The M&A community will need to take careful note of the recent Federal Court decision in Norcast v Bradken1 for a number of reasons.
- First, there was never any doubt that the prohibition against misleading or deceptive conduct in trade and commerce applies to M&A transactions and indeed to all equity and debt capital market dealings. But the risk of misleading or deceptive conduct increases substantially in cases like Norcast v Bradken, which involved collaborative bidding where the seller was unaware of the collaboration.
- Nor was there any doubt that the per se competition law prohibitions against competitor collusion could apply to collaborative bidding in tenders and sale processes. Shares, land and business assets, are all caught by the wide definitions of ‘goods’ and ‘services’ in the Competition and Consumer Act 2010 (CCA). Since 1976, the prohibition against contracts containing an ‘exclusionary provision’ has had to be borne in mind in any collaborative bidding. Since 2009, the ‘bid rigging’ limb of the definition of a cartel provision has added the even greater risk of criminal liability and imprisonment.
What Norcast v Bradken appears to have added to the mix is:
- a relatively broad view of when parties collaborating in a bid will be treated as being ‘in competition’ or ‘likely to be’ in competition with each other in relation to the bid, and
- an adverse characterisation of the purpose of the very term necessary to support the arrangement.
These two findings are likely to be the subject of robust challenges in the appeal, which was filed on 18 April 2013 by Bradken and two of its executives.
- And finally, the fact of an appeal only increases the uncertainty as to how the CCA’s cartel prohibitions will apply in this area in the future.
In early 2011, Norcast S.ár.L, which is controlled by Pala Investments, a Swiss private equity firm, decided to sell its subsidiary, Norcast Wear Solutions, Inc (NWS), a Canadian mining consumables company. It engaged UBS to conduct the sale process.
UBS contacted potential buyers, informing them that NWS was being sold and providing them with a ‘teaser’ document. UBS did not, however, contact Bradken Limited, an Australian mining consumables company, about the sale directly.
When Bradken did become aware of the sale, it did not attempt to contact Norcast or UBS. Instead it contacted Castle Harlan, Inc (Castle Harlan), a US private equity investment firm, to inform them of the sale process. Bradken claimed it believed it had been excluded from the sale process. There was evidence from prior dealings between Bradken and Norcast consistent with that belief.
Bradken and Castle Harlan were found to have communicated extensively about the acquisition of NWS and shared information, taking deliberate steps to conceal Bradken’s involvement in the sale process, which culminated in an express denial by Castle Harlan executives that it planned to on sell NWS to Bradken.
Castle Harlan ultimately bought NWS for $190 million and, approximately seven hours after the sale was finalised, on-sold NWS to Bradken for $212.4 million.
In May 2012, Norcast brought proceedings in the Federal Court of Australia against Bradken and two of its executives, Nicholas Greiner and Brian Hodges.
Norcast alleged that:
- Bradken and Castle Harlan had engaged in cartel conduct by entering into a bid rigging arrangement,2
- Bradken and Castle Harlan had engaged in misleading or deceptive conduct,3
- Bradken was involved in the contraventions by Castle Harlan, and
- Greiner and Hodges were involved in the contraventions by Bradken and Castle Harlan.4
The CCA prohibits making a contract, arrangement or understanding that contains a ‘cartel provision’, and giving effect to a cartel provision.5 There are both criminal and civil sanctions.6 The definition of a cartel provision has several limbs, covering price fixing, output restrictions, market sharing and, relevantly in Norcast v Bradken, ‘bid rigging’.
