Update 1 April 2020: Changes to Australia’s foreign investment regime arising from COVID-19 have flow-on effects for merger control
This week, the Australian Government announced and implemented important changes to its foreign investment framework. The main changes, which will remain in place for the duration of the current crisis, are to:
- reduce the monetary notification thresholds to $0, with the result that most foreign investments will require notification to the Foreign Investment Review Board (FIRB) and Treasurer approval, regardless of the value or the nature of the foreign investor; and
- extend the FIRB review period from 30 days to 6 months, with an intention to prioritise transactions that support Australian businesses and jobs.
Our more detailed note on these changes is available here.
Importantly, the change to the FIRB notification thresholds also creates a de facto ACCC notification requirement for a much larger range of transactions. This is because one of the mandatory factors that FIRB must consider is the effect of a proposed transaction on competition. As a matter of well-established policy, FIRB outsources that aspect of its review to the ACCC and foreign investment clearance will not be granted without ACCC approval.
For deals where there is a FIRB notification requirement, we typically recommend pro-actively engaging with the ACCC if there are any overlaps between the parties. Our experience is that this smooths the process of obtaining the ACCC’s view and FIRB clearance, and reduces the prospect of a more burdensome ACCC information request.
For pending deals involving foreign investment into Australia, it will be imperative to revisit both the FIRB and ACCC filing strategies.
Update 20 March 2020: ACCC issues initial guidance on the impact of COVID-19 on merger control
Earlier this week, we published our predictions as to the impact of the COVID-19 pandemic on Australian merger control processes (see below). As expected, on 20 March 2020, the ACCC released some initial guidance. At this stage, the ACCC:
- has cancelled non-essential meetings, and is transitioning to remote working;
- expects timelines for some reviews may need to be extended (due to difficulties in progressing market inquiries (as we flagged below));
- is not (yet) requesting parties to delay applications, but does encourage parties to consider deferring non-urgent applications;
- requests parties to update the ACCC regularly as to changes in commercial timing or the likelihood that a deal will proceed;
- foreshadows prioritising reviews if COVID-19 effects worsen; and
- anticipates receiving additional merger proposals prompted by concerns about the financial health of target firms.
Interestingly, the ACCC also moved to dispel any hope that its merger process may become accommodative during the crisis. It intends to continue to assess deals on a case-by-case basis “tak[ing] into account not only the present situation but also the longer term impact on competition of any change in the structure of markets. This assessment goes beyond the current impact of the crisis on the profits and share value of the merger parties.”
The COVID-19 pandemic is impacting merger control regimes worldwide. Competition agencies in some jurisdictions, including the European Union and the US, are no longer operating at full capacity and have implemented measures to deter or defer merger filings and reduce their workloads.
The Australian Competition and Consumer Commission (ACCC) has not yet issued any formal guidance about how it will administer Australia’s voluntary merger control regime during the crisis – for the moment it is simply ‘business as usual’. However, the ACCC is likely to find its resources stretched. For example, there may be difficulties in obtaining documents and data from merger parties and interested third parties (e.g. customers, suppliers and competitors), inefficiencies in the ACCC’s remote working arrangements, and increases in ‘failing firm’ arguments and/or merger authorisation applications. As a result, ACCC decision timeframes are likely to lengthen.
In these circumstances, unlike in many other jurisdictions, one option for Australian merger parties – particularly in time-pressured transactions – is to proceed without ACCC clearance, standing ready to respond to any ACCC investigation post-closing. However, that option will not be available where approval by the Australian Foreign Investment Review Board (FIRB), or foreign competition agencies, is also required.
Refresher on Australia’s merger control regime
Australia’s merger control regime is neither mandatory nor suspensory, in contrast to many other jurisdictions where there are market share, turnover or asset thresholds above which a merger must be notified. Parties to proposed transactions affecting Australian markets must form their own view of whether competition concerns may arise and ACCC clearance should be sought. However, if clearance is not sought, the ACCC may commence its own independent investigation and seek injunctions, penalties and divestment orders where it considers that competition is likely to be lessened.
