I INTRODUCTION

The Australian merger control regime appears, superficially, to have many similarities with merger control regimes in other countries. It is, however, materially different from many of the mandatory notification regimes in other countries, because the first question to be addressed in the Australian context is not whether certain filing thresholds are triggered but, rather, whether the transaction is likely to give rise to competition concerns in Australia.

The core of Australia's merger control regime is contained in Section 50 of the Competition and Consumer Act (Cth) 2010 (CCA) (previously known as the Trade Practices Act), which prohibits any direct or indirect acquisition of shares or assets if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a market in Australia.2 The authority responsible for enforcing the CCA's merger control regime is the Australian Competition and Consumer Commission (ACCC). The ACCC may investigate any transaction to ascertain whether it involves an anticompetitive acquisition of shares or assets, and it may seek an injunction from the Federal Court of Australia (the Federal Court)3 blocking a proposed acquisition.4 Post-closing, the ACCC (or any other interested person) can apply to the Federal Court for a divestiture order;5 or, if the vendor is involved in the contravention, the ACCC may apply for a declaration that the transaction is void and order that the shares or assets be deemed not to have been disposed of by the vendor, and that the vendor refund payment made to it. In addition, the ACCC may also seek a court order imposing a pecuniary penalty on the merger parties if a completed merger has the effect, or is likely to have the effect, of substantially lessening competition.6

In considering a transaction, the ACCC can use its wide-ranging compulsory information-gathering powers to obtain the information and market data that it considers necessary to assess the competitive effects of that transaction in Australia.

The ability of the ACCC to investigate any transaction and the risks of court action to prevent a transaction from closing (or post-closing court action for divestiture, declaration that a transaction is void or penalties) have resulted in the practice in Australia of seeking ‘informal clearance' from the ACCC where a proposed merger may raise competition concerns in Australia.

In its Merger Guidelines of November 2008, the ACCC provides guidance as to when it would be prudent for the merger parties to seek clearance. It ‘encourages' merger parties to notify a proposed merger in advance of completing it where the products of the merger parties are either substitutes or complements; and the merged entity will have a post-merger market share of greater than 20 per cent in the relevant market or markets. The ACCC adds that, as market shares are an imprecise indicator of likely competition effects, a proposed merger that does not meet these thresholds may still raise competition concerns and be subject to an investigation.

The ACCC can investigate transactions, even if informal clearance is not sought. The circumstances in which there is a heightened risk that the ACCC may commence an investigation on its own initiative include, in particular, where there are substantial complaints by industry participants; the parties are required to notify the Foreign Investment Review Board (FIRB) under the Foreign Acquisitions and Takeovers Act (the FIRB, as a matter of course, seeks the ACCC's views as part of its consultation process); or, in global merger cases, where the proposed merger raises competition concerns in other jurisdictions, particularly where it is subject to a second-phase investigation in the EU or the US.

The ACCC has recently investigated several closed transactions. For example, in November 2016 it commenced a review of the acquisition by DC Payments Australasia Pty Ltd of First Data Corporation's ‘Cashcard' ATM business, which was completed without seeking ACCC clearance.7 The review was concluded in April 2017. The ACCC also reviewed the completed Menulog and Eat Now merger that took place in January 2015.8 The ACCC's investigation commenced in April 2016 and was finally concluded in April 2017.

Also, in 2016 the ACCC accepted legally enforceable undertakings from Primary Health Care and Healthscope in relation to Primary's acquisition of Healthscope's pathology assets in Queensland, which completed in 2015 without ACCC clearance.9 The parties undertook to divest assets to a third party, unwinding the effects of the merger.

II YEAR IN REVIEW

The ACCC has considered, in recent years, on average between 300 and 400 merger proposals each year. As the following table indicates, the vast majority of transactions either did not require a review, or were reviewed and cleared.

2013 FY

(to 30 June)

2014 FY

(to 30 June)

2015 FY

(to 30 June)

2016 FY

(to 30 June)

2017 FY (to 30 June)

Matters assessed - no review required

213

242

278

287

253

Reviews undertaken

76

55

44

32

35

Not opposed

55

36

35

17

23

Finished - no decision (including withdrawn)

4

2

1

6

8

Publicly opposed outright

6

4

0

2

0

Confidential review - opposed or ACCC concerns expressed

5

2

0

1

2

Resolved through remedies

2

10

7

5

2

Variation to remedy accepted

4

1

1

1

0

Variation to remedy rejected

0

0

0

0

0

Total matters assessed and reviews undertaken

289

297

322

319

288

The overwhelming majority of mergers notified to the ACCC are dealt with in the ‘pre-assessment' process, which is outlined further below. This process is designed to provide faster clearance for ‘non-contentious mergers', without referring the transaction to public market inquiries. Details of those mergers that have been pre-assessed are not made public by the ACCC and there is very little information about the process applied by the ACCC when conducting the pre-assessment.

