Update: On 27 August, the ACCC unveiled its merger reform proposals. Read our latest report.
Written by Caroline Coops, Helena Kanton and Kat Armstrong.
With the current mergers test squarely on the ACCC's reform agenda, we examine the background to the current debate and ask whether it is the substantive legal test or the merger review process that is in the crosshairs.
The ACCC is expected to release its reform proposals towards the end of August 2021 – get up to speed with this deep dive guide and stay tuned for our updates.
The ACCC has experienced difficulties in persuading Courts and the Australian Competition Tribunal (Tribunal) that mergers it has sought to oppose would have the effect, or be likely to have the effect, of substantially lessening competition in breach of section 50 of the Competition and Consumer Act (CCA).
The current ACCC Chairman, Rod Sims, nailed his colours to the mast declaring in May 2019 that 'it is clear there is a problem with the merger regime in Australia' because the ACCC wins cases in other areas, but not in merger matters.
The concerns raised by the ACCC include:
- the Federal Court's acceptance of 'self-serving' evidence from merger parties;
- an overemphasis on the counterfactual (being the future state of competition without the merger) when assessing whether a merger would substantially lessen competition; and
- difficulties in identifying and blocking 'killer acquisitions' by large technology companies.
Possible reforms that could flow from these concerns include:
- amendments to s 50(3) to address large companies acquiring nascent competitors, and to require express consideration of the nature and significance of any data and technology assets being acquired;
- mandating notification of acquisitions by 'large digital platforms' – and potentially the introduction of some broader form of a mandatory and suspensory regime in light of the ACCC's comments that the current lack of a mandatory pre-merger notification requirement in Australia is out of step with the rest of the world;
- relying only on evidence from merger parties that pre-dates the proposed acquisition;
- introducing a 'rebuttable presumption' that certain types of acquisitions will substantially lessen competition; and/or
- abandoning the counterfactual assessment, and replacing it with a requirement to assess the impacts of mergers as against the current 'status quo'.
Remind me – what's the current test?
The current merger test under section 50(1) of the CCA provides that a corporation must not directly or indirectly acquire shares or assets if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a relevant market. The effect of the acquisition must be tested against evidence or established facts, and is not shown by reference to assumptions or independent events.
In considering the effect of an acquisition, it is necessary to consider the 'commercial likelihoods' relevant to the proposed acquisition, so that the test is applied at a level which is commercially relevant or meaningful. In particular, the threshold must not be set so low 'as effectively to expose acquiring corporations to a finding of contravention simply on the basis of possibilities, however plausible they may seem, generated by economic theory alone'.
Further, competition must be lessened in a manner that is substantial. The lessening of competition must be 'substantial in the sense of meaningful or relevant to the competitive process'.
The question of whether an acquisition is likely to have the effect of substantially lessening competition in a market for the purpose of section 50 is determined through application of the future 'with and without' test, also known as a comparison between the 'factual' and the 'counterfactual'. This test requires a consideration of the likely state of future competition in the relevant market with the proposed acquisition (the factual), compared to the likely state of future competition in the relevant market without the proposed acquisition (the counterfactual).
The counterfactual is the pragmatic and commercial assessment of what is likely to occur in the absence of the proposed acquisition. It is not an artificial market design concept or something theoretically considered as an alternative.
What issues does the ACCC have with the current test?
At the highest level, the ACCC has expressed the view that there is 'definitely a problem' with market concentration in Australia, and that Australia's merger regime is not adequately addressing or preventing it. At the Law Council of Australia Competition Law Workshop in August 2019, Rod Sims suggested that Australia's competition law is in need of reform to stop the further concentration of market power, and that there is 'growing community expectation that the ACCC should oppose more acquisitions as the consequences of market power from increased concentration are exposed'.
Sims has also drawn attention to the merger regime in Australia being different to that of overseas jurisdictions, potentially foreshadowing reforms to bring Australia's regime in line with international merger regimes. In his address to the International Competition Network (ICN) Merger Workshop in February 2020, Sims also flagged that the ACCC was 'actively look to competition authorities in other jurisdictions for ideas as we continue to explore improvements in our system'.
