Merger Clearance in Uncertain Times

The ACCC are currently investigating the acquisition of a 19.9% stake in charter airline Alliance by Qantas in February 2019. Some fourteen months later, and in the context of a very different set of market circumstances, Qantas is having to respond to an enforcement investigation as a result of not seeking merger clearance prior to its acquisition.

The ACCC, which is responsible for regulating acquisitions in Australia to prevent transactions that would have the effect or be likely to have the effect of substantially lessening competition in the market, has the power to grant informal merger clearances or authorisations. The formal authorisation procedure is binding on the ACCC but it is rarely utilised as it is complex and expensive.  Most parties seek the ACCC’s attitude to an acquisition through the informal merger clearance.  While the ACCC is not bound by the informal merger clearance, the ACCC is unlikely to take issue with a ‘cleared’ acquisition unless it has reason to believe that the information it has received is significantly incorrect or incomplete.

When parties pursue a transaction without clearance from the ACCC they are subject to enforcement action if the ACCC concludes that the transaction did in fact have the effect of substantially lessening competition in the market. As such, the ACCC has the benefit of hindsight in pursuing enforcement actions in relation to transactions for which clearance isn’t obtained in advance.

In the case of Qantas’ acquisition of its stake in Alliance, Qantas has known since 1 August 2019 (when the ACCC issued a statement of concerns regarding the acquisition) that the ACCC was concerned as to the transaction’s impact on competition. The ACCC noted at the time that:

  • Alliance competed strongly with Qantas for transport of FIFO workers in Queensland, Northern Territory and Western Australia.
  • Alliance was Qantas’ only competitor on regular passenger transport routes between Brisbane and each of Bundaberg and Gladstone; and
  • Qantas’ shareholding had the potential to impact Alliance’s future growth and its ability to be a strong competitor.

One further concern expressed by the ACCC was that Qantas would seek to increase its stake in Alliance. As a consequence, in 2019, Qantas provided an undertaking not to acquire any further interest in Alliance until the investigation was completed.

On 1 June 2020 the ACCC provided an update in respect of its investigation stating:

The Australian aviation industry is in a stage of major upheaval and now, more than ever, we are concerned that the competition by smaller airlines is not hindered.”

The ACCC went on to say that “Qantas’ decision to complete the acquisition of the 19.9% stake in Aliance without first seeking ACCC clearance means this is an enforcement investigation rather than a standard merger review.” This makes it clear that the ACCC is considering exercising its enforcement powers, which include the right of the ACCC to require a divesture of assets by Qantas.  That divestiture power may be exercised within 3 years from the date of the relevant transaction.

The ACCC has confirmed that its investigation is focused on the competitive dynamics between Qantas and Alliance and particularly whether Qantas is using its stake to influence the conduct of Alliance. The fact that the investigation is being undertaken in the context of the unprecedented impact of COVID-19 on the Australian aviation industry means that matters that could not possibly have been anticipated or within the contemplation of the parties (or the ACCC) at the time of the transaction now form a key element of the ACCC’s consideration.

Had Qantas obtained authorisation before completion of the transaction, that clearance would have stood despite the subsequent world and market-changing events of the past few months. Not securing the merger clearance in advance (at the time that the market was stronger) has placed Qantas in circumstances where it may be subject to enforcement action and must then defend its acquisition in circumstances that it did not predict.

If you’re considering a proposed transaction you may wish to consider that the ACCC’s expectation is that parties will seek informal merger clearance where:

  • The merged entity would have a post-merger market share of greater than 20% of any market; and
  • The products or services produced by the entities are complements or substitutes of each other.

Had Qantas sought an authorisation or informal clearance prior to the transaction, the framework within which Qantas’ acquisition of its stake in Alliance was to be considered would have been substantially different. Alliance had a strong partnership with Virgin (which is now in administration) to codeshare flights and other regional airlines which were operating to service regional areas and particularly FIFO workers.  The ACCC issued its statement of concerns in respect of this market, pre-COVID.

The position of regional airlines is now of even more significant concern and some are in difficulty and seeking government support. These changes have clearly impacted the market and made the impact of the acquisition much more serious for the ACCC.

These circumstances demonstrate the need to carefully consider the strategic risk of not seeking ACCC authorisation or clearance in advance of a transaction that may result in a substantial lessening of competition, particularly where future changes to the market may (with the benefit of hindsight) negatively impact a future assessment.

If you’d like to discuss the application of the Competition and Consumer Act on your transaction or your business generally, please contact Rebecca Halkett.