Merger Review Benchmarking Report - Chapter 6

Table of Content

Introduction

Mergers in Australia are subject to review under the Trade Practices Act 1974 (TPA). The TPA is administered and enforced by the Australian Competition and Consumer Commission (ACCC), an independent statutory authority.

In addition to review by the ACCC, mergers can be the subject of private actions under the TPA, but only for damages, declaration or divestiture. Mergers involving foreign investors are also subject to the provisions of the Foreign Acquisitions and Takeovers Act 1975, which is administered by the Foreign Investment Review Board.

Judicial review of mergers arises only:

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• when parties threaten to complete acquisitions despite ACCC opposition and are then forced to defend ACCC injunction proceedings in Federal Court;
• when formal authorization has been applied for and rejected by the ACCC. The decision can be reviewed by the Australian Competition Tribunal (ACT), which will conduct a full re-hearing on the merits. From the Tribunal, appeal to the Federal Court on points of law only are allowed.

Legislative Provisions

Mergers are governed by section 50 of the TPA, which prohibits acquisitions of shares or assets if the acquisition would have, or be likely to have, the effect, of substantially lessening competition in a market. For purposes of merger analysis, relevant product and geographic markets are defined in a manner consistent with the hypothetical monopolist paradigm used by the Bureau. However, for purposes of section 50 of the TPA, section 50(6) provides that market means "a substantial market for goods or services in Australia, in a State or in a Territory." This prevents the capture of de minimus transactions by the legislation. The legislation stipulates that in determining whether an acquisition will or is likely to lessen competition substantially the following matters must be taken into account:

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• the actual and potential level of the import competition in the market;
• the height of barriers to entry to the market;
• the level of concentration in the market;
• the degree of countervailing power in the market;
• the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins;
• the extent to which substitutes are available in the market or likely be available in the market;
• the dynamic characteristics of the market, including growth, innovation and product differentiation;
• the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor; and
• the nature and extent of vertical integration in the market.

All share acquisitions are potentially subject to analysis under the merger provision regardless of whether or not they result in control of the target firm.

There is no formal requirement for parties to a proposed merger to notify the ACCC, however, there is provision for parties to apply for authorization.

Authorization

The TPA allows a process whereby mergers that conflict with the substantive lessening of competition test can be allowed to proceed on the basis that they will create a net public benefit. This process is termed authorization. This a formal process requiring application to and public review by the full Commission. Various trade-offs can be considered under this process, including efficiencies, enhancement of international competitiveness, enhancement of exports, etc. Such trade-offs are considered on a case by case basis.

Structure

The ACCC is a statutory authority created for the purpose of administering and enforcing the TPA. Portfolio responsibility for the Commission rests with the Department of the Treasury. While the Commission has wide-ranging responsibilities under the TPA and other legislation, this chapter focusses on its role in merger review.

The ACCC comprises a Chairperson, a Deputy Chairperson and a number of full-time commissioners and part-time Associate Commissioners. In carrying out its role, the ACCC is assisted by staff, including a Chief Executive Officer and a General Manager responsible for mergers and asset sales. Currently, there are 20 to 23 staff devoted to merger review, which represents approximately six to seven percent of the Commission’s total.

Process

Mergers are generally brought to the Commission’s attention prior to their completion, either through informal procedures or through an application for authorization.

As an integral part of its merger enforcement approach, the ACCC encourages parties to approach it as soon as there is a real likelihood that a proposed merger will proceed. Parties can make this approach on either a confidential basis or on the basis that the proposed transaction is in the public domain. The ACCC is satisfied with this voluntary approach to pre-merger notification, and says that it has only rarely not been notified of a problematic transaction. Compliance with this voluntary approach is probably seen as sensible by the business and legal communities, at least in part, due to provision for pecuniary penalties against parties, including their directors, lawyers, banks and other advisers, if a merger occurs without notice and that the ACCC considers there to have been a breach of the TPA.

When a matter is considered on a confidential basis, the ACCC will not provide the parties with any definitive view until it has the opportunity to seek information from and the views of other parties, including industry participants, appropriate government authorities and, when relevant, competition agencies in other jurisdictions. On a confidential matter a response will be provided that indicates:

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• the acquisition is considered to substantially lessen competition;
• the acquisition raises some concerns but will not be opposed prior to making market inquiries; or
• in the absence of market inquiries, the ACCC does not propose to express an opinion but does not intend to oppose the acquisition at that time.

Parties proposing mergers are encouraged to provide written submissions and background documentation describing the proposal and providing an analysis of the competitive impact of the merger. In cases where there appears likely to be a breach of the TPA, the ACCC will request relevant internal documents from the parties. If such documents are not provided voluntarily, the ACCC is prepared to use its formal powers provided under section 155 of the TPA.

