Merger reform in Australia: What’s the fuss?
Written by: Deborah Healey
Written by: Deborah Healey
The ACCC has proposed ground-breaking changes in merger laws so Australia can thrive in the digital economy and remain competitive on the global market. But not everyone seems to agree.
Last month, the Chair of the Australian Competition and Consumer Commission (ACCC), Rod Sims, announced the ‘start of a dialogue’ on merger reform. He proposed a number of significant changes to the existing merger law Competition and Consumer Act (CCA) , arguing that change is essential for a continuing ‘open, innovative and competitive environment’ in Australia.
Merger law in Australia considers whether consolidation of companies in a particular case impacts competition and would harm consumers. It falls within the ambit of section 50 of the CCA.
In Sims’ view, the current system does not deal effectively with the consolidation of providers and the growth in market power in many important industries. Anti-competitive mergers contribute to structural entrenchment, a slowdown in overall productivity, and harm consumers and small businesses.
Who benefits from this change in merger law?
The push-back from big business and its lawyers has been predictably quick and comprehensive. Opponents argue that the changes are not needed and that they are only motivated by the ACCC’s court losses. In short, they say that the ACCC wants to make its life easier by lowering thresholds for proving that a merger is anti-competitive. They say that the changes are unnecessary and will cost business time and money.
The ACCC has recommended a wide range of changes but we’ll focus here on the proposals to amend the merger test itself and the forum which makes the decisions.
Why the change in merger law?
The proposal for change comes at a time when the ACCC has suffered several losses in court actions to prevent mergers over the last few years. To name a few: ACCC v Metcash (2011); Vodafone Hutchison v ACCC (2020); ACCC v Pacific National (2020).
The ACCC has not actually won a case since 1992 when the merger test changed. In fact, the existing informal clearance mechanism sees around 90 per cent of applications cleared by the ACCC, and relatively few cases actually go to court. So, opponents to the merger law say that the proposed changes are an overkill.
But proposals also come at a time when there is a groundswell of discussion and research worldwide about the effectiveness of existing competition laws and tools to assess the behaviours and strategies of digital platforms. This is perhaps the greatest reconsideration of the effectiveness of laws and tools since competition laws were introduced. So, it is not just the ACCC, which is reconsidering the Australian approach to mergers, – it is being done by competition regulators and governments worldwide.
In short, the Chair proposes:
What are the issues with evidence?
The existing test for mergers is whether the merger has the likely effect of substantially lessening competition in a market. It involves comparing the future with the merger and the future without the merger to see if the merger has an anti-competitive effect.
The problem with the test is that it requires forward-looking assessment of competition and competitive impact in the market, and evidence to support it. This evidence is particularly difficult to provide and introduce in court.
Courts are wary of expert economic evidence because it is not evidence of fact but consists of predictions about the future based on assumptions to explain behaviour, which cannot be fully tested. Competition law cases reveal a strong preference of judges assessing evidence and applying it to legal tests for provable facts, and for the evidence of industry representatives who can be cross- examined in the witness box.
These issues have been problematic for a long time in merger cases involving traditional industries, but particularly since the test of ‘substantial lessening of competition’ was introduced to the merger provision in 1992.
How does merger law affect the digital economy?
Where the digital economy is involved, merger law takes on greater complexity and difficulty. Predicting future digital business competition and strategies is even more problematic than in traditional industries.
For example, the identification of acquisitions that will encourage innovation and competition, as opposed to those acquisitions of start-ups to kill potential competition.
Innovation and entrepreneurship are particularly important for competition so it is important not to stop mergers that would have this impact. But it’s important to stop mergers that kill potential competitors. This issue comes into sharp focus as major platforms have made over 500 acquisitions in the last 10 years.
The best indication can be documents of the parties prior to deciding to merge, and those of their competitors and customers.
What are the proposed merger factors?
The provision governing mergers has a list of nine factors to be used in determining whether a merger is likely to be anti-competitive. These currently include levels of import competition, barriers to entry, and market concentration. The proposed amendments would revise the existing factors to focus more on structural conditions and add two new factors: the loss of potential competitive rivalry, and the increase of access or control of data, technology or other significant assets.
The latter factors were recommended by the ACCC Digital Platforms Inquiry. While the issue of potential competition is regularly considered in merger scenarios, it would be useful in the merger factors to emphasise its importance.
Along with the proposed new factor on data technology or other significant assets, the new factors would provide a clear instruction to decision-makers to focus on these issues in their assessment of an individual merger.
What are the changes in forums?
Currently there is a process of informal merger clearance by the ACCC. If the ACCC decides that the proposal is problematic, it notifies the parties. They may then withdraw the proposal or offer undertakings to decrease the anticompetitive impact of the merger. If the ACCC still objects, the parties may choose to go on.
The ACCC will then seek an injunction in the Federal Court to stop the merger. In some situations, the parties may go to the court to seek a declaration that the merger does not have the required anti-competitive impact.
The proposals flag a new process with limited merits review from a new formal decision of the ACCC by the Australian Competition Tribunal, an independent tribunal.
The Tribunal is arguably a more appropriate forum to hear appeals from ACCC decisions on mergers for two reasons. It is made up of a judge, an economist, and a business professional, and it is not bound by the formal rules of evidence.
This should be more amenable to establishing the likelihood of substantial lessening of competition. There would be appeal to the Federal Court on questions of law.
Australia needs to remain competitive
Taken together, the addition of new merger factors and change of forum to the Tribunal would improve the prospects of high-quality decisions in merger review.
Opponents regard the changes as unnecessary, but at a time when merger review has been complicated by the digital environment, and many countries are reconsidering their competition laws and processes – amendments must be considered carefully to ensure that Australia has the best opportunity to maintain and strengthen its competitive environment.
Deborah Healey is a Professor at UNSW Law & Justice and Director of the Herbert Smith Freehills China International Business and Economic Law Centre. She is also a member of the Centre for Law, Markets and Regulation. Her research and teaching focus on competition law and policy in Australia, China, Hong Kong and the ASEAN nations and she has written widely in them over a long period of time.