The equity market is sometimes seen as capitalism’s last true home. A place where competition is red in tooth and claw, and where corporate life can be, at least for some, nasty, brutish and short. But even in the jungle of pure capitalism, a little bit of cooperation can break out and, as one example of this, bidders for companies may decide that it is better to cooperate than to compete in some instances.
The reasons for this cooperation can be varied. At one end of the spectrum, it may be that an individual bidder is simply financially, or otherwise, unable to compete without teaming up with a partner, or that they are only interested in one part of the business up for auction, so it makes sense to arrange a partner who will acquire the other portion of the business. At the other end of the spectrum, however, it may be that bidders determine that agreeing amongst one another in advance of the auction will result in a lower price being paid for the firm in play. Certainly, this logic is not unknown in more traditional auction settings.
In 2007, this issue was explored tangentially by the United States Supreme Court in the context of a clash between competition laws and securities regulation. In Credit Suisse Securities (U.S.A.) LLC v. Billing, the U.S. Supreme Court found that, at least in the context of the facts of that case, an agreement between underwriters not to sell certain shares unless buyers agreed to buy further shares later, to pay high commissions, and to buy shares of other companies, could not be an antitrust offence. This decision arose in the context of an underwriting syndicate of securities dealers handling a firm’s Initial Public Offering (“IPO”). The members of the underwriting syndicate worked together to price and market the shares and spread the risk between them via the syndicate.
The U.S. Supreme Court found that the challenged activities were central to effectively bringing a new issue of stock to market and that the Securities and Exchange Commission (“SEC”) had the power to supervise the activities in issue. The Court found that the conduct in issue was regulated by the SEC and, therefore, that the conduct was not subject to challenge under the antitrust laws.
Canada has a similar rule with respect to at least some government-authorized action not being subject to challenge under competition laws, called the Regulated Conduct Doctrine. In the same situation in Canada, a similar result might well apply to conduct in the securities markets, pursuant to the Regulated Conduct Doctrine, depending upon the specific regulatory framework which applied.
More recently, the U.S. District Court for the Western District of Washington has had occasion to revisit the issue, but not in the circumstance of an SEC rule. In the case of Pennsylvania Avenue Funds v. Borey, two bidders for a company, after having bid against one another for a time, agreed to join together to bid jointly for the company. The Court found that the conduct engaged in by the two bidders in joining forces was not specifically regulated by SEC rules and, therefore, concluded that the conduct of the bidders was not protected by SEC rules, as had been the case in Credit Suisse. However, the Court went on to find that the two bidders were among 35 or more potential buyers of the company for sale, and that an agreement between two of 35 or more bidders to join forces did not offend the Sherman Act rule respecting agreements among competitors. The court found that “price agreements between competitors in a corporate control context are not per se illegal” as are price fixing agreements in more traditional markets under U.S. law.
Since the agreement was not per se unlawful, the plaintiff had to prove that the agreement actually resulted in negative impact on competition. In a rule of reason analysis – that is, considering the actual economic impact of the conduct – the Court found that these two bidders did not have market power in the “enormous” private equity market. This, notwithstanding that few, if any other, bidders actually bid for the company in issue. That was because, as the court noted, many other suitors had looked at the company and were available to bid if the asset was worth more than the joint bid put in by the agreeing bidders. Therefore, the court concluded that one cannot regard the firms that did not bid as not being in the market, because the fact that they did not bid likely only meant that the asset was not worth more than the joint bidders paid for it.
In Canadian law, the equivalent rule with respect to agreements among competitors is found in Section 45 of the Competition Act. Section 45 provides, in part, that agreements to restrain or injure competition “unduly” are unlawful. The use of the word “unduly” provides some flexibility. In the leading case under this provision, the Supreme Court of Canada indicated that an agreement among two of many possible marketplace participants is, as is consistent with the reasoning of the Pennsylvania Avenue Funds case, unlikely to lead to an offence.
However, the Canadian Competition Act also contains a specific provision (in Section 47) with regard to bid rigging. Here, unlike the Section 45 offence, there is no use of the word “unduly,” and the statute is clearly drafted so as to forbid, on a per se basis, any agreement between two bidders, either that one or more of them agree not to submit a bid, or that they submit bids which are arrived at by agreement – this, even if the cooperating firms are only two of 35 bidders. However, the section is quite precise in the definition of what is bid rigging. The bid or bids that result in the offence have to be made in response to a call or request for bids or tenders. If there is no such call – if offers are simply made to purchase assets and there was no call or request for bids or tenders – then the conduct cannot be bid rigging. Even in a situation in which there appears to be a call for bids, the courts have found that, in circumstances in which the person calling for the bids frequently negotiated after receiving bids and tried to obtain even lower prices than those bid, this is not a call for bids or tenders in the sense that the section envisioned. Furthermore, the courts have found that an agreement that one of the bidders will withdraw its bid after submission is not an agreement specifically prohibited by Section 47. So, to trigger the bid-rigging offence, the conduct has to be quite precise.
In addition, Section 47 of the Act provides an express exemption with respect to bid rigging. It provides that the section does not apply if the agreement or arrangement with respect to the bids is “made known” to the person calling for or requesting the bids or tenders at or before the time the bid or tender is made. Therefore, if there are good efficiency reasons for joint or club bids – as there often are – one way to avoid any risk of problems under the bid-rigging provisions of the Act is simply to advise the person calling for the bids that there is an agreement on the point, prior to the joint bid going in. This is sensible counsel for the situation of joint bidding in any context, including the context of bidding for corporate control in Canada.