Against this backdrop, Sims has confirmed that the ACCC will put forward proposals to the Federal Government to change Australia's merger regime in 2021, stating that existing 'merger laws are probably letting us down'.
The court's acceptance of 'self-serving' evidence from merger parties
The ACCC has emphasised that the informal merger process relies on full and frank voluntary disclosure by the merger parties, but submissions consistently 'underplay the degree of overlap and market dynamics, in some cases to the extent of being potentially misleading'.  This in turn is seen to undermine the informal review process and lead to delays.
Differences in the approach by overseas regulators have also been highlighted, in particular the fact that US courts 'usually place little weight on the testimony of merger party executives' unless supported by documents pre-dating the proposed merger.
This concern was reiterated in comments relating to the 'bias' of merger parties during a panel discussion with representatives from the UK's Competition and Markets Authority (CMA) and Germany's Bundeskartellamt. Essentially, the contention is that merger parties can never be unbiased as they are focused on getting the deal through, and therefore look at things through a narrow prism.
On 20 April 2021, the ACCC, the CMA and the Bundeskartellamt issued a joint statement regarding the need for strong merger enforcement, in which it was noted that 'agencies, courts and tribunals need to be aware of the risk of accepting the merger firm's views over those of competitors, customers and consumers simply because the merger firms are more engaged in the merger review process'.
Further, the ACCC noted in the Final Report to the ACCC's Digital Platform Inquiry (Digital Platform Inquiry Final Report), that 'the tribunal and the courts appear to give greater weight to evidence from the parties to the transaction' who the ACCC considers 'have a vested interest in the acquisition proceeding, rather than from the evidence from third party witnesses'.
An undue overemphasis on the counterfactual – which is too uncertain
The ACCC has said that merger parties and the courts are increasingly focused on what is likely to happen in the future without the acquisition (i.e. the counterfactual), and that this is too challenging to prove in court. Rod Sims has observed that the counterfactual, while a relevant consideration, is 'open to manipulation'. Regulators can feel like they are 'on the back foot' when meeting the challenge of seeking evidence about the unknown future, and making predictions of the future state of competition with the merger, in circumstances where the relevant knowledge rests with the merger parties.
Further, the ACCC believes merger control should 'focus very strongly on the competition that is lost, rather than getting completely tied up with predicting the future'. It has been suggested that the reason the ACCC has not won a merger case in the courts is because of the requirement to 'look forward' in circumstances where the future is inherently uncertain.
In comments to the media after the ACCC's unsuccessful appeal in ACCC v Pacific National Pty Limited  FCAFC 77, Sims was reported as saying that the ACCC 'should not have to prove' who might want to use a freight hub one day and wanted merger laws to focus on a change in market power rather than 'predicting the future, - being 'the essential problem with the way the merger laws are being argued and interpreted'.
Further, undue focus on the counterfactual can risk 'overlooking the likely anticompetitive effects of the merger itself. This is compounded by many of the merger factors listed in s50(3), which can be used to support a merger being cleared.'
Finally, the ACCC has said there is currently not enough weight being placed on the following factors in the assessment of mergers:
- potential competition being lost;
- barriers to entry being raised; and
- competitors being foreclosed,
concluding that the net result is that Australia's merger control regime is 'skewed towards clearance'.
The current regime doesn't adequately deal with 'killer acquisitions' or large technology companies
The ACCC has expressed its concern over large companies (especially technology companies and large financial institutions) acquiring smaller nascent businesses that have the potential to one day, grow to be vigorous competitors of the acquirer.
In the joint statement by the ACCC, the CMA and the Bundeskartellamt it was noted that 'a seemingly small transaction can cause a competitive market to tip in an anticompetitive direction. For example, an acquisition of a small start-up could in reality be the acquisition of what would have been a major competitive threat to the purchaser in the longer term.'
The joint statement specifically called out difficulties in dealing with mergers by large technology companies, stating that 'the last decade has seen the rise of acquisitive tech giants with activities across multiple current or future markets. Anticompetitive mergers in these markets can cause significant harm given the increased importance of these products and services and the aggregation of data over time across various services'.
