Australia: Are merger authorisations now practical? Competition Tribunal takes first merger authorisation decision under the current merger authorisation procedure

Last Updated: 21 November 2014
Article by Martyn Taylor and Claire Forster

To date, most merger clearances in Australia have involved a voluntary application for 'informal clearance' to the Australian Competition and Consumer Commission (the ACCC). The option of applying directly to the Australian Competition Tribunal (the Tribunal) for a merger authorisation has always existed, but has generally been regarded as impractical within the dynamic commercial context of M&A transactions.

However, on 25 June 2014, the Tribunal granted conditional authorisation for AGL Energy Limited's (AGL) high-profile Aus$1.5bn acquisition of the assets of Macquarie Generation (MacGen).1 The decision is the first merger authorisation decision under the current merger authorisation procedure. The decision illustrates that merger authorisation is a practical alternative for certain M&A transactions.

This article provides a brief overview of the AGL decision and provides key insights into the merger authorisation procedure. It will be of current or future interest to anyone involved in Australian M&A transactions that raise material competition concerns.

How does Australia screen for M&A competition issues?

Most jurisdictions around the world follow a 'mandatory pre-notification' procedure to screen M&A transactions that raise competition concerns. Under this procedure, the relevant competition authority must be notified if certain revenue, market share or asset thresholds are exceeded.

Australia is relatively unusual by global standards in that it permits voluntary notification. In Australia, the decision whether to notify the ACCC is at the discretion of the acquirer based on its view as to whether concerns arise under the merger prohibition in section 50 of Australia's Competition and Consumer Act 2010 (the Act). However, the ACCC has issued guidelines in which it 'encourages' and 'expects' voluntary notification by the acquirer if certain thresholds are exceeded.

Australia's approach to merger clearances is similarly unusual. Most M&A transactions are screened by the ACCC through a process that has no statutory basis. The outcome of a successful ACCC review known as 'informal clearance', is not statutory immunity, but rather a non-binding 'letter of comfort' that the ACCC will not injunct M&A completion.

Notwithstanding its novelty, the informal clearance process generally works well. The procedure provides flexibility to resolve any ACCC concerns and to negotiate approval conditions (or 'undertakings'). The process normally enables resolution of ACCC concerns within reasonable commercial timeframes.

The difficulties with the informal clearance procedure arise for those M&A transactions that raise significant competition concerns. While negotiation of undertakings is the standard course of action, sometimes such undertakings fail to address all of the ACCC's concerns.

What does an acquirer do if the ACCC opposes an M&A transaction, even with undertakings? Given that the informal clearance procedure has no statutory basis, there is no ability to appeal an ACCC decision. This was the difficult situation faced by AGL.

What if the ACCC opposes an acquisition?

If an application for informal clearance is opposed by the ACCC, acquirers have four options to enable a merger clearance decision to instead be made by the Tribunal or the Federal Court. Each of these options has advantages and disadvantages.

In all cases, the ACCC will continue to be involved and will likely advocate its opposition. As such, there is no guarantee that any of these options will be successful. If an M&A transaction would contravene the Act, the Tribunal or Federal Court will simply affirm this.

  1. Formal merger clearance: Australia enacted a formal clearance process in 2006 that does provide statutory immunity. One benefit of the formal clearance procedure is the ability to appeal an adverse ACCC decision to the Tribunal. However, if the objective of a formal merger clearance is to obtain an opportunity for review by the Tribunal, the question arises: why not go directly to the Tribunal through a merger authorisation?
  2. Merger authorisation: If a merger has public benefits that outweigh anti-competitive detriments, it is possible to bypass the ACCC and apply directly to the Tribunal. The Tribunal applies a different test based on net public benefit, but the process involves a quasi-judicial review.
  3. Declaration: In Australia, a previous informal clearance application by AGL relating to the Loy Yang power was similarly opposed by the ACCC. In that situation, AGL applied directly to the Federal Court for a declaration that the acquisition did not contravene section 50 of the Act. This method is colloquially referred to as the 'Loy Yang route'.
  4. Contest an injunction: In 2011, the ACCC opposed a merger clearance application by Metcash and subsequently obtained an interlocutory injunction to prevent M&A completion. Metcash successfully contested that injunction in the Federal Court and obtained judicial comfort that the acquisition did not contravene section 50 of the Act. This method is colloquially known as the 'Metcash route'.

Faced with these four options, AGL opted for merger authorisation. The practicality of this merger authorisation process is the subject of this article. The AGL application is only the second application that has been made under the current merger authorisation procedure (implemented from 2007) and the first that has been the subject of a Tribunal determination.

