Merger law reform in Australia: What next after the Exposure Draft?

Introduction

As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024 in the form of the draft Treasury Laws Amendment Bill 2024: Acquisitions (the Exposure Draft). The Exposure Draft progresses the Australian Government’s goal of reforming Australia’s merger control regime as currently set out in the Competition and Consumer Act 2010 (Cth) (CCA).

While much of the Exposure Draft gives effect to the content we identified in our second Client Alert, there are some unexpected drafting twists and turns. Various concerns with the Exposure Draft have been expressed in recent weeks during the public consultation period, hence it is likely that amendments and refinements will now occur.

Some key takeaway points:

1. Breadth of notifiable transactions: M&A transactions will be rendered void in the event of non-compliance with notification requirements. The scope of notifiable transactions caught by the Exposure Draft is broader than anticipated with a highly nuanced concept of control. Given concerns regarding compliance uncertainty, we are expecting the precise tests to be further refined in the final Bill to provide more certainty as to those transactions requiring notification.
2. Notification thresholds forthcoming: The notification thresholds will be set out in subordinate regulation which will be released for public consultation in the coming weeks. The thresholds are unlikely to be aligned with the foreign investment review thresholds and may significantly differ from the notification expectations under the ACCC’s current merger guidelines
3. Reforms to the competition test: The drafting amendments to the current “substantial lessening of competition” (SLC) test are broader in application than anticipated. The proposed amendments apply not only to mergers (as foreshadowed), but throughout the CCA. We are expecting this drafting to be limited to mergers in the final Bill and the application of the amendment could be further refined. As foreshadowed, the ACCC will consider the combined effect of cumulative acquisitions by the acquiring firm in the same industry over the previous 3 years.
4. Procedural transparency: While the new regime will involve greater transparency as to when mergers are notified, some concerns have arisen around whether key aspects of procedural transparency will be carried through into the new regime. The current proposed timelines are also very tight for merger parties. We understand Treasury is further considering these issues.
5. Cumulative effect of changes: There have been many tweaks merger review procedures and legislative provisions to address legacy concerns. Most of these are likely to remain in the final Bill. The cumulative effect of these amendments will generally make it easier for the ACCC to block transactions on competition grounds and to more closely scrutinise M&A documentation. As such, the degree of difficulty in obtaining merger clearances in Australia will commensurately increase.
6. Transitional provisions in 2025: The transitional provisions in the Exposure Draft may undergo further refinement. At this stage, we expect that M&A activity scheduled for the second half of next year will need to consider transitional issues if completion cannot occur before 1 January 2026. Immediate care is now required for any M&A transactions with a completion date scheduled after 1 January 2026 (i.e. in 16 months’ time).

We expect the final version of the Bill will be introduced into Parliament in the coming months as a more refined version of the Exposure Draft. At this stage, all indications are that the final Bill will have sufficient cross-bench and political support to pass into law. We understand the government is expediting the legislative package so that the Bill can be enacted during this calendar year.

Key features of the Exposure Draft

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 are set out in our previous Client Alert.

Relevantly, the Exposure Draft seeks to align Australia’s merger law regime with that of OECD economies, and particularly the European Union and United Kingdom. As such, the Exposure Draft includes broad-ranging amendments to current competition and merger laws, whilst also introducing several new concepts.

Concerns have been expressed regarding the appropriateness of combining drafting from different jurisdictions and we are expecting further refinements to occur that ensure better alignment with existing Australian law. Nonetheless, it is clear that Australian merger control beyond 2026 will have a more European flavour.

Some of the key features of the draft are as follows:

1. Mandatory merger control regime: As previously announced by Treasury in April 2024, the Exposure Draft crystalises the administrative, mandatory, suspensory, formal pre-notification regime for merger clearances. This new merger control regime will replace the current voluntary pre-notification regime that has existed for some 50 years in Australia. Parties to proposed acquisitions in excess of prescribed notification thresholds (yet to be announced) will be required to notify the ACCC of the transaction and will be prohibited from completing until certain criteria are met, usually requiring express ACCC merger approval.
2. Process and time frames for a phased review process: The Exposure Draft provides further clarity on the process and timeframes for the review of mergers by the ACCC.
   1. There will be an initial ‘Phase I’ review process of 30 business days. There will also be scope for a fast-track determination by the ACCC within 15 business days if no competition issues arise. If the ACCC ‘reasonably suspects’ that an acquisition would, or would be likely to have the effect of, SLC in any market, the ACCC may refer the transaction into a ‘Phase II’ review.
   2. A ‘Phase II’ review will be more in-depth and will take up to a further 90 business days. At the end of Phase II, the merger can be put into effect with or without conditions or disallowed entirely. The ACCC cannot block a merger unless a Phase 2 review has occurred and the ACCC ‘reasonably believes’ that the acquisition would, or would be likely to have the effect of, SLC in any market.
   3. After the completion of Phase II, there is scope for parties with standing to apply for a review of the merger application by the Australian Competition Tribunal. Alternatively, the notifying party can apply for a determination by the ACCC that the acquisition would result in a benefit to the public which substantially outweighs any detriment to the public from the acquisition. The concept of ‘substantially’ outweighing is new and will make it harder for public benefit authorisations to be obtained. The timeframe for this further ‘public benefits’ review is 50 business days.
   4. Throughout the process, the ACCC will have broad discretions to delay statutory timeframes for review (i.e. “stop the clock”) or restart the review.
      1. In the first instance, the ACCC can delay starting the clock if it “reasonably considers” that the notification is materially incomplete, materially misleading, or contains information that is false in a material particular.
      2. There are also a number of circumstances in which the ACCC can pause the review, including if the parties fail to respond to a request for information from the ACCC within a specified timeframe or if the ACCC uses its compulsory information or document gathering powers under s 155 of the CCA.
      3. The ACCC can also restart the review if it becomes aware of a “change in fact” which the ACCC reasonably considers is “material” to its decision in relation to an acquisition. It is unclear as to what a “material’ change would be, but it is expected this would be one that substantially alters the market dynamics, thereby significantly altering any counterfactual considerations.
3. Expanded role of the ACCC and penalties: Under the new regime, the ACCC will gain stronger powers as an administrative decision-maker, hence will effectively become the gatekeeper after 1 January 2026 for all mergers that are notifiable in Australia. Specifically:
   1. The ACCC will have the power to determine whether to approve or block transactions that come before it, as opposed to the current regime where the merger parties can, in practical effect, overturn ACCC decisions by seeking a Federal Court declaration that a proposed merger does not contravene competition law.
   2. Under the new regime, ACCC determinations will only be subject to a limited merits review by the Australian Competition Tribunal, which will rely on the information available to the ACCC during original review of the merger application.
   3. The new regime will introduce considerable civil penalties for failing to notify the ACCC of a merger, completing mergers without obtaining ACCC clearance, as well as new civil penalties (to supplement existing criminal penalties) for providing the ACCC with false and/or misleading information in certain circumstances. A key concern for M&A parties and practitioners is that a failure to notify a notifiable transaction could render the transaction void, creating a significant adverse consequences for all concerned. We expect this concept will remain in the final Bill.

What are the surprises?

While much of the Exposure Draft is consistent with expectations set by Treasury in its various earlier documentation and the Government’s formal public response, the drafting of the Exposure Draft does contain a number of surprises.

Implementation of amendments to substantive legal test

Of particular note is the proposed change to the definition of SLC. The SLC test is one of the central concepts for competition analysis used throughout the CCA. In the Exposure Draft, the concept of SLC has been expanded to specifically state that an SLC includes “a reference to substantially lessening competition in the market by creating, strengthening or entrenching a substantial degree of power” . The Explanatory Memorandum accompanying the Exposure Draft (the Explanatory Memorandum) states that these amendments aim to increase the focus on the market power of merger parties and make clear that even incremental changes in market power may amount to a substantial lessening of competition.

However, this amendment has been controversial in its proposed drafting implementation. It was assumed that this amendment would only apply to merger control. However, the proposed amendments apply to the SLC test throughout the CCA via an amendment to a key definitional provision in section 4G of the CCA. Concerns have been expressed that this may lead to unintended consequences, particularly in the context of the misuse of market power prohibition in section 46. We understand this issue will be given further thought by Treasury and the approach in the final Bill could therefore change.

Expiry of ACCC clearance

Another interesting addition is the introduction of a ‘stale’ transaction. In practical effect, merger parties will only have 12 months to achieve completion after an ACCC determination.

A “stale” transaction refers to a transaction that has not completed within 12 months of an ACCC determination to grant clearance. The concept of a ‘stale’ transaction was introduced to account for the fact that market conditions can significantly change within a year, such that the ACCC’s assessment of a transaction may no longer be accurate. Under the Exposure Draft, stale transactions cannot be put into effect until they have been re-notified to the ACCC (i.e. a fresh application for clearance has been made).

Ancillary protections and restraints

M&A documentation in Australia often contains pre-completion business protection restrictions and post-completion non-compete restraints to protect the value of the business both during and after the M&A process. Such restrictions and restraints currently receive the benefit of exemptions from Australia’s cartel provisions, including via a goodwill exemption for share acquisitions.

The Exposure Draft now contemplates a regime in which such restrictions and restraints must be notified to the ACCC as part of a merger review, with the ACCC having the ability to invalidate the exemptions. The Exposure Draft also appears to contemplate that notification of restrictions should occur within 30 days after the relevant transaction documentation is executed.

These issues have raised concerns given the potential significant practical complications, so it remains unclear whether the proposed notification mechanism and invalidation consequences will continue into the final Bill. If the proposed qualifications remain, future M&A transactions may need to factor in the consequences of restrictions and restraints being invalidated after transaction documentation is signed, raising significant potential complexity for such matters as M&A pricing and risk.

Some areas of uncertainty

Creeping acquisitions over three-year periods to be under scrutiny

As expected, as part of the SLC test for mergers, the Exposure Draft states that the ACCC will consider the combined effect of:

1. the current acquisition; and
2. any acquisitions, in the same industry, by the acquirer which occurred in the 3 years prior to the date of notifying the current acquisition.

This amendment is novel and will enable the ACCC to retrospectively analyse historical acquisitions that occur in the same industry, but in the context of an aggregated effect. There will be some uncertainty as to how this is practically applied, so care will be required for parties engaging in serial acquisitions. The concept of an ‘industry’, rather than ‘market’, is also new and gives the new provision greater application than perhaps anticipated. It is important to note that transactions currently occurring are therefore subject to potential ACCC later review given we are already within the three-year period before 1 January 2026.

Concept of ‘control’ and rebuttable presumptions

The Exposure Draft introduces two rebuttable presumptions and a novel concept of “control” in the context of acquisitions of shares. These concepts have been the subject of criticism in relation to the Exposure Draft and it is expected that they could be the subject of further material refinement, hence the following description may yet change in the final Bill.

Under the current proposed drafting in the Exposure Draft, if the acquiring person’s voting power is 20 per cent or more, the person is presumed to control the body corporate. Conversely a person who acquires less than 20 per cent of voting power will be presumed not to have control of the company. Both presumptions are rebuttable if it can be demonstrated that the person does not or does (respectively) have control of the body corporate.

The concept of control is broadly defined as “the capacity to directly or indirectly determine the policy of the body corporate in relation to one or more matters”. That is, the key test is proposed to be whether there is the ability to materially influence, with the 20 per cent threshold being deemed the point beyond which such influence is likely. Notably, acquisitions of shares that do not confer control fall outside the regulatory framework, making these presumptions and concepts essential to the smooth operation of the new regime.

The current proposed draft Explanatory Memorandum explains that, in determining whether a person has control of a body corporate, “the practical influence the person can exert (rather than the rights it can enforce) is to be considered, and any practice or pattern of behaviour affecting the policies of the body corporate is to be taken into account”. This current definition unfortunately does not provide a clear threshold beyond which a person will be taken to have proven that they do or do not control a body corporate. This approach differs from the approach taken in other Australian legislation such as the Foreign Acquisitions and Takeovers Act 1975 (Cth) and the Corporations Act 2001 (Cth). It also differs from the approach taken in other jurisdictions such as the European Union.

As currently drafted, this divergence from established national and international principles may make it difficult for merger parties to determine whether or not their transaction triggers a notification requirement. Merger parties would tend to err towards notification when faced with uncertainty, potentially resulting in excessive notifications out of caution, as has occurred in some other jurisdictions. We therefore anticipate that there will be some potential changes to the proposed drafting to provide greater clarity in the final Bill, particularly given that notifiable transactions not notified would be void.

