Digital innovation is rapidly changing how businesses, specifically digital platforms, behave in the commercial landscape. Consequently, regulators are seeking legislative reform that will strengthen Australia’s merger and acquisition regime by replacing voluntary notification processes with mandatory clearance requirements to accommodate a rapidly shifting business environment and guard against anti-competitive conduct.

In a speech to the National Press Club on 12 April 2023, Gina Cass-Gottlieb, Chair of the Australian Competition and Consumer Commission (ACCC), characterised the current laws as unfit for preventing anti-competitive mergers. The Chair stated the regime is centred on a model of reactive enforcement as opposed to proactive regulation. The Chair noted this issue is exacerbated by the evolving and increasing power of digital platforms with which enforcement measures struggle to keep pace.

Anti-Competitive Mergers and Digital Platforms

Why change?

In 2017, the ACCC was commissioned by the Federal Government to investigate the impact of competition between digital service providers on consumers. The inquiry examined a range of issues including privacy, disinformation, and anti-competitive behaviours.

In 2019, the ACCC handed down its Digital Platforms Inquiry Final Report (Final Report). The Final Report found that the ubiquitous nature of digital platforms and the market dominance of their providers has greatly changed the business landscape by imposing high barriers of entry and consequently restricting consumer choice. The ACCC found that while these platforms provide necessary services to Australian consumers and businesses through social media and general search services, anti-competitive behaviours presented serious challenges to innovation and consumer choice.

The ACCC singled out Meta (formerly Facebook Inc) and Alphabet Inc (formerly Google LLC) as two digital service providers with considerable market power. This power creates potential for anti-competitive practices in the market. For instance, the Digital Platform Services Inquiry Interim Report No.5 – Regulatory Reform (Interim Report No. 5) found that the 2022 market value of Alphabet exceeded Australia’s 2021 Gross Domestic Profit which demonstrates the sheer financial power of one entity. The Final Report expressed concerns that Alphabet and Meta could use their financial power to stifle competition by acquiring up-and-coming potential competitors.

Bargaining Power Imbalances

The Final Report observed that Australia’s economic environment had allowed some digital service providers to obtain a sizeable share of the market. While companies are not prohibited from holding substantial market power, the dominance of a few providers has a detrimental effect on competition and consumer choice. This dominance becomes more profound as those digital service providers acquire smaller providers.

These conditions lead to a substantial imbalance of bargaining power between a few significant providers and the smaller businesses that rely on their digital services to reach consumers. For example, the Final Report highlighted that news media businesses were overly reliant on search engine and social media services as a distribution model for their content. This means that news media businesses would lose substantial revenue if they do not use these services. Conversely, service providers are unlikely to suffer significant financial harm if news media businesses do not use their services.

The lack of competition and the dominance of a few providers has created an environment where small businesses are not able to participate in individual negotiations with digital providers. In the case of news media businesses, these businesses lack the power to increase viewership through making improvements to how digital platform providers highlight their content. Ultimately, this prevents these businesses from increasing their revenues and consequently poses concerns for news media availability to Australian consumers. It should be noted, that since the Final Report, the Australian Government has introduced the News Media and Digital Platforms Mandatory Bargaining Code which specifically aims to address the bargaining power imbalance. However, this issue remains a core concern for small businesses when engaging with major digital service providers.

Anti-Competitive Advertising Regimes

The ability of digital service providers to unilaterally control online advertising practices was a key concern of the Final Report.

For instance, in 2019 Alphabet Inc was fined over AU$2.4 billion by the European Commission (EC) for exploiting its dominating position in the market to create unfair and anti-competitive advertising practices. The EC found that Alphabet was unfairly imposing restrictive clauses that prevented publisher websites from engaging with competing advertising products. The EC claimed that this behaviour prevented rival advertising services from emerging and subsequently left publisher websites with restricted advertising options, limiting consumer choice in the market.

Anti-Competitive Mergers

Another key concern of the inquiry was that large digital platform providers were using their financial power to engage in anti-competitive mergers and acquisitions. The ACCC characterised these mergers and acquisitions as tools of suppression against the growth of potential competitors.

