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Allens Arthur Robinson

Focus: Competition Law – February 2008

ACCC releases updated merger guidelines for public consultation

In brief: The ACCC has released for public consultation its much anticipated Draft Merger Guidelines 2008. This is the first update since publication of the 1999 merger guidelines. Partners David Brewster (view CV) and Jacqueline Downes (view CV) and Lawyer Helen Anness report.

How does it affect you?

  • The Draft Merger Guidelines 2008 set out the ACCC's current thinking on merger reviews, the factors to which most weight will be given in its competition analysis and the framework for accepting undertakings. 
  • The ACCC proposes to abolish the 'safe harbour' concentration thresholds and adopt a broader approach incorporating the Herfindahl-Hirschman Index.
  • As many markets are already highly concentrated in Australia compared to overseas, this index may often be triggered even before a merger occurs. This means that merging parties will need to focus even more attention on demonstrating mitigating factors such as imports as an antidote.
  • The ACCC has flagged that it will rely on internal company documents such as board papers to assess the likely competitive impact of a merger. In addition, the ACCC's approach to divestment undertakings will be stricter.

Background

The Draft Merger Guidelines 2008 (the Guidelines) were published for consultation on 8 February 2008 and outline the Australian Competition and Consumer Commission's (the ACCC) administration and enforcement policy for dealing with mergers under the Trade Practices Act 1974 (Cth) (the TPA). ACCC guidance does not have legal force in determining whether a proposed merger is likely to breach the TPA, but it does provide an important insight into its substantive competition assessment, the theories of harm the ACCC will apply and the current policy regarding undertakings. Australian and international thinking on best-practice merger regulation has advanced significantly since the 1999 merger guidelines, making the release of more sophisticated guidelines that reflect contemporary views and experience accumulated by the ACCC since then eagerly anticipated. 

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Key changes

The most significant changes proposed by the ACCC in the Guidelines are:

  • a decision to drop market share safe harbours (ie indicative market concentration thresholds below which the ACCC is unlikely to intervene in a proposed merger);
  • the introduction of new thresholds for the voluntary notification of mergers to the ACCC;
  • a confirmation of the likelihood that the ACCC will examine internal company documents; and
  • confirmation of the ACCC's recently expressed preference for divestments be made before, or immediately on completion of, a merger rather than at some later point in time.

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Safe harbours

The ACCC's previous merger guidelines stated that it was more likely to be concerned by a proposed acquisition if:

  • the combined market share of the four (or fewer) largest firms was 75 per cent or more and the merged firm supplied at least 15 per cent of the market; or
  • the merged firm supplied 40 per cent or more of the market.

In practice, the ACCC moved away from a strict application of these thresholds several years ago. It is therefore not a great surprise that the ACCC has dropped market share safe harbours from the Guidelines. In doing so, the ACCC has moved away from a presumption that a market is competitive below a certain level of concentration and towards the use of market shares and concentration ratios as an initial indication of whether a merger is likely to give rise to unilateral or coordinated effects. 

The ACCC will measure concentration by reference to market shares, x-firm concentration ratios (CRx) and the Herfindahl-Hirschman Index (the HHI). The HHI is an index that has been used in the United States for many years, and more recently in Europe. HHIs are calculated by adding the sum of the squares of the market shares of all companies in the relevant market. For example, in a market with five firms each with a 20 per cent market share, the HHI is (20)2 + (20)2 + (20)2 + (20)2 + (20)2 = 2000. The ACCC will take into account the total post-merger HHI, as well as the delta (that is, the change in the HHI). The Guidelines state that the ACCC will regard an HHI of 2000 as indicative of a concentrated market. The ACCC will also continue to have regard to the CR4 (ie the sum of the market shares of the four largest firms). 

In abolishing the safe harbours, the ACCC has shied away from specifying what level of market shares, CR4 or delta in the HHI will give rise to an initial indication of potential competition concerns. While it is understandable that the regulator would not want to be tied down to particular thresholds where it was inappropriate, it is difficult to imagine that their continued use would give rise to such an outcome. Instead, thresholds would be, and always have been, a welcome guide towards which mergers might be considered likely to attract regulatory scrutiny (and so require an extended ACCC review period or possible structural alternatives).

In this context, it is useful to note that other competition regulators around the world continue to use safe harbour guidelines, or at least provide more information on how the HHI will be applied.1  If the ACCC is to adopt the HHI as a primary benchmark for consideration of market concentration, it would be very useful for companies to be given some guidance as to what delta is likely to be problematic, rather than just the trigger level of the HHI.

