Obtaining Australian merger and acquisition clearances in 2012


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An overview of the current issues and methodology for obtaining a merger and acquisition clearance from the Australian Competition and Consumer Commission in Australia.

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Obtaining Australian merger and acquisition clearances in 2012

  1. 1. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIESObtaining M&A clearances in 2012: TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCESAdopting an ACCC strategy and other practical issuesDr Martyn TaylorPartnerAugust 2012 © Norton Rose Australia
  2. 2. Overview 1. When do competition issues arise in M&A ? 2. The nature and role of the ACCC Dr Martyn Taylor 3. Obtaining regulatory comfort Partner +61 2 9330 8056 martyn.taylor@nortonrose.com 4. Merger guidelines and analysis 5. Strategy for mergers with significant competition issues2 Obtaining M&A clearances in 2012
  3. 3. When do competition issues arise in M&A ?
  4. 4. Pre-contractual phaseSCOPING 1. Ensure any exclusivity is reasonable and proportionate.• Exclusivity agreement 2. Do not allow competitors to share or discuss price sensitive information (includes structures, discounts, rebates, credits).• Confidentiality agreement 3. Identify if an ACCC clearance is likely to be required.• Negotiation records 4. If the merger will raise significant ACCC issues, take early• Term sheets steps to educate deal team and maintain legal privilege. 1. Expressly include ACCC clearance conditionality: somePREPARATION types of options are still treated as acquisitions of an equitable interest by Competition & Consumer Act 2010.• Heads of agreement 2. Competitors must remain at arms length until deal is• Due diligence completed with no co-ordination of activities or sharing of competitive information. Likewise with vertical supply.• Acquisition finance 3. Norton Rose has a precedent titled “Protocol for Accessing• Document negotiation Information Pre-completion” (#13360652).4 Obtaining M&A clearances in 2012
  5. 5. Due diligence1. Any unidentified contraventions of the Competition & Consumer Act ? • any co-ordination between competitors, particularly pricing, bidding, supply or customers • joint ventures in respect of joint marketing only, with no joint production or supply • long-term contracts covering a large proportion of market output • key facilities to which competitors are being denied access, notwithstanding requests • third line forcing (force to buy from others) or resale price maintenance (specify resale price)2. Any identified contraventions of the Act, litigation or compliance concerns ? • any mentions of correspondence with the ACCC • any current or historical ACCC investigations or litigation in which target has been involved • check for existence of a compliance programme or evidence of compliance training3. Any historic undertakings given to the ACCC (or conditional authorisations received from ACCC) that may restrict business activities ?5 Obtaining M&A clearances in 2012
  6. 6. Competition advice Policy mischief: • Firms with substantial market power (SMP) can raise prices and reduce output to extract value from consumers. • Firms can achieve SMP by acquiring their competitors (or by Statutory elements: vertically integrating across markets). 1. Acquisition of shares or assets Section 50 of the Competition & Consumer Act 2010 (Cth): 2. Actual or likely effect on • A corporation/person must not directly or indirectly acquire: an Australian market • shares in the capital of a body corporate/corporation; or: 3. Substantial lessening of • any assets of any corporation/person, competition in market • if the acquisition would: • have the effect; or CCA does regulate • be likely to have the effect, offshore acquisitions in some circumstances. • of substantially lessening competition in a market.6 Obtaining M&A clearances in 2012
  7. 7. Implementation Method of acquisition Key consequence if competition issues arise Private treaty (e.g., asset An ACCC clearance condition should be included as a condition sale; or share sale for precedent in the share or asset sale and purchase agreement. unlisted coy ≤ 50 members) Off-market (friendly) An ACCC clearance condition should be included in the bidder‟s takeover bid statement as a defeating condition of the takeover bid. Off-market hostile takeover As above, but a strategy will also be required to manage the risk of bid the target company adversely lobbying ACCC and raising concerns. Market (takeover) bid Conditions are not permitted, hence any ACCC clearance must be obtained before an on-market takeover bid is made. Scheme of arrangement An ACCC clearance condition should be included in the scheme of arrangement as a defeating condition. 