Comment: US-style merger-law model creates a buzz among Australian antitrust practitioners

21 November 2023
By Ryan Cropp, James Panichi and Saloni Sinha

It has been just over a day since the government released its discussion paper canvassing different models for the updating — or, arguably, the recasting — of Australia’s merger laws. Yet 24 hours is all many competition practitioners needed to get their mojo back.

It’s true that the three models put forward are at best embryonic — they are all about presenting the broad strokes of a new regime, with detail to follow. But the credibility of one of those models — namely, Option 2 — has given many lawyers new reason to hope.

That’s because, until now, the proposal put forward by the country’s competition enforcer appeared to be in pole position: a streamlined, mandatory-notification system that sidestepped the Federal Court of Australia and guaranteed merging parties a tight timeline.

Now, the Australian Treasury’s Option 2 has injected a credible, competitive opponent into what had been a one-horse race. The proposed mandatory regime, with clear notification thresholds, would align Australia with the US and Canada.

Under the proposal, the Australian Competition & Consumer Commission, or ACCC, would have to prove that the deal is likely to lead to a substantial lessening of competition. Any appeal would be dealt with through a full trial in the Federal Court — a scenario the ACCC had wanted to avoid.

The model has given the ACCC’s opponents something to rally around. They had balked at the regulator’s blueprint, referred to in the government’s discussion paper as Option 3, and its insistence on channeling all appeals to a narrow review by the Australian Competition Tribunal.

None of the models put forward is set in stone, of course — the government could mix and match with elements of all three. But for those arguing that a Federal Court review would both offer procedural fairness and demand greater rigor of the ACCC, there’s now reason to hope.

Yet the road ahead for Australian lawmakers is fraught. Those not inclined to grant the ACCC a stronger role may still be tempted by Option 3’s efficiency, speed and certainty; those wanting to support the ACCC’s agenda may be susceptible to lobbying from industry and lawyers.

As for the Australian government, it will have to ensure that whichever model it backs, it’s able to deliver on its commitment to boost market dynamism and a more competitive, less concentrated economy. Every choice it makes will have to translate into real consumer benefits.

For now, all we know is that the scrapping of the existing voluntary-notification regime is central to Option 2 and Option 3. Other key issues, such as the future of the existing formal authorization regime, and its public-benefits component, remain up in the air.

This means that while the battle lines have now been drawn, the clash over the future of Australia’s merger laws has only just begun.

The right to rigor

The ACCC’s Option 3 model may not have been road tested, but in the seven months since Chair Gina Cass-Gottlieb first aired it, lawyers have had plenty of time to pick it apart — with MLex’s freedom-of-information revelations on proposed thresholds aiding the analysis.

The ACCC model would require a mandatory notification for all deals meeting the thresholds, with the watchdog acting as the sole decision maker — or, as critics would have it, with the antitrust agency taking on the role of judge, jury and executioner.

The antitrust agency would also have the power to “call in” any problematic transactions that don’t meet the thresholds. Appeals would be heard by the specialist Competition Tribunal, which would limit itself to reviewing the decision — stopping short of a bells-and-whistles “de novo” trial.

It’s the proposal to exclude the Federal Court that has drawn the ire of some antitrust lawyers, who say the ability to bring new evidence to court is a matter of procedural fairness — the suggestion being that ACCC decisions can’t be properly or fairly tested without the rigor of a full-blown court hearing.

The argument is that whenever the ACCC has found itself defending its decisions to block a merger, the Federal Court has found its arguments wanting — the Pacific National-Aurizon ruling and the Vodafone Hutchison Australia-TPG Telecom decision are just two examples.

Yet some antitrust lawyers say that any advantage that merging parties may gain from a Federal Court trial should be weighed against the time it would take, as opposed to the streamlined ACCC model.

“You don’t want a process that is going to take a long time and is going to increase the cost,” one lawyer with recent experience of a merger trial told MLex. “The whole thing about mergers is that they need to be done quickly. ‘De novo’ won’t speed things up.”

Others have expressed concern about what they see as potentially onerous up-front filing and information requirements under the ACCC proposal — something that is likely to be a focus of industry lobbying as the legislative process unfolds.

In a statement to MLex, the Business Council of Australia said that it was “critical that any reform in this space gets the balance right.” The top industry body goes on to warn that it would be “concerned about risks to the economy if merger activity is stifled by overzealous and potentially uncertain regulation at a time where Australian industry needs to compete globally.”

Then there’s the matter of transparency. Under Option 3, the ACCC would be the key decision maker in merger clearances and the Competition Tribunal’s review would be based on whatever conclusions the ACCC had reached behind closed doors.

