In a recent decision of the Federal Court, the first decision under Australia’s ‘new’ cartel laws, an Australian company, together with the Chairman of its board and its Managing Director, were found to have contravened the prohibition against ‘bid rigging’ cartels and the prohibition against misleading or deceptive conduct. This was the result of their conduct in connection with the acquisition of a Canadian company. 

Although an appeal has been lodged, the case highlights the potential risks for any purchaser entering into a collaborative arrangement with another prospective purchaser of the same corporate assets. It is also a reminder to those involved in corporate acquisitions of the risks of failing to disclose anything which the other party may ‘reasonably expect’ to be disclosed, even in the absence of any ‘duty’ to disclose.

Background

Since 2009, the Australian Competition and Consumer Commission (ACCC) has had increased powers under new cartel provisions, focused on strengthening the response to so-called ‘hard core’ cartels. In its campaign against serious cartel conduct, the Organisation for Economic Co-operation and Development (OECD) highlighted the practices of price-fixing, market division, output restriction and bid rigging as the ‘most egregious violations of competition law’.

With this increased international focus on cartel conduct, the new cartel provisions — now found in the Competition and Consumer Act 2010 (CCA) — brought criminal penalties, increased search powers and a host of changes to the application of cartel laws in Australia.1

The new cartel provisions have been on the books for almost four years now, and the first case to apply them was decided in March 2013. NorcastS.ár.L. v Bradken Limited (No 2) [2013] FCA 235 (Norcast) is a bid rigging case brought against ASX listed mining consumables manufacturer Bradken. The Norcast case demonstrates the wide application of the cartel provisions, and provides some key lessons regarding cartel conduct, especially for Australian companies and senior executives involved in corporate acquisitions.

Norcast v Bradken

On 6 July 2011, Norcast S.ár.L, a Luxembourg-based holding company owned by Swiss private equity firm Pala Investments (Norcast), sold Norcast Wear Solutions (NWS), a Canadian mining consumables company, to a US-based private equity firm, Castle Harlan, Inc (Castle Harlan), for US$190 million. To Norcast’s amazement, approximately seven hours later Castle Harlan on-sold NWS to Bradken, NWS’s competitor, for US$212.4 million.

Earlier in 2011, when Norcast first decided to sell NWS, it considered Bradken to be a likely bidder for the company. Norcast made an approach to Bradken’s bankers to make sure that they were aware of the sales process and solicited bids from a number of other interested buyers. Bradken learned of the sales process, but did not make a bid, instead contacting Castle Harlan and informing them that Norcast was up for sale. Bradken and Castle Harlan have had an involvement for some time, and Castle Harlan also has a 50 per cent interest in Castle Harlan Australian Mezzanine Partners Pty Ltd (CHAMP), an Australian private equity firm.

Following Bradken’s tip-off, Castle Harlan approached Norcast’s bankers to express its interest in NWS. Bradken did not bid, but throughout the next few months it prepared its own analysis of NWS, communicated extensively with Castle Harlan, and gained access to the confidential materials Norcast provided to Castle Harlan for preparation of a bid. Subsequently, Bradken and Castle Harlan negotiated the ‘price’ of Castle Harlan acquiring NWS in order to on-sell to Bradken. The parties continued to collaborate throughout the bid process, until Castle Harlan purchased NWS, and on-sold it to Bradken as planned.

Norcast brought an action in the Federal Court against Bradken, its Managing Director, Brian Hodges and the Chairman of its Board, Nick Greiner. Norcast claimed that both Bradken and Castle Harlan had contravened the cartel provisions by rigging the bid for NWS, as well as engaging in misleading or deceptive conduct during the sales process. Although it did not bring an action against Castle Harlan directly, Norcast also claimed that Hodges and Greiner were persons ‘involved’ in Castle Harlan’s and Bradken’s contraventions of the CCA.

Rigging the bid process — how a company acquisition became cartel conduct in Norcast

Bid rigging, sometimes known as collusive tendering, can take many forms. At its most simple, bid rigging is a formal or informal arrangement between parties to ‘game’ (or rig) a bidding process by agreeing on a modified value, timing or terms of a bid, or by suppressing bids or withdrawing bids early. In most cases these bidding arrangements allow parties to rotate successful bids among themselves, or to ensure one party attains more favourable terms.

