Fasten your seatbelts… merger law reform in Australia

1 Proposed changes to merger review procedure

The Consultation Paper identifies three key reform options for merger review procedure in Australia. Each of the three options involves material reforms relative to the status quo. The status quo is not presented as an option, suggesting a bias towards reform. However, the Consultation Paper does expressly invite parties to identify alternative options and consider whether the formal authorisation process should be retained, suggesting that the three options are not intended to be exhaustive.

Yet it is also important not to overreact to the reform proposals. Some of the principles underlying the proposed reforms are already incorporated into Australia’s foreign investment review regime (e.g. the suspensory nature of the process), hence will already be familiar to those involved in significant Australian transactions.

The three options are:

(a) A voluntary formal clearance regime

Parties could voluntarily notify transactions to the ACCC. Upon notification, a statutory prohibition would prohibit (or ‘suspend’) completion of the transaction for a specified period while the ACCC made a decision.

ACCC clearance would confer legal immunity if the ACCC were satisfied that the merger would not be likely to substantially lessening competition. However, the ACCC’s decision could be appealed to the Australian Competition Tribunal (Tribunal). If the ACCC denied clearance and the parties sought to proceed, the matter could be resolved in the Federal Court via injunctions and substantive proceedings.

This first option is similar to the current authorisation procedure given that it involves a formal conferring of statutory immunity. However, a key downside risk is that ACCC positive decisions would become subject to Tribunal reviews in the same manner as current authorisation decisions, potentially leading to more contentious mergers becoming subject to a real risk of material litigation delays.

(b) A mandatory and suspensory regime

Parties would be required to notify any merger that exceeded a statutory threshold, currently proposed by the ACCC to be an acquirer or target turnover threshold of $400 million or value threshold of $35 million. The Consultation Paper does not itself express any view on the appropriate threshold.

As with Option 1, completion would be prohibited (or ‘suspended’) for a period while the ACCC made a decision. ACCC clearance would not confer legal immunity, but may presumably involve something similar to a non-binding letter of comfort as is currently the case. As with Option 1, if the ACCC denied clearance and the parties sought to proceed, the matter could be resolved in the Federal Court.

This second option would appear to involve a move from voluntary pre-notification to mandatory pre-notification in Australia, but (as with the current informal review procedure), the ACCC’s decision would not confer statutory immunity and hence would not be subject to appeal. This option may therefore avoid the risk of those more contentious mergers becoming subject to delays caused by Tribunal appeals.

(c) An administrative mandatory formal clearance regime

As with Option 2, parties would be required to notify any merger that exceeded a statutory threshold. As with Options 1 and 2, completion would be prohibited (or ‘suspended’) for a period while the ACCC made a decision.

As with Option 1, ACCC clearance would confer legal immunity if the ACCC were satisfied that the merger would not be likely to substantially lessening competition. As with Option 1, the ACCC’s decision could be appealed to the Tribunal.

However, a key point of difference between Option 3 and the other options is that mergers that were notified would be prohibited from proceeding unless the ACCC had made a positive decision to clear the merger. As such, Option 3 would remove the discretion of the merger parties to proceed regardless of the ACCC’s decision. This is the option that is favoured by the ACCC.

The following table summarises the different options. The Consultation Paper does not express any view as to which of these options is currently preferred:

2 Proposed changes to substantive legal tests

As well as proposing reforms to merger law procedure, the Consultation Paper proposes these options for reforms to substantive merger law. These options are not mutually exclusive, hence any combination of the options could be adopted.

(a) Modernise the statutory factors that guide merger decisions

The proposed reforms would update and modernise the list of factors that must be taken into account when assessing the impact of mergers on competition.

Specifically, the factors would be extended to require consideration of the impact interlocking directorships, the effect of successive ‘creeping acquisitions’, or the impacts of data holdings on competition.

Under the proposal, these factors would now be given formal statutory prominence hence arguably greater weight in any adjudication process.

(b) Include a new prohibition on increasing substantial market power

The substantial lessening of competition test could be expanded to include mergers that ‘entrench, materially increase or materially extend a position of substantial market power.

This amendment would impact on the subset of mergers that involve firms that have a substantial degree of market power in any market. In effect, this amendment would impose an additional statutory prohibition on those firms engaging in merger activity, namely that they would not be permitted to acquire any assets or business if it would entrench, materially increase or materially extend their market power.

Currently, the test of substantial lessening of competition is used as a proxy for assessing impacts on market power. The proposed reforms would make the analysis of market power much more express and direct.

(c) Allow consideration of related agreements

Related agreements between merger parties (such as non-compete agreements or agreements concerning supply of goods or services post-merger) could also be considered as part of the consideration of the effect of the merger on competition.

If this reform were adopted it could lead the ACCC to adopt a more comprehensive formal analysis of transaction documentation.

The ACCC has been strongly pushing for this particular reform.

We suspect it is more likely than not that each of these proposed reforms would ultimately be recommended, although the expansion of the merger test to directly include an assessment of market power is likely to be controversial.

3 Context to the reforms

The political context to the reforms is important.

The ACCC has been a strong advocate for merger law reform, commencing with the previous chair of the ACCC, Rod Sims AO, giving a speech to the Law Council in August 2021. The new chair of the ACCC, Gina Cass-Gottlieb, reiterated the need for merger law reform to protect competition in Australia’s economy during the current critical period of economic transition.

The Consultation Paper echoes those views and cites the findings of the OECD, particularly those contained in the OECD Economic Surveys: Australia 2023 (OECD Survey). The OECD Survey finds that there is evidence in Australia that links excessive concentration and market power with a range of economic issues such as reduced innovation and dynamism, higher prices and poor productivity.

Following this theme, the Government issued a media release to accompany the Consultation Paper which identified that merger reform will support competitive markets, economic dynamism and address concerns over increasing economic concentration.

The positioning of the merger law reforms in this manner will mean that there is likely to be significant political support for merger law reform and hence legislation would be likely to pass through both houses of Parliament. That being said, it is too early to speculate at this stage as to what may ultimately occur by way of actual legislative change.

4 Next steps

The Consultation Paper calls for submissions by 19 January 2024.

Stakeholders are being invited to outline the benefits and risks they see regarding the options identified, or to suggest variations or alternative options as they see fit.

Please do reach out if you would like to discuss any of the reform proposals, or would like assistance preparing a submission to Treasury.