Interestingly, the ACCC has not publicly opposed a merger since December 2015, when it rejected GPC Asia Pacific's proposed acquisition of Covs Parts, a transaction which was subsequently altered in response to the ACCC's concerns and then not opposed.10 In part, this may reflect the fact that a number of transactions that raised significant competition issues were withdrawn and not pursued by the parties (e.g., Halliburton Company's proposed acquisition of Baker Hughes Inc in 201611 and DYWIDAG-Systems International's proposed acquisition of Jennmar Australia)12 and a number of others were addressed through upfront remedies in the form of undertakings (e.g., Iron Mountain Incorporated's proposed acquisition of Recall Holdings Ltd,13 in which Iron Mountain undertook to divest almost its entire Australian business) or restructuring the transaction to avoid the concern (e.g., AB InBev's acquisition of SAB Miller,14 where AB InBev terminated agreements with Lion for distribution of Corona and certain other brands in Australia).

i Closeness of competition

The ACCC continues to focus its analysis on closeness of competition between merger parties and between merger parties and their competitors. In a number of its recent decisions, the ACCC has opposed a merger or cleared it subject to remedies when it had concerns relating (at least in part) to the closeness of competition of the merger parties' products (e.g., Iron Mountain Incorporated's proposed acquisition of Recall Holdings Ltd and GPC Asia Pacific's proposed acquisition of Covs Parts from Automotive Holdings Group Limited).

The ACCC's analysis of closeness of competition goes beyond the process of determining the range of available or potentially available substitutes in each relevant market. The ACCC endeavours to ascertain the relative intensity of rivalry between different products and suppliers within the relevant markets.

If the merger parties are each other's closest competitors (and there would be no other equally close competitors to the merged entity), the ACCC will explore the ability and incentives of rivals to become close competitors to the merged entity by entering into the merged entity's (product or geographical) ‘space'. This requires an assessment of factors similar to those that are relevant in the context of assessing barriers to entry or expansion (e.g., the cost of introducing a new type of product, brand loyalty to the products of the merged entity and profitability of entry targeting the products of the merged entity).

In analysing closeness of competition, the ACCC does not routinely utilise economic techniques such as cross-elasticity of demand for relevant products (and substitutes) and diversion ratios. Instead, it generally prefers to rely on anecdotal evidence from the parties and market participants. Although the ACCC has indicated that its use of quantitative information is gradually increasing, parties relying on such information should proceed with caution.

The key implication of the ACCC's emphasis on closeness of competition is that parties seeking informal clearance should provide the ACCC with factual evidence concerning their behaviour and the behaviour and views of customers. Natural experiment-type evidence concerning customer behaviour in circumstances when the product of one of the merging parties was not available is very useful. If the parties are each other's closest competitors, it will be important to understand why this is the case and to consider the implications it will have on the transaction. In some cases, a divestiture undertaking may be required to obtain clearance from the ACCC for a merger of close competitors. In others, clearance without divestiture may be possible where other, persuasive factors are present (e.g., evidence of low barriers to entry and expansion in the relevant markets).

ii Coordinated effects

A review of the ACCC's Public Competition Assessments (PCAs) over the past several years indicates that concerns from the increased risk of coordinated effects do not arise frequently in the analysis of mergers in Australia.

The ACCC's stated approach to the assessment of coordinated effects, as set out in its Merger Guidelines, is uncontroversial. In some instances, the actual approach taken by the ACCC is similarly uncontroversial. For example, in its assessment of the proposed acquisition of Newreg, a share registry provider, by Link Market Services, which also provided, inter alia, share registry services, the ACCC concluded that the transaction would have been likely to increase the ability and incentive of Link and the only other major supplier of registry services to engage in coordinated conduct.15 This was because, inter alia, changes in the providers of share registry services are highly visible, the barriers to entry and expansion in this activity are high, and the customised nature of the services and the stickiness of customers (because of the perceived risks of switching) were, in combination, likely to give rise to a real chance of muted competition or tacit market sharing post-acquisition.

On the other hand, the ACCC's discussion of coordinated effects has, in some transactions, been less rigorous, and as a consequence less predictable. For example, its controversial refusal to clear the acquisition of the petrol retail assets of Mobil Oil Australia by Caltex Australia Limited in 2009.16

iii Conglomerate effects

The ACCC has investigated conglomerate effects theories more frequently in recent years. For example, in Pfizer/Wyeth,17 it was concerned that, post-acquisition, the merged entity would have the ability and incentive to bundle its range of vaccine products to leverage its strong position in the supply of animal health vaccines into other animal health markets. Pfizer was able to allay these concerns by providing a court-enforceable undertaking to divest a range of sheep and cattle-worming products. More recently, the ACCC's market inquiries letter in Bayer's proposed acquisition of Monsanto (the review of which commenced by the ACCC in February 2017) reveals the ACCC is concerned with exploring similar issues in this transaction.18

iv Vertical effects

The ACCC continues to focus significantly on the vertical effects of transactions, notwithstanding statements in its Merger Guidelines to the effect that ‘it is often the case that vertical mergers will promote efficiency' and that ‘in the majority of cases [vertical] mergers will raise no competition concerns'. This focus is perhaps due to the weight the ACCC places on the third-party views that it obtains through its public market inquiry process. Third parties will frequently articulate vertical concerns, even if they are not economically rational.

The Merger Guidelines indicate that the ACCC will focus on the merged firm's ability and incentive to foreclose rivals in the market and the likely effect of any such foreclosure. The ACCC has adhered to this focus on foreclosure in some recent transactions. One such example is its consideration of Metcash's proposed acquisition of Home Timber & Hardware Group in 2016.19 Home Timber & Hardware Group was Metcash's only rival full-service hardware wholesaler and the ACCC was concerned that in addition to the acquisition potentially resulting in raised prices and reduced service to hardware stores, the acquisition would allow Metcash to foreclose entry and expansion by other wholesale suppliers, by imposing terms on retail stores that restricted their ability to obtain supply from other sources. The ACCC was also concerned that without another wholesale supplier to switch to, Metcash could discriminate against independent retail stores who compete with stores in which Metcash has an ownership interest. The ACCC accepted undertakings from Metcash to address these concerns.

