Merger law reform in Australia: Where next for merger authorisations?

Introduction

To manage the risk of anticompetitive effects arising from mergers, most jurisdictions operate merger control regimes that require transactions to obtain prior regulatory clearance from the relevant competition authority if notification thresholds are met. In most jurisdictions around the world, notification is mandatory if thresholds are met, hence ‘mandatory pre-notification’.

In Australia, the Australian Competition and Consumer Commission (ACCC) reviews mergers to determine whether they have the effect or likely effect of substantially lessening competition in a market in Australia.

Unlike most other countries, Australia utilises a voluntary merger regime, known as ‘voluntary pre-notification’. Where particular thresholds are met, merger parties may choose to notify the ACCC of the proposed transaction in order to obtain comfort that no enforcement action will be taken. Increasingly, merger transactions are being notified to the ACCC on a confidential basis in a ‘confidential pre-assessment’ and may not necessarily appear on the ACCC’s merger register.

A key issue arising in the current debate about the future of merger control in Australia is whether Australia should reform its regime to favour mandatory pre-notification. However, the issues under consideration also touch more fundamental issues regarding the substance of the legal tests that should apply. The ACCC’s Digital Platforms Inquiry touched on many of these issues.

Given the merger regime is primed for further review, this article explores some of the key considerations surrounding merger authorisation (as one aspect of merger control) and its role in the merger review process.

Overview of the merger clearance regime in Australia

In Australia, mergers and acquisitions that have the effect or are likely to have the effect of substantially lessening competition (SLC) in any market are prohibited by section 50 of the Competition and Consumer Act 2010 (Cth) (CCA). This assessment involves consideration of various factors, including the degree of buyer power, market dynamics, whether the proposed merger would raise barriers to entry, increase market concentration, the likely market dynamics absent the proposed merger, among others (the legislation provides a non-exhaustive list of examples).¹

Following reforms in 2017, Australia currently operates a two-tier structure for merger control, namely informal reviews and formal reviews. Informal reviews have no statutory basis, but the ACCC’s procedure is documented in Merger Process Guidelines that supplement the Merger Guidelines. An ACCC decision is normally in the form of a heavily qualified ‘letter of comfort’. Formal reviews have a statutory basis and may confer statutory immunity via a ‘merger authorisation’.

Australia has no formal notification thresholds, rather the ACCC provides guidance as to when it expects to be voluntarily notified. The current guidance is set out in the Merger Guidelines. Parties may opt whether to follow the formal or informal route. Most mergers follow the informal route. The formal route, namely merger authorisation, remains controversial.

A potential move by Australia to adoption a mandatory pre-notification regime would seem to require the greater formalisation of merger review in Australia hence potentially reducing the potential use of informal merger review procedures.

Merger authorisation

Merger authorisations in Australia involve hybrid considerations. Pursuant to section 90(7) of the CCA, the ACCC can grant merger authorisation if it is satisfied that either:

1. the proposed acquisition would not, or would not be likely to have the effect of, SLC; or
2. the likely public benefit resulting from the proposed acquisition outweighs the likely resulting public detriment (i.e. there is a net-public benefit).

The CCA does not comprehensively define what constitutes a net-public benefit. Generally, the ACCC has adopted a broad approach, having regard to various factors including the nature of the market in question, as well as whether the benefit could be obtained in some other way (i.e. in a way absent the proposed transaction). This is consistent with the approach adopted by the Australian Competition Tribunal (Tribunal) which has stated that the concept of a public benefit should be interpreted expansively, including:

“…anything of value to the community generally, any contribution to the aims pursued by society including as one of its principal elements … the achievement of the economic goals of efficiency and progress.”²

Similarly, the CCA does not define what constitutes a public detriment. The Tribunal defined this as:

“…any impairment to the community generally, any harm or damage to the aims pursued by the society including as one of its principal elements the achievement of the goal of economic efficiency.”³

The ACCC has adopted an approach that is consistent with the Tribunal’s views.

The history of the merger authorisation regime in Australia

Merger authorisation is unique to Australia and New Zealand, and was introduced under the former Trade Practices Act 1974 (Cth), now the CCA. Authorisation emerged from a recognition that certain prohibited practices may be justifiable where the conduct in question yields a prevailing public benefit. For example, a public benefit includes circumstances where a merger would assist an Australian industry to compete more effectively in overseas markets.⁴

The merger authorisation process, and the authority that holds original jurisdiction with respect to granting authorisation, has changed significantly over time. Different reviews have made adjustments to seek to address concerns arising at the time, but the current process is still regarded by some as imperfect and desiring of further reform:

