Competition update: merger control reform and increasing regulator scrutiny
The ACCC’s decision in September to query Endeavour’s proposed acquisition of the Rye Hotel is the latest in a string of mergers that the ACCC has denied or closely scrutinised in the past 12 months. In this article, we consider Australia’s current merger control regime and the ACCC’s proposals to make merger notification mandatory, a change that will continue the trend of more transactions receiving closer regulator attention in the future.
What is the current position?
As it stands, section 50 of the Competition and Consumer Act 2010 (the CCA) currently prohibits acquisitions of shares or assets that would have the effect, or be likely to have the effect, of substantially lessening competition (SLC) in any market. This ‘SLC test’ is therefore, on the face of it, broadly applicable to the majority of corporate acquisitions.
Currently, parties are not under a positive obligation to notify or otherwise seek pre-clearance by the ACCC of a transaction that may contravene section 50. However, if the ACCC considers that the transaction will result in an SLC, it can seek certain remedies in the Federal Court, including an injunction to prevent the acquisition going ahead. To mitigate risk, parties will often voluntarily notify the ACCC to obtain the ACCC’s informal views on the transaction. Parties may also seek formal merger authorisation, although this regime is only infrequently used in practice, typically in higher profile transactions or those with potentially significant public impacts.
While the voluntary regime is a useful tool in managing the risk of an adverse ACCC action in relation to a transaction, it is not a mandatory or legislative process – the process is implemented and managed in accordance with the ACCC’s own guidelines only. If the ACCC’s proposed reforms are adopted, this is set to change.
What is proposed?
In April 2023, ACCC Chair Gina Cass-Gotlieb announced her support of a range of reforms to the merger control regime in Australia. These proposed reforms include the following substantial changes to Australia’s merger laws:
- Mandatory notification obligation – parties would be under a statutory obligation to notify the ACCC of any transaction that meets certain specified materiality thresholds. The potential thresholds currently being considered by the ACCC are understood to include (i) a turnover threshold of $400 million, or (ii) a global transaction value threshold of $35 million. In either event, this would capture a significant portion of Australian M&A activity.
- Reversal of the onus of proof – currently the onus of proof that a transaction may have the effect of an SLC lies with the ACCC. This can be a difficult onus to discharge. The ACCC’s proposed reforms would require parties to present evidence that the relevant transaction would not, on the balance of probabilities, result in an SLC. This would effectively mean a transaction is assumed to result in an SLC, unless it can be shown otherwise.
- Change in SLC test – the ACCC has proposed a refinement of the SLC test to include where the event has the effect of ‘entrenching, materially increasing or materially extending a position of substantial market power’ and expands the factors to be considered as part of the assessment process, including whether the merger would result in a merged party gaining increased access to data and technology.
- Call-in power – the ACCC would have the power to ‘call-in’ a transaction for consideration, even where the transaction falls outside of the above mandatory notification thresholds.
- Notification waiver process – to be used where transactions fall above the relevant thresholds but are ‘non-contentious’. The process would allow the transaction to be dealt with in a more efficient manner, where there are limited or no competition concerns.
How will this impact transactions?
These proposed reforms have the potential to substantially change the way in which parties assess and manage regulatory risk in corporate transactions. This is the case even for those transactions where there are limited competition concerns, as timelines will need to allow for ACCC notification and consideration, irrespective of the competitive impacts.
For transactions which reach the relevant (yet to be introduced) thresholds, it will be important for parties to consider the competition aspects of the transaction as early as possible in the process. Transaction timelines should include a sufficient period to:
- consider threshold questions – whether notification is mandatory or whether the nature of the transaction is such that it would be likely to be subject to an ACCC call-in.
- consider SLC test – whether the nature of the transaction and the acquirer’s and target’s market shares mean the ACCC is likely to have a concern from an SLC perspective.
- prepare notification – including assembling and considering appropriate market data. This could include procuring third party economic advice for contentious matters or seeking a notification wavier where non-contentious.
- answer ACCC queries – depending on the nature of the transaction, this could include queries on a range of matters, including information addressing the ‘merger factors’ in section 50(3) of the CCA.
- safeguard information / coordination until completion – to ensure the parties are not alleged to have engaged in ‘gun-jumping’.
While all of the above steps are unlikely to be relevant to all M&A activities, considering the prospect of ACCC scrutiny at an early stage allows parties to assess regulator risk as a part of an overall M&A strategy. This will be increasingly important as merger notification becomes a necessary component of larger acquisitions.
When will these changes come into force?
The ACCC’s reform proposals have yet to be formalised into draft legislation, so it remains to be seen how much of the ACCC’s preferred position is adopted by government in changes put to Parliament. Whatever the approach, it seems likely that Australia’s position as a global outlier in not imposing mandatory merger notification to competition authorities is likely to change in the short to medium term.
Hall & Wilcox’s corporate and commercial team has significant experience working with transaction parties on ACCC merger notification and regulator engagement. Please contact Ben Hamilton, Kurt Wicklund or our team if you would like to speak further about how the changes in competition laws might affect your upcoming M&A activities.
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