The Situation: The leadership of the Australian Competition and Consumer Commission ("ACCC") has put forward a series of sweeping proposals that, if implemented, would be the most substantial changes to Australian antitrust merger laws in nearly 30 years.
The Context: Today, merger review in Australia is voluntary and, for the most part, nonsuspensory. If adopted, the proposed changes would establish mandatory merger reporting for transactions that meet certain thresholds and require that parties to such a transaction suspend closing until they obtain ACCC clearance.
Looking Ahead: Although the proposed changes are a long way from adoption, the ACCC's proposals would significantly increase antitrust scrutiny in Australia, particularly in the technology sector, and they would introduce a presumption that mergers involving a company with substantial market power are unlawful.
Recent Merger Review and Litigation in Australia
Australia's antitrust merger laws have remained largely unchanged since 1993. The law prohibits the acquisition of assets or shares with the effect or likely effect of substantially lessening competition in a market in Australia. In the 28 years since the last significant reform, the ACCC has not, in its own words, "won outright in a contested merger case," including two recent high-profile losses in federal court.
In a number of public statements in recent years, the ACCC chairman, now in the final year of his third (and expected final) term, has expressed his view that Australia's merger laws are weak and therefore unable to adequately address anticompetitive mergers. He recently questioned whether "Australia's merger control regime remains fit for purpose."
To address that perceived shortcoming, in late August 2021, the chairman put forward a number of proposed changes to Australian merger law and the ACCC's review methodology ("Proposals"). The Proposals already have attracted significant attention given the scope of the changes, and in the coming months, the ACCC will advocate strongly for adoption of the chairman's Proposals. The pressure to adopt the Proposals will likely increase after next year's anticipated Australian federal government elections.
Proposed Changes to Australian Merger Review
Below, we highlight the most significant changes to Australian merger review and notification regimes.
Mandatory Merger Review
Merger review in Australia is voluntary and, unlike in many countries, there is no revenue threshold above which parties must notify a transaction. However, the ACCC "encourages" parties to submit a notification if the parties' products are substitutes or complements and combined post-merger market share exceeds 20%, and it regularly investigates deals that are not notified. The ACCC primarily uses an informal merger review process in which parties approach the ACCC on an informal (sometimes confidential) basis, followed by an ACCC review, to obtain clearance. There is also a (rarely used) formal clearance process.
The ACCC has proposed a single mandatory and suspensory merger notification and review process to replace the current informal and formal clearance systems. Parties to all mergers that meet certain, not yet specified, thresholds would be required to notify their transaction to the ACCC. Like in the United States, Europe, and a number of other jurisdictions, parties would be prohibited from consummating the transaction until the ACCC has cleared it. In addition, the ACCC would also have a "call-in" power that would allow the ACCC to review certain mergers below the thresholds if the ACCC has reason to believe that there are potential competition issues. The call-in power could extend for several years after closing.
Increased Scrutiny of Companies with Substantial Market Power
The Proposals would introduce a presumption that transactions where a merging party possesses "substantial market power" ("SMP") would be deemed to substantially lessen competition (and therefore be prohibited), if that transaction is likely to entrench, materially increase, or materially extend that SMP.
The Proposals do not indicate how this additional test would work, or on what basis SMP would be established. However, the focus is similar to the current approach of the U.S. Department of Justice Antitrust Division ("DOJ") and Federal Trade Commission ("FTC"). Under the DOJ/FTC Horizontal Merger Guidelines, mergers in highly concentrated markets "are presumed to be likely to enhance market power," a presumption that the merger parties must rebut. The Proposals also do not make clear whether the merging parties will have an opportunity to rebut the presumption of a substantial lessening of competition arising from SMP.
Additional Merger Factors
The Proposals add two new factors, initially proposed in the ACCC's 2019 Digital Platforms report, that the ACCC must consider when analyzing whether a transaction is unlawful: (i) the likelihood that the transaction will result in a potential competitor exiting the market; and (ii) the nature and significance of assets being acquired, with a focus on data and technology. Those changes are intended to capture acquisitions of "nascent competitors" and so-called "killer acquisitions." A killer acquisition occurs when a company acquires a product or service in development that could compete with its own product and then terminates development of the newly acquired product (or integrates it into its existing product or service) to prevent competition. In Australia, killer acquisitions have attracted particular attention in the technology and finance sectors.
As noted above, Australian competition law prohibits transactions that would have the effect or that are likely to have the effect of substantially lessening competition in any market in Australia. Since a court decision in 2011, "likely" has widely been considered to mean a "real chance or possibility." The Proposals include a new legislative definition that would lower the "likely" standard to mean a "possibility that is not remote."