• Pre-2007: Parties applied directly to the ACCC for authorisation, with the Tribunal holding appellate jurisdiction. The dynamics between the formal and informal merger clearance regime, and the scope of the ACCC’s role, were important issues considered as part of the Dawson Review in 2003. Concerns were expressed that the authorisation process was too onerous and commercially unfriendly, hence a more streamlined route was appropriate.
• 2007-2017: Following the recommendations in the Dawson Review, parties were permitted to apply directly to the Tribunal for net-public benefit authorisations in order to streamline the authorisation process. The Tribunal would consider whether the net-public benefits resulting from the merger outweighed any potential harm arising from the proposed transaction. A new ‘formal merger clearance’ procedure was introduced that provided statutory immunity following a more formalised review by the ACCC applying the straight legal test under section 50. However, the reality was that this formal process was unwieldy and provided little practical advantage over the informal review process. As a result, the formal merger review process was never utilised, with informal merger reviews by the ACCC regarded as delivering better and more workable outcomes.
• Since 2017: Given the formal merger review process was never used, it was abandoned in the context of the implementation of the Harper reforms of 2017. Concerns had also been expressed that the ability to apply for authorisation directly to the Tribunal meant that the ACCC did not have sufficient ability to scrutinise the merger and present a contra case. From 2017, the public benefit authorisation approach was therefore combined with the formal merger review procedure, with the ACCC regaining original jurisdiction to authorise mergers. The test for authorisation also changed slightly to consolidate two distinct statutory tests (i.e. a hybrid test) – the ACCC is now able to grant authorisation if it does not believe the merger will SLC or where it is satisfied that the proposed transaction will result in a net-public benefit.

Notwithstanding historic concerns regarding the role of the ACCC in authorising mergers on net-public benefit grounds, it is important to note the ACCC has a long history of applying this test in non-merger matters, meaning the authorisation assessment of mergers is not a new venture for the authority.

As such, today, merger authorisation under the hybrid test provides an alternative formal avenue for statutory approval and immunity, as compared to the ACCC’s informal merger review process. Between 2007 and 2017, under the Tribunal’s jurisdiction, four authorisations were assessed.⁵ Relevantly, all four of these mergers were initially assessed by the ACCC pursuant to an informal merger clearance application. This indicates that the prevailing preference was to seek clearance on the basis of there being no, or a managed, SLC risk, particularly as no authorisation application was made to the Tribunal at the outset.

Post-Harper reforms

Following the ACCC regaining jurisdiction with respect to merger authorisations in 2017, only three further authorisations have been completed by the time of writing.

At the time of publication, two more authorisations are being considered by the ACCC. To put these numbers into context, over that same period of 2017 to the time of publication, over 150 transactions have been reviewed by the ACCC under its informal merger review process.

The utility of merger authorisation

After some 20 years of reforms, we are now back to a scenario where critics are again assessing whether the current merger authorisation process is fit for purpose. In doing so, it is important to consider the historic reasons for reform to ensure that we do not repeat the mistakes of the past.

However, notwithstanding the option for mergers to be authorised on net-public benefit grounds, there still remains a perennial question as to whether the merger authorisation process realistically offers an efficient alternate means through which mergers can be ‘approved’. The authorisation process is inherently formalistic and evidence intensive. While this encourages rigour in decision-making, it increases costs and can lead to delays, particularly as outcomes can be subject to a lengthy appeal process. Time is of the essence in many M&A deals, particularly those that involve publicly listed entities.

There is also a real question whether public benefit authorisations are necessary or appropriate in a merger review context, particularly where some subjective balancing of qualitative costs and benefits is required that often defies meaningful objective quantification. However, authorisations have been part of the Australian competition law landscape and this issue is not unique to mergers.

Other similar criticisms include whether competition effects tend to be given greater weight, so public benefits are inherently discounted in a conservative decision-making process. The ACCC’s Guidelines note that the authorisation process ‘recognises that, in certain circumstances, proposed acquisitions may not harm competition or may give rise to benefits to the public that outweigh the public detriments’.⁶ Insofar as the ‘effect’ of the merger is to be determined, it will inevitably involve consideration of whether there is a risk that it will SLC, and resultantly the ‘harm to competition’ is always going to be the decisive factor in any assessment. In some circumstances, the net-public benefit test may be unnecessary, as there may not be any need for a party to substantiate a net-public benefit where it has already been shown that the risk of a SLC is low.

Again, these issues are compounded when looking at the cost and time involved to merger parties, raising important issues of commercial practicality. Given that traditionally, the dominant focus of merger review is to determine whether there is a risk of a likely SLC arising from a proposed merger, merger parties are expected to provide substantial evidence demonstrating the efficiencies claimed to arise from a merger will undeniably offset the likely detriments. Practically, this would potentially necessitate merger parties to not only advocate for the net-public benefit test, but also demonstrate the likely risk of a SLC as being low. This is potentially onerous for merger parties, especially where these considerations risk extending the review process, noting that parties would be working according to commercial timelines to effect completion.

In this respect, it is not surprising that the ACCC’s assessment of net-public benefits effectively considers whether a proposed merger gives rise to a SLC risk as part of the public detriment consideration. Given the additional costs in applying for a net-public benefit authorisation, common sense would suggest that this route is only ever followed if the parties considered that the merger would be blocked absent the public benefit. As such, the mere act of applying for a public benefit authorisation will act as a signal that the parties consider the merger gives rise to some anticompetitive risk – and hence also implicitly signal that the merger should not proceed absent the benefit. This mirrors the concerns with the EU and US regimes, where merger parties raising efficiencies claims early in the process effectively indicate there are anticompetitive risks present.⁷

At this point, an important question emerges: given considering whether a merger will SLC is paramount in a merger review, including at the advisory stage prior to any regulatory approval being sought, does the current merger authorisation regime materially assist by allowing mergers to be authorised such that they realistically result in a net-public benefit? In other words, does the authorisation process elevate the likelihood that the objectively desirable or correct outcome of a merger review is achieved?

