Where to now for Australian merger regulation?

Following successive ACCC defeats in merger cases, there is a crescendo in ACCC calls for reforming Australia's merger control laws. However, it is far from clear that the cause of the ACCC's struggles is a permissive legal framework. Neither does the ACCC's record in litigation necessarily indicate any significant problem with Australia merger regulation.

On 6 May 2020, the Full Federal Court found that Pacific National's proposed acquisition of Aurizon's Acacia Ridge Terminal (ART) was not anticompetitive (even without the undertaking offered by Pacific National on the last day of the trial) and rejected the ACCC’s appeal.[1] The decision is the latest in an unbroken series of ACCC defeats in merger litigation that stretches over 25 years, and comes on the heels of its failed attempt to oppose Vodafone Hutchison Australia's (VHA) acquisition of telecoms competitor TPG.[2]

With each recent loss has come renewed and growing calls from the ACCC for statutory reform to lower the bar it faces in Court proceedings. Following the ACCC's losses in AGL/Macquarie Generation (2014),[3] Sea Swift/Toll Marine Holdings (2015)[4] and Tabcorp/Tatts (2017),[5] the ACCC successfully lobbied to have the Competition and Consumer Act 2010 (Cth) (CCA) merger authorisation process amended in order to make the ACCC (rather than the Australian Competition Tribunal (Tribunal)) the first instance decision maker.[6] 

Following VHA/TPG, ACCC Chairman Rod Sims said “proposed mergers can be extremely difficult to challenge ... competition authorities can sometimes feel like they are on the back foot when attempting to meet this challenge”.[7] After the ACCC's first instance loss in the Pacific National case, he commented “Australians have just got to think through whether we want to have the concentrated economy we've got or we rethink how we do merger approvals, because, for this decision to get through, I think we've got a problem.”[8] Following the Pacific National appeal decision, Mr Sims stated “the outcome demonstrates the real difficulty of applying the substantial lessening of competition provisions in the legislation [and] the ACCC will continue to consider what changes are needed to make Australia's merger laws work in the way they need to, to safeguard the economy from highly concentrated markets”.[9]

Mr Sims points to judges' willingness to accept the self-interested evidence of corporate executives as a part of the problem.[10] If this is the cause of the ACCC's struggles, law reform is unlikely to be the answer. A fundamental part of the role of a judge is assessing witnesses' credibility and attributing weight to their evidence – seeing through self-interest is ‘bread and butter’ work. If judges are consistently preferring the views of corporate executives to the ACCC's propositions, then the failure is likely in the ACCC's evidence preparation and its tendency, specifically pointed out by the Courts, to rely on highly theoretical arguments.[11] 

Whether legislative reform is the appropriate response depends upon two related issues:

• first, whether any of the cases that have been challenged by the ACCC were substantively anticompetitive; and
  
  
• second, whether the cause of the ACCC's failure is that merger laws are unnecessarily permissive or, alternatively, whether it is running the wrong cases and/or running them ineffectually.

On the first issue, while the ACCC has claimed that higher electricity prices resulted from AGL/Macquarie Generation and that Pacific National/ART would ultimately result in higher costs of groceries and other goods,[12] little detailed substantive analysis has been performed. The 2015 'Harper Review' of Australia's competition laws and policy proposed a program of post-merger evaluations to determine whether the ACCC's assessments were borne out, but this has not been progressed.[13]

One point should be axiomatic – the fact that the ACCC is not winning merger challenges is not, of itself, proof that current laws are deficient. Unlike in more litigious markets, in Australia the default reaction of merger parties to ACCC opposition is not a reflexive commencement of litigation, but a careful and clear-eyed assessment of the merits of the ACCC's decision and the prospects of success in any challenge. Over the last ten years, 12 deals have been opposed by the ACCC and then abandoned, divestments or other remedies were implemented in around 40 deals, and at least 20 deals were abandoned after confronting ACCC resistance mid-review (typically in the form of an adverse 'Statement of lssues'). This also ignores the potential combinations on which competition law advisors pour cold water before they ever emerge from the boardroom. The rigour of the ACCC's process, and its preparedness to litigate, is itself preventing a significant number of potentially anticompetitive transactions.

