By Camille Capati, Law Graduate
Section 50 of the Competition and Consumer Act 2010 (Cth) (CCA) prohibits mergers that would ‘have the effect, or be likely to have the effect, of substantially lessening competition’ in a market. It is from this section that the Australian Competition and Consumer Commission (ACCC) gets its power to assess a proposed merger, and to consider what effect it may have on the market as a whole.
What is a merger?
A merger is a contractual agreement between organisations to form a single organisation. Depending on their size and nature, the two most common ways for not-for-profits (NFPs) to merge are by:
- One organisation transferring all its assets to the other and then dissolving; or
- Both organisations combining to form a brand new organisation, and then both the previous organisations are dissolved.
Why should NFPs consider mergers?
There has been discussion recently on the need for more NFP organisations to merge as commentary suggests that there are too many NFPs in Australia that provide identical services and/or lack the scale needed to be considered efficient. This is supported by the Commonwealth and State governments encouraging NFPs to either collaborate or merge.
Some benefits for NFPs in merging are that it may allow them to:
- Better meet their mission;
- Broaden their range of services to existing users;
- Develop or maintain market share;
- Improve efficiency;
- Increase the number of people that they serve; and
- Become more financially stable.
Competition and Consumer Act 2010 (Cth)
Since the CCA focuses on the conduct an entity engages in, rather than the type of entity it may be (whether for-profit or not), its provisions are applicable to an NFP to the extent it engages in ‘trade or commerce’. This could include where the NFP engages in fundraising activities involving the supply of goods and services, or fundraising in an organised, continuous and repetitive way, within the context of trade or commerce.
Australian Competition and Consumer Commission
Currently there is no legislative requirement for merger parties to notify the ACCC of a proposed merger, and as such these parties would have the ability to proceed with the merger without seeking any regulatory consideration. However, it is important to remember that the ACCC still has the power to investigate the merger and, if necessary, take legal action.
In some circumstances, it is recommended that merger parties within the NFP sector consider approaching the ACCC once there is a real likelihood that a proposed merger may occur, if the merger is reasonably likely to substantially lessen competition.
Matters to be taken in account when evaluating the level of impact upon competition
Sub-section 50(3) of the CCA lists various matters to be considered when determining whether a merger is likely to substantially lessen market competition, including:
- the actual and potential level of import competition in the market;
- the level of concentration in the market;
- the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margin;
- the extent to which substitutes are available in the market or are likely to be available in the market; and
- the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor.
Available avenues for merger review by the ACCC
Merger parties have two avenues available to them to have mergers considered and assessed by the ACCC on competition grounds:
- Informal merger review; and
- Merger authorisation.
Informal merger review
This process enables merger parties to seek the ACCC’s view on whether the proposed merger is likely to have the effect of substantially lessening competition. The ACCC assesses the merger on an informal basis applying a substantial lessening of competition test.
It is important to note that an informal view made by the ACCC to not oppose a merger does not provide the merger parties with protection from legal action by the ACCC or other third parties. The informal review process acts as a guide for merger parties to see whether the ACCC would seek an injunction under section 50 of the CCA to stop a merger from proceeding.
If the ACCC forms the view that a proposed merger is likely to contravene section 50 of the CCA, the merger parties may decide to:
- Not proceed with the merger;
- Provide a court enforceable undertaking to address the ACCC’s concerns;
- Apply to the ACCC for merger authorisation; or
- Proceed with and defend a court action under section 50.
Merger parties may seek statutory protection from legal action under section 50 of the CCA by lodging an application for merger authorisation. Whilst the merger authorisation is in force, the authorised parties will be able to acquire the relevant assets without risk of the ACCC or third parties taking legal action for a contravention of section 50 of the CCA. It should be noted that merger authorisation cannot be granted to applications that have already been completed.
The ACCC may not grant authorisation unless it is satisfied that either:
- The proposed merger would not be likely to substantially lessen competition; or
- The likely public benefit from the proposed merger outweighs the likely public detriment, including the lessening of competition.
The ACCC cannot oppose a merger that reduces competition unless the effect is substantial. It also cannot oppose a merger for reasons that are not competition related, for example, community preference or national interest considerations.
If the ACCC considers a merger is likely to substantially lessen competition and the parties still intend to proceed, the ACCC can apply to the Federal Court for an injunction to prevent the merger from proceeding. If the merger has already occurred, the ACCC can apply for penalties to be applied or an order that the newly-merged organisation be divested. The onus is on the ACCC to prove to the Court that the acquisition is likely to substantially lessen competition.
What are the risks?
Merger parties should be aware that some actions they take in anticipation of their transaction completing can expose them to legal action for ‘gun-jumping’. This term is used when merger parties start coordinating their activities or behaving as one entity instead of as competitors during the period before a merger is completed. This type of conduct will be at risk of being defined as cartel or as anti-competitive conduct.
Proceeding without regulatory approval may put merger parties at risk of the ACCC or other interested parties taking legal action on the basis that the merger would have the effect, or be likely to have the effect, of substantially lessening competition in one or more substantial markets in contravention of section 50.
In summary, it is important for NFP organisations to consider the implications of merging. In some instances, it may be best to err on the side of caution and approach the ACCC as soon as there is a real likelihood of a proposed merger that may involve substantial lessening of competition.