In this edition of Corporate Insights, we examine the Federal Court of Australia’s recent decision on the ACCC’s challenge to a proposed merger between two opposing rail freight operators in a case that highlights the importance of considering and anticipating competition law issues in any merger involving competitors.

In brief

The Australian Competition and Consumer Commission (ACCC) has been in the news recently regarding a proposed transaction between two close competitors in the rail freight industry.

Briefly, Pacific National (a leading rail freight operator), proposed to acquire a Brisbane intermodal rail terminal. The terminal was operated in by Aurizon, its closest competitor. The ACCC was concerned this acquisition would create a monopoly controlled by Pacific National.

In response, Pacific National offered the ACCC a court-enforceable undertaking that would prevent it from discriminating against other rail operators seeking to access the terminal. The ACCC rejected this, taking the view it was insufficient to overcome the competition concerns.

In the legal proceedings that followed, the ACCC claimed that the merger would be likely to substantially lessen competition in the market. However, the Federal Court dismissed the ACCC’s claim, including on the basis of Pacific National’s undertaking.  This case highlights the importance of considering and anticipating competition law issues in any merger involving competitors.

Background

Section 50 of the Competition and Consumer Act 2010 (Cth)(CCA) allows a merger to be blocked if it will ‘have the effect or likely effect’ of substantially lessening the competition within the market.

In deciding these cases, the Courts will generally apply a ‘future with and without’ test, i.e. will consider the likely state of future competition in the market with and without the impugned conduct.[1]

Where competition law issues arise, merger parties will often (though not always) approach the ACCC for an informal merger clearance as a way of avoiding the more formal s 50 process. However, parties are not obliged to notify the ACCC before completing a merger. In some cases (usually following advice) the parties may proceed even if the ACCC refuses informal clearance.

Doing so creates transactional risk, because (as in this case) the ACCC may take legal action on the basis the merger breaches s 50. If successful, this can result in the transaction being unwound, costs orders and other consequences.

The undertaking

Pacific National’s undertaking stated that it would not engage in discriminatory conduct in relation to the terminal. The ACCC rejected this undertaking under its discretionary power in s 87B(1) of the CCA.  In rejecting the undertaking, the ACCC stated:

  • even though the undertaking was unconditional, it did not address the fundamental flaws inherent in it;
  • the undertaking was equivalent to asking the Court to monitor the intricate and detailed contractual relations between the parties to a commercial agreement, on an almost daily basis and was therefore impractical;
  • the undertaking would be completely ineffectual due to deficiencies in the core obligations; and
  • Pacific National’s obligations are not subject to active independent monitoring and enforcement.

The decision

My response to this is: not really’ [2]

In dismissing the ACCC’s case, the Court was not persuaded by the ACCC’s arguments. The Court did accept that, without the undertaking, there would be a real or reasonably perceived heightened barrier to entry from the merger. That is, the merger would be likely to substantially reduce competition. However, the Court also found that the undertaking sufficiently addressed these issues and therefore allowed the merger to proceed.

Key takeaways

  1. Parties to a merger transaction should always be mindful of the merger clearance rules, particularly where competing closely.
  2. A carefully developed competition strategy, including undertakings where appropriate, is imperative. In this case, the undertaking given was vital to the outcome.

[1] Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 1381.

[2] Australian Competition and Consumer Commission v Pacific National Pty Ltd (No 2) [2019] FCA 669 [1433].

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article