19% then „creep‟ at 3% Analysis required to determine when an ACCC clearance is every 6 months required. Potential to be converted to market bid (see above). Not a substantial The low voting shareholding is unlikely to raise any concerns, but shareholder (<5% voting s50 does not have shareholding thresholds (rather whether a interest) competition issue arises is determined on the facts). NB. The ACCC clearance condition may need to contemplate alternative strategies to obtain regulatory comfort for more complex mergers, or the parties may waive the ACCC clearance condition if successful with an alternative strategy.7 Obtaining M&A clearances in 2012
  8. 8. M&A in joint ventures• Joint ventures will be caught under the merger provisions of the CCA where they involve the acquisition of shares or assets, eg: JV co-ordination arrangements need to • assets may be acquired by an incorporated JV entity; be carefully structured given the risk of criminal liability for a • joint venturer in an unincorporated JV may take a contravention of the participating interest (as tenant in common) in assets. cartel provisions.• Other provisions of the CCA will also normally need to be This requires, for considered in relation to JVs, including: example, that relevant JV provisions are in a • cartel provisions and exclusionary provisions (e.g., joint contract and for the pricing, joint marketing, joint supply/acquisition, co- purpose of a supply or ordination of output); production JV. • various defences that are available for JVs; and The provisions must not have the likely • provisions dealing with anti-competitive arrangements. effect of substantially lessening competition.8 Obtaining M&A clearances in 2012
  9. 9. Restraints of trade in S&P contracts• Two issues with restraints in sale and purchase (S&P) contracts: • must fall within exemption in Competition & Consumer Act (CCA); and • must comply with common law doctrine of restraint of trade.• CCA, s51(2)(e) - “In determining whether a contravention of a provision of this Part… has been committed, regard shall not be had…in the case of a contract for the sale of a business or of shares…to any provision of that contract that is solely for the protection of the purchaser in respect of Example of restraint: the goodwill of the business”. Vendor agrees not to• Common law doctrine, in effect, requires restraints to be reasonable and compete with proportionate to their purpose. Requires some thought as to appropriate Purchaser for a period of 3 years breadth of the restraint to protect the goodwill of the business (e.g., what is throughout Australia area of competition, geographic extent, appropriate duration). in markets X, Y, Z.• Ladder and severability clauses are frequently included where the breadth Is this reasonable to of the restraint could be unreasonable under common law doctrine. protect the goodwill of the business• NOTE: Clauses that involved protections to persons other than the being acquired ? purchaser (e.g., related body corporate) are not within the CCA exemption. 9 Obtaining M&A clearances in 2012
  10. 10. The nature and role of the ACCC
  11. 11. What is the ACCC’s role ? • Australian Competition & Consumer Commission (ACCC) is responsible for the administration of the Act, including section 50. • The ACCC receives information from a variety of sources and determines if a particular merger gives rise to competition concerns. • If concerns are identified, the ACCC notifies the parties of those concerns and alerts them to the risk of contravening the Act. • If the parties proceed with a merger that is opposed by the ACCC, the ACCC can obtain an interlocutory injunction to block the merger. • Most mergers are time sensitive, hence an injunction is normally sufficient to scuttle the merger. • The ACCC does not need to give any undertaking as to damages and can obtain an injunction relatively easily based on the balance of convenience. • The ACCC prefers not to allow a merger to proceed and then seek divestiture, given „unscrambling the omelette‟ following a merger.11 Obtaining M&A clearances in 2012
