Pre-closing conduct in M&A transactions is under the microscope with cartel proceedings launched against a purchaser that the ACCC alleges took premature implementation steps in contravention of Australian competition law.
The ACCC has brought its first case against so-called "gun jumping" conduct in the context of an M&A transaction. This case is a timely reminder for any business doing a deal with a competitor to make sure that its transaction documents and proposed pre-closing steps comply with Australian competition law. Care also needs to be taken to ensure you have appropriate systems and processes to control the exchange of any commercially sensitive information prior to completion (eg. during due diligence). This is particularly important in light of the new prohibition on concerted practices which took effect in November 2017.
What is "gun jumping" conduct?
"Gun jumping" occurs in an M&A transaction where the parties are actual or potential competitors and integrate or co-ordinate their conduct before completion of the transaction.
Australian competition law will continue to apply to dealings between merger parties prior to completion, including in the period between signing and closing. This means that merger parties must continue to behave and operate as independent, competing business until the deal closes.
The ACCC's case against Cryosite
On 12 July 2018, the ACCC commenced proceedings against Cryosite Limited for alleged cartel conduct in relation to the terms of its asset sale agreement with Cell Care Australia Pty Ltd.
Cryosite agreed to sell its cord blood and tissue banking business to Cell Care. Cryosite and Cell Care were the only private suppliers of cord blood and tissue banking services in Australia. The ACCC commenced a review of the proposed transaction under its informal merger clearance process but discontinued that review and commenced cartel proceedings against Cryosite.
The ACCC has taken action against provisions in the sale agreement which it argues:
- required Cryosite to refer all customer inquiries to Cell Care after the sale agreement was signed but before the acquisition was completed (the alleged "gun jumping" conduct); and
- restrained Cell Care from dealing with any Cryosite customer who had cord blood and tissue stored with Cryosite in the five years before the proposed acquisition.The ACCC also alleges that, ancillary to the sale agreement, the companies agreed Cell Care would not market to Cryosite’s existing customers.
The ACCC argues that these restraints in the sale agreement, and the ancillary agreement between the parties, amount to cartel conduct because they restricted or limited the supply of cord blood and tissue banking services, and allocated potential customers between Cell Care and Cryosite.
Managing gun jumping risk in M&A transactions
In some transactions, particularly those in concentrated sectors, there can be extended periods between signing and closing (eg. while necessary regulatory approvals are obtained). During this period, the buyer may be exposed to significant financial and commercial risk while the target is required to operate independently. Steps taken by the buyer to protect its financial interests and manage this risk by placing controls around the activities of the target can be problematic because Australian competition law continues to treat the parties as competitors until completion.
Areas where particular care needs to be taken during pre-closing dealings between a buyer and seller who may be regarded as competitors include:
1. Information exchange
Some level of information exchange will be necessary to get the deal done. Specific systems and processes can be put in place to control the type of information that is disclosed and the individuals to whom it is disclosed to help manage the potential competition law risk.
Uncontrolled sharing of commercially sensitive information between the target and the buyer (e.g.during due diligence) can give rise to material competition law risk, particularly where it has the potential to change the way that the parties compete in the market prior to completion.
2. Restraints on the activities of merger parties
It is common for the buyer to place some restraints on the activities of the seller between signing and closing. These restraints are sometimes referred to as "gap controls". Not all restraints will give rise to competition law risk, however, this is a high risk area and legal advice should be obtained before any potential restraints are discussed or agreed.
In its case against Cryosite, the ACCC argues that the relevant restraints breach Australian competition law because they restrict or limit the products supplied by the target prior to completion and allocate customers between the purchaser and the target.
3. Pre-closing implementation or integration steps
Competition law risk can arise where merger parties co-ordinate to undertake implementation or integration steps in advance of completion (ie. while they are still regarded as competitors). These premature implementation steps are sometimes characterised as "gun jumping" conduct.
In its case against Cryosite, the ACCC argues that the requirement for the seller (Cryosite) to refer all customer inquiries to the buyer (Cell Care) between signing and completion amounts to gun jumping conduct.
Some other examples of conduct that could give rise to gun-jumping risk include: the target making ordinary course business decisions in consultation with, or under the direction of, the purchaser; the merger parties undertaking joint marketing activities; or co-ordination of commercial behaviour between the buyer and target (eg. pricing decisions).
What are the consequences?
Gun jumping conduct in the context of M&A transactions can expose both the buyer and seller to significant penalties under Australian competition law. These penalties include fines of up to $10 million per contravention; three times the gain from the contravention; or 10% of the company's annual turnover in the previous 12 months.
In its case against Cryosite, the ACCC alleges that the relevant gun jumping conduct amounts to cartel conduct. While the ACCC has not caused the CDPP to bring criminal proceedings against Cryosite, engaging in cartel conduct in Australia also exposes the relevant companies and individuals to both civil and criminal liability. In the case of an individual, criminal liability can include imprisonment for up to 10 years.