Upcoming Mallesons seminars- The ACCC is more than willing to intervene in global mergers if they substantially lessen competition in Australia
- The ACCC has also been reasonably flexible in addressing competition concerns
Globalisation and global mergers
In recent years, improvements in technology and communications, together with the increasing internationalisation of financial markets, have resulted in a rapid increase in international trade and global commerce. In response, there has been a significant increase in the number of global mergers in the past 24 months as businesses seek to reduce costs, increase productivity and enhance efficiencies in order to remain competitive in the global marketplace. The Australian Competition and Consumer Commission (‘ACCC’) has demonstrated in several recent mergers that the ACCC is willing to intervene when it believes that a global merger may cause competition concerns in Australia. The ACCC has also shown it is willing to be flexible in finding divestment solutions which address the ACCC’s competition concerns. This article will consider the relevant law, examine the ACCC’s approach and highlight some practical issues for market participants.
ACCC’s power in relation to overseas mergers
The primary provisions of the Trade Practices Act 1974 relating to mergers are sections 50 and 50A. In general terms, section 50 prohibits mergers or acquisitions which have the effect, or likely effect, of substantially lessening competition in a substantial market in Australia. This prohibition is extended by section 5(1) to ‘the engaging in conduct outside Australia by bodies corporate incorporated or carrying on business within Australia or by Australian citizens or persons ordinarily resident in Australia’. If an overseas merger falls outside section 50 (as extended by section 5(1)), section 50A may apply.
In general, section 50A provides that where there has been an acquisition outside Australia of a controlling interest in a body corporate which results in the purchaser obtaining a controlling interest in a corporation in Australia, any person may apply to the Australian Competition Tribunal (‘Tribunal’) for the Tribunal to determine the effect of the acquisition on the relevant market in Australia. If the Tribunal believes that the purchaser obtaining a controlling interest in the corporation would be likely to substantially lessen competition in an Australian market and the acquisition would not be likely to result in such a benefit to the public that it should be disregarded, the Tribunal may make a declaration accordingly.
If the Tribunal makes a declaration, the corporation must stop carrying on business in the relevant Australian market within 6 months of the declaration or any further time as the Tribunal allows. In addition to seeking an injunction to prevent a breach of sections 50 or 50A of the Trade Practices Act, the ACCC can seek divestiture of assets or shares acquired in breach of those provisions and penalties of up to $10 million for corporations and $500,000 for persons involved in the contravention.
ACCC approach to global mergers
At this time, although the recent Senate Report on the Retail Sector has recommended a clearance procedure in relation to the grocery industry, there is currently no compulsory pre-merger notification requirement under the Trade Practices Act. However, the ACCC encourages informal discussions of potential mergers to seek to provide regulatory certainty and is willing to do so on a confidential, but qualified, basis until the transaction becomes public and the ACCC can conduct market enquiries. As a practical matter, because of the ACCC’s wide powers, it is rare for parties not to seek an informal clearance from the ACCC in transactions which have major competition implications. In assessing merger proposals, the approach taken by the ACCC is substantially the same regardless of whether the merger is domestic or part of a wider global transaction. The June 1999 Merger Guidelines issued by the ACCC set out a 5 stage process that the ACCC follows in determining whether a proposed merger will lead to a substantial lessening of competition in an Australian market.
1 Defining the relevant market – in defining the market, the ACCC includes all closely substitutable products to which consumers would turn if the merged firm attempted to exercise market power. The ACCC also considers all suppliers who could, without significant investment, switch their production and/or distribution facilities to supply a substitute product in response to a ‘small but significant and non-transitory increase in price’ by the merged firm.
2 Assessing the market concentration ratios – if after the merger: a the 4 largest participants in the market will have a combined market share of 75% or more and the merged firm will have a market share of 15% or more, or b the merged firm will have a market share of 40% or more, the ACCC will wish to further consider the effect on competition of the proposed merger. If the market concentration ratio falls outside those indicative thresholds, the ACCC will generally consider that a substantial lessening of competition is unlikely.
3 Assessing the level of actual or potential import competition – if import competition is an effective constraint on the exercise of domestic market power, it is unlikely that the ACCC will intervene. The ACCC has not objected to any merger where comparable and competitive imports have held a sustained market share of 10% or more for at least 3 years.
4 Considering barriers to entry – if the market does not have significant barriers to entry, businesses operating in the market are likely to be constrained in their ability to exercise market power by the threat of potential competitors entering the market.
5 Considering ‘other factors’ – for example, countervailing power in the market and whether the merger will result in the removal of a vigorous and effective competitor, to determine whether the merger will have the effect of substantially lessening competition. Ultimately, whether or not a merger is likely to substantially lessen competition is a question that has to be determined on the individual facts of each situation.
Addressing Australian competition concerns with global mergers
If a merger proposal does raise substantial competition concerns in Australia and the ACCC has indicated that it may lessen competition substantially in a substantial market in Australia, there are several ways that the parties may seek to remove those concerns.
1 Authorisation – In Australia, it is possible to proceed with a merger even where it technically contravenes the merger provisions by means of an authorisation. If the merger may result in public benefits which offset any competition concerns, the parties may apply to the ACCC for authorisation of the merger. Once authorisation is granted in relation to a transaction, the merger parties are immune from any action under the Trade Practices Act to overturn the acquisition. However, the immunity only commences after the authorisation is granted and continues for the period set out in the authorisation. Since 1993, the Trade Practices Act has expressly stated that export generation, import replacement and contributions to the international competitiveness of the Australian economy are public benefits. Authorisation applications are generally considered to be unattractive from a commercial perspective given the timeframes involved (some 2-6 months even though the Trade Practices Act provides nominal time limits of 30 and 45 days), the public nature of the process allowing comment from suppliers, competitors and customers and the fact that the ACCC’s determination is subject to appeal to the Tribunal.
2 Undertakings – Where a merger proposal raises competition concerns, the merger parties can provide the ACCC with court enforceable undertakings under section 87B of the Trade Practices Act aimed at restructuring the merger proposal to address those concerns. The ACCC has stated it is likely to look more favourably on undertakings which are able to address structural issues in the market (for example, divestiture of certain brands or assets by the merged entity) rather than undertakings which relate to purely behavioural matters (for example, price, quality and/or service guarantees and obligations). In the recent world wide merger between British American Tobacco plc and Rothman’s International, the ACCC formed the view that the merger was likely to substantially lessen competition in Australia as the merged firm would hold 62% of the Australian cigarettes market in circumstances where import competition was considered by the ACCC to be negligible and barriers to entry were substantial. After negotiations, the ACCC accepted a court-enforceable undertaking under section 87B of the Trade Practices Act, for divestiture of certain cigarette and roll-your-own tobacco brands to Imperial Tobacco Group plc and the merger was allowed to proceed in Australia.
3 Excluding Australia from the transaction – If for commercial or other reasons, it is not possible to address the ACCC’s competition concerns by obtaining authorisation, providing undertakings or divesting competing brands, as a last resort the merger parties may consider structuring the merger so that Australian assets are excluded.
Conclusion
Given the ACCC’s willingness to intervene when it believes that a global merger may cause competition concerns in Australia and the extensive powers that the ACCC has in relation to mergers which raise competition concerns for Australia, parties to a proposed global merger should consider the application of Australian merger law to their transaction. Where appropriate, the parties should consider approaching the ACCC with their advisers at an early stage to ensure that any competition issues can be adequately dealt with in a timely manner which will cause the least inconvenience to the parties.
Wayne Leach
Solicitor
Tel (61 2) 9296 2221
wayne.leach@msj.com.au