The ACCC considered vertical effects again when reviewing the 2016 acquisition of Asciano by a consortium comprising Brookfield, Qube and others.20 The merger was complex and the ACCC had to consider the ability of consortium members to discriminate in favour of their own operations in a number of different markets. One aspect of the transaction was restructured after the ACCC outlined concerns in its statement of issues and the merger was ultimately not opposed by the ACCC.

v Barriers to entry and expansion

Unsurprisingly, the absence of barriers to entry or expansion is a key factor in many of the ACCC's decisions not to oppose proposed acquisitions. The basis of the ACCC's conclusions is, however, not always clear. In many of the short notes on acquisitions it has cleared, the ACCC states that barriers to entry or expansion are low, without supplying facts. While this is understandable, it makes it difficult to predict the outcome of the ACCC's assessment of this issue in other transactions. This unpredictability is of particular significance in sectors that are undergoing dynamic change. For instance, in its decision to oppose the proposed acquisition by Carsales of assets associated with The Trading Post,21 the ACCC concluded that the barriers to entry for the supply of online automotive classified advertising were high. It is unclear, however, why the ACCC reached that conclusion. The acquirer itself was a relatively recent and successful entrant, and the impediments to entry by others were not obvious.

In more static markets, the ACCC's analysis of barriers to entry and expansion has been more rigorous. It requires convincing evidence of the likelihood of new entry or expansion and that it will provide a sufficient and timely competitive constraint on the merged entity. For example, in Iron Mountain's proposed acquisition of Recall,22 the ACCC concluded that new entry or expansion of existing smaller firms would not constrain the merged firm because of high barriers such as a trend away from physical storage of documents and therefore limited ability to attract new customers to the industry, significant customer ‘stickiness' due to permanent retrieval fees in contracts and the need to operate at a particular scale to attract large customers.

vi Merger remedies

The ACCC has a strong preference for ‘fix-it-first' remedies. In its Merger Guidelines of November 2008, it states that ‘wherever practicable, divestiture should occur on or before the completion date of the merger, particularly in cases where there are risks in identifying a (suitable) purchaser or asset-deterioration risks'. It will usually seek to require:

  • a the vendor to divest overlapping assets to a third party prior to, or simultaneously with, completion of the merger;
  • b the purchaser to divest a package of assets to an identified (and ACCC-approved) purchaser simultaneously with the completion of the merger; or
  • c a combination of both approaches.

In circumstances where none of the options is commercially viable, merger parties will need to devote significant time and resources to persuading the ACCC of their difficulties. A mere commercial preference for divestiture after consummation is unlikely to be sufficient to change the ACCC's mind.

Despite the ACCC's stated preference for fix-it-first remedies, it has accepted post-closing divestiture undertakings in a number of instances.23 In cases where the ACCC allows divestiture after completion, the merger parties will be required to agree to detailed and stringent ‘hold-separate' obligations until divestiture to an ACCC-approved purchaser has occurred; a short period in which the sale process for the divestiture business can take place; ‘fire-sale' provisions by a third-party agent if the divestiture business is not sold within the divestiture period (including a ‘no minimum price' clause); and in some cases, a requirement to include ‘crown jewels' in the fire sale to put more pressure on the parties to perfect the sale process within the allocated time and to make the divestiture business more attractive to third-party purchasers.

A corollary of the fact that the ACCC has accepted post-closing divestitures is that it is seeking to insert itself more deeply into the divestiture process. Where the divestiture will take place post-completion, the ACCC will now commonly require parties to seek its approval of the following aspects of the divestiture:

  • a any technical assistance or interim supply agreements proposed with the purchaser of the divestiture business (as part of the ACCC's approval of the proposed purchaser);
  • b the separation and management plan (as part of the ACCC's approval of the independent manager of the divestiture business); and
  • c the marketing and sale plan (as part of the ACCC's approval of the divestiture agent who will conduct the fire sale of the divestiture business if it is not sold within the time specified).24

Notwithstanding the ACCC's preference for divestiture remedies it will, in some circumstances, clear transactions on the basis of behavioural remedies. For example, in Metcash's acquisition of Home Timber and Hardware Group in 2016, the ACCC cleared the proposed acquisition on the basis of an undertaking from Metcash that it would not restrict independent hardware stores from acquiring products from non-Metcash sources, and it would not favour its own hardware stores over nearby independent stores. As part of the undertaking, the ACCC required the appointment of an independent auditor who will report to the ACCC and ensure that Metcash is meeting its obligations. This is a common feature of such behavioural undertakings.25

vii Merger authorisation

As described in more detail below, there is currently an alternative merger clearance route that involves the Australian Competition Tribunal (the Tribunal) assessing the public detriments and public benefits likely to result from an acquisition and authorising the acquisition (immunising it from challenge on competition law grounds) if the transaction is likely to result in such a benefit to the public that it should be allowed to take place.

This mechanism was introduced in 2007, but until late 2013 it had not been used. In late 2013, Murray Goulburn Cooperative Company Limited sought authorisation of its proposed acquisition of Warrnambool Cheese Co. The Tribunal was not required to make a decision on this transaction, because Warrnambool Cheese accepted an offer from a rival bidder, Saputo.

