Recently the ACCC released a joint statement with the UK Competition and Markets Authority and Germany’s Bundeskartellamt reaffirming the importance of effective merger control. The statement warns agencies, courts and tribunals to remain vigilant against anti-competitive mergers – even where faced with uncertainty about the future, strong advocacy from the merging firms and their advisers, and a fractured or hesitant response from suppliers, customers or competitors.
At the launch of the statement, ACCC Chair Rod Sims suggested that these challenges may be heightened in Australia, given the role and the recent approach of the courts in our system. He foreshadowed that the ACCC would suggest some changes to the merger review framework around the middle of 2021 – an important step in a process that has been underway for some years now.
The ACCC has a decent track record in court when it comes to consumer law, cartels and other collusive or unilateral conduct – it wins some and loses some, as you’d expect from an active enforcement agency whose priorities include taking test cases to clarify the boundaries of the law. The courts have recognised this role in considering costs orders, most recently in Colgate-Palmolive:
The public responsibilities of regulators mean that they must, on occasion, pursue hard cases; cases based on circumstantial or highly contentious evidence or perhaps unsettled areas of law. It follows that it might reasonably be expected that they will lose some cases, sometimes emphatically. A regulator who chooses only to pursue easy cases and easy targets might perhaps have an excellent strike rate in terms of winning cases, but it would not be doing its job.
When it comes to merger cases, the ACCC’s informal clearance process gives it real influence over the deals that go to completion and the conditions that are attached – plenty of mergers are abandoned after a red light in a statement of issues, or cleared on the basis of undertakings. But in recent years, the few merger cases to be resolved by the courts have gone against the ACCC.
In 2020 the courts cleared Vodafone’s acquisition of TPG and Pacific National’s asset purchase from Aurizon, both of which the ACCC had opposed. Reflecting on these cases, Rod Sims located the key difficulty facing the ACCC in the need to prove future events to particular standards of certainty that are not always easy to pin down:
The heart of the problem is that, in merger cases, the ACCC is required to prove on the balance of probabilities what is likely to happen in the future if the merger does not proceed. That is, in essence, the merger regime seeks to compare what will happen with and without the merger and determine if the difference can represent a substantial lessening of competition. [Emphasis to indicate various standards of certainty added.]
That summary neatly illustrates the complexities that have built up around the merger test, raising thorny issues of proof and prediction, probability and possibility that begin – but certainly don’t end – with the interpretation of the word “likely” in the statutory merger test. Digging into these issues can help us understand the changes the ACCC may propose and the impact they might have.
A likely story
The word “likely” apparently comes from early Scandinavian forms such as the Old Icelandic líkligr: probable. It appears about 350 times in the Competition and Consumer Act 2010, usually in some conjugation of “X, or is likely to X”.
That construction first appeared in the original section 45 of the Trade Practices Act 1974 – “the restraint has or is likely to have a significant effect on competition” – and has since spread throughout the legislation, including the section 50 merger test, which at first only had “the acquisition is likely to have the effect” but now has “the acquisition would have the effect, or be likely to have the effect of substantially lessening competition”.
This dual or two-limbed structure has shaped the way the courts have interpreted “likely” and the degree of certainty or probability it is thought to require. Since Justice Deane in Tillmanns Butcheries in 1979, many of the authorities have reasoned that:
- whether the acquisition would have an effect must be determined on the ordinary civil standard of a balance of probabilities, or whether the conduct was more likely than not to have that effect; so
- to avoid redundancy, the question of whether the acquisition would be likely to have an effect must require some lesser degree of certainty.
On that basis Justice Deane concluded that “likely” required only “a real chance or possibility”. In the AGL case in 2003, Justice French supported Justice Deane’s conclusion for similar reasons:
In any event as a matter of construction if “likely” simply meant more probable than not, it would be difficult to distinguish the application of that limb of the formula from the application of the first limb which, having regard to the onus of proof applicable in proceedings under Pt IV, could be established on the balance of probabilities.
Not everyone is persuaded by this argument. Former Justice Heerey wrote in 2011:
The short answer is that an awkwardness of drafting should not lead to a reading which commits the greater sin of ignoring the ordinary meaning of words.
Things got more complicated with the Metcash case, where at first instance Justice Emmett found that, although the ACCC only needed to show that there was a real chance of substantially lessening competition, it first needed to establish the future state of the market, both with and without the merger, on the balance of probabilities.
While that two-stage process has not been followed, Justice Emmett had crucially separated the elements of section 50 from the standard of proof required to establish them – issues that had arguably been conflated in some of the cases that reasoned that “likely” must mean less than “more probable than not”. Justice Middleton seized on this distinction in Vodafone/TPG:
One must distinguish between the requirements of the substantive law (s 50) and the principles or rules of evidence. The content of s 50 is not addressing the evidentiary burden.
