A recent speech by Rod Sims, Chairman of the ACCC, is making waves amongst Australian competition law practitioners and business leaders. Sims has proposed requiring more information from businesses seeking informal clearance for complex mergers, which will make the process longer and more resource-intensive. The proposals may allow the regulator to better meet legal tests. However, unless the ACCC provides clear upfront guidance, the changes risk undermining the speed and efficiency of the informal review process.
What is the case for change?
In his address to the Law Council Workshop,1 Sims observed that in his time as Chair, a small number of mergers reviewed under the informal clearance system have become increasingly more complex and contentious. In ‘marginal cases’ which end up being litigated, the Commission has a poor track record, failing to block any of the deals that it has opposed in the Australian Competition Tribunal or Federal Court for at least 20 years.
Sims interprets this as a signal that the Commission’s informal review process is not arming it with ‘adequately probative and persuasive evidence’ to convince the Tribunal or Court that a transaction will harm competition. He considers that Courts tend to give more weight to merging firms’ executives’ claims on the witness stand that they will not have the ability or incentive to act in a way which will have anti-competitive effects – even where the Commission’s own inquiries indicate otherwise.
What is the proposal?
Sims has been inspired by the approaches taken by US and Canadian regulators. Sims says the overseas authorities have more success in litigating to prevent mergers, partly because they routinely gather far more evidence, particularly company documents that pre-date the merger proposal, and data.
Sims has flagged that, for a small number of contentious mergers, the Commission will gather substantially more evidence – which means it will use more compulsory s. 155 notices involving examinations under oath and heavy document requests. However, it is not clear how that category of deals will be identified, or whether any upfront guidance will be given to business. Sims promises that the regulator will continue to have regard to commercial timing pressures, but the new approach will inevitably mean it takes longer to clear some deals.
What can we learn from the overseas approaches?
In some ways, Sims is comparing apples with oranges. The Australian informal clearance process is much more light-handed than the typical merger clearance processes in the US. In fact, the closest Australian equivalent is not the informal merger review system, but the statutory formal clearance process, which has never been used and has been criticised as too inflexible.
One key difference is that, in the States, pre-merger notification filing is mandatory for certain deals depending on factors including the size of the transaction and the relevant parties. In contrast, merger clearance is not mandatory in Australia. Theoretically, companies can choose to ignore the regulator’s guidance and proceed to complete a transaction, forcing the ACCC to seek an injunction if it has real concerns; that could be an option if the informal clearance process is perceived as too unwieldy and uncertain.
In the US, parties commence the clearance process by submitting a prescribed form to both the Federal Trade Commission (FTC) and the Department of Justice (DOJ). 2 The form requires considerable information about the parties’ business and revenues, corporate organisation and shareholdings. The parties must explain the structure of the transaction and provide all studies, surveys, analyses and reports prepared for the purpose of evaluating the acquisition, as well as reports on synergies or efficiencies to be achieved in the transaction. This initial ‘data dump’ can take weeks to gather.
If concerns persist, the relevant agency may issue a further formal request for additional information and documents, known as a ‘Second Request’. Compliance can be very time-consuming, generally taking between three and six months. In complex mergers, Second Requests can require submission of datasets, empirical analysis, and very detailed information about the parties’ businesses including win/loss data, pricing strategies, sales data and relationships with customers. They often involve collection of oral evidence – depositions of senior executives under oath, exploring the rationale for transaction, entry issues, competitive conditions and other strategic issues – and discussions between the regulator and the parties’ economists and other consultants. Following compliance with a Second Request, the regulator has another 30 days (or longer) to make a final decision.
The ACCC’s approach to informal merger clearance is generally regarded as flexible and timely, particularly following refinements to the Informal Merger Review Process Guidelines in 2013. 3 There are three phases: a pre-assessment (which may be confidential), a public review phase involving market inquiries, and a second public review phase which is activated where the regulator issues a ‘Statement of Issues’ indicating further concerns. Timeframes are flexible and may be extended, but parties can generally expect a decision within six to 12 weeks for the first phase, and another six to 12 weeks for mergers which proceed to the second phase.