Since 2013, it has been used only a handful of times. In 2014, AGL Energy Limited successfully obtained authorisation of the proposed acquisition by one of its subsidiaries of the assets of Macquarie Generation.26 In 2016, Sea Swift successfully obtained authorisation for its acquisition of the various ferry assets of Toll Marine Logistics.27

More recently, in June 2017, gambling entertainment company Tabcorp Holdings obtained authorisation of its acquisition of all the shares in Tatts Group, an Australian lotteries, wagering and gaming business. Tabcorp initially requested ACCC clearance but then applied to the Tribunal before the ACCC had made a decision.

Although the Tribunal's ability to manage its procedure so that decisions are delivered within three months of an application being made could encourage other parties in some transactions to consider this pathway to merger clearance, most transactions are not suited to an adjudicative procedure, such as authorisation. In addition, the reform proposals currently before Parliament will, if implemented, result in direct access to the Tribunal no longer being available. Further detail is provided under the heading ‘authorisation' below.

III THE MERGER CONTROL REGIME

The Australian merger control regime has a number of distinctive features that result, directly or indirectly, from the fact that there is no mandatory notification requirement and no statutory suspension of closing of transactions. As previously discussed, a process of informal clearance by the ACCC evolved as a result of, on the one hand, the desire of merger parties to manage the risk of contravening the prohibition on anticompetitive acquisitions and, on the other, the desire of the ACCC to engage with merger parties in relation to transactions rather than in litigation. Over the years, dissatisfaction with some aspects of the informal clearance process has resulted in statutory amendments giving merger parties alternatives to the informal clearance process. Those alternative processes and the informal clearance process are outlined below.

There are currently three processes available for parties who wish to seek clearance for a proposed merger: the formal clearance process, as set out in the ACCC's Formal Merger Review Process Guidelines of June 2008; the authorisation process in accordance with Part VII (Division 3, subdivision C) of the CCA; and the informal clearance process as set out in the ACCC's Merger Review Process Guidelines of September 2013. Legislation currently before Parliament proposes a number of changes to these processes, which are summarised below.

i Formal clearance

The formal merger review process was introduced in January 2007. If an application for formal clearance is made, the ACCC must decide within 40 business days whether to clear the transaction. The ACCC must give the applicant notice of its decision and the reasons for it in writing. The decision can be appealed to the Tribunal, which must make a decision within 30 days. Formal clearance exempts the transaction from challenge by any person under Section 50 of the CCA.

To date, no applications for formal clearance have been made. There is a sense among practitioners that, for most transactions, the advantages of the formal process are materially outweighed by the disadvantages, which include a very complex and data intensive application form, an inflexible review process, limited opportunity to claim confidentiality and an application fee of A$25,000.

In recognition of its unattractive features and lack of use, legislation has been introduced to Parliament that will effectively remove ‘formal clearance' as an avenue for merger review, merging it with the authorisation process (which will also be altered). At the time of publishing, this legislation has not yet been passed.

ii Authorisation

Direct authorisation of an acquisition by the Tribunal was also introduced in January 2007. It is a highly unusual process with few, if any, equivalents in other jurisdictions. Authorisation of an acquisition provides immunity for the acquisition from challenge by the ACCC or third parties.

The Tribunal may authorise an acquisition if it is satisfied that the transaction would result in such a benefit to the public that it should be allowed to take place. Benefits to the public include a wide range of matters, but the Tribunal must regard a significant increase in the real value of exports from Australia and a significant substitution of domestic products for imported goods as public benefits. The Tribunal must also take into account all matters that relate to the international competitiveness of any relevant Australian industry. The authorisation process is a public, quasi-adversarial process in which the ACCC must provide a report concerning the transaction to the Tribunal and may otherwise assist the Tribunal, which must make a determination within three months of receiving an application or it is deemed to have refused to grant the authorisation.

The disadvantages of this process are similar to those of the formal clearance process and few transactions can withstand the extended timetable and the opportunities for opponents to attack the transaction on a wide range of grounds (not just competition grounds) that this process entails.

Legislation which is before Parliament at the time of publication will, if passed, make several changes to this avenue of merger review. Importantly, the Tribunal will no longer be the first-instance decision maker in an application for merger authorisation. This power will be transferred to the ACCC and the Tribunal will become the avenue of appeal from the ACCC's decision. This change may make merger authorisation less appealing to some parties. The ACCC will be empowered to authorise a merger where it does not substantially lessen competition, or where the benefits to the public outweigh the detriments.

iii Informal clearance

The informal clearance process is a merger review process that concludes with an informal decision by the ACCC as to whether it considers that a particular merger proposal is likely to contravene Section 50 of the CCA. If it considers that a proposed merger is likely to result in anticompetitive effects in Australia, the ACCC will ‘oppose' it by giving the merger parties notice in writing of its informal view and (in the case of a public merger review) by issuing a media release (followed by a more comprehensive public competition assessment). Otherwise, it will inform the merger parties in writing that it does not propose to intervene in the proposed merger. The ACCC's decision is ‘informal' - it is effectively the exercise of the regulator's discretion. A decision opposing a merger (or clearing a merger only subject to remedies) cannot be appealed by the merger parties, and a clearance decision does not afford protection from third-party court action challenging the merger.

The process is usually commenced by the purchaser providing the ACCC with submissions which outline the nature and structure of the transaction, provide information on the relevant markets and assess the likely competitive impact of the transaction on those markets. The ACCC will also request information about customers, suppliers and competitors in those markets.

On receipt of the submissions, the ACCC will conduct its own brief internal review known as a ‘pre-assessment', over approximately two to four weeks. For straightforward transactions, the ACCC may ‘clear' the transaction at this point. In some cases, the ACCC may request the merger parties to agree to limited or targeted enquiries of particular market participants. In these transactions, the review may take four to six weeks.

