Proposed Legislation to Introduce Formal Merger Clearance Process

Significant changes to the merger clearance and authorisation processes in Australia are proposed under legislation recently introduced into Parliament. The Trade Practices Legislation Bill 2004 (Cth) (Bill) proposes the introduction of a voluntary new regime for formal merger clearance, and amendments to the Trade Practices Act 1974 (Cth) (Act) to allow firms to apply directly to the Australian Competition Tribunal (Tribunal) to seek authorisation of anti-competitive mergers. Firms will still be able to access the long-standing informal clearance process, although it is unclear how this process will operate alongside the new formal process.

Acquisitions having the effect, or likely effect, of substantially lessening competition in a market are prohibited under section 50 of the Act. Currently, firms contemplating an acquisition which may affect Australian competition can approach the Australian Competition and Consumer Commission (ACCC) on an informal basis prior to completion, providing information in respect of the transaction and its expected competitive effect. Where the ACCC considers that no competition issues are raised by the proposed acquisition, it issues a 'letter of comfort' to the parties. Where the ACCC considers that the proposed acquisition raises competition issues, but that these can be addressed by appropriate undertakings, it may require the merging firms to enter into such undertakings prior to issuing a conditional letter of comfort. A letter of comfort is not binding on the ACCC, and does not prevent actions by third parties. However, the ACCC has rarely taken action against, and third parties have seldom challenged, a transaction in respect of which the ACCC has issued a letter of comfort. The informal process has been developed over a number of years, as a result of interaction between merging firms and the ACCC, and has no statutory basis.

Firms contemplating an acquisition in breach of section 50 can make a formal application to the ACCC for authorisation of the acquisition. The ACCC can grant authorisation only if it is satisfied that the proposed acquisition would result, or be likely to result, in such a benefit to the public that it should be allowed to take place. The Tribunal may review an ACCC authorisation determination on the application of the merging firms or an interested party.

The proposed formal clearance process, which will exist alongside informal clearance and authorisation, will have the following features:

• The ACCC will be able to grant formal clearance if it is satisfied that a transaction will not have the effect or likely effect of substantially lessening competition.

• An application for formal clearance is not compulsory. However, if clearance is granted, the applicant has immunity from proceedings based on section 50 of the Act, whether brought by the ACCC or a third party, in relation to the acquisition (provided it complies with any conditions specified by the ACCC).

• There is a 40 day time limit within which the ACCC must make a decision on the proposed merger. The time limit can be extended only if the applicant agrees to the extension. If no decision is made by the ACCC within 40 days, the application for clearance is taken to be refused.

• The ACCC must publish written reasons for its decisions.

• If the applicant is dissatisfied with the ACCC's decision, it can appeal to the Tribunal. The Tribunal hearing is on the basis of the material which was before the ACCC, and is not a hearing de novo.

The Tribunal must make its decision within 30 days, although this time frame can be extended to 60 days in respect of complex matters or in special circumstances.

The Bill provides for applications for authorisation to be made directly to the Tribunal and proposes the introduction of tighter time frames for the consideration of such applications. In coming to its decision whether to grant the authorisation, the Tribunal must apply the same test as that currently applied by the ACCC; ie it cannot grant the authorisation unless it is satisfied that the acquisition would result, or be likely to result, in such a benefit to the public that the acquisition should be allowed to take place. The Tribunal must make its decision within three months, although this time frame can be extended to six months in special circumstances. There is no merits review from Tribunal decisions.

The proposals arise from the recommendations of The Review of Competition Provisions of the Trade Practices Act, chaired by retired High Court judge Sir Daryl Dawson (Dawson Review), which reported to the government in January 2003.

The Dawson Review found that, while there was widespread support for the informal clearance system, which was considered to be relatively speedy, inexpensive and effective, there were valid criticisms of the process. In particular, informal clearance suffers from a lack of transparency, because the ACCC is not required to give reasons for its decisions. This has hindered the development of a body of precedent to assist in the making of consistent determinations, and firms contemplating a merger have difficulty in predicting how the ACCC will approach their clearance application. Further, the informal clearance process does not provide an effective review mechanism; parties wishing to proceed with a transaction in respect of which the ACCC has refused informal clearance, must either seek authorisation or proceed with the transaction and risk court proceedings for an injunction, or for penalties and divestiture. In practice, if the ACCC declines to clear a proposed merger, the matter is generally resolved by the negotiation of undertakings or the abandonment of the proposal altogether, with very few parties seeking authorisation.

