The M&A sale process has always been a fertile place for ingenious strategies, careful transaction planning and creative deal structuring. Joint bidding and consortium arrangements are both common and legitimate ways for bidders to achieve their objectives. So too are nominee arrangements and those which involve undisclosed principals and investors to whom the target asset may be on-sold.
Norcast v Bradken  FCA 235, a recent ground breaking decision of the Federal Court, highlights the risks to bidders that their silence about consortium arrangements (particularly any on-sell arrangements) can potentially constitute misleading and deceptive conduct. More significantly, the case demonstrates that arrangements between consortium members may potentially contravene the “bid rigging” provisions contained in the Consumer and Competition Act 2010 (Cth) (CCA).
The decision is also significant because the Chairman and Managing Director of the bidder were held personally liable for the deceptive conduct and bid rigging contraventions.
In short summary:
- Norcast owned a subsidiary which manufactured grinding mill liners and mining consumables. Norcast was looking to sell the company. It engaged UBS to run a selective sale process.
- Bradken was a global manufacturer of mining consumables. It was interested in buying Norcast. There were very significant synergies available to Bradken. However, for deliberate strategic reasons, Bradken was not invited by Norcast to participate in the sale process.
- Bradken decided to enter into a behind the scenes bidding arrangement with US private equity firm Castle Harlan (owner of CHAMP). The Chairman of Bradken (Nick Greiner) was also a director of CHAMP.
- The arrangement with Castle Harlan enabled Bradken to enter the sale process “through the back door”.
- During the due diligence phase, Castle Harlan attended several site visits to inspect Norcast’s facilities. It was established that during these site visits Castle Harlan was asked by Norcast if it was acting on behalf of Bradken or was planning to on-sell to Bradken. Castle Harlan basically said “no”.
- As it eventuated, Castle Harlan was the highest bidder. It bought the company for US$190m and then later on the same day on-sold the company to Bradken for US$212.4m.
Bradken was held to have been involved in both the misleading and deceptive conduct and the contravention of the bid rigging prohibition. This article primarily focuses on the bid rigging aspects of the case.
Bid rigging – what is it?
The bid rigging provisions were inserted into the CCA in 2009 as part of a broader package of prohibitions against “cartel” conduct. This is the first decision on these provisions.
The anti-cartel provisions are complicated. In short summary, a bidding arrangement will fall foul of these provisions if the arrangement has the “purpose” of ensuring that “in the event of a request for bids” one of the consortium members will bid but the other members will not. The arrangement must also be between persons who “are or are likely to be” or but for the arrangement “would be or would be likely to be” in competition with each other for the acquisition of the relevant “goods or services”. Other types of bid rigging are also prohibited.
Fundamental to understanding the bid rigging provisions in the CCA is the meaning of several key defined terms and phrases:
- “purpose” – this needs to be a “substantial” purpose or the “end game sought to be achieved” by the arrangement;
- “request for bids” – the request need not be directed to the participants in the bid rigging arrangement. As this case shows, there was still a request for bids even though neither Bradken nor Castle Harlan were invited to participate;
- “likely to be” – this phrase is relevant to assessing whether parties are in competition with each other. The phrase is defined to include a “possibility that is not remote”; and
- “goods or services” – the target goods or services sought to be acquired by the bidding team do not need to be located in Australia. Moreover, “services” is very broadly defined. In this case, it was held to include shares.
The CCA also has very broad territorial application. For example, it did not matter that the sale process was conducted overseas or that the company being sold was incorporated overseas and had no assets in Australia.
What the court found
The court held that the “purpose” of the arrangement was to ensure that Castle Harlan would bid but that Bradken would not. The court found that it was a “natural corollary” of Castle Harlan lodging a bid on behalf of Bradken that Bradken would not lodge a bid itself. However, query if this “natural corollary” meets the test of being a “substantial” purpose. Wasn’t the back door approach just the means to an end, particularly since Bradken thought it had already been excluded from the sale process?