Those transactions that are not cleared will then undergo a full public review process where the ACCC seeks the views of market participants in relation to the transaction. This public process will commence only once the transaction has been announced.

There are no statutory time periods for the informal review process. According to ACCC practice, the public review typically takes six to 12 weeks. At the conclusion of this process, it will decide whether to clear the proposed merger or enter into a second stage investigation by releasing a statement of issues, which is a public document setting out the ACCC's competition concerns and inviting interested parties to comment on the concerns raised in it.

The ACCC will commence a second stage review where, following conclusion of the initial public market inquiries, it considers that the proposed merger raises substantial competition concerns that are incapable of being resolved without further information from the marketplace. There is no standard timeline for the second stage process. The duration of the review depends on, in particular, the complexity of the competition issues and whether merger remedies are necessary to resolve the competition concerns. The second stage review will generally be completed six to twelve weeks after the statement of issues is published. The ACCC will usually issue a public competition assessment for all merger proposals that were subject to a second stage investigation.28

Merger parties may request the ACCC to consider a merger proposal confidentially. The ACCC will first decide whether it is prepared to conduct a confidential merger review. If it is prepared to do so, it will endeavour to provide the parties with an interim view within four weeks as to whether the proposal is likely to raise competition concerns. Unless it is obvious that a confidential merger proposal will not raise any competition concerns, the ACCC will not provide an unqualified final view until the proposal is public and market inquiries have been conducted. Approaching the ACCC on a confidential basis may have some utility in transactions in which the parties do not wish to make a public announcement unless they have received an indication from the ACCC that obtaining clearance for the proposal may be a real possibility.

IV OTHER STRATEGIC CONSIDERATIONS

Aspects of the Australian merger control regime that can take on particular significance in the context of global or multi-jurisdictional transactions include the interaction of the ACCC's information-gathering powers with its desire to exchange information and documents with overseas regulators; the absence of any minimum threshold for identifying share acquisitions that may be of concern; and ambiguity about the consequences of not obtaining informal clearance.

i Information gathering and exchange

The number of international mergers that are being reported to the ACCC has increased significantly over the past few years. The ACCC appreciates that parties to international mergers will often have to deal with multiple competition authorities around the world, and that it can be a challenging task to coordinate multi-jurisdictional filings with a view to ensuring that all regulatory processes are completed in time for the global closing of the deal. For these reasons, the ACCC is increasingly involved in discourse and cooperation with overseas competition authorities. Merger parties should endeavour to ensure that the ACCC clearance application is lodged simultaneously with the merger notifications in other jurisdictions (in particular, the EU and the US). The ACCC expects to be given the same notice of proposed mergers as other authorities.

The ACCC may share information of a non-confidential nature and discuss with other regulators the competition issues that are raised by a proposed merger. In controversial or complex international mergers, it will almost invariably request a confidentiality waiver from the merger parties, allowing it to exchange and discuss confidential information about a particular merger with overseas competition authorities. A refusal to grant a confidentiality waiver may cause delays in the review process.

In theory, the ACCC does not require a confidentiality waiver because Section 155AAA of the CCA allows it to disclose information provided to it in confidence to a ‘foreign government body' (which includes antitrust authorities) if the ACCC chairperson is satisfied that particular confidential information will ‘enable or assist' the foreign government body to ‘perform or exercise any of its functions or powers'. Although it has this broad power to disclose confidential information to overseas regulators, the ACCC's practice to date has been to request the parties' consent in the form of a confidentiality waiver prior to such disclosure so that it can be confident that the overseas regulators are permitted to disclose confidential information to it.

The ACCC has the power to compel merger parties and non-merger parties to produce documents, provide information and make individuals available for interview. It is prepared to exercise these far-reaching powers when considering transactions, even if the transaction is subject to an ‘ACCC clearance' condition precedent. In exercising these powers it may obtain information that concerns other jurisdictions. For example, the ACCC commonly requests merger parties to provide (voluntarily or compulsorily) copies of all documents disclosing the rationale for the transaction or consideration of its effects on competition, namely, studies, surveys and reports prepared by or for directors and other senior executives for the purposes of analysing the proposed transaction (such as board papers and presentations). This locally gathered information is likely to be of significance in global transactions, because the ACCC is statutorily entitled to disclose such information to overseas regulators.

ii Acquisitions of minority interests

Australia's merger control regime applies to any acquisition of shares in a corporation, irrespective of the level of shareholding involved. That is, even an acquisition of a minority interest (e.g., of less than 20 per cent) would be prohibited if it is likely to result in a substantial lessening of competition in a market in Australia. There is also no particular shareholding level at which it is customary to seek clearance from the ACCC. Whether it may be advisable to seek clearance from the ACCC for an acquisition of a minority interest depends on the circumstances of each individual case and, in particular, on the substantive competition effects the acquisition is likely to have in Australia. In determining the appropriate ACCC strategy, merger parties should note that there have been a number of cases in recent years where the ACCC has challenged proposed acquisitions that involved minority shareholdings of 20 or 30 per cent on the basis that the minority shareholding would give the acquirer the ability to ‘exert a high degree of influence' over the target company.29

The Merger Guidelines of November 2008 provide some guidance on how the ACCC analyses acquisitions of partial shareholdings:

  • a an acquisition of a controlling interest will be treated in the same way as an acquisition of all of the shares in the target company. While an acquisition of a majority interest will typically ensure control, an acquisition of a ‘much lower' level of shareholding may suffice to confer control over the target company; and
  • b a level of shareholding that is less than a controlling interest may give rise to competition concerns where it alters the commercial incentives of the parties involved. In horizontal mergers, the ACCC's main concern is the resulting interdependence between the rivals that may result in muted competition or coordinated effects. In vertical and conglomerate mergers, it is particularly concerned about foreclosure effects. A further significant concern that may arise in any of the three types of mergers is gaining access to commercially sensitive confidential information of competitors.

