Regulatory gatekeepers in Energy M&A – ACCC and FIRB

Increasing activity in energy-focused M&A is expected. In the face of a changing regulatory gatekeeping landscape and shifting regulator priorities, what does this mean for deals and dealmakers?

Energy, energy tech and resources companies and assets are expected to remain high-priority acquisition targets over the next 12 months due to the gathering pace of the global renewable energy transition and the current global gaze on Australian energy systems, in particular.

Significant reforms to both Australia’s competition law clearance and Foreign Investment Review Board (FIRB) regimes have been announced in recent weeks. This article examines key aspects of both sets of reforms and their likely impacts upon those looking to invest in Australian energy and related markets.

Competition clearances – transition to mandatory merger control

Merger control reforms bring Australia into line with other developed economies

In what are the most significant changes to Australia’s merger laws in 50 years, from 1 January 2026 there will be a mandatory notification regime for transactions over certain (yet to be determined) thresholds, and a requirement for greater accountability and transparency in the review process by the Australian Competition and Consumer Commission (ACCC).

We see this as largely an alignment with other OECD economies, although the devil will be in the detail. Our detailed article about the merger reforms and their likely impact appears here.

M&A roll-ups more likely to invite regulatory scrutiny

Of course, the impact of the reforms will depend significantly on the actual thresholds and the way they will apply, which are not yet known. We do know that the ACCC will consider the aggregate of all transactions undertaken by the acquirer over the previous three years when considering the acquisition in question.

This will raise some interesting issues as to the precise point(s) in time in which deal value, markets and competitive effects are to be assessed, particularly for dynamic markets and incremental ‘roll-up’ M&A strategies – both of which characterise the energy deal spectrum. One question relevant to the sector is how deals involving early-stage projects will be treated, where the immediate deal value may fall under the merger control threshold, but a contingency fee payable upon the project becoming operational may be above it.

The consideration of deals done over the preceding three years means so-called “creeping” acquisitions of energy assets of a particular profile or within the same vertical continuum, particularly where focused on certain geographic markets, are more likely to raise regulatory eyebrows under the new merger regime than currently.

Another key change is that any merger that ‘creates, strengthens or entrenches a position of substantial market power in any market’ will be viewed as likely to substantially lessen competition – further strengthening the ACCC’s ability to look at incremental competitive changes that have less significance under the current law.

Energy deals have potential for public benefit arguments

For major players, these issues are worth considering from an investment strategy perspective. However, large-scale M&A deals or strategies that have vertical or horizontal competition law impacts may also be well-placed to benefit from the “public benefit authorisation” optionality that will be offered by the new regime. If the ACCC declines to approve a merger on the basis that it is likely to substantially lessen competition, the parties would have two options – to request a “public benefit” authorisation or to immediately appeal to the Competition Tribunal (although these are not mutually exclusive). This can be contrasted to the current approach, when either one or the other approach needs to be selected at the outset.

A “public benefit” authorisation is available where the ACCC is satisfied that the public benefits of the deal outweigh its likely detriments. This was the type of clearance eventually obtained by Brookfield from the ACCC for its proposed acquisition of Origin Energy last year. The ACCC approved the deal on the basis that its planned investments in green energy projects were likely to result in substantial public benefits. So while “big picture” investments and strategies may be more likely to be subject to scrutiny from a competition perspective, that may also move the needle from a public benefits perspective. Renewables-focused deals are the obvious candidates for this type of authorisation approach, but there is also potential for public benefit arguments in favour of mergers in the traditional energy sectors, where they may result in efficiencies, better sustainability benefits, lower costs, energy market stability or security of critical infrastructure.

Additional red tape and intersection with FIRB

For small and large players, the reforms will result in additional red tape that has to be dealt with before the deal can proceed. Where the thresholds are triggered, there will no longer be scope for the parties to bypass the ACCC review process on the basis that the parties themselves considered the merger did not substantially lessen competition. Like FIRB, closure of a deal without ACCC clearance could attract significant penalties.

For transactions that consolidate participation in the same sector that require FIRB, it is already orthodox for the ACCC to be notified of the deal out of courtesy to forestall questions about the transaction. FIRB will consult with the ACCC where there may be competition impacts for a deal. Now that engagement by deal proponents with the ACCC will be obligatory where thresholds are triggered.

Also like FIRB, there will be a necessary early assessment of whether or not a filing will be required to inform deal timing, risk and conditions precedent.

We are confident in the ability of the ACCC to manage this new regime and in our ability to traverse it for our clients. We are accustomed to conducting these types of reviews and have been dealing with mandatory clearance assessments and processes for many years in jurisdictions across our global network.

FIRB changes – strengthening and streamlining review approach

On 1 May 2024, the Australian Government updated Australia’s Foreign Investment Policy (the Policy).¹ Treasurer Jim Chalmers stated that the changes aim to provide a stronger, ‘risk-based’ approach to reviewing foreign investments.² The proposed changes appear to be largely ones of process and can therefore be implemented through policy.

The key issue is an increased focus on transactions in “riskier” sectors, which is likely to include a lot of energy-related M&A. This may lend itself to further delays, and potentially some uncertainty, for transactions where there are foreign bidders. Helpfully though, where there is a competitive bid process it is intended that there be scope for FIRB to refund application fees for failed bidders.

Streamlining low-risk applications

The changes aim to streamline the foreign investment review process by fast-tracking lower risk applications, while more rigorously assessing the national interest and security implications of higher risk investments.³

The Policy indicates that lower risk investments will likely include:

• those with investors which have strong records of compliance with Australia’s foreign investment framework;
• investments in non-sensitive sectors; and
• transactions with clear ownership structures.

There will be a new target of processing 50% of investment proposals within the 30-day statutory decision period by 1 January 2025.⁴

However, for investments that do not satisfy these criteria, there may well be increased scrutiny of economic benefits and national security risks, particularly in sensitive sectors such as critical infrastructure, minerals, and technology, as well as investments in proximity to sensitive Australian Government facilities, and investments having access to sensitive data.⁵ This is likely to include many energy-related M&A transactions.

Taxation implications

The Policy indicates that transactions involving internal reorganisations which may be initial steps of a broader reorganisation resulting in avoidance of Australian tax will attract greater attention.

Other transactions which may be more closely assessed include those involving pre-sale structuring of Australian assets that present risks to tax revenue on disposal, and those migrating assets to offshore related parties jurisdictions with effective low taxation, particularly in jurisdictions with little relevant economic activity.⁶ The use of related party financing arrangements to reduce tax will also attract close attention, aligning with Australia’s recent strengthening of its thin capitalisation rules.⁷

Importantly, the changes will also see refunds provided for application fees where foreign investments have not proceeded because the investor was unsuccessful in a competitive bid process. This is likely to assist foreign bidders in M&A processes as it will allow them to lodge their application early without the risk of wasted expenditure if they lose.⁸

We are highly experienced in obtaining FIRB clearance for investors across the energy market and other Australian markets and have had much success for clients seeking to make investments in higher risk investment categories.