In recent months, the ACCC has taken a tougher stance on merger undertakings. In seeking informal clearance from the ACCC that a proposed acquisition will not have the effect, or likely effect, of substantially lessening competition in contravention of section 50 of Trade Practices Act 1974 (Cth) (TPA), companies can offer, or be requested to give, certain undertakings to the ACCC in accordance with section 87B of the TPA. In the merger context, companies often agree to divest a business or part of a business to ease ACCC concerns and enable the merger to proceed.
Enforcement of undertakings
In the past, the ACCC has generally been reluctant to take on the role of monitoring compliance with undertakings, or enforcing undertakings in the case of non-compliance. This position seems to have changed. In early October, Graeme Samuel (ACCC Chairman) reportedly stated that due to 'one or two mavericks who seek to subvert the intent' of an undertaking, the ACCC has been forced to take a tougher approach.
This was evident in early September when the ACCC took the unusual step of instituting proceedings in the Federal Court against Alinta for failing to comply with an undertaking it made as part of the informal clearance of its acquisition of the Dampier to Bunbury gas pipeline. Alinta allegedly seconded an employee to negotiate carriage contracts with customers of the pipeline. This was prohibited in the undertaking because Alinta is a major user of the pipeline itself. Alinta argued that the secondment was not in breach of the undertaking because the relevant employee was employed by a wholly-owned subsidiary of Alinta. The ACCC is seeking court orders directing Alinta to comply with the terms of the undertaking, terminate the employee's secondment, repay any financial benefit gained and compensate third parties who suffered loss or damage.
Content of undertakings
The ACCC also recently indicated that it will be getting tougher on the content of the undertakings. Mr Samuel commented that businesses were avoiding divestment obligations in merger undertakings by diminishing the value of the business to be divested (eg through the sale of fundamental assets or deployment of employees or customers). Businesses were also interpreting undertaking provisions in a narrow fashion, contrary to the spirit of the undertaking.
At the Senate Estimates Committee hearing on 1 November 2006, Mr Samuel suggested that some businesses are setting asset prices too high in order to circumvent required asset sales. Mr Samuel also suggested that being told by the ACCC to find a buyer for $1 seemed to 'concentrate the mind' of the business. He also mentioned that companies identified as serial offenders in not complying with undertakings may not be given the option of providing an undertaking to the ACCC.
Tim Grimwade (ACCC General Manager, Mergers & Asset Sales) recently highlighted how the effectiveness of undertakings is diminished when companies maintain operational control of assets to be divested. Mr Grimwade indicated that to address these concerns, where appropriate, the ACCC may appoint an independent manager to control the asset or business to be divested. The company providing the undertaking would accept direction (without reservation) from the independent manager in relation to the control and management of the divestment business. Mr Samuel has commented that where possible, a company may be required to sell the divestment business prior to the merger.
A changing relationship between ACCC and merger parties?
To include such measures in an undertaking, the ACCC requires the agreement of the company. Currently, the ACCC's bargaining power is strong. If the ACCC refuses to clear a merger and the acquirer has not agreed to an undertaking containing the ACCC's more onerous terms, the acquiring party has two options. It can either not proceed with the acquisition, or engage in the expense and risk of seeking a declaration from the Federal Court that the acquisition does not breach section 50 of the TPA. Given that neither option is commercially attractive, the ACCC maintains its strong bargaining position to insist on more onerous terms in undertakings.
The impending introduction of a new formal merger clearance system under the recently passed Trade Practices Legislation Amendment (No. 1) Bill 2005 (see our news alert of 26 October) may change these relationship dynamics.
Under the new system, if the ACCC does not provide formal clearance within 40 days (this period may be extended if the company agrees), clearance is deemed to have been refused. The company may then appeal the ACCC's determination to the Australian Competition Tribunal. Should there be a series of more favourable determinations from the Tribunal, companies may have a stronger bargaining position in the first instance with the ACCC. Companies may be more reluctant to agree to the ACCC's proposed tougher clauses in an undertaking and be increasingly willing to take their chances with the Tribunal. Having said that, the Tribunal may only have regard to information given to the ACCC, information referred to in the ACCC's statement of reasons and information the Tribunal requests. A company would need to ensure that the undertaking or any other information it offers to the ACCC would be a sufficient basis on which the Tribunal would be willing to grant clearance.
In the meantime, companies intending to offer an undertaking to the ACCC in a merger clearance should be prepared for the ACCC to be tougher in its approach. Companies that are already bound by undertakings should be aware that non-compliance could see them facing court action or, at a minimum, engendering distrust from the ACCC in relation to any future acquisitions.
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