  12. 12. ACCC investigative powers• Possible breaches of competition law come to the ACCC‟s attention through complaints and information from members of the public, the media, ACCC staff and other agencies.• ACCC‟s Infocentre provides the initial response for all inquiries and complaints. In 2011, it received 145,000 calls, 42,000 emails and 2,200 letters. Most of these were retail and consumer oriented.• If a matter is sufficiently serious, the case is referred to the relevant ACCC staff for investigation.• The ACCC staff have formal powers under section 155 of the Act to: • require persons to answer written questions and provide documents (e.g., emails, board papers); and • require persons to appear and provide evidence.• In the last financial year, the ACCC issued around 270 of these „section 155‟ notices. The compliance burden for recipients can be very substantial indeed, including identifying any privileged documents.12 Obtaining M&A clearances in 2012
  13. 13. ACCC enforcement powers• ACCC may take enforcement action in the Federal Court as a plaintiff in civil jurisdiction: – The ACCC applies its compliance and enforcement policy when decision-making. – Criminal prosecutions are undertaken by the Director of Public Prosecutions• Statutory remedies: – In a merger context, injunctions (but also divestiture and pecuniary penalties) – Pecuniary penalties can apply to firms and individuals per contravention – Firms: greater of up to $10 million, or 3 times benefit (or 10% of group turnover) – Individuals: up to $500,000 per contravention – Disqualification orders against officers and directors – Imprisonment for up to 10 yrs for individuals engaging in cartel conduct (not mergers) – Provisions of contracts may be unenforceable• Other concerns – Costs of an ACCC investigation can be substantial (eg section 155 notices). – Distraction of senior management, cost of litigation and damage to reputation. – Private and class actions by injured parties for damages or other remedies. – Forfeiture of proceeds from criminal conduct under Proceeds of Crime Act.13 Obtaining M&A clearances in 2012
  14. 14. How does the ACCC operate ? • The ACCC comprises an independent statutory Commission of six Commission Members and four Associate Members. Full Commission • ACCC decisions are made through formal Commission meetings. Only the Commission may decide to approve or oppose a merger or commence legal proceedings. Mergers Committee • The Commission has a Mergers Committee comprising at least two Members that have delegated powers to make most merger decisions on behalf of the full Commission. Staff Mergers & • The Commission is supported by around 800 staff structured into a Adjudication number of Divisions and Groups. Group • The staff of the Mergers and Adjudication Group are responsible for investigating mergers and making recommendations to the Mergers Committee via a „staff paper‟. A „staff paper‟ is confidential but can • Merger decisions are referred by the Mergers Committee to the full sometimes be obtained Commission where they are opposed, the matter is complex, there via an FOI or in is high public scrutiny, or if there are special circumstances. litigation discovery.14 Obtaining M&A clearances in 2012
  15. 15. Voluntary pre-notification • Notifying a merger to the ACCC is voluntary in Australia, although most countries operate mandatory pre-notification regimes. • ACCC expects to be notified in any of the following circumstances: An Australian market share of 20% is the • merger would result in the Acquirer achieving an Australian „notification threshold‟, market share, by any measure, of 20% or more; but ultimately whether to notify is a matter of • merger would result in a substantial conglomerate effect; judgement. • merger would result in significant increase in vertical integration; • complaints to the ACCC by third parties are likely; or • ACCC has previously notified the parties, or the industry generally, that the ACCC expects to be notified. • All Foreign Investment Review Board (FIRB) submissions are automatically notified to the ACCC by FIRB. • The ACCC may also self-initiate a review if it becomes aware of a merger that is likely to raise concerns.15 Obtaining M&A clearances in 2012
  16. 16. How many M&A transactions raise concerns? Mergers reviewed in 2010-11 62% No concerns or need for public review 29% Unconditionally cleared after public review Withdrawn Allowed to proceed with undertakings Confidentially opposed Publicly opposed (including Metcash) 4% 3% 1% 1% Of the 377 mergers considered for compliance by the ACCC in 2010-11, only 3 were publicly opposed.16 Obtaining M&A clearances in 2012