For conduct to be considered bid rigging, it must satisfy the requirements for cartel conduct, dealt with in section 44ZZRD of the CCA. The CCA prohibits parties that are ‘in competition’ with one another from making or giving effect to a ‘contract, arrangement or understanding’ (CAU) containing any of the four ‘cartel provisions’ of price fixing, output restriction, market allocation or bid rigging. Parties that contravene the cartel provisions are open to civil claims and even criminal liability, with up to ten years in prison for individuals and possible penalties for companies exceeding $10 million.

  1. Was there a contract, arrangement or understanding? The existence of a CAU is the first element of any cartel conduct. A CAU can be anything from a formal contract to a loose, informal arrangement or understanding. While a contract can be clearly defined, the concept of an arrangement or understanding is somewhat more nebulous. It is something less than a contract, but more than a ‘mere hope or expectation’; it still requires a ‘meeting of the minds’, and often (but not always) entails some measure of reciprocity.2 In Norcast Gordon J found that an arrangement or understanding between Bradken and Castle Harlan (bid rigging arrangement) existed, as various direct communications between the parties evidenced a clear meeting of the minds concerning an arrangement for Castle Harlan to bid for NWS. Even if the direct communications were insufficient, Her Honour found that a bid rigging arrangement could be inferred from the wider circumstances, as the parties collaborated on the NWS valuation and preparation of a bid, continued secret communications and eventually completed the on-sale of NWS.
  2. Was there a cartel provision? Having established that there was a CAU, the second step in establishing cartel conduct is that the CAU must contain a ‘cartel provision’, being a provision which has the purpose or effect of:  the purpose of:
    • restricting outputs
    • allocating markets or
    • rigging bids.

A bid rigging provision, the claim in Norcast, must satisfy two key elements. There must be:

  1. a request for bids in relation to the supply or acquisition of goods or services;3 and
  2. the CAU must contain a provision that has the direct or indirect purpose of ensuring that:
    1. one or more parties bid but others do not
    2. some parties lodge less competitive bids
    3. some parties withdraw from the bidding process
    4. some parties continue in the bidding process but in a way that favours other parties or
    5. the parties have agreed on a material component of the bid in advance.

As to the requirement for a request for bids, Bradken argued that a request must be directed to the parties themselves (in this case, Bradken and Castle Harlan). Since Bradken believed that it had been excluded from the sales process from the beginning, it argued that it was not part of the request for bids. Gordon J rejected that argument, taking the legislation at its face and concluding that there is no requirement that a request for bids is made directly to the parties accused of bid rigging. All that matters is that there was a request for bids.

Gordon J also held that the request for bids need not occur in Australia, nor does the supply or acquisition of goods or services to which the bid relates need to be within a market in Australia. This is a significant change from the pre-2009 cartel provisions, which limited competition to a ‘market within Australia’.4 The court also noted that ‘no similar territorial limitation is to be found in [the current legislation] and no limitations should be implied’.5

Finally, Gordon J was satisfied that the bid ridding arrangement included a provision that had the purpose of ensuring that Bradken would not bid, and Castle Harlan would. In making that finding, the court considered ‘the subjective, operative purpose’ of the parties (that is, the purposes of the senior executives of the two companies). This purpose was inferred from the actions of Greiner and Hodges, as well as the nature of the arrangement and the wider circumstances. Gordon J also found that it was irrelevant that Bradken was under the impression that it could not bid, because the logical extension of Bradken not bidding was that it would seek to find another party, such as Castle Harlan, to bid in its place.6

  1. Were the parties in competition? The competition condition requires that, for the purpose of a bid rigging cartel provision, the parties to the CAU are, or are likely to be (if not for the CAU) ‘in competition’ with one another in the bid process. Gordon J found it was ‘at least possible’ that Bradken and Castle Harlan might have competed with one another in the bidding process, if not for the bid rigging arrangement. This is consistent with how courts have interpreted the phrase ‘in competition’ in various cases, as the definition of ‘likely’ is particularly broad, extending to a possibility that is ‘not remote’.7 Additionally, Bradken argued that, in line with its previous arguments, ‘competition’ should be ‘in respect of a market in Australia’. Gordon J once again rejected this proposition, this time calling a territorial limitation ‘unnecessary and inappropriate’.8

Damages

Having established a CAU, a cartel provision and the competition condition, the court found that Bradken and Castle Harlan had contravened the prohibition against bid rigging. For this contravention, the court assessed damages at US$22.4 million, being the difference between the US$190 million that Castle Harlan paid Norcast, and the US$212.4 million that Bradken paid Castle Harlan to acquire NWS.

