In brief: The ACCC has instituted Federal Court proceedings against Cryosite Limited for alleged cartel conduct. This is the first case brought by the ACCC alleging 'gun jumping' in a merger, and is a reminder to transaction parties who are competitors to carefully manage contact and pre-planning activities in M&A transactions. The use of external legal counsel, clean teams, pre-planning guidelines and carefully reviewing materials shared or exchanged between transaction counterparties can mitigate the risk of contravening the prohibition on cartels while achieving the transaction parties' objectives of engaging in permissible pre-transaction planning activities.
On 18 September 2017, the ACCC announced it had opened a merger investigation into the proposed acquisition by Cell Care Australia Pty Ltd (Cell Care) of assets from Cryosite. Cryosite and Cell Care had entered into an asset-sale agreement but had not approached the ACCC for merger clearance. On 21 December 2017, the ACCC announced it had closed its public merger review, and noted its concerns about the acquisition, which took place in what the ACCC described as a 'highly concentrated market'. The ACCC indicated that, outside of the public system, Cell Care and Cryosite were the only suppliers of private umbilical cord blood and tissue collection, processing and storage in Australia, and that after entering into the agreement, Cryosite would cease to compete with Cell Care for new customers. The parties announced in January 2018 that they would not go ahead with the proposed acquisition.
The allegations in the cartel proceedings
In the cartel proceedings against Cryosite, the ACCC alleges that the asset-sale agreement, which required Cryosite to refer all customer enquiries to Cell Care after the agreement was signed but before the acquisition was completed, amounted to cartel conduct. This was on the basis that the agreement restricted the supply by Cryosite of services that would compete with Cell Care, and resulted in the allocation of customers between Cryosite and Cell Care. When Cryosite announced the transaction to the ASX on 23 June 2017, it indicated that it had ceased marketing, selling, collecting and processing cord blood and tissue, choosing instead to sell its assets to Cell Care. Although the proposed acquisition of Cryosite by Cell Care was abandoned in January 2018, Cryosite has still not re-entered the market, and has retained the compensation it received from Cell Care to acquire the assets.
The ACCC also alleges that Cryosite and Cell Care engaged in cartel conduct by agreeing that Cell Care would not:
- market to Cryosite's existing customers pre-completion; and
- seek or accept an approach from any Cryosite customers who had had cord blood or tissue stored with Cryosite in the five years preceding completion of the Proposed Sale, with a view to convincing that person to obtain storage from Cell Care. This was a post-completion restraint.
Why is the ACCC bringing cartel proceedings in relation to a transaction?
Within the context of an asset or share acquisition or corporate transaction, until completion, the prohibition on cartels in the Competition and Consumer Act 2010 (CCA) continues to apply. It is, therefore, important for the parties to the transaction to maintain their independence as separate competitors until completion takes place. Failing to act independently or acting in a coordinated manner prior to closing may amount to a contravention of this prohibition. This has implications for the permissible level and kind of coordination that parties to transaction agreements or asset acquisitions may engage in prior to completion in circumstances where the parties are competitors.
While parties are permitted to engage in limited pre-closing planning and discussions, they may not engage in any activities or exchange information (without adequate protections) that would compromise their ability to act as independent competitors should the transaction not proceed for any reason. The requirement to maintain independence exists up until completion, and not simply until ACCC clearance has been obtained. Relevantly, the agreement between Cryosite and Cell Care contained a condition requiring the ACCC to state in writing that it did not oppose the transaction (with completion scheduled to take place by 15 January 2018).
In particular, parties should:
- agree to pre-closing guidelines between counterparties that commit each party to abiding by their obligations under the CCA and clarify the purpose and scope of any pre-planning activities (including sharing of information);
- ensure that each transaction party maintains an independent 'face to market', preserving their own relationships with and dealing independently with their own customers and suppliers, especially regarding pricing;
- ensure that each transaction party continues to make its own independent decisions about its conduct on the market and how to compete. In particular, this means that pre-closing rights giving a purchaser the ability to veto certain conduct of the target pre-closing should be carefully reviewed;
- seek advice on any pre-closing conduct of business contractual obligations or notification requirements contained in the SPA or transaction agreements that may otherwise amount to illegal conferring of control to the purchaser prior to completion; and
- ensure that there is no co-mingling of assets, transfer of employees, exchange of pricing information, sharing of customers or amalgamations of brands prior to closing.
Consequences of contraventions of the CCA
Contraventions of the prohibition on cartel provisions can result in civil and criminal penalties, for both individuals and corporations. Corporations face fines of the greater of $10 million, three times the value of the benefits from the offence, or 10 per cent of the corporation's annual turnover. Individuals face fines or a maximum prison sentence of 10 years.
The ACCC is seeking declarations, pecuniary penalties, a compliance training program and costs from Cryosite..