  17. 17. Pragmatic and commercial focusIn 2011, the ACCC lost a Full Federal Court decision in which Metcash sought tooverturn the ACCC‟s opposition to its acquisition of Franklins supermarkets: • The practical outcome is that the Court expects any competition analysis to be more pragmatic and commercially focussed. • The Federal Court confirmed that economic theory must be linked to commercial reality. Any competition analysis must apply theory in light of actual market circumstances as supported by objective evidence. • The ACCC subsequently issued a press release to confirm it would undertake competition analysis based on commercially relevant facts, assessments and evidence and not speculative possibilities.A pragmatic and commercially focussed approach is fact intensive: • We anticipate a greater focus on ACCC information gathering to support any future competition analysis. • The ACCC may issue more statutory „s155‟ notices to compel the disclosure of information. • The ACCC could encourage third parties to substantiate their submissions during the ACCC „market inquiry‟ consultation processes so that the ACCC has cogent evidence of anti-competitive effects. 17 Obtaining M&A clearances in 2012
  18. 18. Change in approach at the ACCC• Graeme Samuel ended his 8 year tenure as Chairman of the ACCC and was replaced by Rod Sims around a year ago: • Rod Sims expects the ACCC to be strategic, not reactive. • Rod Sims will continue to give priority to those areas that have the greatest potential for consumer detriment or where market structures need most support. Rod Sims, ACCC Chairman • Rod Sims believes the ACCC should litigate more frequently. He is prepared to take action even if the law is unclear and success is not assured, suggesting a tougher enforcement approach.• Following the recent Metcash decision, the ACCC will test the commercial veracity of its competition theories to a higher degree.• Commentators have speculated that the ACCC under Rod Sims may be more pragmatic and commercially nuanced in its analysis of competition issues. Graeme Samuel has responded that the ACCC was already pragmatic and commercial nuanced during his tenure. 18 Obtaining M&A clearances in 2012
  19. 19. Obtaining regulatory comfort
  20. 20. Different strategies to obtain regulatory comfortThe Acquirer in a merger has a number of potential merger strategies: Almost all mergers notified to the ACCC1. „Do nothing‟ and proceed with the merger, normally only where there involve either a are no competition concerns. courtesy notification or a request for informal clearance.2. Courtesy notification / pre-assessment, typically a letter to the ACCC explaining merger and identifying there is no section 50 issue. The formal3. Informal clearance, normally where the ACCC expects to be notified clearance process or there are any material competition issues. has never been used given its inflexibility.4. Formal clearance, involving a statutory merger review procedure Declaratory relief with appeal rights, granting statutory immunity. was sought by AGL when acquiring an5. Authorisation, involving a request for statutory immunity from the interest in the Loy Tribunal on the basis that there are net public benefits. Yang power station.6. Declaratory relief, involving an application for a court declaration to During litigation, an the effect that there is no contravention of section 50. undertaking would be given not to complete7. Force an injunction, by threatening to proceed with a merger that is to avoid a opposed by the ACCC and then contesting the injunction in court. contravention.20 Obtaining M&A clearances in 2012
  21. 21. Informal clearance• If clearance is granted, Acquirer obtains a non-binding “letter of Three types of reviews: comfort” (i.e., representation) that ACCC will not oppose acquisition but reserves the right to do so should new information come to light Confidential review takes 2-4 weeks, results• Santos – Sagasco (1992) only instance where ACCC resiled on letter. in a highly qualified view. Becomes a basic review• Informal clearance provides significant procedural flexibility: once the merger enters the public domain. • The procedure is documented in the ACCC‟s Merger Review Process Guidelines but has no formal statutory basis Basic review takes 2-6 weeks, results in a letter of comfort or a • Application involves Acquirer providing the ACCC with a detailed written submission. Vendor normally comments on the draft. statement of issues. • For more difficult submissions, executives of Acquirer and Vendor and Comprehensive review their lawyers may meet with the ACCC to answer questions. takes as long as is necessary and may • If ACCC has concerns, greater scope for parties to make involve negotiation of submissions and negotiate undertakings to resolve concerns. undertakings, but results in a letter of comfort or • No appeal rights from ACCC‟s decision, so a non-complex an expression of ACCC decision is normally swift and is final. opposition to merger. 21 Obtaining M&A clearances in 2012
