Mergers & Acquisitions: Avoiding the pitfalls of section 50 of the Trade Practices Act

The highly publicised bid by Toll Holdings (“Toll") to acquire Patrick Corporation Limited (“Patrick") is a good example of the operations of the Merger Provisions of the Trade Practices Act (“the TPA"). Companies which are considering merging with or acquiring other companies should be aware of these provisions, to ensure that in entering into the merger or acquisition they are not breaching section 50 of the TPA, or, where necessary, seek approval from the Australian Competition and Consumer Commission (“the ACCC") to do so. They also need to be aware of proposed changes to the Guidelines for Informal Merger Review, which if implemented will bring about some variations to the process which the ACCC uses when deciding whether to approve a merger.

In this article, we examine the provisions of section 50 of the TPA, and the procedures for obtaining an informal merger clearance or a confidential merger clearance. In the next edition, we will examine the process for obtaining authorisation of an acquisition which may breach section 50.

Section 50 of the TPA

Section 50 of the TPA states that:

“1. A corporation must not directly or indirectly:

(a) acquire shares in the capital of a body corporate; or

(b) acquire any assets of a person,

2. A person must not directly or indirectly:

(a) acquire shares in the capital of a corporation; or

(b) acquire any assets of a corporation;

Section 50(3) sets out a non-exhaustive list of matters which must be taken into account when deciding whether an acquisition is likely to have the effect of substantially lessening competition in a market. It follows that the decision as to whether a proposed acquisition is likely to substantially lessen competition requires a detailed analysis of the relevant market.

The consequence of entering into a merger or acquisition in breach of section 50 can be the imposition of penalties under section 76 of the TPA of up to $10 million (for a corporation) or $500,000 (for an individual). Parties who suffer damage as a result of the merger or acquisition may also seek damages or injunctions against the parties to the merger or acquisition.

For this reason, although there is no compulsory merger notification in Australia, it is essential that parties entering into an acquisition which may breach section 50 consider going through the process of obtaining either an informal merger clearance, or a formal authorisation, from the ACCC.

The ACCC’s processes for approving Mergers and Acquisitions

There are three processes by which parties to a proposed merger or acquisition can seek to gain ‘clearance’ from the ACCC: Informal Merger Clearance, a Confidential View, and Authorisation. We will examine the process of Authorisation in the next edition of Legal Talk.

(a) Informal Merger Clearance

The parties must provide the ACCC with information including the structure of the relevant market and information about other major market participants, the commercial rationale for the merger and an analysis of the proposed merger or acquisition in terms of the factors referred to in section 50(3) of the TPA. The ACCC will then determine whether there are competition issues arising from the proposed merger or acquisition. The issues which it examines in determining that question, and the way in which it analyses that question, are set out in the 1999 Merger Guidelines, which can be found on the ACCC website, and include:

1. What is the relevant market? The ACCC identifies the relevant market. If the market in which the changes will take place in is not substantial, the ACCC will not take action and will not oppose the merger or acquisition.
   
   
2. How many competitors are there in the market? If the market is substantial, the ACCC will look at how many competitors there are in that market, and what share of the market each holds. The ACCC will not investigate the matter further unless, as a result of the proposed merger, the 4 largest competitors in the market will hold 75 per cent of the market or more and the merged company will supply at least 15 per cent of the relevant market; or the merged company will supply 40 per cent of the relevant market.
   
   
3. Is there import competition in the market? If these ratios are exceeded, the ACCC will then look at how much import competition there is in the market to determine whether imports will provide a challenge to the merged company, and/or whether import competition will prevent the exercise of domestic market power.
   
   
4. How easy is it for new entrants to enter the market? If the ACCC does not think that import competition will prevent the merged company from dominating the market, it will examine how easy it is for new entrants to establish themselves in the market within a reasonable period and on a sufficient scale to prevent the merged company from dominating the market.
   
   
5. What is the market structure? If there are significant barriers to entry to the market, the ACCC will look at the structure of the market, and the way in which parties conduct themselves in the market, including issues such as countervailing power of buyers and suppliers; the availability of substitutes for a particular product; and whether the merger would result in the removal of a vigorous and effective competitor.

If the ACCC does not identify any competition issues, it will pass the information to the Merger Review Committee (“the MRC"), who, if they agree, will advise the parties that it will not oppose the acquisition.

If the ACCC does identify possible competition issues, it will conduct market enquiries, assess the results, and pass all of this information to the MRC for consideration.

If the MRC finds that there are no competition issues at that stage, it will inform the parties that it does not oppose the merger and give informal merger clearance. In this case, the ACCC reserves the right to reopen the matter if the information provided is incorrect, or new information comes to the attention of the ACCC.

If the MRC does identify competition issues, it will publish a Statement of Issues, and engage in further market inquiries. At this stage, it may also discuss with the parties remedial action which could alleviate the ACCC’s concerns. Remedial action could include one party giving enforceable undertakings to the ACCC that it will not operate in certain parts of the market. In the Toll/Patrick matter, the ACCC only approved the merger after Toll gave an enforceable undertaking which included, amongst other things, divesting itself of shares in certain companies and relinquishing certain transport paths.

Once the remedial action has been agreed or further market enquiries have taken place, the MRC again decides whether it will oppose the merger.

The MRC may also provide a public competition assessment that outlines its conclusions and reasoning for its decision. This is particularly so if the merger is rejected; is subject to enforceable undertakings; or is approved but raises important issues that the ACCC considers should be made public.

(b) Confidential Merger Reviews

If the parties to the merger wish to keep their merger confidential, they can approach the ACCC seeking a confidential view. The ACCC will provide a view as to whether the merger would breach section 50, based on the information provided by the parties. However, this view will be a qualified one and will be subject to revision once the matter becomes public and market inquiries are conducted.

Revisions to the 2004 Guidelines for Informal Merger Review

In October 2004, the ACCC published Informal Merger Review Guidelines (“the Guidelines"), which outline the Informal Merger Clearance process set out in (a) above and set out in detail the evaluation process which the ACCC goes through when deciding whether to grant informal clearance to a proposed acquisition. The Guidelines also implemented several changes in the previous informal merger review process, including the establishment of a register on the ACCC"s website where information about merger proposals is posted; the provision of indicative time lines for merger assessments; and the publication of Statements of Issues and Public Competition Assessments on the ACCC website.

In late 2005 the ACCC reviewed the Guidelines, and in early 2006, released a draft version of the revised guidelines for public consultation (the Merger Review Process Guidelines). The proposed changes to the Guidelines include:

• inclusion of processes for confidential mergers, and more details about how the ACCC will treat different types of informal merger reviews

• clearer and shorter indicative timelines for public merger reviews, and

• an opportunity for merger parties and interested parties to provide a right of reply to an ACCC Statement of Issues and publication of those responses on the ACCC website.

It is expected that the revised Guide-lines will be published and come into effect early in the 2006-2007 financial year. The ACCC has also foreshadowed that after it has reviewed the Guidelines, it will review the 1999 Merger Guidelines.

Conclusion

Any party entering into a merger or acquisition arrangement needs to consider the implications of that arrangement for competition in the relevant market. Familiarity with the Merger Guidelines and the Informal Merger Review Guidelines will assist parties to determine whether they need to approach the ACCC for informal clearance, or authorisation, which we will look at in the next issue.

For more information please contact:

	Michael Daniel Partner +61 2 8266 6618 Send email
	Sophie Cockayne Senior Associate +61 2 8266 6642 Send email