Speaking at the Competition and Consumer Workshop 2021 for the Law Council of Australia on Friday (27 August), the chair of Australia’s Competition and Consumer Commission, Rod Sims, put forward a vehement argument for merger law reform.
Mr Sims outlined that while effective control over company mergers were “essential to ensure markets remain competitive by preventing anti-competitive mergers”, he revealed that he believed that: “Australia’s current merger laws are failing to adequately protect competition” and therefore needed to be changed.
“The [current] informal regime is showing the strains of trying to be something like a formal system but with none of the bells and whistles that are needed to ensure that it meets its objectives and provides sufficient time and information for the ACCC to do its job of reaching a concluded view,” he said.
The head of the commission suggested that market power is increasing in Australia, dominated by a small number of providers, including in banking, supermarkets, as well as utilities and domestic air travel.
“Without action, market power in Australia will become further entrenched and will certainly not reduce,” he warned.
“Market power is hurting Australians across many walks of life.
“Consumers are paying more than they should for a wide range of goods and services.”
Mr Sims gave the example of farmers having “little option but to sell their produce to large buyers with substantial bargaining power” and small businesses “becoming increasingly reliant on a few buyers to access markets for their products and a few sellers for their key inputs”.
Some previous “problematic acquisitions” he highlighted included:
- the Vodafone/TPG merger (which “extinguished” the “threat from the entry of a fourth mobile network operator”);
- AGL’s acquisition of Macquarie Generation (“resulting in higher power prices”); and
- the number of competitors in rail container freight going from two to one.
“Market power, or the lack of competition, is having broader effects on the Australian economy.
“It appears to be a contributor to the slowdown in overall productivity and wages growth,” he said, adding it could also add to “economic inequality by promoting the interests of the few with power over the interests of many” and “reduces the efficacy of macroeconomic policy”.
Mr Sims therefore kickstarted a “key debate that, at one level, discusses the appropriateness of our merger control regime and, at another, asks whether we want an open, innovative and competitive economy”.
The current situation
While the chair said that only 1-2 per cent of acquisitions considered by the ACCC are likely to be contentious and may ultimately be opposed, he added that “the impact of being unable to prevent anti-competitive acquisitions proceeding can be very significant”.
The chair noted that while many countries require clearance before they can proceed, the “Australian approach to merger control is out of step as it relies on a ‘merger enforcement’ model rather than on ACCC clearance/approval”.
While he acknowledged that merger control is “a forward-looking exercise that involves inherent uncertainty,” he said that “uncertainty should not make clearance the default, which is where we are today”.
“To stop a merger that we consider is anti-competitive, the ACCC must persuade the Federal Court that the proposed acquisition is likely to have the effect of substantially lessening competition in the future, in breach of section 50 of the Competition and Consumer Act 2010 (the CCA),” he explained.
However, he said it was difficult to obtain evidence of likely future anti-competitive effects, noting that parties likely to be adversely affected by the merger, such as suppliers and customers, “are extremely reluctant to provide evidence because of concerns about future retribution and confidentiality”.
Further, he noted that the courts often place “significant weight” on evidence from the companies’ executives about their plans for the future, “despite the extent of self-interest involved”.
“[The current regime] has sometimes meant we have not opposed acquisitions which we considered would be likely to adversely affect the structural conditions for competition, because of the challenges of proving the future effect to the requisite level required by the law as interpreted by the courts,” he revealed.
“Similarly, these challenges in proving the future effect have also pushed us on occasion to accept remedies to address competition concerns in relation to some acquisitions, rather than opposing them outright. Recent experience indicates that some remedies we have accepted have been a poor alternative to preventing the acquisition outright,” the ACCC chair stated.
While many companies will wait for the ACCC’s decision before proceeding with a merger, the commission said it was seeing “a concerning increase in the number of times legal advisers are threatening that their clients will complete transactions before we have finalised our review”.
“We have sometimes found ourselves in a position where we are forced to negotiate with the merger parties to obtain sufficient information and time to conduct our review.
“This is unacceptable and invites poor decision making,” he told the Law Council of Australia delegates.
Mr Sims said that there were also “flaws in the way our merger law is applied”, calling for changes to the test for assessing mergers to “ensure the focus is on the competition that will be lost if the merger proceeds, and on the impact of the merger on structural conditions for competition in the relevant market”.
“The reason we are proposing change is not because we are worried about losing court cases; it is because we have serious concerns about the level of competition in our economy and our ability under the current law to prevent further consolidation via anti-competitive acquisitions.
“Unless something is done, these concerns will only intensify in the years ahead,” he warned.
The areas for reformation debate
As such, the ACCC chair said that four areas needed “particular attention” and outlined the following sections “for debate”:
- Rather than the current system of having the ACCC go to court and prove that future anti-competitive effects of an acquisition are ‘likely’, the ACCC would like to clarify the legal test to: update merger factors; define “likely” (proposed as being “a possibility that is not remote”); include a deeming provision for acquisitions that “entrench, materially increase or materially extend positions of substantial market power”; and add a provision to allow agreements between the merger parties to be taken into account in the merger assessment of the likely effect on competition;
- To make merger law “recognise that acquisitions of rivals made by firms with substantial market power in a market more likely result in economic harm” (as he argued there is insufficient focus on the structural conditions for competition);
- To update merger law so it is less skewed towards clearance; and
- To close the “gap” in the law in relation to acquisitions by digital platforms (to “adequately deal with acquisitions by large digital platforms... of even nascent rivals”), which are not currently captured.
Mr Sims also called for a single new formal merger regime, rather than the three that exist now (informal merger review, merger authorisation, or Federal Court declaration) so that “all acquisitions above specified thresholds would be subject to mandatory notification to the ACCC before proceeding”.
Under this new single formal regime, the test the ACCC would apply would be framed to require the ACCC to be satisfied that the proposed acquisition is not likely to have the effect of substantially lessening of competition.
‘A vital debate for the future of Australia and our economy’
He concluded: “[T]he ball is not in our court on merger law reform.
“Although we contribute to policy and are fearless and independent in making recommendations on competition and consumer issues, merger reform policy falls to Treasury and then government to potentially progress as they see fit.
“Today we have started the debate, and we will continue to participate and encourage the debate... This is not the end of the discussion. It is the start.
“We expect a very lively debate, which must be open to all, and will hopefully not just involve large businesses, but will also include small-business groups, farming organisations, consumer groups, academics and community groups, as well as competition law practitioners.”
He continued: “This is a vital debate for the future of Australia and our economy. We depend on competition for the effective working of our economy.
“We need merger reform to restore and maintain effective competition in Australia.”
[Related: ACCC calls for feedback on Citi acquisition]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.