  22. 22. Informal clearance - procedural guidelines Stage 1 Public informal Confidential informal clearance application clearance application submitted submittedConfidentialreview Decision not to No concerns ACCC staff initial ACCC staff provide oppose and informal competition an clearance granted assessment indicative, confidenti al view Concerns No concerns Basic Mergers Committee Staff paper review Market inquiries and or full Commission public consultation Once merger is public, ACCC decision commences market inquiries Stage 2 Concerns Further market Statement of issues inquiries and Comprehensive published on ACCC negotiation of any review website undertakings Staff paper Decision not to No concerns Concerns Decision to oppose Full Commission oppose and informal and informal decision clearance granted clearance not granted 22 Obtaining M&A clearances in 2012
  23. 23. Formal clearance • Historically, concerns expressed regarding absence of accountability in informal clearances, particularly insufficient ACCC transparency. • From 2007, a „formal clearance‟ process was introduced into CCA: • Formal clearance results in statutory immunity for the Acquirer as long as the merger occurs within the scope of the clearance. • ACCC has a statutory time frame of 40 days to make a decision, although can extend this by agreement (which would normally be given by Acquirer given alternative is a deemed ACCC refusal). • Decision of ACCC may be appealed to Australian Competition Tribunal: • Only the Acquirer can appeal to the Tribunal. No fresh evidence may be submitted. Review is conducted on the papers. • Tribunal must make decision within 30 days, extendable to 60 days • In the meantime, the ACCC increased the transparency of the informal clearance procedure, hence formal clearance has never used to date.23 Obtaining M&A clearances in 2012
  24. 24. Why has formal clearance never been used?• Formal clearance is not currently favoured for various reasons: Generally, formal clearance has not yet 1. ACCC has addressed most concerns with informal clearance. been used because the ACCC has made 2. Acquirer must submit very detailed prescribed information, beyond changes to ensure that normally required at the start of an informal clearance process. the informal clearance procedure 3. Technically, a reversal of onus of proof if matter proceeds to litigation is more effective. (although still burden of persuading ACCC in informal clearances). 4. Acquirer must undertake not to complete merger until ACCC makes its decision, although this can also occur in the informal process. 5. If Acquirer wishes to amend its application, it must withdraw and If Acquirer considers resubmit, hence less scope to negotiate undertakings with ACCC. it will receive a better outcome from the• However, formal clearance may be appropriate: Tribunal, another option is public • (in practice) Acquirer believes it may receive more favourable benefit authorisation as this bypasses outcome from Tribunal than ACCC (and no scope for authorisation); ACCC entirely (see next slide). • (in theory) risk of competitor action requires statutory immunity. . 24 Obtaining M&A clearances in 2012
  25. 25. Authorisation, if net public benefit• Authorisation results in statutory immunity for the Acquirer as long as the New streamlined merger occurs within the scope of the authorisation: procedure introduced to address concerns• Application is made directly to the Australian Competition Tribunal. regarding significant delays and a lack of• Authorisation granted if net public benefit, so Tribunal considers wider success. public benefits that may outweigh any competition concerns: However, new • “anything of value to the community generally”, including the procedure has not achievement of economic goals of efficiency and progress; yet been used as it still involves some • increase in value of exports or import substitution; procedural rigidity. • international competitiveness of Australian industry; Tribunal must seek a • economic concept of increases in productive and dynamic efficiency report from ACCC. (which outweigh any loss of allocative efficiency) ACCC may make • cost savings to a firm may still be regarded as a public benefit, even submissions to the though they only ultimately benefit a firm‟s shareholders. Tribunal and may examine witnesses.• Tribunal must make decision within 3 months, extendable to 6 months. Tribunal decision remains subject to ADJR.25 Obtaining M&A clearances in 2012
