- Now on appeal, the recent Federal court decision in Norcast v Bradken extends the reach of the anti-cartel bid rigging provisions in tender processes.
- Collaborating bidders contemplating consortia, on-sales and intermediary bidders have pitfalls to avoid in these competition law provisions.
- The case is another example of a successful claim for misleading and deceptive conduct, this time with silence of the bidder contributing.
For would be collaborative bidders in a tender process, the judgment means the bidders will need to be on alert to avoid breaching competition law prohibitions against competitor collusion. Examples where, if not carefully thought out and managed, these prohibitions might apply include:
- arrangements to on-sell part of a recently acquired business to a pre-arranged trade buyer,
- arrangements to restrain an exiting consortium bidder from bidding against the other members of the consortium, and
- use of an intermediary buyer by a buyer which wishes to conceal its identity by using an intermediary to buy on its behalf.
The decision also gives pause for thought:
- by collaborating bidders, about the importance of what they don’t say, as well as what they do say, and
- by sellers, about confidentiality agreements, and the importance of negotiating obligations on bidders to tell the sellers just who are the third parties receiving the sellers’ confidential information.
Contentious sale process
In early 2011, Norcast S.ár.L, decided to sell its Canadian mining consumables subsidiary Norcast Wear Solutions Inc.
UBS conducted the sale process and contacted potential buyers to provide them with a ‘teaser document’. UBS did not contact Bradken Limited, an Australian mining consumables company, about the sale directly.
When Bradken did become aware of the sale, it did not attempt to contact Norcast or UBS. Instead it contacted Castle Harlan Inc, a US private equity investment firm, to inform them of the sale process. Bradken believed, with some justification, that it had been excluded from the sale process.
Bradken and Castle Harlan communicated extensively about the acquisition of NWS and shared information. Bradken’s involvement was kept secret.
Castle Harlan ultimately bought NWS for $190 million and, approximately seven hours after the sale was finalised, on-sold NWS to Bradken for $212.4 million.
Decision of the Federal Court
In May 2012, Norcast brought proceedings against Bradken and two of its executives, claiming that (among other claims):
- Bradken and Castle Harlan had engaged in cartel conduct by entering into a bid rigging arrangement, and
- Bradken and Castle Harlan had engaged in misleading or deceptive conduct.
A contract, arrangement or understanding can breach the ‘cartel provisions’ in a number of ways, one of which is ‘bid rigging’. There are several limbs to the definition of a bid rigging arrangement. For a bid rigging claim to succeed in this case, the arrangement had to satisfy the following limbs:
- the purpose condition – that the arrangement had the purpose of directly or indirectly ensuring that in the event of a request for bids in relation to supply or acquisition of the goods or services, one party would bid but the other would not
- the competition condition – that the parties were, or were likely to be, in competition with each other in relation to the bid.
In March 2013, the court found in favour of Norcast and held that Bradken and Castle Harlan had breached the bid rigging provisions.
The court also held that the misleading and deceptive conduct provisions had been breached by Bradken’s and Castle Harlan’s silence about their arrangements as well as by Castle Harlan’s express representations it was the acquiring entity and would not require funding from non-associated entities.
Norcast was held to have suffered loss or damage in the amount of $US22.4 million. This was the difference between what Castle Harlan paid for NWS, and what Bradken paid to Castle Harlan, which the Court treated as an effective proxy for the amount that Bradken would have paid to Norcast (had it bid directly).
When might collaborating bidders trip the anti bid-rigging rules?
In light of the Norcast v Bradken decision, the tentacles of competition law prohibitions against competitor collusion may reach to impact upon the scenarios below.
- Purchaser selling part of an acquired business to a trade buyer
Where a bidder wishes to immediately dispose of part of a recently acquired business, it will need to take care that it does not fall afoul of the bid rigging provisions of the CCA.
A claim of bid rigging requires proof of a contract, arrangement or understanding between parties, who are ‘in competition’ or ‘likely to be’ in competition with each other in the sale process. The court held, possibly contentiously, that Bradken and Castle Harlan were ‘likely’ to have been in competition with each other in bidding for NWS, referring to a CCA definition of ‘likely’ including a ‘possibility that is not remote’.
In light of this decision, even non competitors in a market will need to be cognisant of whether they could be seen to be competitors in a sale process.
Say a bidder only wants the domestic operations of the target business and assets, and a trade buyer only wants the overseas operations and assets. They might consider an arrangement where only one of them will bid and, if successful, on-sell the relevant part of the business to the other.
