On 16th October 2006, at a Trade Practices Law Conference, Tim Grimwade, the General Manager of the Australian Competition and Consumer Commission (the ACCC), gave a presentation outlining the ACCC’s toughening attitude towards undertakings given by companies during the merger approval process. The ACCC can accept undertakings from companies under section 87B of the Trade Practices Act (1974) (the TPA) as a condition of approving a proposed merger. The purpose of such undertakings is to maintain competition whilst permitting the merger proposal to proceed in a way that does not offend section 50 of the TPA. However, as a result of the failure by some companies to observe the spirit and purpose of the undertakings they give to the ACCC, the ACCC has recently announced a policy that foreshadows a tougher approach in future negotiations. This has immediate implications for merger regulation and affects the approach that companies should take in dealing with the ACCC.
The preference for structural undertakings
The ACCC has traditionally favoured structural undertakings (that is, undertakings which require a change to the structure of a company, for example, an undertaking to divest an asset or business) over behavioural undertakings. Structural undertakings have a long lasting effect on market structures and preserve competition, and, once effected, do not require continued regulatory oversight. Behavioural undertakings, on the other hand, require constant monitoring by the ACCC and may interfere with ongoing competitive processes, although well formulated behavioural undertakings can nevertheless provide valuable safeguards against competition concerns.
The ACCC’s approach to structural undertakings
In his speech, Tim Grimwade said that if a structural undertaking is in the form of an undertaking to divest a business or asset, it will need to satisfy several elements. Mr Grimwade then went through a list of the ACCC’s required components in a structural undertaking.
Firstly, the asset or business that is to be divested must be fully identified so that there is no question about what is to be divested.
Secondly, it is important that the divestiture undertaking sufficiently addresses the relevant competition issues. For example, if competitive concerns arise from the existence of particular barriers to entry into the market, an undertaking to divest assets that relate to those barriers may be sufficient to address the competition concerns. If the ACCC is not convinced that the assets can be sold, a buyer may need to be identified before the undertaking is accepted.
Thirdly, the undertaking should include safeguards to provide the ACCC with certainty that it will achieve its pro-competitive objectives. For example, a divestiture undertaking will generally only be acceptable if the ACCC has the power to veto a particular buyer on competition grounds. This power to veto is important to ensure that the subsequent transaction does not cause the ACCC similar competition concerns as those initially raised in relation to the merger.
In some cases, the ACCC may require the appointment of an Independent Manager and Independent Management Team to manage the operation of the assets or business as an ongoing business until they are sold. This is because divestiture undertakings that allow a merger party to maintain operational control of an asset between agreeing to divest it and actually divesting it, have the potential to undermine the effectiveness of the undertakings in addressing competition concerns. The divesting party may delay the divestiture process, shift assets away or run them down, or switch customers away from the divested business. Where the ACCC considers independent management of divestment assets necessary, the company providing the undertaking will be required to accept direction from the Independent Manager as to the control and management of the divestment business and to do what is necessary to maintain the divestment business as a separate, independent and on-going business.
Lastly, the ACCC will require a ‘good faith’ clause in the undertaking, highlighting that the parties undertake to honour the spirit, intent and letter of the undertaking. This is to address the increasing concern that many merger parties engage in conduct which, though technically compliant with the undertakings, is inconsistent with their spirit.
Non-compliance with undertakings
Mr Grimwade also stressed that the ACCC takes commitments made by merging parties very seriously, and if a company breaches a section 87B undertaking, the ACCC will not hesitate to seek Court orders directing the company to comply with the undertaking. A recent example of this is Federal Court proceedings instituted by the ACCC in September 2006 against Alinta Ltd in relation to undertakings it gave to the ACCC regarding its acquisition of the Dampier to Bunbury Natural Gas Pipeline.
Implications
In formulating section 87B undertakings for consideration by the ACCC, merger parties should take note of ACCC’s approach toward negotiations. Familiarity with ACCC concerns and requirements will assist the parties with preparing an undertaking that will best enable the merger proposal to succeed.
Special thanks to Gina Lee for her help in writing this article