  26. 26. Contest any ACCC injunction (Metcash)Metcash sought to acquire the Franklins supermarket business in NSW.Following unsuccessful informal clearance and ACCC statement ofopposition, Metcash announced it would proceed with merger regardless: • Statement was intended to cause ACCC to seek an interlocutory injunction, hence ensuring the matter was heard in the Federal Court. • Metcash subsequently indicated it would not proceed until the matter was resolved by the court. This mitigated the risk of Metcash being held in contravention of the Act and facing substantial penalties. The Metcash decision • ACCC initiated proceedings against Metcash seeking an injunction. involved the most significant merger • The ACCC and Metcash obtained an accelerated hearing. The ACCC review litigation since lost in the trial court. Metcash proceeded with the acquisition. 2003 and involved a rare opportunity to • ACCC appealed the decision to the Full Federal Court, but was not obtain Federal Court successful. (If it had been successful, it may have sought divestiture). guidance on the ACCC‟s approach toThe Metcash strategy ensures that the issues are determined by the merger review.Federal Court, rather than the ACCC or the Australian Competition Tribunal. 26 Obtaining M&A clearances in 2012
  27. 27. Declaratory relief, if no injunction (Loy Yang)AGL sought to acquire interest in the Loy Yang power station:• ACCC opposed the acquisition following an unsuccessful informal clearance application. ACCC threatened to seek divestiture if the acquisition proceeded.• AGL used the threat of divestiture as a basis for seeking declaratory relief that there was no contravention.AGL had the burden of proof in evidencing no contravention:• AGL needed to establish, on balance of probability, that the acquisition would not be likely to have the effect of substantially lessening competition in relevant markets.• AGL needed to negative the existence of any real chance of a commercially relevant or meaningful lessening of competition flowing from the acquisition. 27 Obtaining M&A clearances in 2012
  28. 28. Where does this leave us ? Procedure When should the procedure be used ? No approach to No material competition issues ACCC Courtesy No material competition issues, but FIRB clearance or likelihood of notification attracting ACCC pre-assessment attention. Formal clearance Third parties may litigate hence need immunity; or Tribunal may give better outcome than ACCC (on appeal), but no net public benefit sufficient for an authorisation Authorisation Net public benefit which outweighs any competitive detriment Declaratory relief ACCC opposes, but does not injunct and instead threatens (Loy Yang route) divesture if the acquisition is completed. Contest injunction ACCC opposes and indicates it will injunct any acquisition. (Metcash route) Informal clearance All other circumstances, particularly where undertakings may need to be negotiated with ACCC or issues worked through.28 Obtaining M&A clearances in 2012
  29. 29. Merger guidelines and analysis
  30. 30. ACCC’s merger guidelines Merger guidelines identify how the law will be applied to the facts: • Merger analysis is highly complex and involves a particular methodology as well as theories of competitive harm. • Merger guidelines provide transparency in the ACCC‟s analysis and assists parties to identify any competition issues. Methodology for merger analysis: 1. Identify the relevant markets and any competitive overlap. 2. Identify the theory of competitive harm and the key issues. 3. Apply the statutory factors. 4. Identify any other relevant factors. Merger analysis is not intended to be a „tick 5. Undertake a forward-looking comparison of the factual (with the the box‟ exercise: the merger) and the counterfactual (without the merger) to determine analysis is complex if any lessening of competition is substantial. and highly fact specific.30 Obtaining M&A clearances in 2012
  31. 31. Porter ‘5 Forces Model’ (1979)Competition analysis involves atwo stage process to simplify acomplex analysis involving manyvariables.First, a market is defined toidentify key competitors with theSupplier and the field ofimmediate competitive rivalry.Second, the market is used toidentify the sources of potentialcompetition and additionalconstraints on the market powerof the Supplier.Merger analysis essentiallyfollows this general approach..31 Obtaining M&A clearances in 2012