Critics say the recent informal review of tollway operator Transurban’s play for Horizon Roads, which culminated in the ACCC’s blocking the deal, illustrates the transparency problem. The ACCC revealed that the state government of Victoria had opposed the deal, but those documents weren’t made public.

Truth seeking

Given the focus on the ACCC’s proposals over the last six months, the appearance of a significant alternative model — and especially one cooked up entirely by the Treasury Department — has come as something of a surprise.

Yet most lawyers who spoke to MLex expressed an immediate preference for Option 2, which includes mandatory notification, specific thresholds and — uniquely for Australia — a “suspensory” element that would put a deal on ice until the review had been completed.

What appeals most, though, is the role it preserves for the Federal Court. Under the proposed “judicial enforcement” model, if the ACCC wanted to oppose a transaction, it would need to prove, in court, that the merger would be likely to substantially lessen competition.

That would give Australia a regime closer to that of the US — one that Australian lawyers say is “onerous” and maintains the “truth seeking” advantages of “de novo” court hearings.

Option 2 is also a model that might be attractive to a cautious government looking for a best-of-both-worlds solution, one that would allow it to push ahead with its agenda of economic progress without ruffling too many feathers.

That said, the proposal isn’t without its downsides. Despite its rigor, positioning the Federal Court as the key decision maker would arguably be the least efficient option, given the additional expenses likely to be incurred and the length of time it takes to reach verdicts.

Of course, these differences may ultimately be a moot point, with the taskforce indicating that the models are rough-and-ready proposals that will be finessed in response to feedback.

Losing public benefits?

The consultation paper published this week offers little clarity on the existing merger-authorization process — an alternative clearance route to the ACCC’s informal review regime.

Applying for a formal authorization can allow merger parties to argue that the public benefits of a deal outweigh any detriments to competition. In what has widely been seen as a turning point in Australian antitrust history, the ACCC recently approved the acquisition by Brookfield of Origin Energy on the basis of environmental public benefits.

But while the paper has sought feedback on whether the existing merger-authorization process should be retained as a “separate approach,” it provides almost no information about which of the three options a public-benefits test would align with.

The only other option the paper mentions is “abolishing” the merger-authorization process while seeking feedback on whether the public-benefits test should be retained at all.

The documents published this week suggest that the ACCC actually wants the public-benefits test to be maintained — albeit as a “second stage” test that would kick in once the deal had been assessed as causing a substantial lessening of competition.

“For public benefits to outweigh a substantial lessening of competition, they should be real, verifiable, significant and beyond the efficiencies that can already be taken into account as part of the competition assessment,” the document says, paraphrasing the ACCC’s position.

Observers are puzzled by the lack of clarity around the future of the public-benefits test — particularly in light of the landmark Origin Energy decision, which sparked discussion about the future consideration of environmental benefits to offset anticompetitive deals.

Option 1, which would retain many aspects of the existing voluntary-notification regime, also doesn’t appear to lend itself to incorporating a public-benefits test — adding to the speculation that the public-benefits route may end up being foreclosed.

Comment: Sensational environmental verdict breathes new life into Australian merger law debate

13 October 2023
By Ryan Cropp

The Australian competition regulator’s formal merger-authorization process has never been well loved. In the six years since this alternate streamlined merger clearance option was put in place, it has only been used seven times — with four of those cases appearing in the past 12 months.

Nor has the watchdog recently provided much in the way of encouragement for companies thinking of taking this option, extending timelines well beyond the advised 90 day review period and taking a narrow view on claims that a deal’s public benefits outweigh any anticompetitive harm.

Yet a decision this week by the Australian Competition & Consumer Commission, or ACCC, appeared to suggest that the formal merger review pathway, long eschewed by merging companies in favor of the “informal” clearance process, may actually be more flexible and business-friendly than previously thought.

On Tuesday morning, in a verdict that sent shockwaves through Australia’s antitrust community, the regulator approved Brookfield’s A$18.7 billion ($11.8 billion) play for electricity provider Origin Energy on environmental grounds, arguing that it would have a material impact on the country’s renewable energy transition.

It was able to do this because the merger-authorization pathway allows the ACCC to weigh up the public benefits of a deal alongside the competitive detriments. And while the regulator wasn’t convinced that the remedies put forward by Brookfield would address the deal’s likely anticompetitive effects, it was impressed by the promised environmental public benefits.

In the days since, lawyers have been puzzling over the decision. They say it’s confusing, and seems out of sync with the strict view of public benefits taken by the regulator in previous decisions.

The legal community’s interest is more than academic.

The ACCC has a suite of proposals for merger-law changes before the Australian government. If adopted in their entirety, they would effectively close off the “informal” merger clearance route, and force all deals into a formal regime — a regime that looks a lot like the existing merger-authorization process.