Merger authorisation is the only option that permits a substantively different test to be applied. As such, it has a number of clear advantages, as discussed below.

Why did the ACCC refuse informal clearance?

By way of background, the State Government of New South Wales (NSW) has been running a process to privatise its electricity generation assets.

AGL sought to acquire the electricity generation assets of MacGen, comprising some 10 per cent of total generation capacity, 12 per cent of output in the National Electricity Market (the NEM), and 29 per cent of generation capacity and 36 per cent of output in NSW. AGL made an application for informal clearance from the ACCC and offered a series of undertakings to address the ACCC's concerns. The ACCC ultimately opposed the acquisition on the basis that it was likely to substantially lessen competition in the market for the retail supply of electricity in NSW.

The ACCC reasoned that, if AGL were permitted to acquire MacGen's assets, the three largest electricity retailers in NSW would own up to 80 per cent of NSW electricity generation capacity as vertically integrated generator-retailers (so-called 'gentailers').

The ACCC expressed concern that AGL's acquisition of MacGen in such circumstances would increase barriers to entry and expansion in the market for the retail supply of electricity in NSW by:

  • significantly reducing liquidity in the supply of hedge contracts to independent retailers (as AGL would instead supply electricity to itself in a so-called 'natural hedge'); and
  • increasing AGL's ability and incentive to withhold competitively priced and customised hedge contracts to independent retailers.

In response to those concerns, AGL offered to supply a minimum volume of hedge contracts to market participants for a period of 6½ years following completion. The ACCC considered that this undertaking was insufficient.

The ACCC also expressed concern that aggregating MacGen's generation capacity with AGL's existing generation capacity in the NEM may substantially lessen competition in wholesale electricity markets across one or more of NSW, Victoria and South Australia, or the NEM as a whole.

Why did AGL seek merger authorisation?

As identified above, of the four options available to AGL where the ACCC had denied informal clearance, merger authorisation was the only option that applied a substantially different test. Under a merger authorisation, the Tribunal can consider wider public benefits and has a broader remit than the ACCC. The Tribunal may authorise a merger if there is 'such a benefit to the public that the acquisition should be allowed to take place'.

In applying this 'public benefits' test, the Tribunal will weigh public benefits against the public detriments of the particular acquisition. While quantification of benefits and detriments is desirable, this weighing exercise does not require mathematical precision. The Tribunal's decision suggests that the breadth of public benefits that can be submitted for consideration is very substantial and probably broader than many practitioners had anticipated. The Tribunal also generally equated public detriments with anti-competitive detriments, although public detriments arising otherwise than from anti-competitive effects may still be relevant.

The Tribunal has indicated that in order for public benefits to be recognised, there must be a causal relationship between the benefits and the conduct to be authorised. Public benefits must be of substance and have durability. There must be a real chance, not just a possibility, of the public benefits occurring: it must not be merely speculative. The estimates and assumptions underlying the public benefits must be robust and commercially realistic and must be able to be tested and verified.

The Tribunal indicated that some weighting of public benefits may occur. The Tribunal will explore other options for achieving the public benefits and discount any benefits that can be achieved in a more competitive way. If a benefit is not widely shared among the public, it can still be claimed as a public benefit but will be weighted appropriately.

In identifying and balancing public benefits, the Tribunal described its approach as having 'something of an inquisitorial character'. The Tribunal must inform itself of the issues arising and obtain evidence to support its conclusions, but is not bound by formal rules of evidence. The Tribunal will seek assistance from the ACCC in that process.

Given that the Tribunal conducts a balancing exercise, the Tribunal must identify the anti-competitive detriments of a merger as part of the public detriments. In doing so, the Tribunal will apply the same merger review analysis as applied by the ACCC. In practice, this meant that AGL had an opportunity to revisit the competition concerns expressed by the ACCC before the Tribunal.

In summary, AGL most likely favoured the merger authorisation procedure because it enabled the concerns of the ACCC to be reconsidered, while also enabling AGL to make a series of public benefits arguments to offset those concerns.

Why was AGL successful in obtaining authorisation from the Tribunal?

AGL's application for authorisation from the Tribunal was ultimately successful. On the one hand, the Tribunal considered that the public benefits of the acquisition were clear and substantial. On the other hand, the Tribunal considered that the public detriments - i.e. the anti-competitive effects - were overstated and sufficiently addressed by AGL's proposed undertakings. On balance, the Tribunal reasoned that the public benefits of the proposed acquisition outweighed any public detriments.

In relation to public benefits, the Tribunal concluded that the acquisition would produce three types of public benefit.