The level of information required in the US is a tsunami compared with the trickle typically provided to the Commission at the outset of an informal review. The ACCC expects parties to provide information about the parties and their business operations, and details of the proposed transaction and its rationale. However, the Commission can and does issue informal and formal (s. 155) information requests seeking more detailed and specific information, including data and internal documents. Depending on the extent and type of concerns, those information requests can be relatively onerous and time-consuming, although they do not tend to be as far-reaching as US Second Requests. Parties can also choose to provide more information at any time; in particular, the Commission regularly advises merger parties of any issues raised in public consultation and gives them an opportunity to respond.
Under the informal review process, there is no deadline by which the Commission must make a decision, nor is there any requirement that that parties refrain from consummating the transaction. In contrast, following submission of the form to the US regulators, parties are legally bound not to complete within a prescribed time (usually 30 days). Nor is there any filing fee for ACCC informal clearance, in contrast to the substantial fees in the US which range from $US45,000 to $US280,000 depending on the value of the transaction. Both these features are similar to the unpopular Australian formal clearance process (although it’s a comparative bargain at a flat $AUD25,000 fee).
How will this affect the informal clearance process?
For business, the signalled new direction raises concerns that the informal merger clearance process will be more burdensome and time-consuming. In the absence of any guidance from the Commission about which transactions are likely to warrant the additional scrutiny, merging parties will need to seek advice at an early stage. They should be prepared to provide business information and strategy documents that pre-date the merger proposal. The use of s. 155 notices means there are more onerous obligations to search for relevant materials and provide comprehensive responses to questions from the ACCC. Company managers and officers should also be prepared to be interviewed.
It is understandable that the Commission is seeking to increase its chances of stopping mergers where there are genuine concerns that a deal will harm competition. And the proposal is a relatively minor tweak to a well-understood and well-functioning process. However, by increasing the evidentiary burden, time and cost of seeking informal clearance, the Commission risks diluting the things that make it a flexible and attractive process. One outcome may be to push complex mergers out of the informal process and into the new merger authorisation process that has been proposed by the Federal Government in its Competition and Consumer Amendment (Competition Policy Review) Bill 2017.
Recognising that the formal review process has been gathering dust since 2007, the Harper Review recommended that it be overhauled. Harper suggested removing the prescriptive information requirements, while still enabling the ACCC to require the production of business and market information. The Bill, which was introduced in March, duly does away with formal merger clearance, rolling it into a revamped general authorisation process which requires the Commission to make a decision within 30 or 90 days depending on the type of merger. At this stage, it is not clear what level of information and documents the Commission would require as part of a new-style merger authorisation – the Bill gives the Commission considerable discretion. 4 The recently-released Exposure Draft of the accompanying Regulations indicates that the filing fee for the new process will be $25,000 – just as much as the formal clearance process. 5
It will be interesting to see whether the Commission’s new approach will assist it to improve its track record of contesting complex mergers. However, we should be wary of adopting ‘best practice’ solutions from overseas which have been developed in a different legal and business context. Making the information provision requirements for some businesses seeking informal clearance more onerous will inevitably slow down the process. Even if the increased information obligations only apply to a small subset of ‘complex and contentious’ transactions, merger parties now face uncertainty about where that threshold lies. In any case, the upcoming introduction of a new merger authorisation process may be a valuable opportunity to design the new merger authorisation process to meet some of these challenges.
Sources:
[1] A transcript of the speech is available on the ACCC’s website at https://www.accc.gov.au/speech/law-council-of-australia.
[2] Both regulators have jurisdiction to review mergers – merger parties must file a notification to both, and then the agencies decide informally between themselves which will review a particular transaction, usually on the basis of familiarity with the relevant industry.
[3] The Guidelines are available at https://www.accc.gov.au/publications/informal-merger-review-process-guidelines-2013.
[4] See Schedule 9, item 77 of the Bill, which amends s. 89(1)(a) to remove the requirement that a form be ‘prescribed by the regulations’ and replaces it with a form ‘approved by the Commission in writing’.
[5] Section 89(1)(c) provides for a statutory fee for an authorisation application to be set in regulations. The Exposure Draft of the Competition and Consumer Amendment (Competition Policy Review) Regulations 2017, released on 9 August 2017, lists the fee at $25,000 (see clause 37, Schedule 1B).
