In brief: The Federal Court has imposed civil penalties of $1.05 million on Cryosite Limited for engaging in cartel conduct. This was the first case brought by the ACCC alleging 'gun jumping' in a merger, being the coordination of competitive conduct by merger parties prior to completion. It's a timely reminder for transaction parties, especially those who are competitors, to carefully manage M&A transactions and to consider their competition law risks throughout the course of transaction negotiations, particularly on the terms of any agreements. Partner Jacqueline Downes (view CV), Managing Associate Felicity McMahon (view CV) and Senior Associate James Somerville report.
On 23 June 2017, Cryosite Limited (Cryosite) entered into an asset sale agreement with Cell Care Australia Pty Ltd (Cell Care), providing for Cell Care to acquire assets used in Cryosite's business of collecting, processing and storing cord blood and tissue (CBT services). Prior to that date, Cryosite and Cell Care were the only private suppliers of CBT services in Australia.
The asset sale agreement provided for a non-refundable, upfront payment of $500,000 from Cell Care to Cryosite. Relevantly, the agreement also contained a clause stipulating that, from the date of the agreement until completion, Cryosite would refer all sales enquiries relating CBT services to Cell Care (the Cryosite restraint).
On 23 June 2017, Cryosite ceased the supply of CBT services to new customers, yet continued to supply services to pre-existing customers. Cryosite also undertook a number of steps to facilitate the referral of customers to Cell Care. Neither party sought clearance from the ACCC from a merger control perspective. However, after the ACCC raised concerns with the parties in August 2017, the agreement was varied to delete the Cryosite restraint and insert a condition precedent requiring ACCC clearance. The ACCC did not make a decision on whether to grant clearance and, accordingly, the proposed transaction was not completed. Cryosite retained the upfront payment it received from Cell Care under the terms of the agreement.
The Federal Court's decision
2.1 Relevant contraventions
Cryosite admitted that by entering into the asset sale agreement and giving effect to the Cryosite restraint (ie ceasing the supply of CBT services and referring potential customers to Cell Care), it had engaged in cartel conduct under the Competition and Consumer Act 2010 (Cth) (CCA). The Cryosite restraint was held to be a cartel provision on the basis that:
- Cryosite and Cell Care were competitors up until the date of the agreement and, but for the agreement, Cryosite was, or was likely to have been, in competition with Cell Care. The court noted Cryosite had the ability to supply the full range of CBT services and that, while its directors had considered whether to close the business absent a sale, there had been no formal decision to this effect; and
- the provision had the purpose of restricting or limiting the supply of services by Cryosite and allocating likely customers to Cell Care.
2.2 Penalties imposed
The ACCC and Cryosite jointly sought, and the court made, declarations of contravention and orders for the payment of $1.05 million in civil penalties and $50,000 in costs.
General deterrence was a key aspect of the court's assessment of the proposed penalty. The court noted the potential for permanent structural market change to be caused by both pre-completion cartel conduct and acquisitions that contravene the merger control provisions. While the court has the power to order divestiture following a completed acquisition, it referred to some limitations on that power being an effective remedy where such structural changes result from pre-completion cartel conduct.
Accordingly, the court said that any penalty needed to be sufficient to deter firms from circumventing the CCA's merger control provisions and, more generally, from prematurely coordinating or integrating their businesses before completion in an anti-competitive manner. In this respect, the court referred to:
- Cryosite and Cell Care being aware that the proposed transaction might be of interest to the ACCC under the merger control provisions of the CCA, but electing to not inform the ACCC; and
- a suggestion by Cell Care that the closure of Cryosite's business be announced before the asset sale agreement to mitigate the risk of ACCC intervention in the proposed acquisition.
The court noted that Cyrosite had received legal advice and considered this was relevant to the fact that it did not engage in conduct with the intention to contravene the CCA, although the conduct giving rise to the contravention did involve senior management, was approved by the Board of Cryosite and resulted in Cryosite benefiting from the conduct.
The prohibition on cartels in the CCA will continue to regulate conduct between purchaser and target until completion. 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. In particular, parties should:
- agree to pre-closing guidelines between counterparties that commit each party to abiding by their obligations under the CCA, and that clarify the purpose and scope of any pre-planning activities (including sharing of information);
- ensure 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 competition law 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 there is no co-mingling of assets, transfer of employees, exchange of pricing information, sharing of customers or amalgamations of brands prior to closing.