To succeed in a claim of bid rigging requires proof of:
- a contract, arrangement or understanding between parties,
- at least two of whom are ‘in competition’ or ‘likely to be’ in competition with each other ‘in relation to’ the supply or acquisition of the relevant goods or services, and
- a provision in the contract, arrangement or understanding that has the purpose of, among other things, ensuring that in the event of a request for bids, one of the parties bids and the other does not.7
To succeed in a claim for misleading or deceptive conduct, it must be shown that:
- in trade or commerce,
- a person engaged in conduct,
- that is misleading or deceptive or likely to mislead or deceive.8
The decision was delivered on 19 March 2013. Justice Gordon found that each of Norcast’s claims were established, and that Norcast had suffered loss or damage in the amount of $US22.4 million – the difference between the amount it received from Castle Harlan for NWS and the amount Bradken would have paid had it bid directly.
In a detailed judgment, her Honour dealt with 16 separately identified ‘issues’ – eight in relation to the bid rigging claim, and eight in relation to the misleading or deceptive conduct claim. We set out some key findings below.
Was there a ‘request for bids’?
Her Honour found that the competitive sale process for NWS conducted by UBS was a ‘request for bids’ within the meaning of the CCA. Her Honour rejected Bradken’s submission that a request for bids must be a request directed to the parties to the alleged bidding agreement. The legislation requires the existence of a request for bids; it does not require a request directly or individually to each of the parties to the alleged bidding agreement.9
Further, her Honour held that a request for bids does not need to be a request for bids in Australia. No territorial limitation is expressed in the relevant prohibition and none should be implied.10
Competitors or likely competitors?
Her Honour emphasised that for the purposes of the cartel prohibitions, ‘likely’ includes ‘a possibility that is not remote’.11 Her Honour found that Castle Harlan bid – it sought to acquire NWS for resale at a profit, and that Bradken wanted to acquire NWS – it was the logical purchaser. On that basis, her Honour concluded that, absent the bidding arrangement, it was at least possible that Bradken and Castle Harlan would have been in competition with each other in bidding for NWS.12
Her Honour also rejected Bradken’s contention that the CCA requires the parties to be in competition with each other in a market in Australia.13
A contravention requires the bidding agreement to include a provision with the purpose of ensuring that Castle Harlan would bid, but that Bradken would not.
Bradken submitted that the purpose condition was not satisfied because it believed it had been excluded from the sale process, and that the approach to Castle Harlan was made simply to preserve the possibility of an acquisition of NWS at some point in the future.
Justice Gordon, however, was satisfied that the arrangement contained a provision with the requisite purpose. Her Honour considered that Bradken’s belief it had been excluded from the NWS sales process was not inconsistent with having the requisite purpose – it was considered that a natural corollary of such a belief was that Bradken would not bid.14
Misleading or deceptive conduct
Justice Gordon found the following instances of misleading or deceptive conduct:
- Bradken’s and Castle Harlan’s silence about their arrangements, and
- express representations made by Castle Harlan that it was the acquiring entity and would not require funding from associated entities.
In relation to Bradken’s and Castle Harlan’s silence, her Honour held that they both took steps to ensure that Norcast did not learn of the connection between Castle Harlan and Bradken. In doing so, they represented that Bradken was not involved in Castle Harlan’s acquisition of NWS.
Her Honour considered that Norcast’s general awareness of the likelihood that Castle Harlan might, at some time in the future, sell NWS could not cure the misleading or deceptive conduct by silence.15
Justice Gordon appeared to accept as genuine Bradken’s belief that Norcast had excluded Bradken from the sale process. Her Honour used this fact to infer that there was a term or provision in the arrangement between Bradken and Castle Harlan that Bradken would not bid for NWS. But, in circumstances where Bradken genuinely believed it could not bid it does not necessarily follow that it made an arrangement that it would not bid. If Bradken genuinely believed it could not bid, it did not need a term in the arrangement with Castle Harlan that it would not bid.
The finding that Bradken and Castle Harlan were ‘likely’ to be in competition with each other for the acquisition of NWS is also potentially contentious. As noted above, the CCA provides that ‘likely’ includes a ‘possibility that is not remote’. However, as a matter of construction, it is arguable that this definition applies only in relation to the likelihood of the supply or acquisition of goods or services and not to the likelihood of the parties being in competition in relation to that supply or acquisition. In addition, the specific finding in the judgment is simply that competition between Bradken and Castle Harlan in relation to the acquisition of NWS was at least a possibility. This finding does not appear to address the statutory test as formulated by Justice Gordon – that the possibility is not remote.