The joint judgment of Justices Middleton and O’Bryan in the Pacific National/Aurizon appeal also questioned the basis for the “real chance” test, but came to a pragmatic landing:
In our view the ordinary meaning of the word “likely” in everyday language is “probable” (in the sense of more probable than not) and that meaning is consistent with dictionary definitions … However, the word “likely” has been construed to mean a likelihood that is less than probable for 40 years … if the meaning of the word “likely” was being considered for the first time, we would have been inclined to adopt the meaning probable, but there is insufficient reason to change course at this point in time.
But their Honours resolved the issue by concluding that:
The matter that must be proved on the balance of probabilities is that the impugned acquisition would have, or be likely to have, the effect of substantially lessening competition in any market.
That is, the ACCC may not need to separately prove, on the balance of probabilities, what is likely to happen if the merger doesn’t proceed – that will be a critical element that will contribute to the single evaluative judgment to be made by the court, but it doesn’t have its own standard of proof.
The ACCC does have to prove, on the balance of probabilities, that the acquisition would have a real chance of substantially lessening competition. That might sound like an enigma or kōan – if a tree is likely to fall in the forest – but it appears to be the test for now, despite any lingering judicial unease about its history. And even that test has proved difficult for the ACCC in the recent cases.
What changes might the ACCC propose?
To address these difficulties, the ACCC has pointed to a number of features of merger assessment frameworks overseas that are likely to inform its proposals for reform in Australia. These include a rebuttable presumption that would put the burden on the merger parties to show that certain deals would not substantially lessen competition; measures to address the acquisition of nascent or potential competitors; and a more mandatory and suspensory merger clearance framework.
A rebuttable presumption
The ACCC has floated some form of rebuttable presumption in merger assessments since at least 2016:
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?
It's not yet clear how a “significant increase in concentration” might be defined. Under the US Horizontal Merger Guidelines the agencies will raise a rebuttable presumption where a merger would increase the Herfindahl–Hirschman Index (HHI) of market concentration by more than 200 points to 2500 or more – most mergers from 5 to 4 competitors would meet that threshold. The ACCC’s 2008 Merger Guidelines also refer to the HHI, but the ACCC hasn’t mentioned it in a public competition assessment or press release since 2010 – perhaps because in Australia’s smaller markets many mergers would fall foul of these thresholds.
A rebuttable presumption may not have made any difference in cases like AGL and Vodafone/TPG, where the acquiring party applied to the court and took on the burden of showing that there was no real chance that the merger would substantially lessen competition. It might tip the balance in cases where the ACCC initiates the action, as it did in Pacific National/Aurizon, where the ACCC had the burden of proving that the acquisition was likely to lessen competition – though even in that case the Full Court found that such a prospect was unlikely.
In the United States, the Competition and Antitrust Law Enforcement Reform Act 2021 introduced by Senator Amy Klobuchar in February 2021 would prohibit acquisitions that “create an appreciable risk of materially lessening competition”. An “appreciable risk” sounds like the same ballpark as a “real chance” or a “real commercial likelihood”, and it’s not clear that a “material” lessening of competition is less than a “substantial” one – though that was what Senator Nick Xenophon intended with the Trade Practices Amendment (Material Lessening of Competition-Richmond Amendment) Bill 2009.
The US bill would raise a rebuttable presumption of such a risk not only where there is a significant increase in market concentration – formalising the existing practice of the agencies – but also where one party has more than 50% of any market and at least a “reasonable probability” of competing with the other; or where the acquisition exceeds $5 billion, or $50 million if the acquirer is valued at over $100 billion. These additional circumstances target strategic acquisitions of nascent or potential competitors, which have proved elusive to merger control.
Nascent or potential competitors
The ACCC has noted that other jurisdictions also use tools such as abuse of dominance or monopolisation provisions to address these nascent mergers. For example, in December 2020 the US Fair Trade Commission took action against Facebook alleging monopolisation and unfair trading in relation to its acquisitions of WhatsApp and Instagram, which the FTC had previously cleared.
In Australia, it might be possible for the ACCC to use section 46 in relation to an acquisition that has the purpose, if not the effect or likely effect, of substantially lessening competition. The ACCC has always said that section 46 is concerned with – and limited to – exclusionary conduct, but it could argue that certain mergers are exclusionary.
In the United Kingdom, the Furman Report recommended a “balance of harms” approach that would take into account the scale as well as the likelihood of any harms and benefits resulting from a merger, in order to address acquisitions that might have a low chance of a very high impact on competition.