Now the bidder firm will need to take care that there is not more than a remote possibility that the trade buyer could be construed as likely to be in competition with them in the sale process. A lack of funds or interest, as well as regulatory restrictions, may be factors which assist to establish that the possibility of competition between the parties in a bid for the whole company was remote.
- Consortium bidding
Assembling a consortium to participate in a sale tender can raise cartel issues of the kind that arose in Norcast v Bradken. After this case, the bid rigging issue is more clearly raised by a restraint on bidding applied to a consortium member which exits pre-bid.
There are several limbs to the definition of a bid rigging arrangement. To qualify as a bid-rigging arrangement in Norcast v Bradken, the arrangement had to have the purpose of directly or indirectly ensuring that in the event of a request for bids in relation to supply or acquisition of goods or services, one party would bid but the other would not (the purpose condition).
In Norcast v Bradken, the court took a broad approach to infer a bid rigging purpose to the arrangement between Castle Harlan and Bradken.
Justice Gordon used Bradken’s belief that it was excluded from the sale process to infer that there was a term or provision in the arrangement between Bradken and Castle Harlan that Bradken would not bid for NWS. In circumstances where Bradken genuinely believed it could not bid, it is not clear that it follows that Bradken made an arrangement that it would not bid. Indeed if Bradken genuinely believed it could not bid, it did not need a term in the arrangement with Castle Harlan that it would not bid.
In the scenario of a consortium which has been assembled for the purpose of participating in a sale tender, the exit of a consortium member will have to be carefully provided for, and managed, to avoid any restraint on post-exit bidding being characterised as having a bid rigging purpose and offending the bid-rigging rules. Assuming it is the real and commercial concern of the consortium members, the appropriate focus and substance of the restraint would be not to use the consortium’s confidential information (including information about bid tactics) other than for the purpose of the consortium bid.
Where the identity of the bidder is sensitive
A bidder who may have a higher willingness or ability to pay for an asset or a unique ability to obtain synergies from the asset, might legitimately wish to conceal its identity by using an intermediary (or nominee) to buy on its behalf. A simple and common example is the consolidation of smaller parcels of land for a subsequent larger development.
After Norcast v Bradken, the bidder and its intermediary will need to ensure that there is nothing more than a remote possibility that the intermediary could be a bidder in its own right. This could prejudice the credibility of the intermediary’s bid in the first place, and possibly increase the risk of misleading or deceptive conduct.
What might sellers do differently in a competitive sales process?
Sellers who wish to be made aware of collaborative bidding may be able to avoid secret bidder collaboration by being a little more demanding under their NDAs.
In Norcast v Bradken, an executive of Bradken obtained information about NWS by acting as a consultant to Castle Harlan. Castle Harlan’s confidentiality agreement with Norcast required the executive to keep information confidential, but did not require the executive’s involvement as a consultant to be disclosed to Norcast. In hindsight, this may have been an error by Norcast.
In light of this, sellers should give more consideration to their confidentiality agreements imposing a requirement for bidders to disclose to the sellers the identity of all persons (particularly external consultants) to whom the bidders are providing confidential information.
Sellers should also consider including an express warranty, deemed repeated at the date bids are due, that the counter-party is not acting as agent for any undisclosed principal and does not have any arrangement for an on-sale of the assets in question.
What other concerns arise for M&A practitioners?
As the Court acknowledged in Norcast v Bradken, it is generally difficult for silence to constitute misleading or deceptive conduct in the absence of a duty, or reasonable expectation, of disclosure. It also acknowledged that full disclosure is not required in the context of commercial negotiations.
It nevertheless appears that the Court was particularly troubled by what it found was Bradken’s ‘deliberate and deceptive’ steps to prevent disclosure of its involvement in Castle Harlan’s acquisition of NWS. Having said that, no clear guidance was given by the Court as to why the general statements of principle set out above did not apply to Bradken’s conduct.
Norcast v Bradken represents another case in which the applicant has successfully used misleading and deceptive conduct prohibitions to achieve a favourable outcome. Recent cases (James Hardie and Fortescue) have considered these provisions in the context of market announcements, or failure to make them, with a potential connection to directors duty breaches. The successful prosecution of a case where silence amounts to misleading conduct can only heighten concern by those involved in the M&A markets – public and private – and the capital markets, about the risks of failing to disclose information, even in the absence of an expectation or positive duty of such disclosure.