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Notification thresholds

The Guidelines introduce new thresholds for the voluntary notification of transactions to the ACCC. Merger parties are encouraged to notify the ACCC (well before completion of the merger and as soon as there is a real likelihood that it may proceed) where any of the following are satisfied:

  • the merged firm would operate in at least one market that is concentrated (ie an HHI of more than 2000);
  • a substantial number of customers consider the merger parties' products to be particularly close substitutes (ie their first and second choices);
  • the target has rapidly increased market share, driven innovation or tended to charge lower prices in one or more relevant markets;
  • the merged firm has significantly higher market share than any of its rivals; or
  • the ACCC has indicated that notification is advisable for a particular firm or industry. 

These are not a shorthand version of the substantial lessening of competition test but indicate which transactions will trigger ACCC interest. However, the thresholds chosen by the ACCC seem to be open to a considerable degree of interpretation. In addition, the concentration of many Australian industries means that the HHI will often already be triggered before a merger occurs. The new notification thresholds are therefore not likely to reduce the number of clearance applications even when there are few substantive competition issues raised.

In addition, the Guidelines confirm that there is no minimum turnover or other monetary threshold for notifying mergers in Australia, compared to other overseas jurisdictions which do have de minimus thresholds.2  Under the TPA, a market must be a 'substantial' market in Australia for consideration by the ACCC, but the Guidelines confirm that this can be satisfied irrespective of number of customers and geographic size, and can occur where the products involved are an essential input in a larger downstream market.

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Enforceable undertakings and divestiture

The ACCC's general practice since 2006 has been to require an independent administrator or manager to be appointed during a hold-separate period between completion of a merger and subsequent divestment of any business or assets required to obtain competition clearance. Before the release of the Guidelines, ACCC chairman Graeme Samuel was reported to have expressed concern that even independent administrators are not able to ensure competitive tension in a market pending divestment: 'The only way that we will allow a merger to proceed that involves a divestiture of assets or business is to actually have that divestiture pre-contract and taking place prior to the merger transaction being consummated'.3  

The Guidelines do not go this far, but they do confirm the ACCC's preference for divestment to occur on or before completion of the merger (particularly where there is risk in identifying a suitable purchaser or of asset-deterioration). There will no doubt be transactions where pre-completion divestiture is not always possible (such as public company takeovers) and a more flexible approach will be needed. However, the ACCC has publicly stated that in recent mergers it considers that divestiture assets were not properly maintained prior to sale and accordingly the comments in the Guidelines indicate a much tougher attitude by the ACCC towards divestiture undertakings. Somewhat ominously, the Guidelines note that there may be circumstances where, if upfront divestiture cannot be achieved, no alternative remedy will be acceptable. 

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Other issues 

Other issues addressed by the Guidelines are:

  • Coordinated conduct and effects –The ACCC's previous merger guidelines primarily dealt with the likely unilateral effects of a merger (that is, the unilateral ability of the merged firm to exercise market power). The Guidelines now give extensive detail on both unilateral and coordinated effects consistent with the approach of the ACCC and other international regulators over the past several years. Coordinated effects occur where the market structure and features are likely to facilitate coordination by remaining firms on pricing or other key market decisions. This increased emphasis is likely to reflect the ACCC's concerns regarding the concentration of Australian industry and the increase in the number of cartels it is investigating.
  • Import thresholds –The Guidelines sensibly retain the 1999 benchmark for import competition that is most likely to provide an effective and direct competitive constraint of 10 per cent of total sales in each of the previous three years. The 10 per cent imports must be completely independent to the merger parties and are only indicative, with a number of other tests (such as no barriers to increased quantity of imports and comparable prices to domestic supply) to be satisfied.
  • Board papers – The ACCC has in recent years increasingly scrutinised merger parties' internal papers as a means of testing the credibility of anti-trust arguments made in their submissions, following the tendency of overseas' regulators such as the European Commission to systematically require full disclosure of relevant internal documents, including board papers. The Guidelines confirm the importance of company documents and board papers in the ACCC's assessment, noting that these will serve as evidence of whether the merger parties are likely to be effective future competitors in the relevant market and the degree of rivalry between them. 

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Conclusion

The Guidelines provide a welcome summary of advancements in the ACCC's thinking since 1999 and are a much-needed update to the guidance available for merging companies. However, their utility could be extended by providing more guidance as to the market shares and changes in concentration levels that the ACCC is likely to regard as problematic. The ACCC has called for submissions to be made by 28 March 2008.

   

Footnotes
  1. For example, the New Zealand Commerce Commission and Canadian Competition Bureau use CRx thresholds; the European Commission, the United Kingdom Office of Fair Trading (OFT) and the US Department of Justice and Federal Trade Commission use HHIs.
  2. For example, the OFT's guidance in the UK states the general rule that a market will only be of sufficient importance if it is £10m (approximately AU$22m) or more in size.
  3. 'Samuel takes a tough line on mergers' The Australian Financial Review, Thursday 31 January 2008. p 10.

 

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