For these reasons, the ACCC's Digital Platforms Inquiry Final Report recommended Australia's merger laws should be amended to better account for certain competitive dynamics such as potential competition and the role of data (learn more here).
What reform proposals has the ACCC put forward so far?
While a formal proposal to reform the merger regime in Australia has not yet been released by the ACCC, the first two recommendations in the Digital Platforms Inquiry Final Report explicitly refer to reforms that the ACCC would like to see to the mergers test.
There are several other possible reforms that may be put forward, based on the ACCC's public statements.
Existing ACCC proposal to expand s 50(3)
Section 50(3) of the CCA provides a list of non-exhaustive factors that must be taken into account when assessing whether an acquisition would have the effect, or be likely to have the effect, of substantially lessening competition. The first recommendation made by the ACCC in the Digital Platforms Inquiry Final Report, handed down in June 2019, was to amend section 50(3) of the CCA to incorporate the following additional merger factors:
(j) the likelihood that the acquisition would result in the removal from the market of a potential competitor;
(k) the nature and significance of assets, including data and technology, being acquired directly or through the body corporate.
The Federal Government has noted that it is undertaking public consultation in relation to this recommendation.
This recommendation was made in light of the ACCC's concerns around the acquisition of nascent competitors by dominant firms and the importance of data in digital markets, and the extent to which mergers allow large platform to further increase its competitive advantage.
If this change was incorporated into law, it would also address the ACCC's concern that the current regime does not place enough weight on the 'potential competition being lost' as it expressly would require consideration of whether the target company may be a potential competitor of the acquirers in the future.
Existing ACCC proposal to make notification mandatory for some businesses
The second recommendation in the Digital Platforms Inquiry Final Report would require large digital platforms to agree to a notification protocol to provide advance notice to the ACCC of any proposed acquisitions that potentially impact competition in Australia.
Such protocols would be agreed between the ACCC and each relevant business and would specify the types of acquisitions requiring notification, any applicable minimum transaction value, and the minimum advance notification period prior to completion of the proposed transaction to enable the ACCC to assess the proposed acquisition.
This recommendation was made in light of the ACCC's view that 'strategic acquisitions contributed to Google's and Facebook's market powers in the relevant markets' and the 'sizeable effects on competition' that it considers past acquisitions have had.
What other reform proposals could be put forward?
Possible proposal to introduce a mandatory and suspensory notification process
More generally, Rod Sims has suggested that mandatory and suspensory notification regimes are appealing to the ACCC. In his view, Australia's informal and voluntary merger notification process has challenges including that:
- the parties do not have minimum notification requirements; and
- transactions are not suspended pending ACCC approval, meaning companies can threaten to complete at various points during the ACCC's investigation.
We can see the potential for the ACCC to agitate for the introduction of some form of mandatory and suspensory regime that is broader than one limited to digital platforms. A talking point for the ACCC has been whether the lack of mandatory pre-merger notification is out of step with the rest of the world.
In the UK, the Digital Markets Taskforce has recently recommended a specific merger control regime for digital platforms with strategic market status, including a mandatory and suspensory regime and lowering of the standard of proof from the current balance of probabilities to a 'realistic prospect' that a transaction would substantially lessen competition. Sims has commented that it is 'interesting to see the UK considering a move from a voluntary to a compulsory notification system, albeit with high notification thresholds'.
The recommendation in the Digital Platforms Inquiry Final Report to introduce quasi-mandatory notification for some technology businesses may be an indication that the ACCC is keen to expand this requirement into other industries and business. At the ICN Merger Workshop in 2020, Sims commented that the ACCC is looking at its international counterparts and sees Australia's voluntary and informal merger clearance process as 'out of place'.
It seems that the ACCC is positioning mandatory notification of proposed acquisitions as a positive step towards addressing some of its concerns with the merger regime as a whole and may consider proposing some elements of such a system to reform Australia's merger regime. We discuss what a mandatory and suspensory regime could look like in more detail here.