  32. 32. Market definition• First stage in merger analysis is to define the markets and identify any competitive overlap between the Acquirer and Target businesses. Heineken • Not intended to be „hard and fast‟, rather intended as a tool to assist analysis of sources of market power. Premium beer • Four dimensions: product, functional, geographic, temporal (PFGT) Beer • Smallest PFGT area within which monopolist could profitably sustain a small but significant (5%) non-transitory increase in price (SSNIP). Alcoholic beverages • Most important consideration is product substitutability. Products Beverages that are substitutes are in the same market. • Substitutability can also be applied to determine the geographic and functional boundaries, for example • good in Sydney not easily be substituted for a good in Perth; • crate of apples sold at wholesale cannot be easily substituted for single apple sold at retail (although other factors also used to determine functional markets, such as vertical efficiencies). 32 Obtaining M&A clearances in 2012
  33. 33. Theories of competitive harm • ACCC classifies type of merger based on whether it is horizontal, vertical or conglomerate. • Merger Guidelines identify the particular concerns and factors to be considered when analysing each of these different types of mergers. • ACCC analyses each merger type with regard to unilateral and co-ordinated effects.. Additional factors relevant to unilateral effects Horizontal mergers Horizontal Significance of the merger parties to competition focus on the removal mergers Closeness of the merger parties competitive overlap. Rival‟s responses Vertical mergers focus Vertical Incentive and ability to foreclose on issues of vertical mergers Likely effect of any foreclosure foreclosure. Access to commercially sensitive information Barriers to entry at all levels of vertical supply chain Conglomerate mergers focus on bundling and Conglomerate Bundling and tying of products mergers tying issues. Formerly separate markets becoming single market33 Obtaining M&A clearances in 2012
  34. 34. Statutory criteria• In order to determine the effect of a merger, the ACCC applies statutory factors to identify the levels of market power of the parties: 1. the actual and potential level of import competition in the market; Identifies ease of market entry by 2. the height of barriers to entry to the market; potential competitors 3. the level of concentration in the market (see next slide); 4. the likelihood that the acquisition would result in acquirer being able Identifies actual level to significantly and sustainably increase prices or profit margins; of competitive rivalry within and between 5. the extent to which substitutes are available in the market or are the relevant markets likely to be available in the market; 6. the dynamic characteristics of the market, including growth, Identifies market innovation and product differentiation; changes over time 7. the likelihood that the acquisition would result in the removal from Identifies unique the market of a vigorous and effective competitor; and features of target 8. the nature and extent of vertical integration in the market. 34 Obtaining M&A clearances in 2012
  35. 35. Market concentration (HHI Index) Herfindahl-Hirschman Index (“HHI”): Entity Share Square A 50% 2500 • Sum of the squares of the market shares. B 30% 900 • Market shares may be calculated by reference to C 20% 400 capacity, sales volumes and/or sales values Pre-merger HHI 3600 ACCC unlikely to have horizontal competition concerns if: Entity Share Square A 50% 2500 • post-merger HHI is < 2000; or B+C 50% 2500 • post-merger HHI is ≥ 2000 with a delta < 100 Post-merger HHI 5000 Post-merger HHI 5000 HHI is consistent with approach used in US and EU. Pre-merger HHI -3600 Not determinative of ACCC‟s view, just one of many factors HHI delta 140035 Obtaining M&A clearances in 2012
  36. 36. Future with and without testTo determine whether a merger would substantially lessen competition, a„future with and without test‟ is adopted. • Future with merger is contrasted against the future without merger. • Question asked whether any lessening in competition is „substantial‟.Complications with the counterfactual: • The „without‟ aspect requires identification of the counterfactual, namely what would occur in the future if the merger did not happen. • Inherent difficulty in predicting future events, hence necessarily based on extrapolation of current market situation. • ACCC would look at evidence as to what the parties intended to do. • In most cases, the counterfactual will involve a continuation of the status quo. Significant complications will arise where the status quo will change and there are number of different possible future permutations (e.g., competitive bidding situation, such as Metcash). 36 Obtaining M&A clearances in 2012
  37. 37. Strategy for mergers with significantcompetition issues
