Treasury Consultation Paper on Merger Reform

Following the ACCC announcement earlier this year on their proposed reforms to Australia’s merger review regime, the Competition Taskforce of the Treasury has now released its Merger Reform Consultation Paper and commenced consultation regarding potential changes to Australia’s merger review rules and processes.

Interested parties are invited to comment on the proposed reform up until 19 January 2024.

In brief

• The Government has commenced the Competition Review, looking at a range of policy reform initiatives to modernise the Australian economy.
• The Competition Taskforce has started with a review of the approach to mergers, assessing whether existing merger rules and processes are effective and could be improved.
• Economic efficiency requires both competitive markets and conditions which facilitate mergers which build efficiency, including to enable Australian companies to compete on the international scale.
• It is a question of striking the right balance, with many market participants concerned that increasingly complex, expensive and pervasive regulatory approval requirements are lengthening deal timeframes and increasing execution risk.
• The Competition Taskforce has now released a consultation paper seeking public input on a variety of questions and potential changes relating to Australia’s merger regime.
• That Taskforce has put forward the following three potential options for reform of the merger review process, while inviting submissions on alternative options and views on whether the existing voluntary informal regime should be retained:
  • a voluntary suspensory clearance regime with the ACCC as the primary decision maker;
  • a mandatory suspensory notification with the Federal Court as the primary decision marker; or
  • a mandatory formal clearance regime with the ACCC as the primary decision maker.
• In parallel, the Taskforce is also inviting submissions on updates suggested by ACCC to the current forward-looking ‘substantial lessening of competition’ merger control test, reflecting the ACCC’s views that it should be less difficult to discharge the burden of proof to satisfy this test.
• The potential updates to the merger control test include:
  • modernising the list of relevant factors considered when assessing the impact of mergers;
  • expanding the test to specifically deal with firms with substantial market power; and
  • allowing related agreements between merger parties to be taken into account.
• The Competition Review’s goal of Australia having modern competition laws, policies and institutions which support a more dynamic and competitive economy is uncontentious.
• More contentious is whether a more onerous approval process is needed when mergers are already subject to increasing level of regulation – and indeed several high profile mergers are being blocked already, which suggests the current regime has significant “teeth”.
• Given the significant increase in the number of deals that would be subject to review, there is a risk of increased cost and time required to implement deals, and debate as to whether that is justified.
• We encourage interested parties to make submissions.

Proposed changes to merger review process

Australia’s current merger review regime consists of a voluntary informal clearance process, which applies to the vast majority of transactions, as well as a much less common formal statutory merger authorisation approval process.

The Taskforce is seeking consultation on three possible options for reform of the current informal clearance process, based on key elements of global merger regimes.

• Voluntary suspensory clearance:.
  • Voluntarily notification to the ACCC for mergers meeting certain thresholds, with potential call-in powers for the ACCC, and the transaction suspended for the period of ACCC review.
  • Clearance only granted if the ACCC is satisfied the merger is not likely to substantially lessen competition.
  • Clearance provides immunity for breach of the statutory prohibition against anti-competitive mergers under the Competition and Consumer Act 2010 (Cth) (CCA).
• Mandatory suspensory notification: Similar to the existing US/Canadian regimes.
  • A system of compulsory notification to the ACCC of mergers above a certain threshold with the transaction suspended for the period of ACCC review.
  • If the merger is likely to substantially lessen competition and the parties do not voluntarily abandon their proposal, the ACCC would need to commence court action for an injunction to prevent the transaction.
• Mandatory formal clearance: Proposed by the ACCC.
  • Compulsory notification to the ACCC of mergers above a certain threshold, with call-in powers for the ACCC for lower transactions where the ACCC considers there may be potential competition concerns, and the transaction suspended for the period of ACCC review.
  • Clearance provides immunity for breach of the CCA prohibition if the ACCC satisfied the merger is not likely to substantially lessen competition (or there is a net public benefit).
  • ACCC decision would be reviewable by the Australian Competition Tribunal.

The consultation paper notes that merger transactions that involve foreign investment (which are a significant proportion of mergers considered by the ACCC) are also subject to a mandatory notification and suspensory framework under Australian foreign investment approval processes and that any amended merger review process would need to work alongside the foreign investment regime, including a potential referral process.

Proposed changes to merger control test

Currently, the relevant test applied in determining whether a merger is anti-competitive (in breach of the Competition and Consumer Act 2010 (Cth)) is whether the acquisition is likely to have the effect of substantially lessening competition.

In addition to the potential amendments to the merger review process, Treasury is also consulting on three reforms proposed by the ACCC to the ‘substantial lessening of competition’ test:

• Merger factors: Update the list of specified factors that the ACCC may, and the Court must, consider when assessing the impact of mergers on competition.
• Acquisitions by firms with substantial market power: Expand the scope of the test to expressly include mergers that ‘entrench, materially increase or materially extend a position of substantial market power’.
• Related agreements: Allow related agreements between merger parties to be considered as part of the consideration of the impact on competition.

Commentary

The broader Competition Review goal of seeking to ensure that Australia’s competition laws, policies and institutions remain fit‑for‑purpose for the modern economy is uncontentious.

More contentious is whether a more onerous approval process is needed when mergers are already subject to increasing level of regulation – and indeed several high profile mergers are being blocked already, which suggests the current regime has significant “teeth”. It is a question of striking the right balance, with many market participants concerned that increasingly complex, expensive and pervasive regulatory approval requirements are lengthening deal timeframes and increasing execution risk.

For many reasons, transactions have become slower, more challenging and more expensive to implement. Time kills deals, and the delay associated with working through those processes has significantly raised execution risk. Mandatory merger review processes and the resulting surge in reviews could be expected to exacerbate these challenges.

The vast majority of transactions do not raise competition concerns. There is debate as to whether changes from the existing regime would provide incremental benefit which justifies a more onerous review process. The Taskforce consultation paper acknowledges some of these challenges, including the difficulty of setting appropriate thresholds for compulsory notification, which can result in an excessive number of transactions subject to review and impose unnecessary cost on merger parties and relevant authorities.

The ACCC has expressed the view over time that the onus it bears in a Court process to establish a substantial lessening of competition is too onerous, citing mergers where the Court has not accepted the ACCC’s position. Others maintain that in fact there was no substantial lessening of competition in those cases, and that is why the Court accepted that position. They note that blocked mergers tend to be litigated only where there are strong arguments that there is no substantial lessening of competition, so it is not surprising that the ACCC has not been successful in that very small number of cases which reach the Courts.

Under the current system, there have been a number of transactions that the ACCC has declined to approve just this year, including the Qantas / Alliance Airways and Transurban / Eastlink transaction and the TPG Telecom / Telstra spectrum sharing and related arrangements. We encourage interested parties to make submissions with a view to ensuring that we continue to have a balanced regime, which appropriately supports the economic benefits of merger activity as well as competitive markets.

Consultation

Interested parties are invited to comment on the proposed changes up until 19 January 2024. Details regarding how to respond can be accessed on the Treasury website here.