The countdown begins…merger law reform in Australia

This article was co-authored with Susan Graham.

As predicted, the Australian Treasurer announced on 10 April 2024 significant potential reforms to Australia’s merger regime. The reforms, if and when implemented, will represent the most significant amendments to Australia’s merger laws in 50 years. Importantly, the reforms are not expected to be effective until 1 January 2026, hence some 20 months’ lead time has been provided to resolve the detail.

The stated aims of the merger reforms are to improve competition by making mergers simpler, faster and more transparent. The important context to the merger reforms is set out in our previous Client Alert. The reforms are intended to align Australia’s merger regime with that of OECD economies. Treasury published a Paper on 10 April 2024 that set out significant detail, greater than we were anticipating. The salient features of the proposed reforms and our initial thoughts on potential implications are set out below.

Some key takeaway points:

• We have plenty of time. The merger reforms are not expected to commence until 1 January 2026. Significant further consultation and work is required over the next 20 months to resolve the detail. Parliamentary processes also need to be followed to enact the reforms. As such, the proposed reforms should not affect transactional activity scheduled for 2024 and 2025.
• Australia will abandon the ‘voluntary notification’ regime that has been in place since 1974 and instead adopt a mandatory pre-notification regime. As such, all assets and share acquisitions over a pre-determined threshold will need to be notified to the Australian Competition and Consumer Commission (ACCC). The precise notification thresholds are yet to be determined.
• Australia will move to an administrative model, meaning the ACCC will become the gatekeeper for notifiable mergers. Mergers exceeding the notification thresholds will be prohibited until the approval of the ACCC is obtained or a specified statutory period has lapsed. A right of appeal of ACCC decisions to the Australian Competition Tribunal (Tribunal) will exist.
• The Paper sets out proposed timelines and processes with significant detail, although these remain indicative at this stage pending further public consultation. A phased merger review approach is proposed, with the ability to steer a merger application into a public benefit authorisation process if the ACCC expresses concerns.
• While the legal test for merger review will be reformed, the proposed amendments are generally consistent with the existing approach. The ACCC’s request to reverse the onus of proof has not been granted, following receipt of significant submissions by Treasury opposing this reform.

Treasury will next undertake consultation on Exposure Draft legislation that gives effect to these reforms. The precise timing for release of the Exposure Draft is currently unknown, but we expect the draft will be made available in the coming months. 

While there is adverse media commentary, the proposed reforms do provide some important benefits. The Government has clearly sought to balance the competing views of different stakeholders.

1. Proposed changes to merger review procedure

In our previous Client Alert, we identified that the Government had proposed three reform options. The Government has now opted for the third of these options, namely an “administrative mandatory formal clearance regime”.

The acquirer of assets or shares (colloquially known as a “merger”) would be required to notify to the ACCC any merger that exceeds the merger notification thresholds. The Paper does not identify the precise thresholds, but notes these will be based on monetary and market share thresholds. The thresholds will be subject to periodic review and will be intended to result in notification of some 300 mergers per year, consistent with current notification levels. The ACCC will also publish guidance.

The notification itself will follow a prescribed format, that will contain information requirements calibrated with the likelihood of the merger raising competition concerns. We would expect notifications to be more information intensive and for the ACCC to decline to accept a notification until a complete set of information is provided. Given the prospect of appeals to the Tribunal, it may be necessary to submit more information ‘up-front’ than has been the case in mergers to date, particularly if a merger is likely to be controversial or raise substantive competition concerns.

An application fee would be payable. Treasury expects this to be around AUD50,000 to AUD100,000 for most mergers. An exemption from fees will be available for small business so that the fees are not a disproportionate burden for those businesses.

There would remain scope for parties to consult with the ACCC on a confidential basis before making a notification. Once made, the notification would be published on the ACCC’s merger register. As such, important issues will continue to arise in relation to the timing of notifications in the context of confidential M&A, particularly transactions involving public companies. However, the greater transparency of merger clearances is to be welcomed given many decisions are currently made by the ACCC without any mention on the merger register.

A failure to make a notification would attract a significant penalty, but the magnitude of the penalty is yet to be determined. Once a notification is made, completion would be prohibited (or ‘suspended’) for a period while the ACCC made a decision. The indicative timelines are summarised below.

An important feature of the new approach is that notifiable mergers would be prohibited unless and until the ACCC had made a positive decision to clear the merger or the statutory timeframe had otherwise elapsed. As such, there would be no scope to bypass the ACCC on the basis that the parties themselves considered the merger did not substantially lessen competition (SLC).

2. Escalation into Phase 2 and negotiation of remedies

The Government proposes a phased approach to merger review. The ACCC must make a ‘Phase 1’ decision whether to clear a merger (including by not responding) or raise competition concerns within a period currently proposed to be 30 working days (ie, 6 weeks). A fast-tracked application (ie, a notification raising no competition concerns, but tripping a monetary threshold) could be cleared within 15 working days.

The expectation is that most mergers would be cleared within 15-30 working days, although it is likely the ACCC would have ‘stop the clock’ mechanisms that it could trigger via information requisitions. As such, the actual practical timelines may be longer.

If competition concerns are raised, the merger would enter a ‘Phase 2’ review, which is currently proposed to involve a further period of 90 working days (ie, 3 months). As with the existing process, the intention of a Phase 2 review would be to enable more detailed examination of the competition issues, with more detailed legal and economic analysis. We would expect feedback to be provided by the ACCC in the nature of the current Statement of Issues, although exact details are yet to be determined.