Possible proposal not to rely on evidence from merger parties that post-dates the proposed acquisition
A repeated concern of the ACCC is that merger parties use 'self-serving' evidence of facts subsequent to contemplating or proposing the relevant merger. This may lead the ACCC to propose a legislative change that only allows the court to give very little, if any, weight to such evidence.
Rod Sims has commented that one of the key areas of difference between Australia's regime and overseas jurisdictions which the ACCC is keeping its eye on is 'the weight given by the courts to information created after the deal was agreed because of the inherent bias and unreliability of that information'.
In this context, the ACCC may seek to propose reforms that only allow the court to place weight on the evidence of the merger parties and their executives that is supported by documents that pre-date the announcement of the proposed merger.
Possible proposal to reverse the onus of proof, or introduce a rebuttable presumption
In raising concerns about the current approach to merger law in his address to the RBB Economics Forum in November 2019, Rod Sims noted various options that could be considered, informed by overseas approaches. These included changing the onus of proof or introducing structural presumptions about certain mergers. Reforms of this nature would aim to address the ACCC's concerns that the evidentiary burden is too high for it to prove its case before the courts.
A reversal of the onus of proof would mean that the merging parties would have to prove that the proposed acquisition would not have the effect, or be likely to have the effect, of substantially lessening competition. The UK's Digital Markets Taskforce did not recommend to the CMA that a reversal of the onus of proof be introduced as it would be difficult for merger parties to meet this burden in the vast majority of cases. Further, Australian commentators have noted that reversing the onus would not have changed the outcome of the contested merger cases as the merger parties had the burden of proof in the majority of these cases anyway.
In relation to introducing a rebuttable presumption, the Digital Platforms Inquiry Final Report specifically noted that the ACCC considers that it may be worthwhile to consider whether a rebuttable presumption, in some form, should apply in Australia. The report cited the benefit of such a presumption is that it makes it clear to the court in contested cases that, without clear and convincing evidence put by the merger parties, the starting point for the court is that the acquisition will substantially lessen competition.
The ACCC first raised the idea of a US-style rebuttable presumption in 2016, with Rod Sims asking the RBB Economics Conference 'do we need to consider something similar to the approach adopted by US courts where once markets are defined and the merger is likely to result in a significant increase in concentration, there exists a "rebuttable presumption" that the merger should not proceed absent evidence to the contrary?'
Rod Sims also commented in August 2019 that the US courts' reliance on the rebuttable presumption has them 'starting with the basic premise that increased concentration will cause a lessening of competition' – a starting point that he does not believe is reflected in Australia.
This was later reflected in his address to the ICN Merger Workshop in February 2020, in which he commented that one aspect of overseas jurisdictions that the ACCC has its eye on is that 'in some jurisdictions, the approach taken by courts is to allow hearings to begin based on the premise that increased concentration will cause a lessening of competition'.
In the US, the Competition and Antitrust Law Enforcement Reform Bill 2021 introduced in February 2021 would prohibit acquisitions that 'create an appreciable risk of materially lessening competition'. This Bill would have the effect of raising a rebuttable presumption that there is a 'appreciable risk' where:
- there is a significant increase in market concentration; or
- one party has more than 50% market share or otherwise has significant market power acquires a competitor or a company that has a "reasonable probability" of becoming a competitor in the relevant market; or
- the acquirer is buying an entity that "prevents, limits, or disrupts coordinated interaction among competitors in a relevant market"; or
- the acquisition would enable the "acquiring person to unilaterally and profitably exercise market power" or "materially increases the probability of coordinated interaction among competitors"; or
- where the acquisition exceeds $5 billion (or $50 million if the acquirer is valued at over $100 billion).
This raises the prospect of the ACCC seeking merger reforms along similar lines – being a US-style rebuttable presumption for some merger cases, while leaving the suggestion of a reversal of the onus of proof alone.
Possible proposal to replace the counterfactual test with a 'status quo test' through legislative reform
Beyond the process reforms the ACCC have expressly proposed, the ACCC may also go further and seek legislative change to the nature of the section 50 test, to move away from assessing the comparative state of competition as against the counterfactual, to making that assessment as against the current 'status quo'.