On 12 July 2018, the Australian Competition and Consumer Commission (ACCC) announced that it had instituted proceedings against biotech company Cryosite Limited (Cryosite) for alleged ‘gun jumping,’ in breach of the civil prohibitions on cartel conduct.
Why the case is important
It is the first ‘gun jumping case’ – implementing a merger before completion and before there was any certainty about a completion - brought by the ACCC, for implementing a merger before completion.
The asset sale agreement
In June 2017, Cryosite entered into an asset sale agreement to sell its umbilical cord blood and tissue banking business to Cell Care Australia Pty Ltd (Cell Care), the only other private provider of cord blood and tissue banking in Australia.
When Cryosite signed the asset sale agreement, Cell Care made an upfront, a non-refundable payment of $500,000 to Cryosite.
In addition to the non-refundable deposit, the asset sale agreement provided that:
- Cryosite must refer all new customer enquiries to Cell Care after signing (and before completion); and
- Cell Care must not deal with any Cryosite customer who had cord and blood tissue stored with Cryosite in the five years before the proposed acquisition.
The asset sale agreement did not complete and Cryosite announced it would not be re-entering the market
In January 2018, Cryosite announced that the asset sale would not be completing and that it would not be re-entering the market.
The ACCC’s allegations
The ACCC alleges that the non-refundable deposit, the obligations straight after signing to commence referring all new customers to Cell Care and to refrain from dealing with certain customers, together with a less formal arrangement where Cell Care agreed it would not market its services to Cryosite’s existing customers, resulted in breaches of Australia’s cartel laws.
In essence, the ACCC is alleging that Cryosite ‘jumped the gun’ by implementing parts of the asset sale agreement, before completion and before they had a letter of no objection from the ACCC.
There might be a substantive question as to whether Cell Care and Cryosite would have ever obtained a letter of no objection from the ACCC for a merger to monopoly. They might have if they had been able to show the ACCC that one of the businesses was not viable and, in the absence of the transaction, would have been forced to exit the market.
It's interesting that the ACCC did not commence its public review of the proposed transaction until 18 September 2017, more than 2 months after the parties had signed the agreement.
It's also interesting that the ACCC has only commenced proceedings against one of the parties – the party who received the non-refundable deposit.
The orders being sought by the ACCC
The ACCC is seeking declarations, pecuniary penalties, a compliance training program and costs.
What is ‘gun jumping’?
‘Gun jumping’ occurs when parties are competitors and unlawfully combine or coordinate their conduct before close a sale and purchase transaction.
In Australia there are no bright lines around what constitutes ‘gun jumping’. Unlike other jurisdictions with mandatory merger filing requirements, there is no requirement for parties to notify a proposed transaction to the ACCC once a particular threshold is met.
As such, the focus in Australia is on parties protecting their own confidential information and maintaining sufficient independence until the deal has completed, or there is sufficient certainty that it will complete.
In jurisdictions where filing is mandatory, such as the European Union, ‘gun jumping’ may be ‘procedural’, where parties who meet the filing thresholds complete a transaction without notifying the competition authority, or ‘substantive’, where parties coordinate their conduct prior to the closing of the transaction and receiving regulatory approval.
Gun jumping – a global enforcement trend
The ACCC’s announcement follows recent cases in the European Union and the United States, where competition authorities have demonstrated their willingness to penalise merger parties for coordinating their activities prior to completion.
On 24 April 2018, the European Commission imposed a fine of 125 million Euros on Altice S.A. (Altice), a multinational cable and telecommunications company, for partial implementation of its acquisition of Portuguese telecommunications operator, PT Portugal SGPS, S.A. (PT Portugal), prior to obtaining merger approval, and in some instances, prior to notification.
The European Commission found that Altice had exercised control over PT Portugal, through the acquisition of veto rights over PT Portugal’s day-to-day business operations and by seeking and receiving commercially sensitive information in the absence of a confidentially agreement.
Accordingly, the fine imposed on Altice recognised the seriousness of failing to abide by the European Union Merger Regulation’s (EUMR) ‘hold-separate’ obligation, which prohibits parties from prematurely coordinating their activities or receiving the benefits of ownership.
The fine imposed on Altice is significantly higher than previous fines imposed by European Commission for ‘gun-jumping.’ Those fines were imposed in cases whether the parties failed to notify their proposed transaction to the European Commission.
The United States competition authorities have been, and remain, active in enforcement matters involving ‘gun jumping.’ Most recently, in January 2017, the Department of Justice (DOJ) reached a settlement with Duke Energy Corporation (Duke), a seller of wholesale electricity, for gun jumping in relation to its acquisition of Osprey Energy Centre (Osprey), an electricity generating plant in Florida.
The DOJ alleged that, at the same time Duke agreed to purchase Osprey in August 2014, it entered into a ‘tolling agreement’. Under the tolling agreement, Duke assumed control of operational responsibilities at Osprey as well as the right to receive profits and losses from Osprey’s day to day business. The tolling agreement came into effect before Duke had notified the proposed purchase of Osprey to the DOJ and had observed the statutory waiting period.
In the settlement announcement, the DOJ stated that it ‘remains vigilant’ against ‘gun jumping’ and will take action when parties cease to compete independently prior to the expiration of the review period.
The ACCC’s Cryosite case is consistent with recent enforcement actions against ‘gun jumping’ in the United States and European Union.
Co-ordinating competition before completing a sale and purchase undermines the effectiveness of merger control regimes and, in Australia, can result in breaches of the prohibitions on cartel conduct, which can have civil or criminal consequences.
It is important for parties to a sale and purchase agreement to ensure they are doing everything reasonably and practically possible to maintain their independence prior to the completion of their deal, regardless of whether a merger filing is necessary. This includes establishing robust confidentiality protocols and ‘clean teams’ to ensure that any commercial sensitive information is held separate prior to the completion of the transaction.