Silence during negotiations — when does sharp dealing become ‘misleading conduct’?

The Australian Consumer Law (ACL) prohibits misleading or deceptive conduct, and conduct which is likely to mislead or deceive.

It is well established, and consistent with the definition of ‘conduct’ in the CCA, that silence or failing to disclose information may constitute misleading conduct in some circumstances. However, it is not always clear when courts will conclude that silence has been misleading conduct. For many years, the courts have approached the question of whether silence has been misleading conduct by determining whether the person claiming to have been misled by another’s silence had a ‘reasonable expectation’ of disclosure. If they did, then that silence is misleading conduct. This approach means that there need not be any ‘duty’ of disclosure, whether statutory, contractual or otherwise.

In this case, Norcast claimed that both Bradken and Castle Harlan had engaged in misleading or deceptive conduct by:

  • Bradken and Castle Harlan representing, by their silence, that they were not co-operating on the bidding arrangement or the on-sale of NWS;
  • Castle Harlan, by its silence, deliberately failing to disclose certain facts and matters to hide the connection between Castle Harlan and Bradken; and
  • Castle Harlan expressly representing that it was the entity acquiring NWS, and that it was not receiving funding from non-associated parties.

Bradken argued that neither it nor Castle Harlan had any duty to disclose Bradken’s identity or its involvement with the bid process. The court rejected this argument, reiterating that Norcast only needed to establish it had a ‘reasonable expectation’ the information that would be disclosed. Gordon J found that in the circumstances, Norcast had a reasonable expectation that Bradken’s involvement in the bidding process would be disclosed, and that Castle Harlan’s and Bradken’s silence concerning the bidding arrangement constituted misleading or deceptive conduct.

Accessorial liability and extraterritorial conduct

 For both the bid rigging and misleading or deceptive conduct, Norcast also brought claims against Mr Hodges and Mr Greiner. On the evidence of extensive communications between Hodges and Greiner, Gordon J was satisfied (within the meaning of s 75B of the CCA) that they were each sufficiently ‘involved’ in Bradken’s and Castle Harlan’s contraventions to be liable as accessories.

Additionally, because Castle Harlan is a US-based private equity firm, its actions would not normally be the concern of Australian law. For Hodges and Greiner to be considered persons involved with Castle Harlan’s actions, the extraterritorial provisions in the CCA and ACL required Norcast to establish that Castle Harlan was itself ‘carrying on business’ in Australia. Despite the fact that the sale of NWS between Norcast and Castle Harlan did not occur in Australia, the court found that Castle Harlan was nonetheless carrying on business in Australia. This was established on the basis of Castle Harlan’s involvement with CHAMP over a number of years, including a 50 per cent ownership stake, shared directors, shared capital raisings and multiple co-investments made in Australia.

Hodges and Greiner, by their involvement in Bradken’s bid rigging and misleading or deceptive conduct, were held personally liable for a proportion of the US$22.4 million in damages suffered by Norcast.

What can be learned from Norcast?

As the first judicial application of the cartel provisions enacted in 2009, the Norcast case provides some important lessons.

  • Cartel conduct, and especially bid rigging, is not necessarily long-term conduct involving smoky back rooms and shady individuals. Even once-off ‘commercial’ transactions can involve a contravention of the cartel provisions.
  • Collaborative arrangements between a purchaser and another prospective purchaser of the same assets can, in some circumstances, raise ‘bid rigging’ cartel concerns.
  • The cartel provisions are not limited to the Australian market. They apply so long as a party involved has a sufficient connection to Australia, which may be through a related company or arrangements with Australian companies.
  • Silence, especially in negotiations, can be misleading or deceptive where the other party has a reasonable expectation that a particular situation would be disclosed.
  • Senior executives should be aware of their potential liability as a person ‘involved’ in cartel conduct and misleading or deceptive conduct.

This article was first published in Keeping Good Companies on 4 June 2013.