Applicants could proffer proposed remedies to the ACCC at the start of the process or during the Phase 2 review, meaning there would be scope to determine a remedy that addressed the ACCC’s articulated concerns rather than attempting to second-guess those concerns. This would preserve one of the most valuable features of the current informal merger review process. The ACCC could make decisions conditional on remedies, which would most likely involve the same section 87B divestiture undertakings as are used today.

Importantly, given the merger review process will now be enshrined in statute, the ACCC will become subject to legal obligations of administrative fairness. As such, the ACCC will become more accountable in its decision-making processes, encouraging transparency. It remains unclear whether judicial review of the ACCC’s processes would be available on administrative law grounds, but we expect this would be likely in the same manner as for other administrative decision-makers.

If the ACCC did not make a positive decision to clear the merger before the end of the ‘Phase II’ extension, the merger would be deemed cleared. However, we assume the ACCC may be given scope to request time extensions, and the precise timelines will be the subject of further public consultation during 2024.   

3. Potential for public benefit authorisations or appeals to the Tribunal

If the ACCC declined to approve a merger, the parties would have two options, namely to request a public benefit authorisation or to immediately appeal to the Tribunal. The options would not be mutually exclusive, so an appeal to the Tribunal could still occur at the end of a public benefit authorisation.

A public benefit authorisation would involve the ACCC being satisfied that the merger would result, or be likely to result, in a substantial benefit to the public which outweighs the anti-competitive detriment of the merger. We would expect the current tests and considerations for merger authorisations would be replicated into the new regime. The ACCC would likely be given a further period of 50 working days (ie, just under 2 months) to make a decision. A further fee would be payable.

Alternatively or additionally, a party with standing would have the ability to appeal the ACCC’s decision to the Tribunal. The Tribunal would undertake a limited merits review, so an appeal would only consider the same material as had been before the ACCC, with limited scope for presenting new evidence (eg factual updates in dynamic markets). The Tribunal would have the ability to affirm, set aside or vary the ACCC’s decision. As such, it would be possible to overturn the ACCC’s decision by way of appeal to the Tribunal.

We expect the processes for Tribunal appeals would be similar to those that exist today, hence appellants could include ‘spoiling’ parties with standing, or targets of hostile takeovers. As such, more controversial merger decisions could potentially be appealed to the Tribunal even if the ACCC had made a public decision to clear the merger. Given the risk of gaming, we would expect Treasury to be carefully considering appeal processes and standing to appeal. The Government identifies that the Tribunal will be given the power to award costs to discourage vexatious or frivolous appeals.

4. Changes to the substantive legal test

The Government is not intending to reverse the onus of proof in the manner sought by the ACCC. Rather, it will remain for the ACCC to form a view whether a merger could have the effect, or be likely to have the effect, of substantially lessening competition in any market in Australia.

However, there are some proposed amendments to the substantive legal test that could affect the way in which mergers are treated going forward:

1. The ACCC will consider the aggregate of all transactions undertaken by the acquirer over the previous 3 years when considering the acquisition in question. This will raise some interesting issues as to the precise point(s) in time in which markets and competitive effects are to be identified, particularly for dynamic markets or incremental ‘roll-up’ M&A strategies.
2. The Government has indicated the substantial lessening of competition test will be clarified, to expressly include any merger that creates, strengthens or entrenches a position of substantial market power in any market. This proposed amendment introduces a concept that does not currently exist in Australian competition law, so will require careful thought.
3. The current statutory factors to be applied when considering mergers will be replaced by new principles. We will need to await the Exposure Draft to see what is proposed, but we expect the new principles will involve some modernisation and updating of the historic merger factors.

The ACCC would continue to publish its Merger Guidelines, although this is not expressly stated in the Paper. Merger Guidelines are a feature of international best practice in merger review. The ACCC’s current Merger Process Guidelines will clearly need to be updated to reflect the new regime, and the ACCC has confirmed it will consult on those updates.

5. Policy justifications for the reforms and further consultation

In his accompanying speech, the Hon Dr Jim Chalmers MP, Treasurer, emphasised the importance of evolving competition policy in line with the changing economy. He identified that Australia is one of only three OECD countries that does not require mandatory notification of mergers. This has given rise to concerns that the ACCC is not adequately placed to detect and manage potential anti-competitive mergers.

Australian markets are generally concentrated when compared to global standards, and this has been cited as a reason for the reducing productivity in the Australian market and contributing to current ‘cost of living’ concerns. These reforms are positioned as part of the Government’s response to these  issues. The Treasurer stated that the Australian Government is “reforming our competition settings to make our economy more dynamic… Stronger and simpler and faster and more targeted and more transparent”.   

Please see our previous Client Alert for more detail on the other competition law and policy reforms currently under consideration for Australia.

Importantly, many of the finer details of the reform package are not yet settled. We would expect consultation on the Exposure Draft legislation to focus on issues such as the merger notification thresholds and timelines, as well as the nature of procedural safeguards, and penalties.

We would not expect the ACCC to commence consultation on amendments to guidelines, including information requirements, until after a legislative package had been enacted to give effect to the merger reform package. As such, the ACCC consultation would be likely to occur during 2025.

In summary, there is still a lot of work to occur, and we are happy to provide further updates and insights over the coming months.