Mergers

Overview

Australia's competition laws prohibit acquisitions which have, or would be likely to have, the effect of substantially lessening competition in any market. There is no requirement that a controlling interest be acquired and asset acquisitions alone are sufficient where they will produce an anti-competitive effect. Consequently, for example, acquisitions of land, intellectual property rights or other non-controlling interests which produce the necessary anti-competitive result may be caught.

Mergers or acquisitions which would otherwise be prohibited may be 'authorised' in advance where the parties can demonstrate a public benefit which would outweigh the likely anti-competitive detriment associated with the merger or where it can be shown the merger would not substantially lessen competition.

There are no mandatory pre-merger notification requirements in Australia's competition laws. However, in practice, parties are encouraged to - and do - notify the Australian Competition and Consumer Commission (ACCC) about proposed mergers which may raise competition concerns. This process is informal and ACCC approval does not provide assurances against subsequent third party litigation.

Proposals for reform

The ACCC has recently proposed reforms to the merger review process, claiming that the current laws and processes are no longer fit for purpose.

In a speech to the National Press Club in April 2023, ACCC Chair, Gina Cass-Gottlieb, proposed significant changes:

Process

• move from a voluntary enforcement model to formal suspensory clearance model, including mandatory notification of mergers above specified thresholds and a call-in option for mergers that do not meet the threshold but raise competition concerns (conversely parties could apply for notification waivers in cases of non-contentious merger proposals);

• parties would be required to demonstrate to the ACCC (or the Tribunal on appeal) that their transaction would not be likely to substantially lessen competition before the merger would be cleared;

• if a merger is not cleared on competition grounds parties could subsequently apply for clearance on public benefit grounds;

• the Australian Competition Tribunal would be the review body for ACCC clearance and public benefit authorisation decisions; the Federal Cour would consider applications for declaration and judicial review and in cases involving transactions that do not trigger notification thresholds.

Law

• legislation to explicitly provide that substantial lessening of competition includes ‘entrenching, materially increasing or materially extending a position of substantial market power’

• adding new ‘merger factors’ that must be taken into account when assessing mergers, including:

  • impacts on the height of barriers to enry;

  • loss or actual or potential competitive rivalry

  • increased access to, or control of data, technology or other significant assets;

  • whether the acquisition is part of a series of relevant acquisitions; and

  • whether the acquisition entrenches or extends a position of substantial market power.

The prohibition

Section 50 of the Competition and Consumer Act 2010 prohibits the direct or indirect acquisition of shares or assets where the acquisition would have, or be likely to have, the effect of substantially lessening competition in any market.

In addition, section 50A deals with mergers occurring outside Australia; however, because section 50 is broad enough to cover most anti-competitive mergers producing anti-competitive effects in Australia, this provision has not been used in practice.

Acquisition of shares or assets

There is no requirement that a controlling interest be acquired and asset acquisitions alone are sufficient where it will produce an anti-competitive effect. Consequently, for example, acquisitions of land, intellectual property rights or other non-controlling interests which produce the necessary anti-competitive result may be caught.

Substantial lessening of competition

The current substantial lessening of competition test has applied since 1992. There have, however, only been two Federal Court decisions applying the provision and there is no High Court authority. The necessary level of proof required to demonstrate a proposed merger would substantially lessen competition is unclear following the Full Federal Court's decision in Metcash.

Before an assessment can be made about whether a merger is likely to substantially lessen competition, it is necessary to assess what is likely to happen in the future both with and without the merger (the counterfactual or “future without” and “future with” tests). At trial in Metcash Justice Emmett considered that it was necessary for the ACCC to establish 'on the balance of probabilities' what the 'future state of the market will be, both with and without the proposed acquisition' (para 145), but that if this can be established then it is sufficient to demonstrate that there is a 'real chance' that the proposed acquisition would result in a substantial lessening of competition (para 146). Relying on the decision in AGL at [348] Justice Emmett noted that (at para 136) 'does not encompass mere possibility' but requires assessment 'at a level that is commercially relevant or meaningful'. In Metcash the ACCC had argued multiple counterfactuals and Justice Emmett concluded they were not entitled to succeed unless the Court finds (para 146):

• that it is more probable than not that one of the Commission’s counterfactuals will come to pass if the proposed acquisition does not proceed; and

• that there is a real chance that, if the proposed acquisition does proceed, that would result in a substantial lessening of competition compared to the scenario in which one of those counterfactuals comes to pass.

