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HG Alert: Proposed Changes to Anti-Merger Law in Australia - 15 Jan 2010

Mergers and acquisitions are vital to the success of Australia’s economy. They enable failing companies to be strengthened by the more dominant merger party while still maintaining sufficient competitive tension within the market.

Merger law in Australia could undergo significant changes this year following the introduction of the Trade Practices Amendment (Material Lessening of Competition – Richmond Amendment) Bill 2009 to the Senate late last year.

The Bill, if passed, will mean major changes to the way the competition aspects of a proposed merger are assessed. The Bill also aims to prevent ‘creeping acquisitions’ by corporations with an already substantial share of a market.

Current law

Section 50 of the Trace Practices Act regulates mergers and acquisitions. It states that corporations are prohibited from directly or indirectly acquiring shares or assets if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a market.

The term ‘substantial’ is not defined in the Act, and has therefore been subject to many different formulations by the courts. The most widely accepted meaning is that something is substantial if it is real or of substance, not merely visible but material in a relative sense, and meaningful.

In practice, the question of whether an acquisition has or will have a substantially anti-competition effect is complicated. To assist, the Act provides the following non-exhaustive list of ‘merger factors’ to consider when making such a determination:

  • The actual and potential level of import competition in the market
  • The height of barriers to entry to the market
  • The level of concentration and degree of countervailing power in the market
  • The extent to which substitutes are available or are likely to be available in the market
  • The dynamic characteristics of the market such as growth, innovation and product differentiation
  • The likelihood that the acquisition would result in a vigorous and effective competitor being removed from the market
The Australian Competition and Consumer Commission adopts a case-by-case analysis approach to each merger according to the specific nature of the transaction, the relevant industry and the merger’s likely impact on competition in the relevant market. According to the ACCC Merger Guidelines, the forward looking nature of the ‘substantial lessening of competition’ test requires the ACCC to look one to two years ahead when considering the likely effect of a merger on competition.

Proposed amendments to current law

The Explanatory Memorandum to the Amendment Bill states that the current test is too lenient and has resulted in the approval of a number of controversial mergers in recent times. If the Bill is passed, section 50 of the Trade Practices Act will be amended so that it prohibits any acquisition or merger that will have, or is likely to have, the effect of materially lessening competition in a market. The Explanatory Memorandum states that a merger will have a ‘material lessening of competition’ if it will or be likely to have a pronounced or noticeably adverse affect on competition.

Clearly, the proposed amendments will significantly lower the current threshold test. One effect of the Bill, if passed, will be a significant reduction in the number of mergers and acquisitions approved by the ACCC each year. Currently, around 97 percent of mergers are approved.

The rationale for lowering the threshold test is to protect small businesses and consumers from the anti-competitive strategies of large corporations which seek to constantly increase their market share, creating highly concentrated markets where competition is stifled.

However, an equally strong argument can be made that the current merger laws have enabled Australian firms to merge and grow to a size that enables them to effectively compete with larger overseas corporations, and that any change to these laws will jeopardise this.

The Bill also proposes amendments to Section 50 that are aimed at preventing ‘creeping acquisitions’. If passed, the proposed provision will prohibit a corporation with an already substantial share of a market from directly or indirectly acquiring shares or assets of a body corporate or person, if the acquisition would have the effect, or be likely to have the effect, of lessening competition in a market.

These changes are designed to address a loophole in the current law, which enables companies (particularly the large supermarket chains) to make a series of small acquisitions which individually do not have a substantially anti-competitive effect, but do have that effect if taken together. The changes will enable the ACCC to consider the cumulative effect of a series of small acquisitions over time.

Where to from here?

If passed, the Bill will significantly change the landscape of anti-merger law in Australia. The Bill is currently under review by the Senate Economics Legislation Committee, which is due to provide its report on 18 March 2010.

For more information on the Trade Practices Amendment (Material Lessening of Competition – Richmond Amendment) Bill 2009, please contact HopgoodGanim’s Competition and Trade Practices team.