  38. 38. Use of economists - ‘dirty’ and ‘clean’• If the acquisition raises complex competition issues (or if it is clear that the ACCC will not be easily persuaded), it is common for the legal team to engage the assistance of economists.• Generally, an economist that has assisted in the preparation of submissions would normally be regarded as a „dirty‟ expert: • If the matter proceeded to litigation, they would not be called as expert witnesses given they would have difficulties presenting evidence as an independent expert.• An economist that provides an independent report to support an application would normally be regarded as a „clean‟ expert: • If the matter proceeded to litigation, they could be called as an expert witness to provide independent evidence.• When engaging an economist, it is important to determine whether or not they will be treated as „dirty‟ or „clean‟, as only the former should be permitted to assist with preparation of submissions. 38 Obtaining M&A clearances in 2012
  39. 39. Market inquiry process and spoiling tactics• The ACCC will not normally make a public decision in a merger clearance until it has undertaken public consultation (known as “market inquiries”) . • Generally, the ACCC will identify all key persons affected by the merger and write to them seeking their input. Normally, the request for input comprises a letter with questions in an annexure. • A response is voluntary, but normally parties respond to maintain amicable relations with the ACCC (and given the potential for a s155 notice if the ACCC needs the information). • Persons opposed to a merger may make submissions against it. The most effective submissions are substantiated with evidence.• Where information sought by the ACCC is confidential to third parties and No! protected by contractual obligations, it is possible for a party to solicit a „friendly‟ s155 notice to mandate information disclosure to the ACCC.• In a hostile takeover context, lobbying of the ACCC may be an important aspect of a merger defence. Part of that lobbying can include agitating third parties to make adverse submissions during market inquiries. 39 Obtaining M&A clearances in 2012
  40. 40. Negotiation of section 87B undertakings• ACCC may decide not to oppose the merger on the condition that the parties comply with court-enforceable undertakings. • Undertakings are voluntary and typically involve restructuring the acquisition to address ACCC competition concerns. • ACCC favours structural solutions (such as divestiture of assets) rather than behavioural undertakings (such as price and service guarantees), as the latter can be inflexible and difficult to monitor. • ACCC will consider the effectiveness of the remedy, how difficult it will be to administer, the ability of the firm to deliver the required outcomes, and monitoring and compliance costs. • ACCC normally undertakes market inquiries on undertakings.• Section 87B undertakings are public. They may be enforced in court by the ACCC, including via compliance orders and damages.• ACCC favours divestment before or at completion, or independent manager or administrator must be appointed for „hold separate‟ period. 40 Obtaining M&A clearances in 2012
  41. 41. Hypothetical and questions
  42. 42. Hypothetical example Example Origin Energy Limited (ASX:ORG) makes an off-market hostile takeover bid for 100% of the shares in Santos Limited (ASX:STO), conditional on ACCC clearance or authorisation. Issues 1. What is the business rationale for the acquisition ? 2. What are the relevant markets and areas of actual or potential competitive overlap ? 3. What is the likely impact of the acquisition on competition in each market ? 4. Do market concentration, or other vertical, horizontal or conglomerate competition issues, arise such that informal or formal clearance should be sought from the ACCC ? 5. If so, when and how should the ACCC be approached, given confidentiality issues and ASX takeover processes? 6. Can undertakings be offered to the ACCC to address any adverse issues and secure a regulatory clearance ? 7. How will likely spoling tactics be addressed during market inquiries? 8. If clearance by the ACCC is unlikely, should an authorisation be sought and, if so, what public benefits arise ?42 Obtaining M&A clearances in 2012
  43. 43. Questions?43 Obtaining M&A clearances in 2012
  44. 44. Our international practiceDisclaimerThe purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Norton Rose LLP, Norton Rose Australia or Norton RoseOR LLP on the points of law discussed. No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual isdescribed as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to a partner or director is to a member, employee or consultant with equivalentstanding and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose OR LLP or Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates. 44 Obtaining M&A clearances in 2012