A notable example was Meta’s 2012 acquisition of Instagram. At the time, Instagram was a smaller company with thirteen employees and eighty million users. Since this acquisition, the popularity of Instagram has rapidly grown, making it one of the most popular social media applications. According to Interim Report No. 5, Facebook and Instagram supply around 79% of social media services in Australia. In 2019 the former ACCC Chair, Rod Sims, characterised the acquisition as an elimination of the threat of a potential competitor. Since 2020, the US Federal Trade Commission has been pursuing legal action against Meta for anti-competitive acquisitions of potential competitors, including its acquisition of Instagram. Interim Report No. 5 noted concerns that some digital platform providers were incentivised to obtain small emerging tech businesses before they become potential competitors. According to Mr Sims, the acquisition of smaller firms may not trigger current anti-competitive regulation.

Current Merger and Acquisition Laws

At a high-level, the Competition and Consumer Act 2010 (Cth) (CCA Act) prohibits mergers and acquisitions that are likely to result in a substantial lessening of competition. The ACCC is empowered to apply to the Federal Court to halt or unwind anti-competitive mergers and acquisitions. However, parties are not obliged to notify the ACCC of planned mergers, or obtain ACCC clearance before completing the mergers.

This differs from other jurisdictions, particularly in certain OECD nations, which often require mandatory notification of mergers and acquisitions. The ACCC has found that in multi-national mergers and acquisitions where parties are required to file in multiple jurisdictions, parties will prioritise meeting the obligations of jurisdictions with mandatory notification requirements over Australia’s voluntary regime. This is largely attributed to the informality of Australia’s merger regime which often sees parties handing in late or incorrect information to the ACCC but not facing significant penalties. The ACCC has limited power to prevent potentially anti-competitive acquisitions or mergers where they are not sufficiently aware of the transactions and forced to react to the completion of the transaction as opposed to preventing its commencement.

Currently, the ACCC has two voluntary processes to manage mergers:

1. 1. Informal mergers reviews

Parties can request the ACCC’s position on whether a planned merger or acquisition breaches anti-competition requirements. The ACCC can initiate an informal review on proposed and completed mergers if it has received information from third parties indicating anti-competitive behaviour.

1. 2. Voluntary formal authorisation process

Parties can apply for formal authorisation from the ACCC to proceed with a planned merger or acquisition. This process protects the applicant parties from legal action from the ACCC or other third parties relating to anti-competition concerns arising from the merger or acquisition.

The ACCC Chair has expressed the view that these processes provide inadequate avenues for the ACCC to scrutinise and prevent anti-competitive mergers and acquisitions. While the ACCC has recorded a rise in voluntary formal authorisation applications, the informal merger reviews remain the popular option among businesses. The Chair noted the fee-free informal nature of these reviews means a substantial number of applicants are filing late or incomplete information. Additionally, the ACCC have asserted that an increasing number of informal review applicants threaten to complete the merger prior to the ACCC’s final review of the proposal. The Chair has characterised Australia’s current legislative regime as ‘voluntary and enforcement-based’.

Proposed Reforms

In her National Press Club speech on 12 April 2023, the ACCC Chair reaffirmed the 2021 push for merger and acquisition reform. The reforms seek to prevent anti-competitive behaviour and deal with concerns arising from the Interim Report No. 5. The proposed reforms include:

• replacing the voluntary informal processes with a mandatory merger clearance process;
• requiring that mergers cannot be completed until the ACCC or Australia Competition Tribunal are satisfied the merger or acquisition is not anti-competitive; and
• introducing additional and broader factors that must be considered by the ACCC when approving or denying a proposed merger or acquisition, including the loss of potential competitive rivalry, increased access to data, and extension of substantial market power.

These reforms are intended to shift the approval process from a voluntary, enforcement-based system to a mandatory clearance model. It is worth noting that the proposed reforms have not yet been brought to Parliament. However, it is clear the ACCC intends to explore legislative reform options to manage anti-competitive behaviour. The Chair’s speech is the latest in a series of ACCC statements into digital platform service providers and their impact on business and consumer welfare. Further merger and acquisition reforms may materialise as the ACCC continues its Digital Platform Services Inquiry. The Final Report of the latest inquiry is expected to be delivered to the Treasurer in 2025.

Next Steps

Though changes to Australia’s merger and acquisition regimes are not imminent, it is important for businesses to be aware of the changing legal landscape. Businesses that are or interact with digital platform service providers should familiarise themselves with the Digital Platform Services Inquiry 2020-25.

Please do not hesitate to get in touch with us for tailored advice on how to prepare for the reforms.