In almost all cases where approval is sought, the ACCC’s ‘informal clearance’ process is used. Under that process, the ACCC adopts a relatively flexible approach, tuning its information requirements and timelines to suit the significance and complexity of a transaction. By contrast, the alternative and rarely used merger authorisation process is suspensory in that merger parties must give the ACCC a court-enforceable undertaking not to complete a proposed transaction while the ACCC is considering the application.
No ACCC guidance but delays are likely
The ACCC is yet to provide any public statements regarding how it will operate through the COVID-19 pandemic. However, it is currently formulating its response and we expect to hear an announcement soon.
In terms of merger control, there are at least four reasons why longer ACCC decisions timeframes might be expected.
- First, and most immediately, on the assumption that most or all ACCC staff will soon be working remotely, there are likely to be inefficiencies that reduce the rate at which the ACCC can digest merger party and interested third party submissions, analyse relevant documents and data, and make decisions.
- Second, the ACCC’s ability to engage meaningfully with the merger parties and interested third parties may be compromised, particularly if relevant documents and data are less available and/or more time-consuming to pull together.
- Third, the economic impacts of the COVID-19 pandemic will undoubtedly increase the number of insolvencies amongst Australian firms and lead to opportunistic M&A transactions that may consolidate domestic industries. Such transactions are fertile ground for ACCC clearance applications on the basis of a ‘failing firm’ argument (broadly, that argument is that, in a case where a financially challenged target would exit the relevant market anyway, its acquisition by a competitor could not be said to have an anti-competitive effect). The ACCC treats failing firm arguments very sceptically, and usually subjects them to intense scrutiny. For those reasons, clearance applications that involve a failing firm argument are generally more resource-intensive and time-consuming for the ACCC.
- Fourth, there may be an increase in merger authorisation applications to take advantage of the ability to deploy public interest arguments in that process. Briefly, the ACCC may grant a merger authorisation if it is satisfied either that a transaction would not be likely to substantially lessen competition, or that the likely public benefit from the transaction outweighs the likely public detriment (including any lessening of competition). Public benefits of a transaction in the current climate might include ensuring industry sustainability and maintaining existing levels of employment, strengthening strategically important sectors, and creating ‘national champions’ (although that concept has been largely discredited in Australian policy and practice).
Responding to ACCC clearance delays
In respect of transactions for which informal clearance would ordinarily be sought, but where confident advice can be provided that the transaction is unlikely to lessen competition, a potential option for merger parties is simply to proceed to close without ACCC clearance and avoid a COVID-19-related delay. If that approach is taken, merger parties will need to be ready to handle any independent ACCC investigation post-closing. Independent ACCC investigations are often protracted, less co-operative and more adversarial in nature and carry the ultimate threat of ACCC prosecution if it forms a different view as to the likely anti-competitive effects of the transaction. However, the downside risks of a post-closing ACCC investigation may well be outweighed by the advantages of closing sooner rather than later – particularly in circumstances where extended delays in ACCC reviews are likely and the financial position of the target demands that the parties move quickly.
Given the voluntary nature of the ACCC’s process, its expected guidance may well warn of the risks of not seeking ACCC clearance during this period. Ultimately, the decision will be a risk assessment for both parties to make and will rely heavily on competition law advice.
Interaction with FIRB approval and foreign jurisdictions
One situation in which merger parties will find themselves unable to close without ACCC approval is where the proposed transaction is subject to Australian foreign investment approval from FIRB.
FIRB reviews transactions on a case-by-case basis by applying a national interest test and, as a matter of well-established policy, it consults with the ACCC to determine whether a transaction raises competition concerns. FIRB will only approve a transaction if the ACCC has indicated that it does not object, creating a de facto ACCC clearance condition where FIRB clearance is required.
Similarly, where a transaction is multi-jurisdictional and requires mandatory approval in one or more foreign jurisdictions, there may not be any ability to complete the transaction in Australia.
This article was originally co-authored by Alistair Newton.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.