Reforms are on the horizon for the Australian merger control regime.
Under the current regime, the Australian Competition and Consumer Commission (ACCC) does not have the power to authorise anticompetitive mergers where public benefits outweigh the competitive detriment (the “public benefit” test). That power currently rests with the Australian Competition Tribunal (Tribunal), a division within the Australian Federal Court (Federal Court).
At the time of publication, the Australian Parliament is still in the process of enacting laws that would enable the ACCC to authorise anticompetitive mergers that satisfy the public benefit test, and to scrap the ACCC’s formal merger clearance process. The Tribunal will become an appeals body.
While the reforms are making their way through Parliament, the ACCC has recently succeeded in judicial review proceedings against the Tribunal in relation to its application of the public benefit test in authorising the merger between Tabcorp Holdings Ltd (Tabcorp) and Tatts Group Ltd (Tatts), to form a AUD 11.3 billion wagering juggernaut. The Federal Court has referred the Tabcorp-Tatts merger back to the Tribunal for reconsideration.
In this article, we look at:
- the proposed changes to the merger control regime; and
- the Tabcorp-Tatts merger case.
The Australian merger control regime
The current regime
The current regime provides different tests for permitting mergers depending on whether clearance is sought from the ACCC or the Tribunal. Merger parties can currently seek merger clearance in the following ways:
- ACCC informal clearance
- ACCC formal clearance, and
- Tribunal authorisation.
Almost all merger filings in Australia are assessed under the informal clearance process, which, as the name suggests, is not prescribed in legislation. Under the ACCC informal clearance process, the ACCC considers whether it would oppose the merger by considering the likely anticompetitive effects of the merger (ie a “competition” test). The ACCC can assess mergers on a confidential basis.
Both the ACCC formal clearance and Tribunal authorisation process are formal (and public) processes with prescribed timeframes set in legislation. Since its conception in 2008, the formal merger clearance process has never been used in Australia; while the Tribunal authorisation process has been used only a handful of times.
Currently, the ACCC assess merger filings under the competition test under both the informal and formal process. Under the authorisation process, the Tribunal assess merger filings under the public benefit test. The differences between the competition and public benefit tests are summarised below.
|ACCC – Competition test
||Tribunal – Public benefits test
- The ACCC may clear an acquisition if it would not have the effect or likely effect of substantially lessening competition (s50 of the Competition and Consumer Act 2010).
- The ACCC must consider "merger factors" e.g. level of import, barriers to entry, countervailing market power, availability of substitutes, etc.
- The Tribunal may authorise an acquisition if it would result, or be likely to result, in such a benefit to the public that it should be allowed (s95AT & s95AZH(1) of the Competition and Consumer Act 2010).
- The Tribunal must treat the following as benefits to the public: (1) significant increase in real value of exports; and (2) significant substitution of domestic products for imported goods.
The newly proposed merger regime
The Australian Parliament is considering a legislative bill to reform the current merger regime. The bill is expected to become law in late 2017.
Key features of the proposed regime are:
- the ACCC will be able to authorise mergers under the public benefits test as well as clearing mergers under the competition test;
- the Tribunal will become an appeals body and can review ACCC decisions in relation to merger authorisations only; and
- the formal merger clearance process will be repealed.
Tatts and Tabcorp are two of the biggest publically listed companies in the Australian wagering and gambling entertainment space. Tatts is a supplier of lotteries, wagering and gaming products and services. Tabcorp’s business also incorporates wagering (including the retail network of TAB outlets and Sky Racing) and gaming services. The wagering and gambling related businesses of both Tatts and Tabcorp are heavily regulated by both the Federal Government and state and territory governments. The gambling divisions of Tabcorp and Tatts Group Limited overlap in respect of electronic gambling machines and ancillary services in Queensland.
Initially, the merger parties followed the well-trodden informal merger process and sought approval from the ACCC. However, rather than waiting for the review process to be completed, Tabcorp withdrew its application for informal clearance and lodging an application for authorisation with the Tribunal shortly after the ACCC had published its Statement of Issues identifying various competition concerns.
The Tribunal authorised the merger subject to the condition that Tabcorp divest its gaming business in Queensland i.e. the area where the merging parties’ businesses overlapped.
This approach of switching tracks mid-way through the informal merger clearance process was unprecedented and unexpected given the ACCC had not expressed any insurmountable concerns. The ACCC’s preliminary view, as published in its Statement of Issues, was that the proposed merger might substantially lessen competition as it would combine two of the biggest operators in the wagering and gaming industry in Australia. In particular, the ACCC was concerned that the increased market power would:
- adversely affect the terms on which pooling arrangements are offered;
- increase barriers to entry and deter potential bidders in future wagering licence processes; and
- enable the merged entity to restrict the level of rebates offered by a guest totalisator to premium wagering customers.
The Tribunal found that the merger would not substantially lessen competition and that it would generate substantial public benefits through efficiency savings and gains for the merger parties, part of which would be shared with the racing industry. The Tribunal considered the possible detrimental effects of the merger – which the ACCC and other stakeholders argued included reduced competition, increased problem gambling and reduced employment – were either unlikely to arise or didn’t outweigh the public benefits of the merger. The Tribunal also noted that the wagering market was competitive and that there was strong substitution between the different wagering channels and products.
During the Tribunal process, it became clear that the Tribunal and the ACCC disagreed on how to value the “public benefit” of a merger; the Tribunal had higher regards to economic and commercial benefits that only flowed to the merger parties (such as cost savings and business efficiencies), while the ACCC considered that those benefits should be given less weight and more emphasis should be placed on public benefits that flow through to consumers and the public at large.
Judicial review by the Federal Court
Following the Tribunal’s decision to authorise the Tabcorp-Tatts merger, the ACCC commenced judicial review proceedings in the Federal Court relating to the Tribunal’s application of the statutory test and the considerations taken into account. Specifically, the ACCC argued that the Tribunal was wrong on three grounds.
First, the ACCC criticised the Tribunal for stating it could only conclude the merger would be detrimental if there was a “substantial lessening”, rather than just a “lessening”, of competition. The ACCC succeeded on this ground, with the Federal Court ordering that the decision be set aside and the matter be referred back to the Tribunal for consideration. In reaching this decision the Federal Court confirmed that under the public benefit test, any detriments will need to be balanced against the public benefits and there does not need to be a substantially lessening of competition for there to be detriment.
Second, the ACCC alleged that the Tribunal had failed to compare the future state of competition with and without the merger when it was considering any potential competitive detriment. The Federal Court, however, found in the Tribunal’s favour on this ground.
Finally, the ACCC argued that the Tribunal had placed too much weight on the benefits retained by the merger parties, such as cost savings and revenue synergies, and not those benefits which would be shared with consumers more broadly. The Federal Court rejected the ACCC’s arguments, finding that the public benefit test (as expressed under the current text in s95AZH(1) of the Competition and Consumer Act 2010) is broad and does not necessarily require a weighting of different public benefits that may benefit one segment of the public (e.g. shareholders) over another (e.g. consumers). The Federal Court did not, however, go as far as to say definitively how much weight should be given to those benefits that only enrich a segment of the public.
This decision is relevant for the ACCC and merger parties as it sets out the limits and the correct application of the public benefit test in Australia, particularly if the ACCC is given the power to authorise mergers under the reforms.
The judicial review challenge by the ACCC sheds light on the way the ACCC may approach the public benefit test. Importantly, the Federal Court’s decision does not prevent the ACCC from giving a lower weight to benefits that are retained by merger parties, if it were minded to do so in the future - assuming it is granted the power to authorise mergers.