On appeal to the Full Federal Court, Justice Buchanan disagreed with the trial judge, noting that, in his view, the 'real chance' test should not be applied at all to the application of s 50 [at para 25], instead expressing the view that it is necessary to establish likely substantial lessening of competition 'on the balance of probabilities' (para's 35 and 40). In separate judgments, the two other Federal Court judges did not reach a concluded view on the matter.

Substantial lessening of competition: matters to consider (s 50(3))

When assessing whether or not competition would be substantially lessened as a result of the merger or acquisition, the Court must consider the following factors (section 50(3)):

(a) the actual and potential level of import competition in the market;

(b) the height of barriers to entry to the market;

(c) the level of concentration in the market;

(d) the degree of countervailing power in the market;

(e) the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins;

(f) the extent to which substitutes are available in the market or are likely to be available in the market;

(g) the dynamic characteristics of the market, including growth, innovation and product differentiation;

(h) the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor;

(i) the nature and extent of vertical integration in the market.

This list is non-exhaustive with the result the Court may consider other relevant factors.

Relevant market

Subsection 50(6) provides that:

market means a market for goods or services in:

(a) Australia; or

(b) a State; or

(c) a Territory; or

(d) a region of Australia.

In addition, section 4E states:

For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first‑mentioned goods or services.

Although territorially defined, there is case law in relation to other competition law provisions that suggests a global or regional market may be a market for purposes of section 4E: Singapore Airlines Ltd v Australian Competition and Consumer Commission [2009] FCAFC 136 (2 October 2009). Given the existence of s 50(6) it is unclear whether or not such a broad market may be defined for purposes of the merger provision. However, even if a global market is artificially contained to Australia, the competition analysis will enable this to be assessed in the broader global context.

The Courts have recently emphasised the need for market definition to 'reflect commercial reality, rather than be driven by economic theory' (Justice Buchanan in Metcash para 10)

International mergers

Section 50A applies where the acquiring corporation is foreign and does not carry on business in Australia. However, asthe extraterritorial breadth of s 50 is wide enough to capture more mergers involving foreign corporations. s 50A is not used in practice.

Although there is no mandatory reporting obligation for proposed mergers in Australia, parties proposing to merge generally do notify the ACCC when proposing to merge and rely upon both the analytical and process guidelines produced by the ACCC to inform this process.

The current applicable guidelines for mergers in Australia are:

• ACCC Merger Guidelines (November 2008) (analytical) ➤

• ACCC Informal Merger Review Process Guidelines 2013 ➤
  (Updated 2017 to reflect Harper reforms)

• ACCC Merger Review Process Guidelines (July 2006) ➤

• ACCC Merger Authorisation Guidelines (2018) ➤

• ACCC Media Merger Guidelines (2017) ➤

• ACCC Gun Jumping Risks For Merger Transactions Guidance (2019) ➤

Merger Guidelines (2008) (analytical)

ACCC Merger Guidelines (November 2008) (analytical) ➤
Final Guidelines released 21 November 2008 and replace the 1999 Guidelines ➤

Notification

Notification remains voluntary in Australia, but the ACCC encourages parties to notify the ACCC in advance of completing a merger where (a) 'the products of the merger parties are either substitutes or complements' and (b) 'the merged form will have a post-merger market share of greater than 20 per cent in the relevant market/s' (p 9 Guidelines). 

Competition

The Guidelines note, at 3.1, that competition is 'a state of ongong rivalry between firms'. Only mergers which substantially lessen competition are prohibited by s 50. The Guidelines (at 3.14) note that section 50 requires 'forward-looking' analysis into effect or likely effect of a merger and the ACCC will focus on the 'foreseeable future' - normally one to two years - when considering market definition and the factors set out in s 50(3). The future 'with and without' test used to assess likely the impact of a merger on competition is discussed on page 13 of the guidelines. The ACCC's treatment of failing firm arguments is dealt with on page 14 of the Guidelines. 

