Metcash/Franklins merger - Full court downs ACCC appeal and leaves matters of principle unresolved
On 30 November 2011 a full bench of the Federal Court made up of Finn J, Buchanan J and Yates J handed down its decision in relation to the ACCC’s attempt to block the acquisition of Franklins by Metcash. The ACCC had appealed the decision of Emmett J to dismiss its case for an injunction to prevent the deal proceeding. The Full Federal Court affirmed Emmett J’s decision without exception.
The Full Court decision was expected to clarify some fundamental principles of merger analysis, but has left several unanswered questions.
Essentially, the ACCC appealed because it considered that:
- the deal was anti-competitive and that based upon the same facts considered by Emmett J, the Full Court should reach a different conclusion and block the deal; and
- if left unchallenged, Emmett J’s finding that the ‘future without the deal’ scenarios (referred to as the counterfactual) needs to be established on the balance of probabilities test would inhibit the ability of the ACCC to regulate mergers.
The first issue was squarely resolved by the Full Court. Yates J, with whom Finn J and Buchanan J agreed, was not persuaded that the trial judge had been anything other than thorough in his reasoning and compelling in his conclusions.
However, it is the Full Court’s consideration of the second issue that is most remarkable about this judgement. It has the potential to challenge the manner in which the ACCC has been reviewing mergers for some time.
The issue in play is the appropriate standard of proof to establish the counterfactual. While not settled at law, it has been generally accepted since the decision of French J (as he then was) in AGL v ACCC in 2003 that the standard of proof required to establish a ‘likely’ substantial lessening of competition under s 50 of the Competition & Consumer Act (CCA) is that of a ‘real chance or possibility’. This is a lower test than the normal civil standard of ‘balance of probabilities’ as there is scope for a real chance or possibility to be demonstrated in the context of multiple possible scenarios or even where the scenario put forward by the ACCC is not the one most likely to occur.
For some years, the ACCC has sought to apply this lower standard of proof to the identification of the counterfactual (as well as to the likelihood that competition will be lessened) for the purpose of its competition analysis. While there was no law to this effect, the ACCC saw it as implicit that the proper operation of s 50 of the CCA could not be achieved if the higher standard of proof was applied to any part of the competition test.
In contrast, Emmett J found at first instance that the application of a ‘real chance or possibility’ test to the counterfactual would risk factual matters being substituted with speculation and cannot be the appropriate burden of proof. He went on to apply both tests to the facts before him, concluding that the ACCC’s counterfactual could not be made out on a ‘real chance or possibility’ or ‘balance of probabilities’ basis.
The ACCC challenged Emmett J’s reasoning in this regard in the appeal. However, Yates J, with whom Finn J agreed, did not consider it necessary to clarify the appropriate test given the trial judge had effectively applied both tests and the issue could not influence the prospects of the appeal.
Buchanan J on the other hand, provided a substantive analysis of the issue, concluding not only that the normal civil ‘balance of probabilities’ standard should apply to establishing the counterfactual, but that it should also apply to establishing that a substantial lessening of competition is likely to take place. While the latter was not an issue raised by either party to the appeal, Buchanan J felt “at liberty to express reservations” about the application of a lower standard than the normal civil standard the Court would otherwise be bound to apply.
While Buchanan J rejected the notion that applying the balance of probabilities standard would necessarily undermine the operation of s 50 of the CCA, he expressed the view that this is ultimately not a matter for the court. This analysis conflicts directly with that of French J (as he then was) in AGL v ACCC and squarely raises the issue of what the correct standard of proof should be. As a result, the issue remains unresolved.
Since the Full Court’s decision was handed down, ACCC Chairman Rod Sims has confirmed that the ACCC will not seek special leave to appeal the Full Court’s decision to the High Court. Significantly, Sims has also confirmed that given the support by the majority of the Full Court, the ACCC will continue to apply the “real chance” standard to the analysis of whether there would be a substantial lessening of competition in the market “with” the acquisition in comparison to competition in the market “without” the acquisition.