House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Chapter 1: Overview

General outline

1.1 This Bill amends the CCA to overhaul merger review in Australia. The existing framework will be replaced with a mandatory and suspensory administrative system for acquisitions, with the Commission as the first instance administrative decision-maker. Foreign acquisitions will continue to be also subject to the process under the Foreign Acquisitions and Takeovers Act 1975 (FATA).

1.2 A corporation or person that is a party to an acquisition must provide a notification to the Commission if an acquisition is a notifiable transaction, unless the Commission has determined that the acquisition does not require notification. The Commission must undertake an assessment as to whether the acquisition is likely to substantially lessen competition or result in a public benefit. In doing so the Commission must publish details of the acquisition on a public acquisitions register and engage with businesses, stakeholders and the community. The acquisition must not be put into effect unless the Commission has made a determination that it may be put into effect.

1.3 A faster, clearer, streamlined process for the review of acquisitions will enhance efficiency, predictability and transparency. It will strengthen merger control by targeting, through a risk-based system, those mergers most likely to impact Australian consumers if they are anti-competitive.

1.4 By moving to an administrative system, business will benefit from guidance and engagement with the Commission as the expert decision-maker. This will reduce uncertainty and improve predictability. The Commission will undertake an economic and legal, evidence-based assessment of notified acquisitions, improving outcomes for competition and consumers. This will deliver lower prices and improved quality and service for consumers, businesses and the wider community. Importantly, the reforms will meet community expectations that the Commission can detect and stop harmful, anti-competitive acquisitions.

Context of amendments

Australia's approach to mergers and acquisitions

1.5 Mergers and acquisitions (acquisitions) are important for building a more productive and dynamic economy. They allow businesses to achieve greater economies of scale and to access new resources, technology and expertise.

1.6 While most acquisitions are unlikely to raise competition concerns, some can harm competition, which can lead to businesses increasing prices for consumers and not passing economic gains on to consumers. Australia's merger control framework plays a crucial gatekeeper role in focusing on preventing the small number of acquisitions that could substantially lessen competition, thereby harming consumers and the wider economy.

1.7 Australia's current approach to control of mergers and acquisitions prohibits acquisitions that would have the effect, or be likely to have the effect, of substantially lessening competition, assessed through three pathways:

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informal review by the Commission;

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formal merger authorisation by the Commission; and

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Federal Court proceedings related to the acquisition.

1.8 As businesses are not legally required to notify the Commission before completing a transaction, they can also choose to proceed without seeking clearance through one of the three pathways. However, this may put the businesses at risk of the Commission subsequently investigating and taking legal action if it considers the acquisition has the effect or likely effect of substantially lessening competition.

1.9 Informal review, a process which has developed without any legislative framework, enables businesses to manage regulatory risk and seek the Commission's non-binding view on whether an acquisition is likely to substantially lessen competition.

1.10 Merger authorisation is a formal legislative process which allows the Commission, and the Tribunal on review, to provide businesses with immunity from court action under competition law for a proposed merger or acquisition if it is satisfied that it would not be likely to substantially lessen competition or that it is likely to result in a net public benefit.

1.11 Federal Court proceedings are those in which the Commission, parties to the acquisition or third parties can seek orders relating to the acquisition.

The Commission's informal review process

1.12 Instead of applying for formal authorisation from the Commission, businesses may, to manage regulatory risk, opt to seek an informal view from the Commission on whether an acquisition is likely to breach the prohibition against anti-competitive acquisitions.

1.13 Currently, most transactions are notified to the Commission via this process. Most of these transactions are confidentially informally reviewed by the Commission, which does not permit stakeholder and community engagement. A small proportion are subject to public informal review. For these transactions, the Commission maintains a public register, and has established procedures including, for example, receiving submissions from businesses, consultation with stakeholders, and issuing voluntary and compulsory information requests. However, the informal process is voluntary and not legislated, and the Commission's view is non-binding.

The Commission's formal merger authorisation powers

1.14 The Commission may grant authorisation for an acquisition following a voluntary application by the relevant corporation or persons if it is satisfied the acquisition is not likely to substantially lessen competition or if the likely public benefit arising from the transaction outweighs the likely public detriment.

1.15 A formal Commission authorisation provides businesses with immunity from court action under competition law for a proposed transaction.

