Why the government’s merger law shake-up gets a tick from me

The government’s merger reforms – as announced on Wednesday by Treasurer Jim Chalmers – herald a significant shake-up for competition policy in Australia. Once implemented, they will deliver direct benefit to consumers, small business, farmers and even big business itself (although it will deny it).

The reforms will strengthen merger law and compel it to operate more efficiently and less legalistically. They will be implemented at a time when there is increasing evidence of the damaging impact of reduced competition in Australia.

Treasurer Jim Chalmers with ACCC Chair Gina Cass-Gottlieb.Credit: Dominic Lorrimer

The key change is to move merger decision-making from the courts to the Australian Competition and Consumer Commission. This will mean more economics and less legalism. As a safeguard, however, there will be a right of appeal to the Australian Competition Tribunal, which is headed by a judge and includes members from the business community and economists. Historically, the tribunal has not hesitated to overturn commission decisions, as it did recently in the ANZ/Suncorp merger.

The introduction of compulsory pre-notification of big mergers is a no-brainer. Nearly every other OECD country has this. Australia’s an outlier. The combination of ACCC decisions, compulsory notification, and some other proposed procedural reforms will lead to better and quicker processes.

The test relating to which mergers should be rejected has been significantly improved. The current law requires the ACCC to prove in a court of law that the merger would substantially lessen competition.

Courts are good at deciding what has happened in the past; say a crime. However, they struggle with attempts to prove future economic outcomes of complex mergers. Moreover, the current legal interpretation of the words “substantial lessening of competition” has led to more of a focus on the uncertain and hard to ascertain likely behaviour of a market sometime in the future. The more tangible and immediate effect on the degree of concentration and the structure of the market has tended to be downplayed.

Allan Fels: ‘The merger law is our best and most substantial protection against a highly monopolised economy.’Credit: Alex Ellinghausen

The government has made a much-needed clarification to the “lessening of competition” test: it will now apply if the merger “creates, increases or entrenches” substantial market power. This will emphasise the effect on the structure of the market.

The need for this key change has been magnified by the fact that these days, the ACCC – competent and formidable litigator that it is – often faces an army of corporate lawyers and silks, economists, consultants, business advisors, and well-rehearsed business witnesses in court. This has contributed to a recent string of losses in merger cases.

The new law also will help curb creeping acquisitions. If a big retailer acquires a store in a country town, this does not “substantially lessen competition”. But now, the aggregate effect of a number of acquisitions over a period of up to three years can be considered. The ACCC may decide that, taken as a whole, the acquisitions substantially lessen competition.

This change also addresses in part the habit of digital platforms acquiring small “nascent” competitors before they threaten the platform.

The government has rejected the somewhat problematic ACCC reverse onus of proof test that would have required applicants to satisfy the commission that the merger would not substantially lessen competition. This proposal is now less vital, given the effect of the overall reforms.

The government does not propose to introduce divestiture powers to compel big businesses to be broken up when a court finds that they have acted illegally and concludes this is the best remedy. But for the record, the USA, the home of free markets, has used divestiture power to great effect.

One point made by the government should be qualified: ever anxious to show a light-handed approach, the proposal says – not incorrectly – that only a small numbers of mergers are affected by the change of law. True, but the number of anticompetitive mergers that would occur if there was no merger law in this country is huge and would likely involve banks, supermarkets, energy and oil businesses, telcos and countless others.

In other words, the merger law is our best and most substantial protection against a highly monopolised economy. This is a good day for competition policy.

Let’s hope when the federal government – in conjunction with state and territory leaders – turns to the broader question of reinstituting the national competition policy of the 1990s (triggered by the 1992 Hilmer Review) that its policies are as consequential as its merger proposals.

Allan Fels is a former chairman Australian Competition and Consumer Commission. He recently chaired an ACTU-commissioned Inquiry into Price Gouging and Unfair Pricing Practice.