Furthermore, whatever the test may be, if Bradken genuinely believed it was excluded (a matter which her Honour relied on as to the purpose of the arrangement), it must be arguable that Bradken and Castle Harlan were not in fact in competition with each other in relation to the acquisition of NWS at the time the relevant arrangement was made.
In addition, there does not appear to have been any evidence as to whether Castle Harlan would have bid at all apart from the arrangement with Bradken. It appears to have been arguable that Castle Harlan was not otherwise a bidder for NWS – and that the arrangement between Bradken and Castle Harlan was commercially irrational if they were both genuine bidders for NWS.
And finally, the two key factual findings that:
- Castle Harlan and Bradken were ‘likely to be’ in competition with each other in relation to the acquisition of NWS, and
- Castle Harlan and Bradken entered into an arrangement that had the purpose of ensuring that Castle Harlan would bid, and Bradken would not bid, for NWS,
could also have helped to establish that the arrangement included an exclusionary provision (if that had been alleged). A purpose of ensuring that Castle Harlan would bid for NWS and Bradken would not bid could equally have been characterised as a purpose of preventing, restricting or limiting the acquisition of the shares in NWS from Norcast. Accordingly, the analysis and conclusions are capable of extending to all collaborative supplies and acquisitions, not just those made in the event of a request for bids.
There are many situations in an M&A context that are analogous to the situation in Norcast v Bradken, or that might attract the analysis in that decision. For example:
- A bidder who may have a higher willingness or ability to pay for an asset, a unique ability to obtain synergies from the asset, or exposure to hold out or ransom demands by the seller, might legitimately wish to conceal its identity by using an intermediary (or nominee) to buy on its behalf. A simple and common example is the consolidation of smaller parcels of land for a subsequent larger development. After Norcast v Bradken, if the approach adopted by Justice Gordon stands on appeal, the bidder and its intermediary will need to ensure that there is nothing more than a remote possibility that the intermediary could be a bidder in its own right. This could prejudice the credibility of the intermediary’s bid in the first place, and possibly increase the risk of misleading or deceptive conduct.
- Another example is where different bidders are interested in separate parts of a business offered for sale. Suppose Bidder A only wants the domestic operations of the target business and assets, and Bidder B only wants the overseas operations and assets. They might consider an arrangement where only one of them will bid and, if successful, on sell the relevant part of the business to the other.
- In the US, the practice of ‘club bidding’ or ‘consortium bidding’ by private equity firms for listed corporations ‘going private’ drew the attention of the DOJ some years ago. The investigation did not lead to action, but the US law is more flexible in this area. In addition, the US Supreme Court in Credit Suisse Securities (USA) LLC v Billing16 found that securities regulation displaced antitrust law in relation to certain equity capital market conduct. These comforts are not available in Australia – and club and consortium bidding as well as ‘club lending’ can all raise cartel issues similar to those that arose in Norcast v Bradken.
In light of the decision in Norcast v Bradken, parties who find themselves in Bradken and Castle Harlan’s position might wish to consider the following questions:
- Should Bradken have submitted a bid despite believing it was excluded? If Bradken was rejected in stage 1, could it then have approached Castle Harlan and asked it to bid? But how could it ensure Castle Harlan had made it to stage 2?
- Why was Castle Harlan treated as a likely competitor of Bradken for NWS? How could Castle Harlan have established that, but for Bradken’s belief that Bradken had been excluded, Castle Harlan was never a likely buyer?
- What should Castle Harlan have said when asked by the vendor whether it was going to on sell to Bradken? Would it have been safe simply to refuse to answer the question?