Form then substance? Merger regulation of tech deals after the ACCC Digital Platforms Inquiry - Trade Regulation & Practices

The Final Report of the ACCC Digital Platforms Inquiry (DPI) will lead to a further step-up in the ACCC's scrutiny of digital deals and the proposed new merger notification mechanisms for 'large digital platforms' will, if implemented, inevitably complicate M&A strategies in competitive bid scenarios. While the immediate impact on merger regulation in Australia is unlikely to be dramatic, more substantive reform may follow.

The ACCC's recommendations suggest that its immediate aim is to involve itself in a broader range of transactions and in greater detail, but without necessarily raising the bar for obtaining ACCC clearance. The Final Report does, however, feed into an existing ACCC complaint about the challenges it faces in seeking to block transactions, and the ACCC indicates its intention to pursue longer-term reforms that would strengthen its hand in opposing contentious mergers.

New mandatory merger factors

As discussed in a previous article in our series Unpacking the ACCC Digital Platforms Inquiry Final Report, the Final Report identifies Facebook's and Google's strategic acquisitions as key contributors to their accumulation of substantial market power.

ACCC Chair Rod Sims has previously commented about the challenges the ACCC faces in reviewing digital mergers, and the possibility that different conclusions on a number of platform acquisitions would have been reached with the benefit of hindsight. He has emphasised that: "we are now very much alive to the significance of data, the implications of the network effects associated with these platforms and the potentially far-reaching consequences of acquisitions of smaller rivals."

Consistent with those comments, and the preliminary report, it is no surprise that the ACCC recommends that the Competition and Consumer Act 2010 (Cth) (CCA) be amended to include the following two new mandatory factors to be considered in evaluating whether a transaction substantially lessens competition:

The likelihood that the acquisition would result in the removal from the market of a potential competitor.
The nature and significance of assets, including data and technology, being acquired.

The existing merger factors are more generic considerations such as concentration, import competition and barriers to entry, and have little practical impact on merger review.

The proposed merger factor relating to 'potential competitors' (i.e. targets that do not currently, but may in future, compete with an acquirer) is intended to apply to situations in which a dominant digital platform acquires a nascent but potentially significant competitor (Facebook's 2014 acquisition of Instagram is often referred to as an example).

The proposed merger factor relating to data is focused on transactions in digital markets in which data is important and where there is a possibility that a digital platform (which may already have access to a relatively or uniquely large dataset) would increase and entrench its competitive advantage by acquiring access to further data.

In each case, however, the new merger factor would have wider application across industries, and would not be limited to digital markets. Indeed, in the Final Report, the data merger factor has been broadened to refer to the 'nature and significance of assets' generally, in response to concerns that the data-only formulation in the Preliminary Report was inappropriately industry-specific.

As the ACCC acknowledges in the Final Report, it is not currently prevented from considering potential competition or the nature and significance of the assets (including data) being acquired when it makes its merger assessments. We have observed a significant increase in the ACCC's focus on these issues in merger reviews over the last 1-2 years.

For that reason, the ACCC claims that the value of these reforms would not be in their influence on the ACCC, but rather in 'signalling' the importance of the new factors to business and the courts. Of course, the ACCC would also undoubtedly consider that, post-reform, its scope to assess potential competition and data issues would be increased, and those issues are likely to have a greater prominence in ACCC merger clearance processes as a result.

The risk for merger parties is that the issues are given undue emphasis in ACCC merger reviews and, for example, the ACCC becomes more inclined to entertain speculative theories about the growth trajectory of innovative target businesses.

Advance notification protocols for 'large digital platforms'

The ACCC also recommends that 'large digital platforms' enter into voluntary protocols with the ACCC, in which they would commit to providing the ACCC with advance notification of proposed acquisitions potentially impacting competition in Australia.

The proposed protocols sit uncomfortably with Australia's merger control regime, in which there has never been a mandatory pre-merger notification requirement and merger parties make their own assessment of whether a transaction may raise substantive competition concerns that should be put before the ACCC. In this context, a protocol may well put the large digital platforms at a disadvantage in competitive bid scenarios – even where there is no substantive competition concern. That may occur, for instance, where potential third-party acquirers have no similar requirements to submit to any ACCC process, could engage with the ACCC on a shorter timetable, and offer a target or vendor a more certain or timely process.