  • The NSW public would benefit, by way of the State Government, in the sale of a deteriorating and slowly devaluing electricity generation asset that would have 'an increasing level of inefficiency and vulnerability to break down'. The funds from the sale would be allocated into the Restart NSW Fund for infrastructure projects in NSW, which would similarly benefit the public.
  • AGL proposed to invest Aus$345m into the MacGen assets to increase their efficiency, capacity and longevity. In turn, this would allow those assets to generate greater volumes of electricity at more competitive prices over a longer period of time, providing a public benefit.
  • AGL would be able to use the MacGen assets to compete more vigorously in the retail electricity market, thereby improving electricity prices for the public.

While the ACCC argued that these benefits could be achieved by any acquirer of the MacGen assets, the NSW Government had expressly stated that AGL was the only qualified bidder and that the MacGen assets would not otherwise be sold. The Tribunal therefore accepted that in the event that AGL did not acquire the assets, the NSW Government would retain the assets in the short term, and they would continue to devalue. The Tribunal therefore also avoided the complication, common in merger clearances involving competitive bidding, where future competitive states could be influenced by the identity of other bidders.

In relation to anti-competitive detriments, the Tribunal considered that the ACCC had overstated the likely anti-competitive effects. The Tribunal concluded that there would still be a 'substantial and adequate' hedge market for small retailers in NSW after the acquisition, assisted by AGL's undertaking to supply minimum hedge volumes.

Following the AGL decision, are merger authorisations practical for M&A transactions?

Importantly, the breadth of public benefits that was recognised was substantial and probably greater than many had expected. The Tribunal's approach suggests that there would be scope to seek merger authorisations in many circumstances since most M&A transactions will give rise to synergies and efficiencies that ultimately benefit the public.

So if merger authorisations are theoretically possible for most M&A transactions, why is the process not more commonly used?

The answer to this question is that for most M&A transactions, the informal clearance procedure is much less information intensive, less costly, and more flexible in its approach. If an informal clearance delivers a timely and successful outcome, there is no need to apply for merger authorisation.

By way of illustration, the AGL merger authorisation included the following steps:

  • AGL submitted a detailed submission, accompanied by eight witness statements and three expert reports, plus supporting documents (including a pre-drafted undertaking).
  • The ACCC provided an issues list and its own report, including identifying information which the Tribunal might seek from other entities.
  • Third parties were permitted to intervene in the proceedings and make submissions. While a number of third parties made submissions, no third parties actually intervened. In more contentious mergers, third party intervention may add further complexity to proceedings.
  • The Tribunal allocated a period of ten days for verbal hearings. During the hearings, the largely documentary evidence of AGL was presented supported by affidavits of a number of its senior management team. The ACCC also adduced some documentary material and affidavit material.
  • During the hearings, where the ACCC considered that evidence might usefully be tested or challenged, or other information elicited, AGL witnesses were asked questions by counsel for the ACCC. Counsel for AGL asked questions of ACCC witnesses.

Timing is a further important consideration. While the Tribunal will seek to complete a merger authorisation within three months, it may extend this time frame to six months. The Tribunal made its AGL decision within three months. In doing so, the Tribunal stated that a prompt determination is preferred to an exhaustive and prolonged inquiry that might take many months to complete. Many commentators have seized on these comments and the timing as indicating that merger clearances could, in some instances, be faster than an informal clearance decision.

While the Tribunal's comments on timing are encouraging, we do urge some caution. The comments should be taken in context. The Tribunal's rapid decision was facilitated by the efforts of AGL and the ACCC. In turn, the ACCC's prompt response was most likely possible largely because the ACCC had already undertaken its detailed informal clearance analysis. If the ACCC had not had the relevant information at hand and an application had been made directly to the Tribunal, it is likely that the Tribunal may have sought to extend the time period in order to give the ACCC sufficient time to provide effective support to the Tribunal. The time period for consideration by the Tribunal could well have been the full six months.

Based on the AGL experience, we suspect that the three month timeline is therefore more likely only if the ACCC has previously considered the merger in the context of an informal clearance application. In the absence of informal clearance, the six month timeline is more likely.

Conclusions

In summary, the informal clearance procedure is still optimal for most M&A transactions in Australia. The AGL decision does not change that. However, there are a limited set of circumstances in which merger authorisations are practical, namely where:

  • ACCC opposition is likely, as indicated by the release of a Statement of Issues;
  • undertakings cannot be offered that are sufficient to resolve the ACCC's concerns; and
  • there are compelling public benefits from the acquisition.

In such circumstances, the AGL decision indicates that Australia's merger authorisation procedure can work effectively to deliver a timely result.

1 Application for Authorisation of Acquisition of Macquarie Generation by AGL Energy Limited [2014] ACompT 1

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions