Alert - Introducing The New Merger Bible.

Overview The Australian Competition and Consumer Commission (ACCC) has released revised merger guidelines for public comment on 8 February 2008.

For businesses contemplating a transaction, the biggest practical issues likely to arise from the revised merger guidelines are the introduction of new 'notification' thresholds used by the ACCC and the removal of the existing 'safe harbour' market concentration thresholds for notification.

This is likely to increase the number and type of mergers submitted for review.

Submissions are invited on the draft merger guidelines - to be made by 28 March 2008 to the ACCC.

The revised merger guidelines set out the general analytical framework applied by the ACCC when assessing whether a merger (or proposed merger) is likely to substantially lessen competition under section 50 of the Trade Practices Act 1974 (Cth). Once finalised, the revised guidelines will replace the existing merger guidelines.

Purpose And Content Of Revised Guidelines The revised guidelines seek to modernise the existing guidelines which have been in place since 1999. In particular, the ACCC has sought to adopt the key theoretical frameworks developed in Europe and the United States. The revised guidelines contain a greater emphasis on the underlying theories of competitive harm and on the unilateral and coordinated effects of a proposed merger, and focus on three categories of merger: horizontal; vertical and 'conglomerate'. This reflects contemporary thinking on competition law issues in merger assessment as well as recent experiences in merger cases examined by the ACCC. There is also an updated discussion on the principles underpinning the ACCC's consideration of enforceable undertakings.

Practical Impact The greatest issue for businesses that is likely to arise from the revised guidelines is the change in the 'notification' thresholds used by the ACCC, specifically the replacement of the existing 'safe harbour' market concentration thresholds with revised notification thresholds.

Under the existing guidelines, the following 'safe harbour' market concentration thresholds apply:

the market share of the merged entity is greater than 40% following the merger; or

the market share of the merged entity is greater than 15% and the combined market share of the four (or fewer) largest firms is greater than 75% following the merger.

Where a proposed transaction gives rise to market shares in excess of these thresholds, the usual course to follow is to notify the ACCC of the proposed transaction by submitting an application for informal clearance, or a courtesy letter containing basic factual information about the transaction.

The revised guidelines replace these 'safe harbour' thresholds with new notification thresholds. Merger parties will now be encouraged to notify the ACCC in advance of completing a merger, where any one of the following criteria is likely to apply:

the merged firm would operate in at least one market that is 'concentrated';1

a substantial number of customers consider the products of the merger parties to be particularly close substitutes such that the merger parties represent their first and second choices;

the target firm has shown a recent rapid increase in market share, has driven innovation or has tended to charge lower prices than its competitors in one or more markets in which the merged firm would operate;

the merged firm would have a significantly higher market share than any of its rivals in one or more markets; or

the ACCC has indicated to a firm or industry that notification of proposed mergers in that industry would be advisable, given past history in that industry or the level of acquisitive activity.

In practice, these revised notification thresholds are likely to capture a greater number of potential mergers than was done in the past. However, as is currently the case, notification will not be compulsory - merger parties are still entitled to make their own decision as to whether or not they notify the ACCC of the proposed transaction.

Submissions Sought By ACCC The ACCC has invited submissions from the public on the revised guidelines. The closing date for submissions is 28 March 2008.

Footnotes 1 The revised guidelines state that the ACCC considers markets to be 'concentrated' for the purposes of notification when a small number of firms accounts for a large proportion of sales, output or capacity, giving an 'HHI' of greater than 2000. The Herfindahl-Hirschman Index (or HHI) is a concentration metric which takes into account the relative size and distribution of the firms in the market. The HHI is used by US regulators as the principal market concentration measure. The HHI is calculated by adding the sum of the squares of the market shares of each firm in the relevant market. For example, for a market consisting of four firms with shares of thirty, thirty, twenty and twenty per cent (%), the HHI is 2600 (302 +302 + 202 + 202 = 2600). The absolute level of the HHI indicates the level of concentration post merger while the change in the HHI reflects the change in concentration post merger.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Geoff Carter

Minter Ellison

Aurora Place

88 Phillip Street

Sydney

New South Wales

2000

AUSTRALIA

Tel: [phone]

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URL: www.minterellison.com

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