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Let's talk antitrust: Discussing recent cases and emerging competition issues
Recent cases and judgments have shone a light on some emerging themes and trends that companies will want to consider as part of their risk management framework.
Global | Publication | November 2018
The prohibition on acquiring shares or assets where the effect is likely to be a substantial lessening of competition in a market applies to all transactions, whether large or small by value or volume, the industry or the size of the business. There is a common misconception that small-to-medium sized enterprises (SMEs) are not subject to competition laws as they are “not big enough”. This is not always the case - all acquisitions should be considered carefully to ensure that any competition risk is identified early and the transaction structure contemplates any clearance requirements.
The Competition and Consumer Act 2010 (Cth) (CCA) prohibits mergers or acquisitions that will have the effect, or are likely to have the effect, of substantially lessening competition. The CCA does not provide a threshold or “safe harbour” based on transaction size, revenue or the size of the company – all transactions should therefore be subject to an assessment of whether the transaction substantially lessens competition in any relevant market.
The Australian Competition and Consumer Commission’s (ACCC) expects to be notified of a proposed merger or acquisition where the goods or services of the parties are substitutes or complements, and where the post-merger market share will be more than 20 percent in any relevant market. Importantly, any transactions occurring in an industry of interest to the ACCC may attract scrutiny notwithstanding market shares that fall below the threshold. The ACCC’s identified priorities in 2018 include the financial services sector, energy sector, digital platforms, emerging markets, and franchise networks.
The field of competitive rivalry will assist in setting the bounds of a “market”. A market is determined by reference to the product or service being supplied and the geographic boundaries of that supply. Establishing how competition occurs is fundamental to understanding the extent of competitive rivalry, and ultimately, the market sets the parameters to assess the extent to which the consolidation between the merger parties will alter or limit competition.
Where there is a large number of competitors, operating in a highly fragmented environment and significant competitive constraints exist, competition concerns are generally less likely to arise. However, new product markets, markets that are subject to rapid innovation, niche product or service offerings, products that cannot be easily replicated, or narrow geographic bounds of competition indicate that the field of competitive rivalry may be more limited, and competition concerns may be more prevalent.
For example, a narrow geographic market resulted in the ACCC opposing Sonic Healthcare Limited’s acquisition of businesses of the Delta Imaging Group in Newcastle and in Maitland (a town in the Hunter Valley, NSW)1, a product category for the supply of electric fence products resulted in Gallagher Group’s acquisition of Country Electronics being cleared subject to court enforceable undertakings2, and in the Dow and DuPont merger, the ACCC was concerned that the transaction may reduce competitive tension in research and development (among other matters), which was ultimately cleared after 11 months3.
As the examples above indicate, there is always the potential for the market share to be high where there is a narrow field of competitive rivalry, so scale is not necessarily a pre-requisite for considering whether a proposed transaction will effect competition in a market. How a proposed transaction will shift the competitive dynamics in an industry or alter the field of competitive rivalry is the starting point for considering competition clearance. Ensuring that a proposed consolidation does not raise competition concerns, is critical to ensuring a smooth road to completion of a deal. All enterprises, irrespective of size, should consider the effect the transaction will have on competition - ultimately, you are never too small to consider the need for competition clearance.
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Recent cases and judgments have shone a light on some emerging themes and trends that companies will want to consider as part of their risk management framework.
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After a lacklustre finish to 2022 when compared to the vintage year for M&A that was 2021, dealmakers expected 2023 to see the market continue to cool in most sectors, in response to the economic headwinds of rising inflation (with its corresponding impact on financing costs), declining market valuations, tightening regulatory scrutiny and increasing geopolitical tensions.
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On 18 September 2023, the CMA published its Initial Report (Initial Report) on AI Foundation Models (FM), supplemented in April 2024 with the publication of its “Update Paper” focused on potential antitrust risks associated with FMs and a “Technical Update Report” providing more detail on the development on FMs (collectively the “Reports”). Below, we consider these CMA publications.
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