The new formal merger clearance process available for complex mergers

Who does this affect?

ASX listed entities, foreign corporates, private equity, government owned corporations.

What do you need to do?

Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations.

Author
Sharon Henrick
Partner

Sharon Henrick

Partner
T +61 2 9296 2294

Sydney
Tim Bednall
Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations. David Friedlander
Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations. Trish Henry
Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations. Tony O'Malley
Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations. Jason Watts
Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations.

Melbourne
Amanda Bodger
Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations. Neil Carabine
Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations. Caroline Coops
Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations. Lisa Huett
Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations. Andrew Monotti
Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations. Roger Featherston Consider formal clearances as well as direct applications to the Australian Competition Tribunal when planning to apply for merger authorisations.

20 November 2006

The new formal merger clearance process available for complex mergers - 23 November 2006

Last month’s amendments to the Trade Practices Act introduced a new option of seeking a formal clearance of a merger. Although the option offers some advantages, you will need to carefully consider when to use the new formal merger process.

This new process is likely to be most appropriate in only the complex 5-8% of mergers that have been difficult to resolve with the ACCC under the current provisions. The new process will provide business with an opportunity to have an appeal forum to consider those matters in a more commercially realistic time frame.

Similarly, the amendments to the procedure for the authorisation of mergers are likely to be applicable to only a limited range of circumstances. While the amendments may speed up an application for authorisation, the applicant will still be required to satisfy a net public benefits test to achieve an authorisation.

Therefore it is likely that the great majority of mergers will still be processed by the ACCC under its informal clearance process.

All three processes (formal clearance, authorisation and informal clearance) are voluntary. They depend upon an applicant choosing to apply. There will still be no obligation under the Trade Practices Act on a party to give advance notification of a merger to the ACCC.

You should carefully consider which process to use with your competition and M&A adviser.

The new voluntary formal clearance process

This process will have the advantage of providing an applicant, who is granted a formal clearance, with immunity under the Act for the merger. That means the party will not be liable for any penalty nor exposure to any actions for divestiture or damages.

The new formal merger clearance process will also provide an applicant with a right to appeal the ACCC’s decision to the Australian Competition Tribunal.

Both the ACCC and the Tribunal will be subject to statutory time limits.

As it is also a formal, positive decision by the ACCC or the Tribunal to clear a matter (as opposed to the “no action” type letter under the informal clearance process) the new formal merger clearance process will be as public and information intensive as the current authorisation process. It also involves some disadvantages. These include:

significant requirements to provide comprehensive documentary and market information when making the formal application (an incomplete application will be rejected);
a substantial filing fee;
an inability to change the application without having to start over;
the process being public - confidentiality is restricted to matters which are strictly commercially confidential; and
potentially long time frames - the ACCC has 40 business days in which to make a determination. This period may be extended with the consent of the applicant. The ACCC may also extend the statutory 40 business days (or such longer period as agreed to by the applicant) by a further 20 business days if the matter is complex or involves special circumstances. The Tribunal may extend its 30 business days by a further 60 business days.

The balance of these advantages and disadvantages means that a formal clearance application is only likely to be made where the applicant is prepared to withstand a formal public examination of its proposed merger. The applicant’s target also needs to be prepared to wait between six months and nine months for the formal application to be lodged and processed (depending upon whether an appeal to the Tribunal is required).

The information requirements for the application for a formal clearance are still being worked out, but they are likely to be extensive and onerous. It is likely that an applicant will need to have all of its relevant information and evidence (including any economic expert’s report) before lodging its application with the ACCC and starting the clock. An applicant will also have to give an undertaking that it will not complete the merger while the application for formal clearance is pending.

The formal notification, except for commercially confidential aspects, will be likely to be available on the internet. Because the formal clearance process is public and affects third parties’ rights, the ACCC and the Tribunal will be required only to grant confidentiality where it is properly justified. This is likely to result in the publication of a lot more information and evidence than currently occurs under the informal clearance process.

Therefore it is likely that the formal clearance process will only be used in a small proportion of proposed mergers. This will not guarantee a different result before the Tribunal than before the ACCC in terms of whether a merger is cleared or rejected, it will only provide an additional forum in which to consider the matter on its merits.

The new merger authorisation process

At present, an application for authorisation of a merger is made initially to the ACCC, with either the applicant or a third party being entitled to appeal the ACCC’s determination to the Tribunal. By contrast, the new process requires an application for the authorisation of a merger to be made directly to the Tribunal. The Tribunal will be required to make a determination within three or six months.

Like a formal clearance, an authorisation provides the merging parties with immunity under the Act. Unlike a formal clearance, which is decided on a substantial lessening of competition test, an authorisation requires the applicant to satisfy the Tribunal that its proposed merger will result in public benefits. These benefits have to outweigh any detriments, including detriments resulting from any lessening of competition. Experience shows that it is difficult for merger parties to satisfy the net public benefit test and as this test is not altered by the recent amendments, it will remain a major obstacle in obtaining authorisation of a merger.

The current authorisation procedure has rarely been used for mergers - since 1974, only 13 applications for authorisation of mergers have been made and only 4 have been successful. It is unlikely that the new process will result in many more applications just because the process has been abbreviated.

There are also some difficulties with the process in how a merger, coupled with the authorisation of an agreement or non equity joint venture, will be dealt with under the new provisions as they only apply to mergers. It is certainly not what some politicians have suggested, in being likely to lead to an “onslaught of mergers by ‘big’ business”.

Informal clearance will still be the most popular

Although a formal clearance or an authorisation will provide greater certainty and statutory protection, informal clearance will still be the most attractive and most popular option.

The ACCC usually clears some 92-95% of mergers presented to it for informal clearance.

The informal process will remain much cheaper and more flexible and quicker than either a formal clearance or an authorisation.

It remains to be seen whether the additional information requirements, restrictions on the availability of confidentiality, and the increase in the public examination involved in the proposed formal clearance process will flow over, to some extent, into the informal clearance process. If this happens, it will be a shame and will limit some of the current advantages of the informal clearance process.

The recent amendments to the TPA were intended to expand the options available to parties, without reducing the flexibility, speed and attractiveness of the informal merger process. The new options of formal clearance and speedier authorisation are for use in limited, extremely complex circumstances, and the ACCC and the business community should seek to act appropriately and avoid the risk that these new processes adversely affect the utility of the informal clearance process.