On 21 November 2008, the Australian Competition and Consumer Commission (ACCC) released its new Merger Guidelines (New Guidelines). The New Guidelines replace the ACCC's original merger guidelines released in 1999 (1999 Guidelines) and the subsequent update issued in 2006.
The New Guidelines are intended to provide parties with an explanation of the framework the ACCC will apply when considering whether a merger or a proposed merger would have the effect of, or be likely to, "substantially lessen competition" in a market in contravention of section 50 of Trade Practices Act 1974 (Cth) (TPA).
While the ACCC's merger guidelines are not legally binding, they do provide merger parties and corporate advisors with a useful overview of the policies and procedures applied by the ACCC when reviewing whether a proposed merger will, or will be likely to, substantially lessen competition in a market.
The New Guidelines were initially released in draft form for public consultation. The consultation process resulted in some aspects of the draft guidelines being simplified. For an overview of the draft guidelines please refer to our earlier Legal Update - ACCC releases new draft merger guidelines.
New voluntary notification thresholds
The TPA does not mandate that parties advise the ACCC of a proposed merger or acquisition and ACCC clearance is not required before the transaction is completed. However, given the significant consequences that could arise if a merger is later found to be in breach of section 50 of the TPA, merger parties commonly notify the ACCC of a pending merger and seek informal clearance before proceeding. Indeed, many businesses insist that ACCC approval is obtained as a condition precedent to sales of businesses or share sales.
One of the key changes in the New Guidelines from the 1999 Guidelines is the ACCC's shift away from 'safe harbour' thresholds. The 1999 Guidelines provided 'safe harbour' thresholds to assist merger parties to determine whether to notify the ACCC of a proposed merger. The 1999 Guidelines provided that the ACCC was likely to investigate a merger if:
- it resulted in the combined market share of the four largest firms being 75% or more and the merged firm would supply at least 15% of the relevant market, or
- the merged firm would supply 40% or more of the relevant market.
Usually, mergers that fell below these 'safe harbour' thresholds were not notified to the ACCC.
Under the New Guidelines, the ACCC now encourages merger parties to notify the ACCC of a pending merger where:
- 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% of the relevant market.
This new voluntary notification threshold is significantly lower than the original 'safe harbour' provisions and considerably different from the set of five voluntary notification principles proposed in the draft guidelines.
Whilst the New Guidelines provide that mergers that fall outside of the new voluntary notification threshold are unlikely to be subject to review by the ACCC, the new threshold is an indicative measure only and should not be construed as a 'safe harbour'. Rather, the threshold is intended to provide a starting point for identifying those mergers that may raise competition concerns and therefore require investigation by the ACCC. This is particularly the case where the ACCC has indicated to a firm or industry that notification of mergers by that firm or in that industry would be advisable. Accordingly, the decision whether or not to notify the ACCC of a proposed merger will depend on the circumstances of each case.
The new voluntary notification threshold will greatly expand the number of companies that should consider ACCC notification as part of any merger or acquisition transaction, especially companies operating in markets with relatively few participants where a market share of 20% or more is common. Given the relatively small number of players in Australian markets this potentially means that the ACCC should be notified of many more transactions.
ACCC assessment of market concentration
The New Guidelines also provide guidance on the factors that the ACCC will consider when assessing whether a merger will substantially lessen competition in the market. As proposed in the draft guidelines, the ACCC will now have regard to the market concentration of a firm calculated by reference to market shares and firm concentration ratios using the Herfindahl-Hirschman Index (HHI).
The HHI is calculated by adding the sum of the squares of the market share of each firm in the relevant market. The absolute level of the HHI indicates the level of concentration post-merger while the change in the HHI reflects the change in the concentration as a result of the merger.
The New Guidelines provide that the ACCC will be less likely to identify horizontal competition concerns where the post-merger HHI is either:
- less than 2000; or
- greater than 2000 but with a change in HHI arising from the acquisition of less than 100.
For example, assume there are 9 firms in the hole punch manufacturing market and a merger between 2 firms occurs to leave 8 firms in the market. Pre-merger, 2 firms each had 15% market share and the other 7 firms had 10% each (HHI 1150 [2 x 15˛ + 7 x 10˛]). If the 2 firms with 15% market share each merged, the HHI would then be 1600 (30˛ + 7 x 10˛). The ACCC would be less likely to identify horizontal competition concerns as the HHI post merger is below 2000. This seems logical as the market has not changed substantially from its pre-merger position.
