addition to the acquisition of control remains to be seen.

Creeping and multiple acquisitions

As anticipated, the Draft Legislation provides that a current acquisition is taken to meet the substantial lessening of competition test, if, taken together with previous acquisitions, those transactions would in combination (likely) substantially lessen competition in any market.

Previous acquisitions will be taken into account where they:

• completed during the three years prior to the current acquisition;
• contained any party to the current acquisition or any of its related bodies corporate; and
• involved the same ‘industry’.

The intent of these amendments is to capture roll-up transactions and will likely have a significant effect on private equity sponsors. In addition, the current drafting may leave parties unclear as to what previous transactions will be taken into account since the term ‘industry’ is not defined in the CCA or the Draft Legislation.

Finally, the Draft Legislation provides for multiple acquisitions to be notified together where those acquisitions form part of a single transaction and the parties all form part of that transaction.

What is the relevant test going to be?

Substantially lessening competition

The Draft Legislation provides that the ACCC is to approve a notified acquisition unless it reasonably believes  the acquisition would have the (likely) effect of substantially lessening competition (SLC) in any market.

However, the Draft Legislation also proposes to amend section 4G of the CCA to include the creation, strengthening and entrenching of a substantial degree of market power (even if occurring in a different market) as factors to be considered when determining if there has been a ‘lessening of competition’. This amendment, together with Treasury’s explanatory memorandum accompanying the Draft Legislation, suggests a shift in focusing the test on market power of the parties. Taken together with the new merger factors (see below), it is arguable  the SLC test will be shifting, if not broadened.

Further, as the SLC test applies to various anti-competitive practices such as misuse of market power and exclusive dealing, the changes will also broaden the scope of these provisions.

Replacement of current ‘merger factors’

With the repeal of the current sections 50 and 51 of the CCA, the so-called ‘merger factors’, which served as a guideline for circumstances to be considered when assessing SLC, will also be repealed and replaced with a new list, as outlined in the table below. This underscores  Treasury’s emphasis on an analysis of market power and the current and prospective relationship of the parties.

How long will it take to reach a determination?

The Draft Legislation provides for a two-phase review process which can be summarised as follows:

The timeline only starts from when the ACCC is satisfied it has all necessary information and considers the application to be complete. Further, the timeframes can be extended when the ACCC requests additional information. Whether the indicated timelines will prove to be the norm or the exception remains to be seen.

If there is a material change in a proposed transaction, such changes need to be notified to the ACCC. In that case, the ACCC is not bound by the timeline set out above but is held to provide a determination within a ‘reasonable’ time frame.

What are the consequences if the new rules are not complied with?

The Commission may apply to the Federal Court, which has the power to make various orders (depending on the type of breach), including:

• forcing the parties to notify the acquisition;
• imposing civil penalties (of up to 1,000 penalty units, currently being $313,000);
• ordering divestures;
• finding the transaction to be void; and
• ordering injunctions to prevent the acquisition from proceeding.

It’s important to note ACCC has access to remedies not only in cases where a party fails to notify as required but also when parties provide false or misleading information to the regulator.