Obtaining competition law clearance for mergers, acquisitions and joint ventures is now pervasive across the globe. Almost every jurisdiction now has a merger control notification regime and harsh consequences can flow if clearance is not obtained before a transaction closes.
From a regulatory perspective, significant financial penalties can be imposed for failure to file and completed transactions can even be wound back.
From a commercial perspective, filing requirements affect bid strength, including the necessity of including conditions precedent on the subject. It can also create deal risk should completion be delayed while a regulator (or regulators) deliberate or, indeed, where they block it.
Most merger control notification regimes around the world are mandatory. In other words, a merger filing must be made where certain thresholds are met or exceeded. Very few regimes (being really only the UK, Australia, New Zealand and Singapore) have a voluntary regime.
In this article we briefly remind our Australian readers about the voluntary regime that exists in Australia and then contrast that by explaining how the mandatory regimes in most of the rest of world generally operate. We also outline the risks and pitfalls presented by those mandatory regimes, especially when they capture transactions that have seemingly little connection to the jurisdiction.
Voluntary merger notification in Australia
The Competition and Consumer Act 2010 (Cth) (CCA) prohibits mergers or acquisitions that would have the effect, or likely effect, of substantially lessening competition in any market.
The CCA provides a non-exhaustive list of the factors to be taken into account when assessing whether or not a transaction would be likely to substantially lessen competition. The ACCC also publishes detailed merger guidelines that identify the approach it will take when analysing whether or not the acquisition will likely have such an impact (Merger Guidelines).
While parties are not obliged to notify the ACCC of a transaction, failure to do so may result in the ACCC conducting an independent investigation, which can be disruptive. If the ACCC ultimately has concerns, it can take legal action to obtain a court order to block or unwind the relevant transaction (or part of it).
Therefore, where a merger or acquisition could have competition law implications in Australia, the usual course is for parties to seek an informal merger clearance from the ACCC prior to completion. The ACCC's Merger Guidelines set out the manner in which it will assess any informal notification of a proposed acquisition. The threshold for notification of a proposed acquisition is:
- the products of the merger parties are either substitutes or complements; and
- the merged firm will have a post-merger market share of greater than 20% in the relevant market/s.
This threshold provides a good indication as to whether the parties should notify and seek informal clearance from the ACCC on the proposed acquisition. However, it is a guideline only. Sometimes parties choose to notify certain transactions due to the nature of the industry, others are less cautious and may not even notify when the threshold is exceeded.
Australia does have a mandatory notification regime for transactions involving foreign investment that exceed certain thresholds. Statistically, Australia's record in approving foreign investments remains one of the best in developed nations with less than 0.1% of the applications received by the Foreign Investment Review Board rejected each year. Since 2001, only four significant business acquisition applications have been rejected by the Australian Government.
To learn more about the foreign investment filing regime, please see our publication, accessible here. It covers recent reforms to the regime which came into effect on 1 December 2015.
Criteria for mandatory notification
Although they vary, jurisdiction to jurisdiction, merger control rules typically require mandatory notification where the two following criteria are met:
- the transaction constitutes a "merger" or a "concentration"; and
- at least two of the parties to the transaction have a certain presence in the relevant jurisdiction, measured by reference to their market share, their total assets or their total sales, consolidated at group level.
In most cases, if the above thresholds are met, merger control filings are required irrespective of whether the transaction presents substantive competition impact.
Where the transaction does not present a substantive competition impact, the process is more one of formality than in-depth assessment. Nonetheless, even a low-impact transaction can take a significant amount of time to process in some jurisdictions.
In order to determine whether or not a relevant "merger" or "concentration" will be taken to occur, it is necessary to look to the "controlling" owners.
Rules vary from country to country on determining who the "controlling" owners will be. In jurisdictions such as the European Union (EU), its Member States and the People's Republic of China (PRC), the notion of control is not limited to positive control rights (through majority shareholder or board representation) but also includes negative control rights (typically through veto rights over the annual budget or business plans, the appointment of key personnel or any other matter relating to the commercial and strategic conduct of the target). In other jurisdictions, the approach is broadly similar, although there are safe harbours depending on equity and voting rights thresholds.
Extraterritorial reach of merger control
Foreign merger control obligations can arise as soon as two parties to the transaction are materially active abroad, even if the actual transaction has no nexus with the country in question. The regulators that aggressively enforce its thresholds for foreign-to-foreign mergers are mainly the EU (and the individual EU Member States), the PRC, Korea, Pakistan, Taiwan and Turkey. As such, if an acquirer of "control" and the target each have the threshold amount of turnover/assets in the relevant jurisdiction, a filing obligation will likely arise, even if the transaction in question relates to subsidiaries offshore.
This can often be a perverse outcome and one that can catch acquirers by surprise, particularly in consortium-type transactions. However, it is a reality
Implications of not filing
In most jurisdictions, a transaction in not permitted to close (or be otherwise implemented) before merger control clearance is obtained. Significant financial penalties may be imposed for failure to comply with this restriction. Damage to reputation of merger parties may also flow, including jeopardising the company's relationship with the regulator.
In some jurisdictions, a failure to notify a reportable transaction may lead to an order to unwind the transaction. Such risks are higher in case of transactions raising a substantive issue in the relevant jurisdiction.
As a result, and particularly where the transaction does not raise significant competition impacts, there is little downside to filing as the approval process can generally be managed within an adequate timeframe.
Three-step guide – managing merger control
Merger control notifications and competition concerns identified may impact deal imperatives, bid strategy, structure and risk and change the approach to the drafting of the transaction documentation. Therefore clearances must be considered at the outset and the following three steps followed as closely as possible.
Step 1: Assess where mandatory notifications might be required.
- Work out which parties are acquiring control. Always beware of joint acquisitions and joint ventures, even if the target is in one jurisdiction only.
- Think about the turnover/business presence of parties:
- How big are the parties (total turnover)?
- Where do the parties sell? (although some jurisdictions have unusual tests e.g. assets or market share)
- Focus on the parties, not the transaction. If at least two parties are big, there is a chance of merger control requirement, even if the transaction is small.
Step 2: Consider competition impacts (especially for voluntary merger control regimes).
- Do the parties have any of the same products or services?
- Do the parties operate in the same industry?
- Do the parties supply the same companies with any product or service?
- Does one party supply the other party upstream or downstream with any good or service?
- If substantive competition issues arise, consider likelihood of clearance being obtained with and without remedies (i.e. divestitures) and resulting impacts upon transaction timing and documentation.
Step 3: Allocate risks of merger control.
- Is a condition precedent of competition clearance required? Suspensory jurisdictions in particular may require a condition precedent and extended period for closing the transaction.
- Does the sunset date on the agreement allow enough time for competition clearance? Is there the ability to extend the sunset date should the clearance process be extended or delayed?
- Parties should specify the extent to which the seller must cooperate with competition authorities as well. The buyer usually carries risk of filing, but some regimes require joint notifications.
- Clarify the buyer's right to walk-away or its obligations to offer remedies if the merger is challenged by authorities.
- Will a break fee be attached to fail to satisfy a condition precedent?
- Does a communications strategy need to be agreed?
Norton Rose Fulbright Global Merger Control Practice
Our antitrust and competition practice comprises more than 140 lawyers across our offices in Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia, enabling us to provide clients extensive global coverage combined with in-depth local knowledge of markets, laws, regulators and enforcement practices. Read more about our expertise here.