Mergers are a relatively common business strategy in corporate structuring. It is, however, integral that in affecting a merger your business does not fall foul of competition law. If you are considering undertaking a merger, it is important you understand the regulation of mergers and the circumstances in which they will be considered anti-competitive, as well as the ways in which you may approach the regulators to better understand your position.
Mergers, that is the amalgamation of different companies, are not prohibited under Australian law unless they have, or would be likely to have, the effect of substantially lessening competition in any market. (see Competition and Consumer Act 2010 (Cth) s 50) In other words, a corporation must not, directly or indirectly, acquire shares in a body corporate or any assets of a person if that acquisition would have the effect of substantially lessening competition. Section 50(3) of the Act provides a list of non-exhaustive factors that must be considered in the context of determining whether a merger will have the effect of substantially lessening competition, including:
- The actual and potential level of import competition in the market;
- The height of barriers to entry to the market;
- The level of concentration in the market;
- The degree of countervailing power in the market;
- The likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins;
- The extent to which substitutes are available or likely to be available in the market;
- The dynamic characteristics of the market, including growth, innovation and product differentiation;
- The likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor; and
- The nature and extent of vertical integration in the market.
An illustrative example of a prohibited merger can be found in the case of Australian Meat Holdings Pty Ltd v Trade Practices Commission (1989) FCA 25. This involved a prosed merger between abattoirs, where Australian Meat Holdings (AMH) acquired all issued shares in another abattoir business, namely Thomas Borthwick & Sons (Australiasia) Ltd. The predominant issue in this case was whether the market that included the particular AMH abattoirs was confined to North Queensland or whether it encompassed the entire State. That is, the case predominantly involved an examination regards the geographical market. Industry evidence was led to suggest that, although cattle could be carried fairly easily to Southern Queensland, cattle producers had a significant preference against transporting cattle by truck over these distances, for various reasons which included but were not limited to transportation costs and damage to cattle during transportation. The court held contravention of the merger provision stating that, as a result of the acquisition, AMH was ‘in a position to dominate the northern Queensland fat cattle market’.
It should be noted that businesses are not bound by any compulsory notification requirements in this context. However, if you are concerned that your business may potentially infringe competition laws you may have the option of seeking an informal notification from the Australian Competition and Consumer Commission (ACCC) or an authorisation from the Australia Competition Tribunal (ACT). In the context of informal notification, it is helpful to review the ACCC’s Merger Guidelines. For example, guideline 3.5 states that the distinction between lessening competition and substantially lessening competition ‘is a matter of judgement and will always depend on the particular facts of the merger under investigation…’ but, generally, will consider it to be substantial ‘if it confers an increase in market power on the merged firm that is significant and sustainable’.
Evidently it is integral to review the regulation of mergers when considering restructuring via a merger. Consider seeking a notification or authorisation from the regulators if you are concerned the merger will be considered anti-competitive in effect. If you need assistance in doing so please get in touch using the form at the bottom of the page.
This article was authorised by Warwick Heeson