If, however, pre-merger, 1 firm had 35% market share, 1 firm had 30% market share and the other 7 had 5% market share each (HHI 2300 [35˛ + 30˛ + 7 x 5˛]) and the firm with 35% market share merged with the firm with 30% market share, the post-merger HHI would be 4400 (65˛ + 7 x 5˛). The ACCC would be more likely to identify horizontal competition concerns as the HHI post-merger is over 2000, and the change in HHI as a result of the merger is 2100. On the other hand, had a firm with 5% market share merged with another firm with 5% market share the HHI would be 2350 (35˛ + 30˛+ 10˛ + 5 x 5˛), while this figure is over 2000, the ACCC would be less likely to identify horizontal competition concerns as the change in HHI is less than 100 (from 2300 to 2350).
The New Guidelines stress that this concentration threshold should not be confused with the voluntary notification threshold discussed above. The voluntary notification threshold sets out the ACCC's expectation of when a merger should be notified to the ACCC whereas the concentration threshold provides an indication of when the ACCC may have a concern with a merger.
The new concentration threshold is indicative only and is one of the many factors that the ACCC will consider as part of an overall assessment of whether a merger is likely to substantially lessen competition in breach of section 50 of the TPA. The New Guidelines reiterate that the ACCC will also consider each of the 'merger factors' set out in section 50(3) of the TPA which include height of barriers to entry, actual and potential import competition, availability of substitutes, degree of countervailing power, dynamic characteristics of the market, removal of a vigorous and effective competitor, vertical integration and the ability to increase prices or profit margins.
The ACCC's use of the HHI to calculate market concentration is positive as it is more in line with international standards. The HHI, however, relies heavily on accurate definitions of market share which is presumably the reason why the ACCC has reserved its rights to use the HHI as part of its overall assessment of the legality of any mergers. Therefore, while the HHI will provide companies with an indication of whether or not a planned merger or acquisition will result in a breach of section 50 of the TPA, it does not provide concrete evidence either of a breach or non-breach. Companies should continue to consider all of the factors the ACCC has listed as relevant in assessing the legality of a merger if planning a merger or acquisition.
Divestiture undertakings and undertakings for international mergers
The New Guidelines confirm the ACCC's preference for the use of divestiture undertakings rather than behavioral undertakings for a merger that is likely to substantially lessen competition in the market. A divestiture seeks to remedy the competitive detriment of a merger by either creating a new source of competition, or strengthening an existing source of competition, principally through the disposal of assets.
The New Guidelines provide that in order to maintain the value and integrity of divestiture undertakings, the ACCC prefers divestiture to occur on or before the completion of the merger. The ACCC considers that this is particularly important if there is a risk that a suitable purchaser for the assets cannot be located or there is likely to be asset deterioration post merger. This creates a number of difficulties for companies. Given that, especially in the current tumultuous markets, transactions are volatile up to completion, pre-completion divestures may be difficult to implement and affect the dynamics of a transaction.
The New Guidelines also provide that before accepting a behavioral or divestiture undertaking in an international merger, the ACCC will now have to be satisfied that any undertaking provided to the ACCC is capable of being enforced by the ACCC and coordinated with any of the other relevant jurisdictions involved. This is in addition to the other factors that the ACCC will need to be satisfied of before accepting an undertaking relating to a domestic merger that is likely to raise competition issues. These factors include the proposed undertaking being customized to the relevant merger, the core obligations in the proposed undertaking meeting the ACCC's competition concerns and the parties to the undertaking being capable of carrying out their obligations.
Increased merger scrutiny
The New Guidelines confirm that the ACCC intends to intensify merger scrutiny by using company documents, such as board papers, internal plans and financial accounts, as evidence in determining whether merged parties are likely to be effective competitors in the relevant market in the future or evidence that would support a finding that the target is a 'failing firm'. In light of this more proactive approach from the ACCC all companies should ensure that their corporate governance procedures are up to date and that their record keeping is in line with current market standards.
The New Guidelines also provide that if a merger that raises competition concerns is not notified to the ACCC in adequate time for the ACCC to conduct a timely review, the ACCC will seek to use its formal information-gathering powers and/or seek injunctive relief to enable it to properly consider such mergers to ensure no anti-competitive harm arises.
The New Guidelines provide a useful insight into the ACCC's current approach to scrutinising and addressing potential competition issues associated with mergers and proposed mergers. The introduction of the lower voluntary notification threshold and the move away from the "safe harbour" provisions highlight the ACCC's flexible approach to determining whether a proposed merger is likely to substantially lessen competition in a market.
This flexible approach, coupled with the ACCC's increased merger scrutiny, will require merging parties to conduct significant analysis of the market in the lead up to a merger to determine whether to approach the ACCC for clearance. This may result in more merger parties seeking clearance from, or insisting on clearance from, the ACCC before proceeding with their transaction.
While the New Guidelines do not represent a change in the law in relation to mergers, they do appear to represent a change in the way in which the ACCC will approach its assessment of the legality of mergers in its role as regulator. Companies should be aware of these changes and ensure that their corporate governance and record keeping policies are in line with market best practice.
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.