The actual review process and factors taken into consideration by the ACCC in assessing mergers are substantially similar to those in Canada, but there are some significant differences in internal processes. These arise principally from its differing structure (i.e. it is a commission that incorporates both investigative and adjudicative functions).

In matters where parties wish that the matter to remain confidential, the Commission will generally provide its informal advice within two to three weeks. Where it is appropriate to make market contacts, the ACCC attempts to meet the following service standards:

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• in matters that do not breach the merger thresholds, parties are informed within 10 to 15 days that the ACCC does not propose to take any action at that time;
• in matters which do appear to breach the thresholds, the ACCC will usually require approximately one month to make market inquiries and consider the matter; and
• in those few major cases that raise substantial issues and are likely to be subject to some form of enforcement action by the ACCC, it may take six to eight weeks to fully consider the matter.

(Note that these standards only apply from the point at which the parties have provided to ACCC staff all relevant information necessary to conduct the review of the proposed merger)

Approximately 65 percent of merger matters fall into the first category. These are straightforward, non-complex mergers that do not require extensive analytical work or market contacts before concluding that they raise no significant issues. For the second and third categories, analysis requires careful consideration under the Merger Guidelines and all these matters are considered (up to 1996) by the full Commission either in the first instance or after initial review by the Mergers Review Committee. Some delays can be encountered due to incomplete information being provided by the parties or obtaining information relating to offshore acquisitions.

In 1996, the ACCC streamlined its process for merger review. Only the most complex matters are now considered by the full Commission. The majority of matters are considered by the Mergers Review Committee, comprising the Chairman and nominated Commissioners, with the Committee’s decision being reported to the ACCC. The Committee meets once a week to deal with proposals. Matters which raise concerns are referred to the full Commission for further consideration.

Remedial Measures

If the ACCC concludes that a proposed merger would, or would likely to have, the effect of substantially lessening competition, the parties will be advised of this view. At that point, the parties have the following options:

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• abandon the proposal;
• modify the proposal to address the anti-competitive consequences, either informally or formally by way of enforceable undertakings;
• apply for authorization for a ruling by the ACCC that, notwithstanding the substantial lessening of competition, the merger should be allowed on the basis that it would result in a net public benefit;
• seek to complete the transaction at their own risk; or
• seek a declaration that the proposal does not contravene the TPA.

In cases where the ACCC concludes that a merger proposal will, or is likely to, lessen competition substantially, it has a number of possible responses. It may:

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• seek an interim or a permanent injunction against the merger from the Federal Court;
• seek an informal undertaking or an undertaking pursuant to section 87B of the TPA from the parties not to proceed; or
• seek enforceable undertakings under section 87B that will resolve the competition concerns.

The ACCC does not normally consider it appropriate to allow a merger about which it has concerns to proceed and to seek remedies post-closing.

The availability of enforceable undertakings is an interesting facet of the Australian system of competition policy. Section 87B of the TPA allows the ACCC to accept written undertaking in the exercise of its power and for the enforcement of such undertakings in the Federal Court. Once undertakings are provided, parties can vary or withdraw them only with the consent of the ACCC.

The Commission considers undertakings to be an integral part of the enforcement scheme. The ACCC does not have the power to require undertakings; rather they can be raised as an option and it is left for the parties to offer them. Undertakings can only be accepted by the ACCC itself, not by the Commission staff. They must be of substance and address the conduct at issue. They will not be accepted if they include a denial of liability, statements that they are not an admission in relation to the conduct at issue, terms purporting to defend the conduct at issue, or obligations placed upon the ACCC.

There are a number of basic elements for undertakings, the include:

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• a brief description of the parties and conduct at issue;
• the undertaking (i.e. the proposed action of the parties); and
• acknowledgement that the undertakings will be put on the public record.

In respect of mergers, undertakings are used:

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• to ensure that an acquisition is not completed until the Commission has had the opportunity to make market inquiries; or
• to resolve matters where the proposed acquisition is, in the Commission’s view, likely to contravene the TPA.

Structural solutions to merger issues are preferred and the Commission is not likely to favour behavioural undertakings. In almost all cases, the ACCC will want to consult with relevant market participants before accepting substantive undertakings in respect of a merger proposal. Following acceptance of undertakings, the Commission requires that its implementation and effectiveness be monitored.

Public Register

The ACCC maintains a public register of all the mergers it considers. Included in the register are brief details of the proposed merger, product descriptions and brief reasons for the Commission’s response to the merger. Merger authorizations are also registered publicly.

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