On the second issue, the Court/Tribunal decisions in the six most recent ACCC losses arguably do not reflect marginal outcomes, or decisions that rested upon fine legal distinctions such as the burden of proof. Instead, the decisions turned on fundamental factual findings. In particular:

• PN/Aurizon: The proceeding turned on factual issues related to barriers to entry. The Court concluded that, even if Pacific National's acquisition of ART would raise barriers to entry (as the ACCC contended), barriers were already high and new entry was a ‘mere possibility’ that was unlikely within five years, by which time a new competitive terminal associated with the Inland Rail project would likely be constructed.
  
  
• VHA/TPG: The Court rejected the ACCC's core contention that, without the merger, there was a ‘real chance’ that in the near term TPG would roll out a mobile network in competition with VHA.
  
  
• AGL/Macquarie Generation: The Tribunal disagreed with the ACCC's theory that smaller electricity retailers would have difficulty entering or expanding in New South Wales because AGL's vertical integration would reduce the supply of hedge contracts available to them.
  
  
• Tabcorp/Tatts: The Tribunal disagreed with the ACCC that Tabcorp and Tatts were closely competitive in the supply of wagering services and found that they only overlapped significantly in the online channel, where they were reasonably distant competitors and where Tatts was a moderately successful and declining force.
  
  
• Toll/Sea Swift: The Tribunal accepted that, on the available evidence, Toll would exit the supply of certain marine haulage services in the Northern Territory and Northern Queensland if the deal did not proceed. Therefore, in the future without the proposed transaction, there would be only one provider of the relevant services in any event.
  
  
• Metcash/Franklins: The ACCC argued that, absent the acquisition of Franklins by Metcash, other acquirers could have acquired Franklins and established a competitive, independent wholesale business. The Court found that on the facts there was no realistic prospect that such an alternative acquisition would eventuate.

Even putting aside the case for reform, there are few sensible reform options. The CCA mergers test applies the ‘substantial lessening of competition’ threshold, which is used throughout the CCA and, in the same or an equivalent form, in most other jurisdictions. This is clearly the right test – it seeks to filter any acquisition that has a ‘real chance’ (i.e. more than a speculative possibility) of resulting in a lessening of competition that is ‘real and of substance’ and ‘meaningful to the competitive process’.[14] 

The ACCC has recently favoured either placing the burden of proof on the merger parties and/or introducing rebuttable presumptions that a deal is anticompetitive when it is opposed by the ACCC. However, the merger parties already bear the burden of proof in any deals where the parties seek a declaration from the Federal Court that the deal is not anticompetitive (as in VHA/TPG, and as will be the case where foreign investment (FIRB) approval and therefore ACCC approval is required to close). Further, as discussed above, analysis of the recent Court challenges shows decisions made by the Court on clear factual bases and often on the basis of analytical failings identified by the Court – fundamental issues that are unlikely to be remedied by shifting burdens of proof or applying presumptions.

Anticipating an escalation of the ongoing reform debate, our key propositions are:

• The consequences of Australian merger law are too important to the success of the small, fragile and trade-exposed Australian economy to risk an overly restrictive or 'precautionary' merger regulation regime.
  
  
• Current law is economically coherent, balanced and consistent with international jurisdictions – there are no or few sensible reform options available.
  
  
• No credible case for further reform of Australian merger law has yet been made.
  
  
• Notwithstanding the ACCC's litigation struggles, Australia's merger regulation regime is working well in preventing anticompetitive deals proceeding. While continual enhancements can be made to the ACCC's decision making and case preparation, there is not necessarily any shame in the ACCC losing in litigation.  Its preparedness to bring marginal cases is part of what makes the Australian merger regime robust and effective.