In 2015, subscription television provider Foxtel proposed to acquire up to 15 per cent of free-to-air broadcaster Ten Network (Ten), while Ten proposed to acquire a 24.99 per cent stake in MCN, a company majority-owned by Foxtel which supplied advertising on subscription television channels. Ten also proposed to acquire an option to invest in 10 per cent of Presto TV, a joint venture between Foxtel and Seven West Media.30 The ACCC considered the extent to which the proposed acquisitions would result in Foxtel being able to influence Ten's decision making by looking at a range of factors, including the size of Foxtel's investment, Foxtel's right to appoint directors to the Ten Board and the composition of the rest of the Board. The ACCC also looked at whether the proposed acquisitions would lead to a greater alignment of interests of Foxtel, Ten, MCN and Presto, altering their incentives. The ACCC's review concluded that while there would be greater influence of Foxtel over Ten and greater alignment between the various companies, the proposed acquisitions were unlikely to result in a substantial lessening of competition.

While not strictly involving the acquisition of a minority shareholding, the ACCC's consideration of the acquisition of Country Electronics Pty Ltd by Gallagher Group provides insights into the ACCC's approach to this issue.31 Gallagher Group, Country Electronics Pty Ltd and Tru-Test Limited supplied animal electric fence energisers in Australia. Gallagher Group had a 12 per cent interest in Tru-Test Limited. The ACCC required Gallagher Group to divest that interest as a condition of clearing the acquisition of Country Electronics Pty Ltd. The ACCC considered that Gallagher's incentives to increase the prices post-merger would include receiving a share of that increase in the form of dividends from Tru-Test Limited. The ACCC also considered that the shareholding increased the likelihood of coordinated conduct between Gallagher Group and Tru-Test Limited.

iii Options if the ACCC does not clear the transaction

There is no appeal avenue against an informal clearance decision by the ACCC. Essentially, if the ACCC opposes a proposed merger, the choices for the merger parties are to seek a court declaration to the effect that the transaction will not have the likely effect of substantially lessening competition or to ‘threaten' to complete the merger, thereby forcing the ACCC to seek an injunction from the court blocking the merger. A third option, seeking authorisation of the merger from the Tribunal (if the merger parties believe there are public benefits which outweigh any detriments) is discussed earlier in this chapter.

The pathway of merger parties seeking a court declaration that the proposed transaction does not contravene the CCA has been used only once. In 2003, AGL, one of Australia's leading energy companies, chose to seek a court declaration in relation to its proposed acquisition of a 35 per cent interest in the Loy Yang A power station. In this case, the ACCC had refused to grant clearance for AGL's proposed acquisition, even after the company had offered a court-enforceable undertaking that it would limit its interest in Loy Yang A to 35 per cent and not be involved in the marketing activities of the business so as to avoid the risk of a contravention of the Trade Practices Act (as it then was). The court was satisfied that the undertaking was sufficient to protect the electricity market from any potential anticompetitive effects that may otherwise have arisen as a result of the acquisition, and concluded that the proposed acquisition was not likely to result in a substantial lessening of competition in any relevant market.32 The ACCC indicated that, following this case, its practice will be to seek an injunction to prevent a transaction proceeding rather than permit a merger party to seek a declaration of non-contravention.

The ACCC followed that approach in 2004 when it commenced proceedings in the Federal Court to block Boral Ltd's proposed acquisition of Adelaide Brighton Ltd. The ACCC had refused to clear the transaction because it was concerned that the acquisition would result in a substantial lessening of competition in the cement and concrete markets in Australia. Boral did not accept this view and announced that it would continue with the takeover. The ACCC then sought an injunction from the court to prevent Boral from taking steps to acquire or exert control over the business of Adelaide Brighton. After some months of pretrial preparations, Boral withdrew its takeover offer and provided an undertaking to the court that it would not acquire any interest in Adelaide Brighton for one year without prior written consent from the ACCC.

The ACCC also commenced proceedings in the Federal Court in February 2006 against Toll Holdings Limited, seeking an injunction to prevent its proposed acquisition of Patrick Corporation Limited. The ACCC alleged that the proposed acquisition would be likely to have the effect of substantially lessening competition in a number of markets in Australia, including rail, freight forwarding, shipping and integrated logistics services markets. The ACCC had earlier refused informal clearance of the transaction, finding that an undertaking offered by Toll Holdings did not adequately address the ACCC's competition concerns. Shortly thereafter, the ACCC announced that it would institute proceedings against Toll Holdings on the basis that Toll Holdings' bid had not been withdrawn and it had not confirmed that it would not proceed with the transaction. There was some uncertainty, however, as to whether Toll Holdings would in fact proceed with the transaction or allow its then current bid to lapse. The ACCC pressed Toll Holdings for confirmation of its intention in the event that the ACCC commenced proceedings (as any such proceedings could not be sustained if the bid was allowed to lapse). The proceedings were discontinued on 11 March 2006 when the ACCC accepted revised remedies from Toll Holdings.33

In December 2010, the ACCC again confirmed its expressed preference for commencing proceedings for an injunction in merger cases when it sought, in the Federal Court, to prevent the acquisition by Metcash Trading Limited of Pick n Pay Retailers (Pty) Ltd's Australian supermarket business, Franklins. In that case, following an extensive review of the proposed acquisition under the ACCC's informal merger clearance process, in mid-November 2010 the ACCC opposed the transaction on the basis that it would remove Metcash's closest and only genuine competitor in the market for the wholesale supply of packaged groceries to independent supermarkets in New South Wales, being a market in which the major supermarket chains - Coles and Woolworths - did not compete (or otherwise exercise sufficient competitive constraint on Metcash).

