Cartel Conduct in M&A – Don’t Jump the Gun

“Gun jumping” occurs in an M&A transaction where the parties are actual or potential competitors and integrate or co-ordinate their conduct pre-closing of the acquisition resulting in anti-competitive behaviour, known as “cartel conduct” under Australian competition law.

Pursuant to the Competition and Consumer Act 2010 (Cth) (CCA), the merging parties are considered competitors during all stages of the pre-completion phase and must continue to operate as such until completion occurs. This prevents either party from having any influence over the operation of the other’s business and effectively undercut the competitive process.

On 23 June 2018, Crysoite agreed to transfer its cord blood and tissue banking business to Cell Care Australia Pty Ltd (Cell Care). It is understood that at the time Cryosite and Cell Care were the only two private suppliers in the Australian cord blood and tissue banking market. Following the announcement of the sale, the ACCC commenced a reviewed of the proposed sale under the asset sale contract.

The contract required Cryosite to cease supply of cord blood and tissue banking services (CBT Services) and direct all customer enquiries to Cell Care during the period between exchange of the contract and completion of the sale. An ancillary agreement was also reached which restricted Cell Care from dealing with any Cryosite customer in the five years preceding the proposed acquisition.

The ACCC alleged that such an arrangement amounted to cartel conduct on the basis that it:

• was intended to directly or indirectly restrict or limit the supply or likely supply of CBT Services; and
• resulted in a pre-arranged, non-competitive allocation of customers between Cryosite and Cell Care.

Cryosite admitted to engaging in cartel conduct by entering into a sale agreement that was designed to restrict or limit the supply of CBT Services as well as giving effect to the restraint by ceasing to supply CBT Services to new customers.

On 13 February 2019, the Federal Court ordered Cryosite to pay $1.05 million in penalties. In delivering his judgment, Beech J noted that premature collaboration can have the “commercial but illegitimate attractions of removing price or other competition between the parties, providing access to advantageous commercially sensitive information,” ultimately sidestepping the application of merger controls under the CCA.

Section 50 of the CCA prohibits the completion of a transaction that would have the effect, or be likely to have the effect, of substantially lessening competition in any market in Australia. Within the context of an asset or share acquisition, the CCA’s prohibition on cartels continues to apply until the sale has completed.

The cartel activities prohibited under the CCA are agreements, arrangements or understandings between competitors which have the purpose or effect of:

• fixing, controlling, sharing or maintaining prices;
• restricting or limiting capacity, production or supply;
• jointly acquiring goods or services;
• allocating markets, suppliers, customers or territories; or
• rigging bids.

It is therefore vital for merging parties to maintain their independence as separate competing entities at all stages of the transaction. Failure to act independently or engagement in premature co-ordination may constitute a contravention of this prohibition which can result in civil or criminal penalties, for both individuals and companies. A party found to have engaged in cartel conduct (seller and/or purchaser) may face severe penalties, including company fines of up to 10% of the company’s annual turnover, and up to 10 years’ jail and individual fines of up to $500,000 for directors.

The Cryosite case underscores how “gun jumping” can lead to risks of contravention of the prohibitions against ‘cartel conduct’ when engaging in any form of M&A transaction. However, it is important to note that “gun jumping” can also arise in more subtle circumstances such as an exchange of competitively sensitive information between parties proposing to merge.  Parties must ensure that they remain independent competitors until any sale completes.

During the pre-closing phase of an M&A deal it can become difficult to navigate the competition law issues.  If a purchaser implements steps to mitigate its financial and commercial risk by placing controls around the activities of the target, the purpose or effect of these controls may inhibit the ability of the target to operate independently until completion of the proposed merger transaction.  These ‘controls’ may include so called ‘hand-cuff’ provisions in a share or business purchase agreement that apply between exchange and completion of a proposed transaction.

In recent years, SWS has seen a steady lengthening of the time period between exchange of sale contracts and completion of transactions, particularly in private treaty M&A deals between competitors. As the pre-completion period increases, the ‘hand-cuff’ or trade restriction provisions tend to become more important and play a more significant role in the deal. In this context, timely advice on how to manage conduct and interactions between the merging parties to ensure compliance with Australian competition law whilst achieving the parties’ objectives of engaging in permissible activities during the pre-completion period is critically important.

To mitigate risk during pre-completion dealings, parties should:

• implement specific systems to control the type of information that is disclosed and to whom it is disclosed;
• ensure there is no co-mingling of assets, discussions of pricing information or marketing strategies, sharing of customers and suppliers, or transfer of employees;
• not make any representations suggesting an integrated or a sole entity;
• enforce pre-closing guidelines that confirms their commitment to abide with their obligations under the CCA; and
• ensure that each merging party continues to operate as independent competitors, including making self-governing competitive decisions.

SWS has also observed an increase in the importance of competition law issues in private treaty transactions involving unique or highly competitive counterparties as the economy has slowed. We consider the legal and regulatory risks associated with “gun jumping” are material and should be taken into account well in advance of document preparation and final transaction negotiation.

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  Please contact us if you require advice on matters covered by this article.