ACCC unveils proposal for major overhaul of Australias merger control regime

• The ACCC has today announced significant proposed reforms to Australia's merger laws, saying the current regime is "not fit for purpose".
• The proposed reforms include changing Australia's "voluntary" merger review regime to a "mandatory" and "suspensory" regime, where merger parties would be required to notify the ACCC of mergers that meet certain thresholds and to not complete transactions pending ACCC approval.
• The proposed reforms would confine appeals of ACCC decisions to limited merits review by the Australian Competition Tribunal.
• The ACCC has also proposed changes to the substantive merger test including amending the merger factors to be taken into account in assessing mergers, changing the standard of proof for finding that a merger substantially lessens competition, deeming certain acquisitions involving firms with substantial market power as contravening the merger prohibition without requiring specific proof of competitive effects and permitting the ACCC to consider ancillary agreements in its review process.
•  The ACCC has also proposed tailored rules for mergers involving nominated large digital platforms (as well as other ex-ante rules, to be considered in 2022).

What you need to do

• Stay tuned. The ACCC has framed the proposals as opening the debate on the future of Australia's merger control regime. It is unlikely that the proposed reforms will be considered by the Federal Government before the next election, so there is time to reflect on the proposed reforms and prepare to engage in the debate in due course.
• For now, the current merger control regime lives on, and businesses contemplating mergers in the near future need not panic.

Proposed merger law reforms

The ACCC has today announced its long-awaited proposed reforms to the merger review rules in Australia, which the ACCC hopes will "start a debate".

The proposed reforms fall under three categories:

1. A new formal merger review process.
2. Changes to the substantive merger test.
   
3. Reforms to deal with acquisitions by large digital platforms.
   

A new formal merger review process

The ACCC proposes to create a single merger review process which would replace the various options for merger review that are currently available to merger parties (that is, pre-assessment, informal clearance, merger authorisation or declaration by the Federal Court).

The ACCC proposes that the new review process would have the following features:

• Australia's merger control regime would switch from being a "voluntary" system to a "mandatory" system, in line with most overseas jurisdictions. This would mean that all acquisitions above certain specified thresholds would be required to be notified to the ACCC. The ACCC has not indicated what those thresholds would be.
  
• The merger system would become "suspensory" meaning merger parties would be prohibited from completing a transaction until the merger is cleared by the ACCC (currently, there is no rule preventing merger parties from completing a transaction pending ACCC clearance).
  
• If the ACCC decides a merger contravenes the substantive test, the merger would be prohibited from completing (subject to limited appeal rights, referred to below).
  
• A simplified process would be retained within the new review system to ensure that mergers that are unlikely to have anti-competitive effects can still be dealt with in an expeditious manner.
  
• The ACCC would have a "call in" power to review mergers that do not meet the specified notification thresholds but which the ACCC considers could give rise to competition concerns.
  
• Merger parties would need to provide their best information up-front to support their notification (currently, under the informal review process, merger parties can elect what information to provide and when, and then respond to any information requests from the ACCC as and when they arise).
  
• The ACCC would publish all decisions and provide clear detailed reasoning as to why it chose to clear or block a transaction.
  
• The ACCC's decisions would be subject to a limited merits review by the Australian Competition Tribunal. In its review, the Tribunal would only be able to consider the information that was before the ACCC in the first instance unless subsequent events have occurred. The ACCC does not appear to contemplate a role for the Federal Court in the new system.

Changes to the substantive merger test

The ACCC proposes to introduce four main reforms to the merger test:

1. Updating the merger factors.
   
2. Defining the term "likely" as used in the substantive prohibition.
   
3. Including a provision that deems certain acquisitions as likely to substantially lessen competition.
   
4. Incorporating a provision allowing the ACCC to consider ancillary agreements between merger parties in the merger assessment.
   

1. Updating the merger factors

The ACCC maintains that the current merger factors set out in section 50 of the Competition and Consumer Act 2010 (CCA) are unduly focused on factors pointing against a merger giving rise to a substantial lessening of competition when there should be a greater emphasis on the factors pointing towards a merger being likely to substantially lessening competition.

Accordingly, the ACCC proposes to amend the merger factors in section 50 of the CCA to focus on the structural conditions for competition that will be changed by the acquisition to the detriment of competition.

The ACCC also proposes the inclusion of factors that address the acquisition's capacity to result in:

• the loss of potential competitive rivalry; and
  
• increased access to, or control of, data, technology or other significant assets.
  