It is unclear whether the ACCC will be able to successfully negotiate the proposed protocols with the large digital platforms. For leverage, the ACCC foreshadows further recommendations to Government (impliedly for a legislated merger notification requirement) if it is unable to extract voluntary commitments.

While simple in concept, there are various potential sticking-points in the ACCC's attempt to negotiate merger notification protocols.

What form would the protocols take? If the protocols were sought by the ACCC in the context of an enforcement matter, they would likely be in the form of court-enforceable statutory undertakings. Here, however, there is no suggestion of any merger-related breach of the CCA, and the large digital platforms would presumably resist protocols that created new legal obligations.
To which platforms would the protocols apply? At this stage, the stated targets are Google, Facebook and 'possibly other platforms' incorporated overseas. However, there is clearly scope for the ACCC to seek to broaden the concept to smaller and/or domestic digital platforms.
Would a minimum size threshold apply and, if so, how would it be set? Given the nature of the industry, a de minimis threshold will be contentious – Rod Sims has previously observed that, at the time it was acquired by Facebook, Instagram had no revenue and 13 employees.
What transactions would be caught and in particular, what level of connection with Australia would be required? The large digital platforms are likely to resist any mechanism that requires advance notification of the acquisition of a business not present in Australia. However, the ACCC is likely to want to understand whether there is the potential for a target to enter concentrated Australian markets or for its technology be deployed in relation to Australian consumers.
How much notice would be required? While the ACCC is concerned about the unique analytical challenges of some digital transactions and is likely to prefer a long period, some transactions will be self-evidently unproblematic and able to be dispensed with very quickly.
Would a confidential notification suffice? The impact of the notice period will differ depending on when the clock starts to run. If a confidential notice was sufficient, it could be provided prior to announcement so as to minimise transaction impacts.

Building pressure for more restrictive merger regulation

A clear theme of the ACCC's recommendations is that they imply ACCC involvement in a broader range of transactions – either because of merger parties taking a more conservative view on notification on the basis of the new merger factors or as a result of straightforward transactions being caught by notification protocols.

However, there are indications that the ACCC is unlikely to be content with those process-orientated changes, and is likely to push in future for reforms that lower the bar for substantive objections to mergers.

In the Final Report, the ACCC makes a number of additional comments on mergers that foreshadow ACCC lobbying for additional reforms that would significantly strengthen its position where it seeks to prevent a contentious merger from proceeding.

The ACCC is keen to improve its ability to successfully oppose mergers given its poor track record in merger litigation to date, its ongoing frustration with courts' acceptance of evidence from the business executives of merger parties, and its concern that the courts are developing a practice of relying on behavioural undertakings to resolve structural competition concerns. Most recently, in response to its May 2019 failure to oppose a rail infrastructure transaction between Aurizon and Pacific National (after the court accepted a behavioural undertaking), Rod Sims observed "we've got a problem" with Australian merger laws and advocated rethinking merger review. Those calls are likely to get louder if the ACCC is unsuccessful in its current challenge to Vodafone Hutchison Australia's proposed acquisition of TPG Telecom.

In the Final Report, the ACCC suggests that it may be appropriate for Australian law to adopt a 'rebuttable presumption' that a merger opposed by the ACCC is anti-competitive unless the merger parties can provide clear and convincing evidence to the contrary. Beyond pointing to its track record in litigating contentious mergers and the fact that merger parties will often have an informational advantage over the ACCC, the ACCC has not articulated why it should be able to avoid being put to proof when intervening in market activity that is efficiency-enhancing in the overwhelming majority of cases. Further, merger parties already bear the burden of proof in many cases where it is necessary for them to seek from the court a negative declaration that a merger is not anticompetitive (as is effectively the case in all deals where Australian foreign investment approval is required).

Such a reform would "stack the deck" in the ACCC's favour in litigated merger challenges be much more dramatic than anything that the ACCC recommends in the Final Report. It would substantially improve the ACCC's prospects of success in court, and have knock-on effects by increasing the ACCC's appetite to oppose contentious mergers and, in turn, reducing mergers parties' willingness to pursue potentially contentious mergers in the first place.

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