The Dawson Committee considered that the creation of a voluntary formal process, which would operate in parallel with the existing informal system, would provide parties with the option of pursuing a process whereby they would gain greater understanding of the reasons for the decision and be given the opportunity for Tribunal review of an unfavourable decision, while retaining the advantages of the current informal system. The Dawson Committee considered that most merger proposals would continue to be dealt with under the informal process, thereby limiting the additional burden placed on the ACCC by the introduction of the formal process.

In relation to authorisation, the amendments aim to provide a more streamlined authorisation process. In submissions to the Dawson Committee, dissatisfaction with the authorisation process was largely attributed to concerns about the time which may be taken by the ACCC to reach a decision and the risk of third party intervention by way of appeal to the Tribunal. These factors were considered to render the authorisation process commercially impractical for many merger proposals, especially those involving publicly listed companies.

Despite its more streamlined process, authorisation is unlikely to be adopted by firms unless they consider that a proposed transaction raises serious competition issues and results in substantial public benefits. In other instances, firms wanting to notify the ACCC of a merger must consider whether to pursue informal clearance, formal clearance, or both.

Currently, applications for informal clearance are commonly lodged even where transactions are unlikely to raise competition issues, and it is likely that firms will continue to notify such transactions through the informal process. However, in respect of mergers raising some competition concerns, merging firms will need to understand the differences between the formal and informal processes, so that they can decide which process to adopt.

The following table summarises some of the important differences between the two processes:

Given the above differences, the following issues may be relevant to a firm's choice of process:

• the degree of comfort required

• whether financiers insist on the merging firms obtaining formal clearance because of the statutory immunity it provides

• where merging firms consider that they have little hope of persuading the ACCC, but consider a better opportunity may exist before the Tribunal, the formal clearance process gives parties access to the Tribunal (albeit only on the papers and in a streamlined process)

• if a merger involves particularly complex competition issues, it may be important to use the informal process to 'educate' the ACCC before having the ACCC deal with the clearance application within the time constraints of the formal process, where there may be a risk that the ACCC will take a 'conservative' stance

• whether the detail required in the formal process renders it unworkable

• time constraints.

The view of the Dawson Committee was that the majority of mergers will continue to proceed by the informal process, despite the introduction of a more formal merger clearance regime. The government's stated intention is also that the formal and informal processes should continue as parallel processes. However, some public comments by ACCC Chairman, Graeme Samuel, post-Dawson suggested that the ACCC envisaged that the introduction of the formal process may see the eventual demise of the informal clearance process. This perhaps suggested that we would eventually follow the New Zealand experience, where the introduction of the formal regime saw the virtual death of the informal process. In circumstances where there is no statutory backing for the informal clearance process, it being a creature of the ACCC's administrative processes, there was some risk that the ACCC could allow the informal process to die. This would have been regrettable if it had occurred, as the process has worked well for the majority of mergers and is generally viewed favourably by the business community.

Despite these comments by the Chairman (perhaps made in the context of lobbying against the introduction of a formal clearance process), the Chairman's more recent public statements suggest that the ACCC will abide by the government's intentions and continue the informal clearance process in parallel with the formal process. In a speech made to the Australian Institute of Company Directors on 28 May 2004, Mr Samuel identified the following factors that could be addressed in the ACCC's new informal clearance guidelines to give the process greater transparency, accountability and procedural fairness:

• information requirement guidelines

• time frames

• communication with the ACCC

• statement of ACCC concerns, and

• providing public reasons.

The precise details of these proposed adjustments to the informal process remain to be determined. While the general direction of the proposals would seem to enhance the informal process, particular care will be needed not to undermine the major benefits of the system, for example, by releasing publicly ACCC concerns before a final view is formed. If the ACCC is committed to the continuation of the informal process, and takes steps to increase its transparency and accountability, then the introduction of a formal clearance regime is unlikely to alter the first choice of process for merging firms in respect of all but the most difficult of mergers. The formal process will be an option suited to some but not the majority of mergers where the particular combination of binding clearance, more certain timeframes and rights of Tribunal review are considered beneficial.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.