2. Definition of 'likely'

The ACCC proposes to define the term "likely" in section 50 of the CCA as "a possibility that is not remote". This is a lower threshold than the test currently applied by Courts, which the ACCC's Chair says makes it too hard for the ACCC to prove that section 50 would be breached by the merger.

3. Deeming certain acquisitions to be likely to substantially lessen competition

The ACCC proposes that, where one of the merger parties has substantial market power, and the merger is likely to either entrench, materially increase, or materially extend that substantial market power, the acquisition should be deemed to be likely to substantially lessen competition. This means mergers of this type would not require specific proof of competitive effects.

4. Consideration of other agreements in merger assessments

The ACCC proposes to amend the rules to allow it to consider other agreements (besides the underlying sale agreement) in its merger review that could bear on competition. The ACCC believes that this will assist to prevent parties taking steps to artificially construct the counterfactual or restructure the transaction to take advantage of anti-overlap provisions.

Acquisitions by large digital platforms

The ACCC proposes to implement a tailored merger review test for large digital platforms. This would only be applied to specific firms. In determining which firms are subject to the tailored rules, the ACCC would consider factors such as:

• the size and scope of the firm's services in Australia;
  
• whether they are considered a "gateway" firm with a level of control over how businesses interact with the market; and
  
• the firm's market power.
  

The tailored test would incorporate a lower threshold for establishing probability of competitive harm than that which would apply to mergers involving other sectors. The threshold for notification would also be lower.

This proposed test, and other potential reforms to the regulation of digital platforms, will be addressed by the ACCC as part of the 2022 phase of its Digital Platforms Services Inquiry, with a report to be provided in September 2022.

ACCC's concerns with the current merger rules and track record of challenging mergers

Today's announcement follows repeated calls by the ACCC in recent years for a rethink to Australia's merger laws following a string of losses in contested merger cases and an unimpressive track record challenging mergers in Court over several decades.

Since the introduction of the Trade Practices Act in 1974, later replaced by the CCA, the ACCC has contested 10 merger cases in Court and has won only three. It has not won a merger case since 1993. Most recently, in 2020, the Federal Court rejected ACCC challenges to the proposed merger of TPG and Vodafone and the acquisition of Aurizon's Acacia Ridge terminal by Pacific National.

Broadly, the concerns expressed by the ACCC fell into four categories:

• that the Federal Court was placing too much weight on the assertions of executives of merger parties and not enough on evidence of economic incentives;
• that there has been insufficient focus by the Courts on the structural conditions for competition and the negative impacts of increasing market concentration;
• that Australia's voluntary merger notification system appeared out of step with most other merger control jurisdictions which are mandatory notification systems (ie, notification is required when certain financial or market share thresholds are met); and

• that transactions involving digital platforms create a uniquely elevated risk of competitive harm and that this risk is not sufficiently addressed through the current rules.

The reforms proposed by the ACCC today have sought to address each of these concerns. The proposed reforms appear to remove the Federal Court from the merger assessment process. Proposed changes to the merger factors and the introduction of deeming provisions would reorientate the merger system to prioritise the assessment of structural issues and concentration levels. The proposed reforms would ensure that the ACCC has greater control over the merger review process and empower the ACCC to review any mergers it deems fit, through a "call in" mechanism, while obtaining comfort that merger parties will not complete transactions pending finalisation of the ACCC's review. Finally, the proposed reforms specifically target the heightened economic risks associated with acquisitions involving digital platforms.

Today's announcement builds on the ACCC's earlier recommended changes to the merger control regime in the context of the ACCC's Digital Platforms Inquiry. The ACCC's Final Report, released in July 2019, proposed that:

• the CCA be amended to include two additional factors that the ACCC must consider when assessing proposed mergers, being the likelihood that the acquisition would result in a potential competitor being removed from the market; and the nature and significance of assets being acquired, including data and technology.
  
  (Practically, these proposed amendments would be unlikely to alter how mergers are currently reviewed since the ACCC and the Courts can already consider these factors when assessing whether mergers would breach the CCA.)
• "large digital platforms" enter into voluntary protocols with the ACCC in which they commit to provide the ACCC with advance notice of proposed acquisitions potentially affecting competition in Australia.