1.16 The Commission may vary, revoke or substitute merger authorisations. The Commission may also specify conditions in an authorisation, including that the relevant corporate person must give, and comply with, a court enforceable undertaking.

1.17 The Commission must keep a register of applications for merger authorisations and publish the receipt of each application. The Tribunal can review the Commission's decision to grant, decline to grant, vary or revoke a merger authorisation. The Tribunal's review of the Commission's decision is not a rehearing.

1.18 The Tribunal conducts a limited merits review of the Commission's determinations. The Tribunal can substitute the Commission's determination for the correct or preferable decision. However, the Tribunal can only generally consider information that was before the Commission and new information not in existence at the time of the Commission's determination.

1.19 A person must not give the Commission or the Tribunal information that is false or misleading in connection with an application for a merger authorisation.

Federal Court's consideration of mergers and acquisitions

1.20 The Commission, the Minister, transaction parties, or third parties can seek orders from the Federal Court where there are concerns that an acquisition may contravene the law (that is, it is likely to have the effect of substantially lessening competition).

1.21 The Commission can seek:

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an injunction to restrain the acquisition prior to completion,

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divestiture post-completion,

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an order that the completed acquisition is void where the vendor is involved in a contravention of section 50 of the CCA, and

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penalties.

1.22 Upon application by the Commission, the court may also make orders to disqualify a person from managing corporations under certain circumstances, if such an order is justified.

1.23 A party may also seek a declaration in the Federal Court that an acquisition does not substantially lessen competition. Third parties may seek a declaration, divestiture or damages. In these circumstances, such relief is at the discretion of the Federal Court and the evidentiary burden of proving the case is usually on the party seeking the orders.

1.24 The Commission may also apply to the Federal Court for a range of orders if the Commission considers that the person who gave a court enforceable undertaking has breached any of its terms.

The current approach to merger control is not fit-for-purpose

1.25 On 23 August 2023, the Government announced a Competition Review to provide advice on how to improve competition across the economy, with a focus on reforms that would increase productivity, reduce the cost of living and/or lift wages. In particular, the Competition Review Taskforce was asked to consider proposals put forward by the Commission around merger reform, as well as other competition law issues.

1.26 The Competition Review Taskforce released a consultation paper on 20 November 2023 seeking views on:

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the effectiveness of Australia's current merger rules and processes to enable beneficial mergers while addressing those that could be anti-competitive, and

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options for improving Australia's merger rules and processes.

1.27 The Competition Review Taskforce consulted a diverse range of stakeholders - including the Commission, businesses, industry associations, academics, consumer groups and small business representatives. Stakeholder feedback identified shortcomings of the current approach to merger control, which are briefly outlined as follows:

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For business, some uncontentious mergers are subject to delays, uncertainty and added costs, with only limited guidance provided by the Commission.

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For the wider community, engaging with the Commission's merger reviews is often difficult and the current approach lacks transparency in some aspects.

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For the Commission, the voluntary nature of the current approach to merger review can mean it may not receive timely, upfront notifications of proposed acquisitions. This can impede its ability to detect and prevent anti-competitive mergers and acquisitions effectively and efficiently. For example, there have been instances where businesses threatened to complete a transaction before the Commission has completed its review, failed to notify (including for international cross-border mergers and acquisitions), and/or provided insufficient or inaccurate information to the Commission.

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The cost of merger control is borne by the public due to the lack of cost recovery mechanisms in a voluntary informal system.

1.28 The Commission has also raised concerns about enforcement under the current approach if there is uncertainty or difficulty predicting the future effect of an acquisition. This is because of factors such as:

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the emphasis that the courts place on having to predict the likely state of competition in the future with and without the acquisition in order to determine whether the acquisition would have or be likely to have the effect of substantially lessening competition;

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the information asymmetry between transaction parties and the Commission; and

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the reluctance of third parties to disclose relevant but confidential business information and give evidence in court.

1.29 In addition, several types of acquisitions by businesses also do not appear to be adequately captured by the current approach to merger control:

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creeping or serial acquisitions (a series of small acquisitions by businesses which individually do not result in material changes to market concentration or competitive dynamics, but over time forms part of a strategy of consolidation);

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acquisitions by incumbents of nascent competitors (acquisitions by a leading company in its industry of a firm that may potentially pose a serious competitive threat to that leading company); and

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expansions into related markets, including by digital platforms.

