IPO managers will need to consider the concerted practice laws when they consider how to sound out their clients to price the IPO.
A recent decision by the UK Financial Conduct Authority has invoked competition law to object to a practice of would be investors disclosing the likely price they might pay to buy shares in Initial Public Offerings (IPO).
Four asset management firms are accused of sharing their pricing expectations shortly before the share prices were set. The information sharing generally occurred on a bilateral basis and allowed the firms to know the other’s plans during the IPO or placing process, when the FCA says they should have been competing for shares.
This is an application of the law which prevents competitors engaging in "concerted practices". The alleged conduct in the UK provides a useful example of the type of behaviour that may now be caught by Australia's new concerted practice laws that came into effect on 6 November 2017.
Australia's new laws
Australia's Parliament has passed laws prohibiting competitors from entering into concerted practices.
In the European Union and United Kingdom, a concerted practice may consist of a one-off event or a pattern of conduct, usually involving the disclosure of sensitive information between competitors which can have the effect of reducing competition between them.
No Australian definition of concerted practice
It is not clear how Australian courts will approach concerted practices. This is in part due to the term "concerted practice" not being defined in the Competition and Consumer Act 2010 (Cth) (CCA). However, the Explanatory Memorandum does describe them as:
"any form of co-operation between two or more firms (or people) or conduct that would be likely to establish such co-operation, where this conduct substitutes, or would be likely to substitute, co-operation in place of the uncertainty of competition."
The ACCC has also published Interim Guidelines which are designed to assist companies determine what concerted practices are. The ACCC gives a number of examples including brokers and traders who share market information through private online chat rooms.
The ACCC's Interim Guidelines explain that a concerted practice may be thought of as:
- any form of co-operation or co-ordination between two or more persons, or conduct that would be likely to establish such co-operation or co-ordination; or
- co-operative behaviour which falls short of meeting the cartel threshold of there being a "a contract, arrangement or understanding", and
where such co-operation or co-ordination removes the risks that would otherwise exist in a competitive market.
Generally, a concerted practice involves some type of communication between competitors which indicates future behaviour. Signalling can be either public or private and the new law applies to both situations.
For parties to engage in a concerted practice the sharing of information is the crux. There is no need to go further and show that they subsequently:
- acted in the same way or at the same time; or
- altered their behaviour in response to the communication.
One can contrast concerted practices with an independent response to market conditions which is lawful. For example, where one competitor announces that its prices are increasing to customers, other competitors may respond immediately. Acting on generally available market information is not likely to be a concerted practice because, in a highly competitive market, competitors may independently respond almost immediately to each other’s changes in pricing. This is part of competition and is not the product of co-ordination or co-operation.
However, where patterns of co-operative behaviour are present, the chances of the ACCC commencing an investigation for a concerted practice increase.
Concerted practices are different to cartels
It is easier for the ACCC to prove a concerted practice than a traditional cartel.
To establish a cartel, amongst other things, the ACCC must prove that the participants in the cartel committed to behave in a certain way . Over time, Australian courts have interpreted these concepts as requiring proof that there was a meeting of the minds of the competitors and that there was an adoption by at least one participant of some commitment to act, or not act, in a particular way.
However, where two or more persons have not entered into a cartel arrangement, it may not always be clear whether they have nevertheless engaged in a concerted practice.
Under the new laws, a concerted practice might be shown through demonstrating some acts of co-operation or co-ordination between competitors, or conduct that would be likely to establish such co-operation or co-ordination, where this is likely to reduce or soften the competition one would otherwise expect to occur.
The recent UK Decision is provisional and not a finding but it does show a continuance of the recent trend to apply competition laws to financial services, and now to pricing structures around an IPO. IPO managers will need to consider the concerted practice laws when they consider how to sound out their clients to price the IPO.