Transitional considerations

While the new regime is not set to come into effect until the start of 2026, the Exposure Draft states that the ACCC will cease to accept new applications for formal merger authorisations from 1 July 2025 and that merger parties will be able to voluntarily notify the ACCC of a proposed merger from 1 December 2025. Conversely, informal merger reviews will continue until 31 December 2025. Interestingly, there are no provisions in the Exposure Draft that provide for grandfathering for acquisitions signed but not completed on or before 31 December 2025.

The need for greater clarity regarding transitional provisions has caused problems for other jurisdictions historically in the transitioning of reforms to merger control regimes. We anticipate that the transitional provisions could be refined in the final Bill to address concerns raised with the Exposure Draft.

For present purposes, we recommend that our clients and M&A practitioners assume that the new merger control regime will be effective from 1 January 2026, hence significant care will be required for all M&A transactions with completion scheduled after this date. We also recommend that the potential impact of the new merger regime and transitional provisions be considered for all M&A activity scheduled for the second half of 2025. Additionally, we are already within the three-year period for consideration of cumulative acquisitions in the same industry, hence if multiple acquisitions are contemplated in the same industry, further thought will be required as to potential cumulative market effects.

Transparency factors

One of the key goals of the reform is to make Australia’s merger control regime more transparent. To that end, the Exposure Draft introduces a public register of notified acquisitions, which will make key information in relation to notified acquisitions available to the public. The Exposure Draft also includes an obligation for the ACCC to inform merger parties of the grounds, facts, and evidence its competition and merger concerns are based upon and provides merger parties with a reasonable opportunity to respond to these concerns.

However, the new regime does not currently appear to require the ACCC to publish the new equivalent of Statements of Issues (SOIs) other than to the merger parties. SOIs have been extremely helpful to merger parties, as well as third parties making submissions, as they set out the ACCC’s preliminary views on competition issues arising from proposed acquisitions and identify areas of further inquiry. As yet, some of these procedural details may be addressed in ACCC process guidelines, but the absence of statutory requirements has been raised as an issue requiring further thought.

What is not yet known from the Exposure Draft

Although the Draft Bill provides a detailed outline of the proposed regime, we do not yet know the likely notification thresholds or filing fees.

The Exposure Draft does not set out the notification thresholds beyond which a merger must be notified to the ACCC. The draft makes it clear that such thresholds will be set by regulation (yet to be consulted on) or determinations of the Minister.

Interestingly, the Exposure Draft sets out a broad scope for the determination of thresholds, perhaps broader than had originally been anticipated. To some extent, this does provide significant flexibility for the merger notification thresholds to be refined over time, hence it does seem that notification thresholds may be more fluid than originally anticipated. The Exposure Draft indicates that the regulations may establish notification thresholds wholly or partly by reference to:

• the value of an acquisition or of a contract, arrangement or understanding; or
• a party, or a class of parties, to an acquisition or to a contract, arrangement or understanding; or
• an asset or a class of assets; or
• a business or class of businesses; or
• the turnover of a person, a business or part of a business; or
• a market or a class of markets; or
• another acquisition, or a class of acquisitions.

Although less immediately relevant, clarity on filing fees was also omitted from the Exposure Draft. However, the Explanatory Memorandum notes that fees will be set in regulations to ensure they can be updated as required to reflect changes in the economy and be more responsive to the experience of businesses that pay the fees.

Next steps

We expect that, as a next step, Treasury will undertake consultation on the proposed notification thresholds to be set out in subordinate regulations. We understand that the draft notification thresholds may be released for public consultation once the consultation on the Exposure Draft has completed.

We understand that Treasury is seeking to resolve the full legislative package, including the subordinate regulations, before the final Bill is introduced into Parliament. However, there are only a limited number of Parliamentary sittings left for this calendar year. As such, the government is expediting the drafting and public consultation process.

The final version of the Bill is therefore likely to be introduced into Parliament in the coming months as a more refined version of the Exposure Draft. At this stage, all indications are that the final Bill will have sufficient cross-bench and political support to pass into law before the end of this calendar year.

Please do reach out if you would like to discuss any aspects of the Exposure Draft, including our current predictions as to the drafting of the Bill to be introduced into Parliament.