1.30 On 10 April 2024, taking into account stakeholder feedback, the Government announced proposed reforms to improve Australia's merger rules by introducing a mandatory and suspensory administrative merger control system. The new system will be faster, stronger, simpler, more transparent and more targeted.

Summary of new law

General

1.31 The amendments replace the current approach with a mandatory and suspensory administrative system for acquisitions.

1.32 The amendments introduce a mandatory obligation on parties to acquisitions that meet certain thresholds to notify the Commission of the proposed acquisition, unless the Commission has determined that the acquisition does not require notification, before putting it into effect. Thresholds will be determined by the Minister by legislative instrument.

1.33 Thresholds will be regularly reviewed and set with respect to evidence of the risk of potential harms to the community over time. To ensure that the system is fit for purpose as businesses evolve and minimise avoidance, the Minister will be able to determine whether certain categories of transactions should be notifiable or exempt from notification. The Commission will regularly report on the number of notifications made and provide a general description of the kinds of acquisitions notified.

1.34 To increase certainty and support efficient administration of the new system, the amendments also provide for parties to seek a notification waiver from the Commission. Upon application, the Commission will be able to determine that an acquisition is not required to be notified. The requirements for a notification waiver application are to be determined by the Minister in a legislative instrument.

1.35 The amendments provide that an acquisition must not be put into effect in circumstances including in which:

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the acquisition is required to be notified but has not been notified to the Commission;

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the acquisition has been notified to the Commission, but the Commission has not made a determination in respect of it;

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the Commission has determined it must not be put into effect;

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an application for a public benefit determination may be made, or has been made but not yet determined;

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a person may seek or has sought review by the Tribunal; or

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12 months has elapsed after the Commission made a determination in respect of the notification or public benefit application.

1.36 An acquisition, which has been put into effect, or purportedly put into effect, when it must not be, is rendered void by the amendments.

1.37 The Commission will assess notified acquisitions by applying the 'substantial lessening of competition' test. An acquisition may have the effect of substantially lessening competition in a market if it would or would be likely to have the effect of creating, strengthening or entrenching a substantial degree of power in the market. To consider whether an acquisition is likely to substantially lessen competition, also requires an assessment of the relevant markets in which the parties compete or operate affected by the acquisition, as well as adjacent markets, whether that is at a national or local level, wholly or partly in Australia.

1.38 The amendments establish a two-phased approach for the Commission's assessment of an acquisition against the 'substantial lessening of competition' test. All notified acquisitions will be considered by the Commission in an initial stage, known as Phase 1. Where no competition concerns are raised, the Commission may quickly determine that a notified acquisition can proceed.

1.39 For acquisitions that the Commission is satisfied could be likely to substantially lessen competition, the Commission may decide that the acquisition be subject to a further in-depth stage, known as Phase 2. The Commission will give parties written notice of the decision that a notification is subject to Phase 2 review. If the Commission does not give a Phase 2 notice, the notified acquisition may proceed.

1.40 To promote timely decision-making on the merits, the opportunity to seek review under the ADJR Act for the decision to commit an acquisition to a Phase 2 review has been limited. This approach balances the need for judicial oversight with the Government's objective of providing more efficient resolutions, ensuring that critical decisions are not unduly prolonged by extensive legal challenges.

1.41 During Phase 2, the Commission must issue a notice of competition concerns to the parties setting out the Commission's preliminary assessment of whether the acquisition would be likely to substantially lessen competition in any market and the grounds for that assessment.

1.42 At the end of Phase 2, the Commission must determine that an acquisition may be put into effect, with or without conditions, unless it is satisfied that the acquisition would have the effect or be likely to have the effect of substantially lessening competition.

1.43 To facilitate mergers that are of net public benefit to the community, upon application by the parties, the Commission may approve an acquisition that would, or would be likely to have the effect of substantially lessening competition if the Commission is satisfied it would be likely to result in a public benefit that outweighs the public detriment.

1.44 The amendments set out the timeframes in which the Commission must make its determination under Phase 1 and Phase 2, and for public benefit applications. Timeframes are also specified for reviews by the Tribunal of Commission decisions.