Large Digital Platforms
The Proposals would introduce special rules for acquisitions involving a large digital platform; however, they do not define a "large digital platform" or what thresholds would apply. The ACCC has promised to provide more specific rules in this area in September 2022 as part of its Digital Platform Services Inquiry report.
Consideration of Other Agreements in Merger Reviews
Under existing guidance, the ACCC must consider the competitiveness of a marketplace both with and without the transaction. The ACCC compares post-merger competition to what is likely to happen in the absence of the proposed transaction (i.e., the "counterfactual").
In response to the ACCC's loss in the Aurizon/Pacific National case (where side agreements, which the ACCC considered were relevant to the overall analysis, could not be considered as part of the merger review), the Proposals would permit the ACCC to consider other agreements between the parties in its assessment to "stop parties taking steps to change the counterfactual or take advantage of the anti-overlap provisions" that are available under Australia's antitrust laws.
The U.S. Experience with Presumptions Offers Guidance for Australia
Overseas experiences can provide helpful guidance on the approach that might be taken if the Proposals are adopted in Australia. The United States has long had a rebuttable presumption that certain mergers are anticompetitive, which provides useful guidance on the likely starting point for the proposed deeming provisions for parties with SMP.
The federal courts may enjoin a merger that results in a company "controlling an undue share of the relevant market, and results in a significant increase in concentration" in the absence of evidence clearly showing that the transaction is not likely to have such anticompetitive effects. In recent years, courts have often referred to language from the existing DOJ/FTC Merger Guidelines that establish a presumption of harm based on market concentration. Based on our merger review and litigation experience in the United States, there are at least two significant consequences of such a presumption for merger review:
- First, a presumption provides (some) guidance and offers (some) clarity to merging parties regarding whether they are likely to face an in-depth merger investigation, and potentially litigation.
- Second, there is a significant advantage for the party (the government or the merging parties) who wins the battle over the presumption.
In the United States, the emphasis on market definition is most pronounced during the litigation phase. Almost by definition, because it is easier to win a case in which the other side has the burden, the existence of the presumption places increased emphasis on the battle over what is the appropriate product and geographic market in merger cases. In litigation, the DOJ or FTC will typically advocate for a court to adopt narrow product and geographic markets to establish the presumption of competitive harm based on high market shares and concentration. In response, parties focus on alternative markets that could undermine the presumption. That focus leads to a battle regarding market definition that can overshadow the ultimate question—the net competitive effect of the transaction.
In contrast, DOJ/FTC merger investigations tend to focus more on the competitive effects of a transaction rather than market definition. Aside from cases they settle, the DOJ/FTC do not challenge a number of transactions in court that might trigger the presumption. In those cases, the DOJ/FTC typically has determined that anticompetitive effects are unlikely or that it lacks evidence to meet its burden of proof in court.
If implemented, the introduction of an anticompetitive presumption for certain mergers in Australia would likely lead to a similar narrow focus on market definition (for the purposes of SMP assessment). A presumption also may encourage the ACCC to challenge more cases involving marginal competitive effects if it believes it can meet its burden on market definition.
In recent years, the ACCC has successfully lobbied to change Australian antitrust law to enhance its authority. For example, following the ACCC's lead, in 2017 (as detailed in this Commentary), Australia amended its "misuse of market power" law to enhance the ACCC's authority to bring market power cases. Despite that success, any change will be a slow process, with many more months of debate. Indeed, the Proposals are just the first step on a long road to potential changes, and they are likely to face opposition from the business community and potentially members of the federal legislature. The ACCC chairman has acknowledged that no change is likely before next year's federal election.
Four Key Takeaways
- The ACCC has proposed sweeping changes to Australian antitrust merger review—the most significant updates in nearly 30 years. Although there will be much debate (and perhaps many months or years) before any of the Proposals are adopted, the Proposals may influence ACCC merger reviews in the meantime.
- Merger notification in Australia is historically voluntary and, in most cases, nonsuspensory. The ACCC's Proposals recommend adoption of mandatory merger reporting that would require parties meeting certain thresholds to suspend closing until they obtain ACCC clearance.
- The existing informal merger clearance regime benefits both the government and merging parties in that it allows for quick clearance of no-issue deals, while also permitting the ACCC to commit resources to more substantial transactions. The ACCC and lawmakers should carefully consider whether the Proposals detract from the benefits of the current flexible regime.
- The Proposals include a presumption of anticompetitive harm in merger cases involving companies with "substantial market power." Based on experience with presumptions in the United States, a presumption in Australia could lead to focus on narrow market definition arguments rather than the substantive arguments about the likely impact of the merger.
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