Market definition

Chapter 4 of the Guidelines discusses the ACCC's approach to market definition, noting that the ACCC's starting point will be to identify 'the products and geographic regions actually or potentially supplied by the merger parties' and then focusing on 'defining markets in areas of activity where competitive harm could occur' (page 16). Substitutes are then considered. The ACCC will apply the hypothetical monopolist test (HMT) to help define the relevant markets (see pages 17-18) - although it will not apply it strictly, but rather as an 'intellectual aid'. Page 19 of the Guidelines sets out somr of the information the ACCC will rely on to assess substitution possibilities.

The relevant market must be a 'substantial market in Australia, a state, territoru or region of Australia' (s 50(6)). The ACCC notes that it considers that it is possible for a 'small' market to nevertheless still be 'substantial' (at 4.29). In particular, it is noted that a market might be geographically small but nevertheless 'substantial within the region in which it is located' (at 4.30).

The Guidelines consider issues that might arise in market definition (such as product differentiation and indirect substitution) at pages 20-23.

Unilateral effects

Chapter 5 is devoted to unilateral effects. Para 5.4 acknowledges that vertical and conglomerate mergs will normally be less likely to raise competition concerns than horizontal mergers; the chapter is, therefore, divided in to sections on horizontal mergers and non-horizontal mergers. In relation to non-horizontal mergers, the Guidelines note that the ACCC will only be concerned with non-horizontal mergers 'where the merged firm has the ability and incentive to use its position in one market to anti-competitively foreclose rivals in another market in a way that lessens competition' (para 5.22) and, in determining whether foreclosure would be likely to increase unilateral power of the merged firm the ACCC will consider (1) 'the merged firm's ability to foreclose', (2) any incentive the merged firm may have to foreclose' and (3) 'the likely effect of any such foreclosure'. 

Coordinated effects

Chapter 6 deals with the potential for mergers to lessen competition through coordinarted effects.

 Merger factors

Chapter 7 deals with each of the factors set out in s 50(3) which must be considered in determining whether a merger would substantially lessen competition.

The first section discusses concentration and market share. The 1999 Guidelines applied a test based solely on market share; the new Guidelines take into account the Herfindahl-Hirschman Index (HHI) in assessing market concentration (see para 7.9 and 7.12-7.16). The ACCC is 'less likely to identify horizontal competition concerns when the post-merger HHI is: * less than 2000, or * greater than 2000 with a delta less than 100. (para 7.14; calculating HHI and delta is set out at 7.13).

Other sections discuss barriers to entry, actual and potential import competition, availability of substitutes, countervailing power,dynamic characteristics of the market, removal of a vigorous and effective competitor, vertical integration, ability to increase prices or profit margins and other factors. Othe factors include efficiencies which are discussed at p 51-52. The Guidelines note, at 7.65, that "The ACCC generally only considers merger-related efficiencies to be relevant to s 50 merger analyses where it involves a significant reduction in the marginal production cost of th merged firm and there is clear and compelling evidence that the resulting efficiencies directly affect the level of competition in a market and these efficiencies will not be dissipated post-merger".

Undertakings

Appendix 3 sets out the circumstances in which it might accept undertakings to alleviate competitive concerns raised by a merger.

Merger Review Process Guidelines (2013)

ACCC Informal Merger Review Process Guidelines 2013 ➤
(Updated 2017 to reflect Harper reforms)

See also Peter Campbell, 'New ACCC Merger Process Guidelines' (July 2013) ➤

Merger authorisation Guidelines (2017-2018)

Merger authorisation guidelines 2018
On 31 October 2017 the ACCC released Guidelines on merger authorisations for consultation. These were replaced with new Merger Authorisation Guidelines published on 24 October 2018.

The Guidelines follow the reforms to the merger provisions that came into operation on 6 November 2017 following recommendations in the Harper Report. ☞ As part of those reforms the power to grant authorisation reverted to the ACCC (previously it was with the Tribunal).

Media Mergers Guidelines (2017)

Media merger guidelines 2017 ➤
(replaced the 2006 Media Merger Guidelines)