1.45 As a safeguard and to promote the integrity of the system, parties may apply for review by the Tribunal, an independent administrative decision-making body with economic, business and legal expertise, based on the material before the Commission and other certain information at the Tribunal's discretion.

1.46 It is the intention of the Government that the administration of the system operates to deliver timely decision-making. The amendments provide for this through the levels of decision-making, primarily by:

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implementing a two-phased, scaled approach to the assessment of the competition impacts of acquisitions that meet the thresholds,

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a process for considering public benefit applications, and

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providing for merits review via the Tribunal, which appropriately balances timely decision-making and the interests of parties.

1.47 The Government considers that parties to an acquisition should be able to engage with the Commission on the status of their applications on a regular and reasonable basis. Further, the Commission will issue new and updated substantive competition and public benefit guidelines, as well as new process guidelines, to inform businesses, stakeholders and the community.

1.48 The current system fundamentally relies on enforcement and court decisions for setting incentives for merger parties. An administrative system shifts the emphasis to the Commission as administrative steward to provide public guidance and meaningful engagement for merger parties and strengthens powers for identifying and stopping anti-competitive mergers. This will provide more certainty for parties to an acquisition and improved community understanding of competition concerns - and most importantly, less incentive for anti-competitive acquisitions.

1.49 Consistent with the object of the CCA, it is also the intention of Government that the Commission has the capacity to prevent acquisitions that have an anticompetitive effect on Australians irrespective of the location of the parties to the acquisitions. The Commission will have the powers to assess acquisitions that impact Australia wherever those acquisitions occur or wherever the parties are located.

1.50 To create the new system, the amendments add new Division 1A into Part IV. New Division 1A in Part IV sets out contravention provisions which are replicated in the Schedule version of Part IV, to include them as part of the Competition Code. This ensures they operate in all States and Territories of Australia.

1.51 The amendments also introduce new Part IVA into the CCA which comprises six Divisions:

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Division 1 - preliminary (see Chapter 1: Overview)

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Division 2 - acquisitions that are required to be notified (see Chapter 2: Scope of acquisition notification requirements)

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Division 3 - notification of acquisitions (see Chapter 3: Notification process and suspensory rule)

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Division 4 - Commission consideration of acquisitions: substantial lessening of competition (see Chapter 4: Substantial lessening of competition)

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Division 5 - Commission consideration of acquisitions: public benefit (see Chapter 5: Public benefit)

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Division 6 - miscellaneous (see Chapters 2, 6 and 7).

1.52 Part IX of the CCA has been amended to include Divisions 1A and 1B to provide for review by the Tribunal (see Chapter 6: Review of Decisions).

1.53 It should be noted that the Commission as an administrative decision-maker is subject to general administrative law principles that regulate government decision-making, as well as judicial review.

1.54 As a decision-maker, the Commission must afford procedural fairness. This means the Commission must give the affected parties to an acquisition the opportunity to be heard before making a decision that affects them and be impartial in its decision-making. These general rules are known as the 'hearing rule' and the 'bias rule'. A number of specific administrative law rules will apply to Commission decisions, for example decision also cannot be 'so unreasonable that no reasonable person could have so exercised the power' (section 5 of the ADJR Act). Many of the Commission's decisions will also be subject to an obligation to provide detailed reasons under section 13 of the ADJR Act.

Acquisitions provisions

1.55 Acquisitions provision under the new law means any of the following provisions and any other provision in the CCA to the extent that it relates to such a provision:

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a provision in the new Division 1A of Part IV;

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a provision in the new Part IVA;

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a provision in the new Division 1B of Part IX.

[Schedule 1, item 6, subsection 4(1) of the CCA, definition of "acquisitions provision"]

1.56 The new Division 1A of Part IV introduces several obligations and prohibitions in relation to notified acquisitions (e.g. obligation to notify, comply with conditions imposed by the Commission, etc.).

1.57 The new Part IVA introduces a mandatory and suspensory administrative system for certain acquisitions. A simplified outline of key aspects of Part IVA of the Act is included in section 51ABA of the Act.

[Schedule 1, item 35, section 51ABA]

1.58 New Divisions 1A and 1B of Part IX provide for review by the Tribunal of certain decisions made by the Commission and also sets out the process for applying for Tribunal review, the Tribunal's functions and powers and procedural matters such as time limits, and information gathering. Minor consequential changes are made to headings to reflect the insertion of Divisions 1A and 1B.