The ACCC Chair previously mooted the possibility of applying a "rebuttable presumption" to the assessment of mergers in which it would be presumed that mergers that involve a certain level of increase in concentration in a market would lead to a substantial lessening of competition, but, after criticism that this approach would lead to a reversion to an unsophisticated and retrograde market share-focused approach to merger reviews, more recently appeared to retreat from this idea.

While the ACCC's track record in contesting mergers in Court has been indisputably poor, the notion that this evidences a problem with the current merger regime deserves greater scrutiny.

First, a large proportion of the challenges brought by the ACCC over the years have been in respect of "vertical mergers" – mergers that involve integration of players at different levels of the supply chain. Economists view vertical mergers as more likely to be competitively benign than "horizontal mergers" – mergers between competitors operating at the same level of the supply chain. One can reasonably question whether the ACCC's out of step focus on vertical mergers (and more recently, in the case of Vodafone/TPG, on a novel "potential competition" theory of harm) may have contributed to its current track record.

Second, focusing on the ACCC's track record in Federal Court litigation ignores the wider picture that many problematic mergers are aborted before they reach the stage of a final judgment at the end of Federal Court litigation. There are various "checkpoints" at which potentially problematic mergers can, and often are, voluntarily abandoned or restructured to remove the problematic element, including:

• on initial advice from competition counsel,
• following initial engagement with the ACCC,
• upon receipt of a market feedback letter pointing to significant concerns from market participants,
• upon the issuance of a Statement of Issues at the end of a Phase 1 review,
• during the course of informal engagement with the ACCC during the Phase 2 review,
• upon the ACCC issuing a final decision to oppose a merger at the end of a Phase 2 review, and
• before the end of a Federal Court trial.

It also fails to recognise that many mergers for which the ACCC identifies concerns are resolved, to the ACCC's satisfaction, through the merger parties offering court-enforceable undertakings or otherwise through adjustments to the transaction structure.

Moreover, sellers, in competitive bidding situations, will often heavily discount, or reject outright, the bids of buyers that will give rise to significant regulatory risk – or will include provisions to allow them to walk away from the sale agreement if competition clearance is not readily forthcoming – providing further, commercial disincentives to proceed with potentially problematic mergers.

Ignoring all the potentially problematic mergers that are filtered out or remedied prior to, during and following the ACCC's merger review process, and instead focusing, myopically, only on Federal Court outcomes, presents a slanted view of the ACCC's, and the wider merger control system's, success in acting as a bulwark against anticompetitive mergers.

Notwithstanding criticisms of this kind, the ACCC's concerns with the current merger rules did not falter, with today's announcement the next important stage in its crusade for changes.

Merger law reforms are a global phenomenon

The ACCC's proposed reforms echo a wider global trend of proposed or recently enacted reforms to the merger control laws in other jurisdictions, and share many of the same features.

For example:

United Kingdom: The UK government has recently proposed a number of reforms to competition and consumer policy, including reforms to update the UK's merger control thresholds and processes to enable the UK regulator, the Competition and Markets Authority (CMA), to better scrutinise potentially harmful mergers while reducing costs to businesses in other cases. The reforms include:

• Increasing the turnover threshold, the satisfaction of which gives the CMA jurisdiction to review a merger, from £70 million to £100 million.
• Creating a safe harbour for mergers between small businesses where worldwide turnover of each of the merging parties is less than £10 million.
• Changes to the "share of supply" jurisdictional threshold to enable the CMA to review certain types of mergers that remove potential competition from a market or facilitate the leveraging of market power across different products or services, where those mergers may not have satisfied the current threshold because the target is small or not yet present in the relevant market. The changes proposed are to allow the CMA to review a merger if any merger party has a share of supply of at least 25% of a category of goods or services supplied or acquired in the UK or a substantial part of the UK and a UK turnover of more than £100 million.

In December 2020, the CMA issued advice to the UK government on the design and implementation of the UK’s new pro-competition regime for digital markets. If implemented, the new regime will govern the most powerful tech firms – those with ‘strategic market status’ (SMS) – meaning those with substantial, entrenched market power and where the effects of that market power are particularly widespread or significant. In the merger control context, the CMA proposes amending the merger rules to enable the CMA to apply closer scrutiny to transactions involving SMS firms, including making it mandatory for SMS firms to notify the CMA of a transaction, imposing a block on completing a deal until the CMA has investigated, and a change to a more cautious legal test when looking at the likelihood of harm to consumers in order to address concerns about historic under-enforcement of mergers involving big tech firms.