These kinds of questions will be central in discussions surrounding the proposed merger reforms. When considering these issues, it is useful to reflect upon how the SLC test has been applied in the historical examples of mergers authorised since the 2017 reforms.

Prior to 2017, the authorisation test focused only net-public benefits. Since introduction of the SLC limb, the analysis primarily focused on the likely effects that the proposed merger would have on competition.⁸ As noted above, since the ACCC regained original jurisdiction it has authorised three mergers, with those decisions having largely hinged on demonstrating a lack of a SLC. In none of these decisions has the net-public benefit test been given anything resembling primacy (i.e. authorisation was not granted on the basis of a merger yielding a net-public benefit).

Prior to 2017, the SLC test was not a feature of the merger authorisation test, and the net-public benefit test took the lead role. An illustrative example of this was the merger between Tabcorp Holdings (Tabcorp) and Tatts Group (Tatts), both being companies providing gambling, wagering and entertainment products and services. The parties initially sought informal merger clearance from the ACCC, however, the ACCC expressed concerns that the merger might result in a SLC, following which the merger parties withdrew their application and lodged an application with the Tribunal seeking authorisation. The Tribunal ultimately granted authorisation, subject to Tabcorp divesting particular assets. The Tribunal was satisfied that the public benefits significantly outweighed the likely public detriments, including any risk of a SLC, such benefits including: access to licences required for the purposes of wagering/gambling; the merged entity would continue to be constrained by online media services; and the merger parties were largely complementary, rather than in direct competition with one another.

The ACCC’s initial concerns for anticompetitive effects are consistent with the observed pattern since 2017 – the SLC test is inevitably the primary focus when undertaking a merger review. With the change to the test and original jurisdiction remitting to the ACCC in recent years, the emphasis on the SLC test has, understandably, only strengthened.

The ACCC is currently in the process of considering two further mergers, which may present an exception to this historical rule, given submissions for the parties appear to address both limbs of the authorisation test, with parties having also provided more substantive submissions relating to the net-public benefit limb of the merger authorisation test, as opposed to solely focussing on that limb. With these decisions expected in the coming months, the extent to which the ACCC reverts to a dominant focus on the SLC limb will be worth observing.

What’s next for the merger authorisation regime?

In the history of merger review in Australia, the role of the ACCC has fluctuated considerably and the regime has been subject to a vast amount of change. Both the Dawson and Harper reviews represent significant landmarks in which the industry scrutinised how to develop an efficient and effective merger review regime.

Indeed, given concerns arising in the context of digital mergers (which have been identified by the ACCC as part of its Digital Platforms Inquiry, as well as other regulators overseas), we can expect discussions around merger reform to gain traction in the near future. In August 2021, then Chair of the ACCC, Rod Sims, reignited conversation around the need for significant changes to the Australian merger regime, including by recommending that a mandatory and suspensory review process is introduced, with a limited role to be performed by the Tribunal.⁹ The proposed changes would replace the current avenues for obtaining merger clearance, including by removing the merger authorisation regime.

Whilst discussing the merits of the proposed reforms is beyond the scope of this article, proponents argue that further reforms to the regime have the potential to streamline the merger clearance process, clarify the appropriate test to be applied, and communicate to parties the fundamental questions to be addressed in a merger review. However, one needs to be careful that this will actually occur, as each of the previous reforms have resulted in changes that were, in hindsight, somewhat unsatisfactory.

Whilst the merger authorisation option may provide merger parties with another avenue to demonstrate the efficacy of a proposed merger, this is yet to occur. As such, when considering how merger authorisations have been assessed to date, including by having regard to the merger parties’ applications, it would seem that the current merger authorisation regime may in fact reflect much of the same processes as the informal merger clearance process given the key focus is on ascertaining whether there is a SLC risk or not. Indeed, the net-public benefit proponent of the authorisation process could be replicated through introduction of more stringent efficiencies considerations (i.e. allowing for an efficiencies defence to manage identified competition concerns, as is the case in the US and EU regimes).

While it is true that the existence of the authorisation procedure acts as an important theoretical safety net against mergers that may deliver overriding public benefits, in practice such circumstances have proven to be extremely rare.

Ultimately, there may be some merit in reforming the merger authorisation regime. Critics argue that since the introduction of the regime it has not added significant value by way of facilitating mergers which may otherwise have been unable to satisfy the SLC test under the informal clearance regime. Particularly in the context of the ACCC’s Digital Platforms Services Inquiry, the approach to merger clearance and the role of the regulator will no doubt be given further thought. It will be critical for commercial parties to maintain an awareness of best strategies as the merger regime continues to develop.

The question remains, where next?