The parties to the transaction publicly disputed the ACCC's findings, and by 23 November 2010 had notified the ACCC of their intention to close the transaction in any event within five days. The ACCC responded by commencing court proceedings seeking an interlocutory order to prevent the parties from closing the transaction, pending the outcome of a final hearing for a permanent injunction to prevent the transaction. By 26 November 2010, however, the parties had agreed to proceed directly to an urgent final hearing on an expedited basis, given the natural desire to achieve certainty as quickly as possible. The final hearing was conducted in March and April 2011, and the Federal Court delivered its judgment on 25 August 2011. The ACCC's application for an injunction was dismissed.34 The trial judge held, inter alia, that the counterfactuals to the proposed merger must be proved on the balance of probabilities. The ACCC had argued that it was sufficient to establish that there was a real chance of the counterfactuals occurring.

The ACCC appealed the Federal Court's decision. The transaction was, however, completed by the parties, following an unsuccessful application by the ACCC for a temporary injunction to prevent completion pending the outcome of its appeal. The Full Federal Court dismissed the ACCC's appeal unanimously.35 On the important issue of the standard of proof for the counterfactual, the position is now quite unclear. Two of the three judges did not express a concluded view on the applicable test but indicated some reservations about requiring proof on the balance of probabilities. The third appeal judge strongly supported the trial judge's position.

V OUTLOOK & CONCLUSIONS

As outlined above, more and more mergers are being dealt with by the ACCC in the first part of the informal clearance process known as ‘pre-assessment'. The pre-assessment analysis by the ACCC takes place once it has received submissions from the parties and the process involved in this analysis is largely opaque. As such, the speech made by Chairman of the ACCC, Mr Rod Sims in October 2016 gives an interesting insight into the ACCC's current internal thinking about mergers.36 In that speech, Mr Sims outlined how increasingly concentrated Australia's economy had become and outlined several questions on how the ACCC might best administer Australia's merger regulations, so as to prevent potentially anticompetitive outcomes. One of the questions posed, is whether Australia should introduce ‘something similar to the approach adopted by US courts, where once markets are defined and the merger is likely to result in a significant increase in concentration, there exists a ‘rebuttable presumption' that the merger should not proceed absent evidence to the contrary?'.

Mr Sims says: ‘It seems to me that, absent a clear and convincing economic and evidence based explanation of how a merger will avoid harming consumers the standard economic wisdom should prevail. This wisdom is that mergers resulting in high levels of concentration in markets with substantial barriers to entry will usually reduce competition and cause harm to consumers and our economy.'

The speech does not represent the current law on mergers in Australia, but it appears to provide insight into how the ACCC approaches its internal consideration of proposed mergers, particularly in circumstances where a significant portion of the ACCC's decision-making (the pre-assessment phase) is not transparent to merger parties or practitioners.

PETER ARMITAGE

Ashurst

Peter Armitage is a senior partner in Ashurst Australia's competition and consumer protection team and has been a partner since 1992. He is recognised as one of Australia's leading competition law practitioners. He specialises in complex merger clearances in both domestic and international transactions. He also has a long track record of effectively defending clients in investigations and legal actions by the ACCC.

Mr Armitage has advised on competition law issues and obtained merger clearances from the ACCC in numerous acquisitions in the pharmaceutical, hospitals, medical equipment, payments, telecommunications, food ingredients, gas, paper, chemicals, entertainment, sugar, airline catering, metal manufacturing, automotive components, building materials, plastics, explosives, clothing and mining equipment ssectors.

Mr Armitage advised Pick n Pay on the merger clearance process for the sale of its Franklins business to Metcash. He is very experienced in working with overseas counsel in the coordination of global merger clearances. For example, he acted for Office Depot in its proposed acquisition by Staples, for Wyeth in its acquisition by Pfizer, for Google in its acquisitions of DoubleClick and Motorola Mobility, for Adidas in its global acquisition of Reebok, for Boston Scientific in its acquisition of Guidant and for Bucyrus in its acquisition of Terex's earthmoving equipment business.

ROSS ZAURRINI

Ashurst

Ross Zaurrini is a partner in the competition and consumer protection team. In addition to experience in advising clients on mergers in a range of industries, he has extensive experience in competition litigation. He also has significant experience in litigating complex competition law issues against the ACCC, conducting civil litigation with respect to consumer protection claims and responding to ACCC investigations.

Mr Zaurrini's experience includes acting for Australian Cooperative Foods Limited in successfully defending a prosecution by the ACCC for alleged price-fixing; acting for a major Australian medical products manufacturer in defending a prosecution by the ACCC for alleged misuse of market power and exclusive dealing; successfully defending two federal court proceedings for alleged third-line forcing in respect of preferred supplier arrangements and alleged unconscionable conduct against a not-at-fault party; and acting for Samsung in civil litigation with Apple involving complex issues of patent and competition law.