And it’s the high-stakes nature of the game that has encouraged some more skeptical observers to tell MLex that the watchdog may have deliberately and strategically softened its stance on merger authorizations in this instance, lest they frighten the horses in the lead-up to the government’s review of the new laws.

But even those with less conspiratorial casts of mind would be hard pressed to deny that the Brookfield decision — premised on broad public benefits claims and delivered in only four months — has provided the merger law dissenters with plenty of food for thought.

Awkward

Under Australia’s existing merger laws, companies can take one of two options: submit a public, formal merger authorization application, or request an off-the-books assessment and allow the ACCC to assess — informally — whether it would be likely to oppose the deal.

The reasons for taking the formal route have always been contested, but are generally agreed to be clearer deal review timeframes and the ability to make “public benefits” arguments to offset any potential anticompetitive detriments.

However, if recent experience is anything to go by, such advantages have not been born out in reality. High-profile deals involving telcos Telstra and TPG Telecom and lenders Australia and New Zealand Banking Group and Suncorp both fell foul of the watchdog, which took a tough stance on the anticompetitive detriments of both deals, as well as a dim view of the companies’ public-benefits claims.

What’s more, in both cases, the regulator took much longer than the allotted 90 days to review the deals, nullifying any timing advantages that the companies may have hoped to gain.

Most significantly, though, in the ANZ case, the ACCC referenced its own public-benefits verdict on the Telstra matter — later upheld by the Australian Competition Tribunal — that concluded any claims needed to show evidence of a “causal connection” with the transaction itself.

The judgment effectively struck a line through ANZ and Suncorp’s public-benefits arguments, which were premised on broader claims about innovation and the Queensland state economy.

In addition, the only case that had previously been approved by the ACCC on public benefits grounds — a merger between cash in transit companies Armguard and Prosegur — was thought by lawyers to be a unique deal that would be hard to replicate.

Not surprisingly, in the wake of those verdicts, antitrust lawyers have been getting increasingly vocal about the downsides of the merger authorization system, especially given the ACCC’s stated desire to funnel all major deals through it in the future.

They say that without any obvious timing and public-benefits advantages, companies will be unlikely to take the merger authorization route, especially as it shifts the onus of proof onto the companies themselves, involves greater information requirements and doesn’t offer a full-merits review on appeal.

On these matters, the ACCC appears to have dug itself into a slightly awkward position.

On the one hand, it has been doing its best to make merger authorizations appear as unappealing as possible. But in the same breath it has been lobbying the government to have all deals reviewed through this process.

A new calculus?

In this somewhat confusing environment, the ACCC’s Brookfield decision has come like a bolt from the blue.

Despite acknowledging that the deal raised competition concerns, the watchdog said it had given significant weight to the companies’ green claims — enough weight to get the deal over the line.

In a televised interview with an Australian public broadcaster, ACCC Chair Gina Cass-Gottlieb was at pains to point out that the regulator’s decision was not simply based on vibes, but on hard evidence.

The ACCC’s analysis indicated that if the deal went ahead, Australia’s renewable energy transition would be expedited by up to a year and a half, Cass-Gottlieb said.

She also noted that Brookfield planned to bring on more than 14 gigawatts of new renewable energy power, which was materially greater than the four gigawatts promised by Origin without the deal.

Lawyers, though, say that at first glance, the ACCC’s public benefits arguments in the Brookfield case don’t appear to have a straightforward “causal connection” with the transaction — if the asset manager wanted to open more new renewable power plants, it didn’t need to buy Origin to do so.

The watchdog’s decision is therefore out of sync with its tough reasoning in recent merger authorizations, they say.

This view appears to be supported by the ACCC’s detailed reasons for the decision, published yesterday, in which it explicitly rejected many of the other public benefits claimed by Brookfield and Origin, including decreased energy prices, increased employment and the development of new technologies and renewable supply chains in Australia.

What this suggests is that when it comes to public benefits, the watchdog may be more open to broader (and arguably more spurious) benefits claims if they can point to environmental advantages. On other types of claims, though — such as ANZ’s broad “benefits to the economy” — it appears inclined to take the more narrow view.

The question, then, is whether this potentially fruitful new line of argument will have any impact on the calculus of companies trying to decide which merger route to take.

MLex understands that for most lawyers, the answer to that question is a resounding no.

The key issues with merger authorizations, they say — and thus with the ACCC’s merger law proposals — remain unaddressed: the reversal of the onus of proof, and the foreclosing of a proper merits review on appeal.

And while they concede that the ability to potentially get a deal passed on environmental grounds does demonstrate that there may be a place for merger authorizations in the future, they nevertheless insist that it will not materially shift the decision-making calculus of merger companies — unless changes are made.

On merger authorizations, the companies are losing more battles than they are winning. But with the debate over the shape of Australia’s future competition laws still very much unresolved, they may yet win the war.

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