Although the Competition and Markets Authority has expressed concerns about that approach, its Digital Markets Task Force has recently recommended a specific merger control regime for digital platforms with strategic market status. The regime would include an obligation for those platforms to inform the CMA of all acquisitions, with mandatory notification and suspension of transactions that meet threshold tests of materiality and connection to the UK. It would also shift the standard of proof from the current balance of probabilities to a “realistic prospect” that a transaction would substantially lessen competition. It has not recommended a reversal of the burden of proof on the basis that it would be difficult for the merging parties to meet this burden in the vast majority of cases.
A mandatory and suspensory regime
The ACCC has pointed out the differences between Australia’s informal clearance regime and the processes that apply internationally:
When we look to our international counterparts, the Australian system is out of place next to the formal, mandatory and suspensory regimes in many jurisdictions … For example, there is no compulsory upfront information requirements, and transactions are not suspended pending ACCC clearance. This latter point can cause us large problems when companies can threaten to complete the acquisition at various points of our investigation, as sometimes happens.
The ACCC could modify its own policies and processes to encourage this behaviour, for example by regularly asking for an undertaking not to complete the transaction before it will consider granting informal clearance – as it does in relation to formal merger authorisations.
But to be most effective, this is likely to require legislation. That would be a significant change to Australia’s merger regime following the changes to the formal clearance and authorisation processes recommended by the Dawson and Harper reviews, and could mean the end of the informal clearance process as we know it.
It’s also not clear to what extent the change would increase the ACCC’s influence on merger outcomes in practice. The number of completed mergers investigated by the ACCC has dropped dramatically over the last decade, now averaging between one and two each year since 2015 – suggesting that most of the mergers likely to interest the ACCC are now being notified ahead of time.
Even where the ACCC has investigated a completed merger, it hasn’t gone on to take action against such a merger in the modern era. The ACCC now treats completed mergers as enforcement investigations rather than informal merger decisions, and stopped listing them on its public register in August 2020. But the last completed deal that remains on the register – Google’s acquisition of Fitbit completed in January 2021 – may prove an exception as the ACCC considers its options.
It’s possible that the ACCC will recommend changes that go further than the options it has publicly raised, in light of recent and proposed changes overseas. We’ll keep you up to date with any further developments in the ACCC’s thinking or the meaning of “likely”.
In other news …
- The ACCC has released a report into the authorisations it has granted to collaborations designed to address the COVID-19 pandemic. The ACCC received 33 applications for urgent interim authorisation between March and May last year, and granted most of them within 48 hours. It went on to grant final authorisation for all but five applications, which had already been withdrawn. It has recently issued conditional interim authorisations to replace a number of the COVID-19 cooperation authorisations that were about to expire, including those between major supermarkets, 7-Eleven and its franchisees, and private health insurers – the last of which then withdrew its application for renewal. Two other COVID-19 authorisations have also expired without being renewed, and the rest will expire in the coming months unless they are renewed.
- The second interim report of the ACCC’s Digital Platform Services Inquiry 2020–2025, focusing on mobile app marketplaces, was just released. G+T has a great update on the ACCC’s findings and proposed measures. The ACCC’s third interim report will focus on market dynamics and consumer choice screens in search services and web browsers, and has released in Issues Paper; submissions were due by 15 April 2021.
- The Commonwealth Government ran out of time to pass the Treasury Laws Amendment (2021 Measures No.1) Bill 2021 to extend relief measures permitting virtual meetings and electronic execution of documents before those measures expired. ASIC has adopted an interim “no action” position in relation to virtual meetings but electronic executions have returned to their somewhat uncertain pre-COVID state.
- Airlines still face turbulence/headwinds/etc in Australia as overseas, with Virgin Australia emerging from voluntary administration, REX expanding into major domestic routes and the ACCC tasked with monitoring the industry until 2023. Our colleagues Louise Klamka and Johnathon Geagea have a detailed update.
- Criminal penalties apply to cartel conduct in New Zealand as of 8 April 2021, almost ten years after the first bill to criminalise cartel conduct was introduced. The Commerce Commission has some arresting videos illustrating the kind of conduct that may now result in jail time.
- First-person view (FPV) drones captured spectacular footage of a bowling alley in Minnesota and the Fagradalsfjall volcano in Iceland. In Australia, drones are regulated by the Civil Aviation Safety Authority (CASA) and FPV drones are subject to additional regulation since they don’t provide the traditional line-of-sight to the drone that is usually required.
Don’t forget, you can read our last edition of the News Media Bargaining Code.