[Schedule 1, items 49 to 51 and 56, sections 100A to 100H, 100J to 100N, 100P to 100T, 111 to 113 and Part IX (heading) and Division 1 of Part IX (heading) of the CCA]

1.59 The amendments also insert other definitions relating to these provisions in the CCA or amend existing definitions to take account of the new provisions.

[Schedule 1, items 6 to 11 and 35, subsections 4(1) and 4A(5A) and section 51ABK of the CCA]

Application to persons, partnerships and trusts

Persons

1.60 The acquisitions provisions apply to acquisitions by persons due to the application of the Competition Code by the States and Territories. This extends the reach of the new merger control system beyond corporations to cover a wider range of economic actors.

Partnerships and trusts

1.61 The acquisitions provisions apply to partnerships and unit trusts subject to certain modifications.

[Schedule 1, item 35, subsections 51ABZZJ(1) and 51ABZZK(1) of the CCA]

1.62 The modifications ensure that the acquisitions provisions can effectively cover acquisitions involving partnerships and trusts structures, attributing obligations and liability in a manner that reflects their practical and economic realities.

Partnerships

1.63 The acquisitions provisions apply to partnerships as if they were persons, but with the following changes:

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obligations are imposed on each partner but may be discharged by any of the partners.

[Schedule 1, item 35, subsection 51ABZZJ(2) of the CCA]

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offences otherwise committed by the partnership are taken to be committed by each partner who did the relevant act or made the relevant omission (or aided, abetted, counselled, procured or was knowingly concerned in or party to the relevant act or omission). The same applies in relation to contraventions of civil penalty provisions.

[Schedule 1, item 35, subsections 51ABZZJ(3) and (4) of the CCA]

1.64 These provisions also provide that:

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if all the partners in a partnership are corporations, a reference to a corporation in the acquisitions provisions is taken to include the partnership; and

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a change in the composition of the partnership does not affect the continuity of the partnership.

[Schedule 1, item 35, subsections 51ABZZJ(5) and (6) of the CCA]

Unit trusts

1.65 The acquisitions provisions apply to unit trusts as if they were persons, but with the following changes:

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If the unit trust has a single trustee:

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obligations are imposed on the trustee;

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offences are taken to have been committed by the trustee; and

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a reference to a corporation in the acquisitions provisions is taken to include the trust if the trustee is a corporation.

[Schedule 1, item 35, subsection 51ABZZK(2) of the CCA]

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If the unit trust has multiple trustees:

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obligations are imposed on each trustee but may be discharged by any of the trustees;

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offences are taken to have been committed by the trustee who did the relevant act or made the relevant omission (or aided, abetted, counselled, procured or was knowingly concerned in or party to the relevant act or omission); and

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a reference to a corporation in the acquisitions provisions includes the trust if all of the trustees are corporations.

[Schedule 1, item 35, subsection 51ABZZK(3) of the CCA]

1.66 Rules that apply to offences also apply in a corresponding manner to the contravention of civil penalty provisions.

[Schedule 1, item 35, subsection 51ABZZK(4) of the CCA]

Meaning of 'party to an acquisition' and 'target'

Party to acquisitions

1.67 For the purposes of the acquisitions provisions, the new law clarifies who is considered a party to an acquisition.

1.68 A party to an acquisition is:

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the person acquiring the shares, assets, or a determined thing (referred to as the principal party); and

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a person party to a contract, arrangement, or understanding pursuant to which the acquisition takes place.

[Schedule 1, item 35, subsection 51ABI(1) of the CCA]

1.69 The term principal party is used to describe the key person involved in an acquisition, usually being the acquirer.

1.70 The law also clarifies that a reference to a party or principal party to an acquisition that has not been put into effect is a reference to a person that would be a party or principal party to the acquisition if the acquisition were put into effect.

[Schedule 1, item 35, subsection 51ABI(2) of the CCA]

1.71 The term target is:

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for an acquisition of shares in the capital of a body corporate, the body corporate;

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for an acquisition of assets of a person, the person; and

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for an acquisition of anything determined under paragraphs 51ABB(1)(c) or (f), the person or entity determined.

[Schedule 1, item 35, subsection 51ABI(3) of the CCA]