ASHURST

Level 11, 5 Martin Place

Sydney

New South Wales 2000

Australia

Tel: +61 2 9258 6000

Fax: +61 2 9258 6999

peter.armitage@ashurst.com

ross.zaurrini@ashurst.com

www.ashurst.com

1 Peter Armitage is a senior partner and Ross Zaurrini is a partner at Ashurst.

2 In addition, Section 50A of the CCA applies to acquisitions that occur outside Australia that result in a controlling interest in a corporation and that would have the effect, or be likely to have the effect, of substantially lessening competition in a market in Australia.

3 The Federal Court may grant injunctions on such terms as it determines to be appropriate. In merger cases where closing of a proposed transaction is imminent, the ACCC may seek an interlocutory injunction restraining the merger parties from consummating the proposed transaction pending a hearing of the case on a final basis. The Federal Court has wide discretion in relation to the granting of interlocutory injunctions. The Federal Court must be satisfied that there is a serious question to be tried, and that the balance of convenience favours granting an interlocutory injunction. The Federal Court will then make its decision about the granting of a final injunction after a full trial.

4 Third parties cannot seek an injunction from the Federal Court to prevent a proposed transaction from closing.

5 To date, however, a divestiture order has never been made in Australia.

6 The maximum penalty for corporations per contravention is the greater of A$10 million; three times the total value of the benefits that have been obtained by the contravention; or, if the court cannot determine the total value of those benefits, 10 per cent of the annual group turnover referable to activities in Australia. Penalties totalling A$4.8 million were imposed in 1996 on Pioneer International Limited and others for contravening Section 50.

7 http://registers.accc.gov.au/content/index.phtml/itemId/1201838/fromItemId/751046.

8 http://registers.accc.gov.au/content/index.phtml/itemId/1201843/fromItemId/751046.

9 http://registers.accc.gov.au/content/index.phtml/itemId/1196388/fromItemId/751043.

10 http://registers.accc.gov.au/content/index.phtml/itemId/1191442/fromItemId/751043.

11 http://registers.accc.gov.au/content/index.phtml/itemId/1195648/fromItemId/751043.

12 http://registers.accc.gov.au/content/index.phtml/itemId/1197130/fromItemId/751043.

13 http://registers.accc.gov.au/content/index.phtml/itemId/1194800/fromItemId/751043.

14 http://registers.accc.gov.au/content/index.phtml/itemId/1195692/fromItemId/751043.

15 http://registers.accc.gov.au/content/index.phtml/itemId/920335/fromItemId/751043.

16 http://registers.accc.gov.au/content/index.phtml/itemId/904294/fromItemId/751043.

17 http://registers.accc.gov.au/content/index.phtml/itemId/895088/fromItemId/751043.

18 http://registers.accc.gov.au/content/index.phtml/itemId/1199209/fromItemId/750991.

19 http://registers.accc.gov.au/content/index.phtml/itemId/1197122/fromItemId/751043.

20 http://registers.accc.gov.au/content/index.phtml/itemId/1197152/fromItemId/751043.

21 http://registers.accc.gov.au/content/index.phtml/itemId/1094677/fromItemId/751043.

22 http://registers.accc.gov.au/content/index.phtml/itemId/1194800/fromItemId/751043.

23 For example, Iron Mountain's proposed acquisition of Recall Holdings Ltd in 2016 required a post-closing divestiture within a specified confidential period. The undertakings given by Federation and Novion in 2015 in relation to their proposed merger were also post-closing and (unusually) gave the parties the option of divesting either Novion's Bayside Shopping Centre or Federation's 50 per cent interest in Karingal Hub Shopping Centre, also in a specified confidential period.

24 Recent examples of these requirements are found in Iron Mountain's and Federation's undertaking referred to in the footnote above. Further examples are also found in Healthscope and Primary Health Care's undertakings in 2016, though these were given in the unusual circumstance of the parties already having completed the acquisition without seeking prior ACCC review.

25 Another example of a recent behavioural undertaking accepted by the ACCC is in the proposed acquisition by Qube Holdings Ltd of the remaining 50 per cent of Australian Amalgamated Terminals Pty Ltd in November 2016.

26 www.judgments.fedcourt.gov.au/judgments/Judgments/tribunals/acompt/2014/2014acompt0001.

27 www.judgments.fedcourt.gov.au/judgments/Judgments/tribunals/acompt/2016/2016acompt0009.

28 The ACCC's practice is to issue a PCA for all proposals where a merger is opposed; a merger is subject to undertakings; the parties seek such disclosure; or a merger otherwise raises important issues that the ACCC considers should be made public.

29 For example: BG Group's proposed acquisition of Origin Energy Ltd in 2008; Alinta Ltd's proposed acquisition of AGL in 2006; DUET Consortium's proposed acquisition of the DBNG Pipeline in 2004; and AGL's proposed acquisition of the Loy Yang power station in 2003.

30 http://registers.accc.gov.au/content/index.phtml/itemId/1190276/fromItemId/751043.

31 http://registers.accc.gov.au/content/index.phtml/itemId/1129241/fromItemId/751043.

32 www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2003/2003fca1525.

33 http://registers.accc.gov.au/content/index.phtml/itemId/724185/fromItemId/751043.

34 www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2011/2011fca0967.

35 www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/2011/2011fcafc0151.

36 Speech by Rod Sims to RBB Economics Conference: ‘Is Australia's economy getting more concentrated and does this matter?'; 27 October 2016; www.accc.gov.au/speech/keynote-address-rbb-
economics-conference-0.