United States: The US Federal Trade Commission and Department of Justice Antitrust Division issued a statement on 9 July 2021 that they intend to shortly launch a joint review of US merger guidelines. The statement indicates that the review will look at whether the current guidelines are "overly permissive". The statement came on the same day that President Biden issued an Executive Order on "Promoting Competition in the American Economy", which encouraged the FTC to review the merger guidelines. The Executive Order expressed concern about increasing concentration in markets, identifying the information technology sector as being dominated by a small number of internet platforms and that the purported dominance of these platforms stems from serial mergers, the acquisition of nascent competitors and the aggregation of data.

• In addition, there is currently a Bill before Congress which proposes to:
• lower the threshold to find a merger or acquisition unlawful;
• prohibit mergers that create a monopsony; and
• shift the burden to the merging parties to show that the merger is not unlawful.

Europe: The European Commission (EC) recently announced a new policy to facilitate the review of so-called "killer acquisitions", which are said to occur where an acquirer with a strong market presence acquires a small company (often a potential competitor) but the acquisition falls under the turnover thresholds for notification to the EC. The EC will encourage Member States to refer such transactions to the EC for review. This announcement was the result of an evaluation that began in 2016 and was published in March 2021. The evaluation considered whether the EU merger control provisions allowed the EC to address the recent increase in high-price transactions for targets with low turnover in the digital, pharmaceutical and other sectors. It concluded that such deals sometimes fell outside the jurisdiction of the EC and of Member States.

The European Commission has also issued a proposed Digital Markets Act which would establish a set of narrowly defined objective criteria for qualifying a large online platform as a so-called “gatekeeper”. Gatekeepers will need to notify the EC of their intended mergers and acquisitions in the digital sector regardless of whether they meet the EC's notification thresholds.

Germany: The German legislature adopted broad reforms to its merger law in January 2021. The changes included:

• increasing the notification turnover thresholds;
• introducing filing obligations in certain circumstances for so-called "killer acquisitions"; and
• expanding the time frame for merger control proceedings.

While the proposed reforms in these and other jurisdictions are designed to address the specific issues arising in those jurisdictions, some general themes are apparent across jurisdictions, which share traits with the concerns raised by the ACCC, namely:

• Concerns about a gradual rise in concentration levels in markets and the impact of that increased concentration on prices and consumer welfare.
• Concerns about the growing dominance / entrenchment of the market positions of "big tech".
• Concerns, in mandatory notification jurisdictions, about existing notification thresholds not capturing acquisitions involving targets with low or no revenues or assets (ie, because they are nascent or start-up companies) but which involve large purchase prices.
• Concerns about the ability of competition regulators to block transactions involving "nascent competitors", ie, competition from firms that are either not yet in the market but could enter, or that are small but have significant potential to grow into significant competitors challenging the incumbent players.

The release by the ACCC of a joint paper with the CMA and the German Bundeskartellamt in April 2021 underscoring the importance of rigorous and effective merger enforcement highlights the extent to which concerns with merger control enforcement are increasingly common across jurisdictions and the likelihood that coordination between competition agencies, both in terms of evidence about individual cases but also approaches to common issues, will likely be an increasingly defining feature of merger control enforcement in the years to come.

Where to from here?

It is fair to say that the ACCC's merger control wish list exceeds what many of us were expecting.

ACCC Chair, Rod Sims, has emphasised that the ACCC's proposals are only meant to "start the conversation". There is no imminent proposal to send the ACCC's proposed reforms to the Government and the ACCC does not expect that the reforms would be considered by Government before the next Federal election, including because the Government continues to be focused on pandemic management.

Additionally, the ACCC has indicated that much of its proposed tailored approach to regulating digital platforms will be fleshed out over the course of the year, with the ACCC continuing its significant and ongoing engagement with overseas competition authorities on this issue.

For now, the current merger control regime lives on, and businesses contemplating mergers in the near future need not panic.

Further background on this topic can be found in our chapter on Australia published in The Merger Control Review - edition 12, which gives an overview of Australia's merger control regime. Our chapter describes the current options available to parties who wish to seek clearance for their proposed merger: the informal clearance process and the authorisation process and the role of the ACCC in those processes.

Authors: Tihana Zuk, Partner; John McKellar, Senior Associate; Lauren Satill, Lawyer; and Olivia Duce, Graduate