The changing tide of merger regulation: ACCC releases draft guidelines25 March 2008 Topics: Compliance and corporate governance, Mergers and acquisitions
With a takeover activity playing an ever-increasing role in Australian equity markets, the efficient regulation of mergers and acquisitions has become an even more topical issue for the Australian competition regulator. In attempting to strike a balance between the laissez faire attitudes of big business on the one hand, and the need for regulation on the other, the ACCC has released draft guidelines to bolster the regulation of merger activity in Australia.
The biggest regulatory hurdle for many M & A players, particularly in the context of larger transactions, is section 50 of the Trade Practices Act 1974 (Cth) (“TPA”). Under this provision, the ACCC can prevent a merger where the effect would be to ‘substantially’ lessen competition.
To ameliorate some of the risk profile surrounding this provision and to provide certainty in assessing the likelihood of regulatory approval, in 1999 the ACCC released merger guidelines to serve as a point of reference for merger participants. However, following significant structural changes to global equity markets, the currency of the guidelines has come into question. The main criticism levelled at the existing guidelines is the apparent divide between Australian and international best practice.
Arguably, the draft guidelines are a response to these criticisms. The guidelines focus squarely on ‘horizontal’, ‘vertical’ and ‘conglomerate’ merger transactions. However, it is not the structuring of M & A transactions which has attracted the attention of the regulator but rather the notice parties are encouraged to give the ACCC when contemplating a merger.
Under the existing guidelines, merger parties should notify the ACCC of any merger activity that exceeds ‘safe harbour’ market threshold levels. In practice, parties to a merger transaction will only need to notify the ACCC of an impending merger if:
- the combined market share of the four (or fewer) largest firms is 75 per cent or more and the merged entity will supply at least 15% of the market; or
- the market share of the merged entity is greater than 40% following the merger.
The guidelines provide certainty by giving quantifiable thresholds by which M & A participants can assess regulatory risk. Merger activity which falls within the ‘safe harbour’ will be unlikely to give rise to further investigation by the ACCC. However, many commentators criticise the current position as sending the wrong message to merger participants; it is this apparent immunity from review which attracts most attention from
the new guidelines.
The end of the ‘safe harbour’
The proposed guidelines will have the practical effect of increasing the ACCC’s regulatory role. Under the new guidelines, merger parties should notify the ACCC where:
- the merged entity will operate in a ‘concentrated’ market with a Herfindahl-Hirschman Index (HHI) of greater than 2000. This is tested by summing the squares of each supplier in the merger;
- the target entity has rapidly increased market share, charged lower prices in relevant markets or driven innovation;
- the merged entity will have significantly higher market share than its rivals; or
- the ACCC has indicated to the entity or industry that notification is advisable.
While notification is not mandatory under the current guidelines and will not be made so under the new guidelines, merger parties who do not notify the ACCC in practice run a greater risk.
Significantly, the ACCC has also flagged that it will examine internal documents when determining the legitimacy of statements made by firms on competition issues. The practical effect of the new guidelines is yet to be seen. While the new guidelines appear to increase the role of the ACCC in scrutinising pre-merger activities, the implications for small to medium sized enterprises will be minimal unless they work in niche areas where their markets are small and emerging. However, what is readily apparent is that a tide of change sweeping over merger regulation in Australia.
The ACCC is inviting submissions on the draft merger guidelines to be submitted by 28 March 2008.
If you would like to know how these proposed changes will affect your business or how Cooper Grace Ward can lower your corporate risk profile in merger deals, please contact David Grace on (07) 3231 2421.