The court also held that Bradken and Castle Harlan were in “competition” to acquire Norcast. It's certainly true that Castle Harlan wanted to acquire Norcast so that it could on-sell to Bradken and thereby earn its $20m fee. However, Castle Harlan’s interest in acquiring Norcast only came about because of the arrangement with Bradken. Absent that arrangement, it seems unlikely that Castle Harlan would have bid. It wasn't invited to bid by UBS and nor was Castle Harlan even aware that Norcast was on the market until Bradken told it about the sale process. It appears that there was little evidence before the court on this point. On closer analysis, it may have been concluded that the possibility of Castle Harlan independently bidding was only a “remote” possibility. Overall, based on the court’s reasoning, a surprising number of transaction participants could now potentially be characterised as being in “competition” with each other.
Where to from here?
The case is currently on appeal. Interestingly, the ACCC has not sought to prosecute Bradken or its executives even though the bid rigging was held to have contravened the cartel provisions for which very significant criminal penalties and prison sentences can be imposed.
Norcast is currently suing Castle Harlan in the USA claiming equitable fraud and damages of US$75m. Bradken may potentially be joined in the New York litigation. Bradken may potentially also be liable to compensate Castle Harlan under an indemnity it gave in order to receive detailed due diligence material from Castle Harlan during the final stages of the bidding phase.
- Participants in any type of bidding arrangement need to be sure that there is (at best) only a “remote” possibility that the bidders are in competition with each other. From this decision, it appears that the courts will take a very broad view of being in competition.
- An “arrangement or understanding” containing a bid rigging provision can develop at a very early stage. In this case, it was held to have existed between Bradken and Castle Harlan well before terms of the deal (including Castle Harlan’s fee) had been agreed. There was a “meeting of minds” and it did not matter that it was unenforceable, verbal or informal only.
- As mentioned, Norcast was awarded damages equal to the difference between the price it sold to Castle Harlan and the price at which Castle Harlan on-sold to Bradken. It's interesting that Norcast deliberately excluded Bradken from the sale process yet was awarded damages because Bradken did not directly bid.
Key points for vendors
- The confidentiality agreement between Norcast and Castle Harlan permitted Castle Harlan to make disclosure to its advisers and consultants, but it didn't require Castle Harlan to divulge to Norcast the identity of its advisers or consultants. Castle Harlan exploited this as a means to utilise Bradken as a “consultant”. Vendors should therefore ensure that their confidentiality agreements more closely regulate this behaviour, and require disclosure of any joint bidding or consortium arrangements if they want to be confident that the highest bid they receive is the highest bid they can get.
- Vendors should also consider including “anti-embarrassment” or “no flip” type clauses which either seek to prevent the successful bidder from on selling within a short period after completion or entitle the vendor to a slice of any profit made on resale within that period.
Key points for bidders
- For bidders, the case poses some very difficult issues that cannot readily be solved with 100% certainty. It may well be that some of the court’s findings about the “purpose” of the arrangement or the finding that Bradken and Castle Harlan were “competitors” will be overturned on appeal. Be that as it may, bidders should be cautious about entering into any bidding arrangements. Very close consideration should be given to whether the bidders are or are likely to be competitors for the target asset. For example, are each of the consortium members wanting to acquire the whole asset or perhaps they are only joining together to acquire the whole so that it can then be broken up between them? Reserving the right to bid separately may also potentially help.
- Section 44ZZRU of the CCA contains an exception for cartel provisions (such as bid rigging provisions) insofar as the provision provides for the acquisition of any shares or assets. At first glance, this may appear to be a useful exception for M&A sale processes; however, the court gave this section a relatively narrow interpretation. It held that the section didn't apply to this case because the bid rigging provision did not actually “provide for” the acquisition of any shares even though it was obviously part of a larger plan which had as its end game the acquisition of shares in Norcast.
- On the court’s reasoning, it wouldn't have mattered if the on-sale occurred one hour or one year later. That said, if there's a greater gap between the acquisition and on-sale, this may have some practical implications.