In the recent Bradken case1, the Federal Court of Australia found that an Australian listed company engaged in bid-rigging in connection with the acquisition of a Canadian industrial manufacturer and supplier, when it chose not to participate directly in the sale process and, instead, agreed with a private equity firm to subsequently acquire 100% of the shares in the Canadian company from the private equity firm.
This is the first substantive case falling to be considered under the new cartel laws2 and gives a clear warning against any form of coordination or collusion between bidders in M&A transactions, even those with limited connection to Australia, as such conduct could be construed as bid-rigging in breach of the prohibition against cartel conduct.
What happened in Bradken?
Australian company Bradken Limited (Bradken) competed globally in the manufacture and supply of grinding mill liners, including with Norcast Wear Solutions, Inc (NWS). In late 2010, the owners of NWS embarked on a competitive sale process where potential buyers were invited to bid to acquire 100% of the shares in NWS. Despite historical expressions of interest by Bradken to acquire NWS, Bradken was not invited to participate in the initial bidding process.
When Bradken was eventually made aware of the sale, it either considered that it was excluded from the sale process altogether or that any bids made by it would not be successful. As such, rather than seek to bid for NWS directly, Bradken contacted Castle Harlan, Inc, a New York-based private equity firm about the sale. Following this, Castle Harlan expressed interest in participating in the sale process.
From this point on, Bradken coordinated closely with Castle Harlan about the proposed purchase of NWS. In particular, the two parties entered into a consultancy agreement to ensure that Bradken had access to confidential information about NWS that was provided under a non-disclosure agreement.
At no stage during the sale process was Bradken’s association and involvement with Castle Harlan ever disclosed to NWS. Eventually Bradken reached an informal understanding with Castle Harlan that, if Castle Harlan were successful in purchasing NWS, Bradken would buy NWS from Castle Harlan at a higher price.
On 6 July 2011, Castle Harlan purchased NWS for US$190 million. Later that day Castle Harlan on-sold NWS to Bradken for US$212.4 million.
Consortium bidding or other coordination between bidders – the legal issue
Where there is scope for collaboration between potential bidders for an interest in shares or assets and, accordingly, selective or joint responses to tenders, that collaboration may constitute bid rigging.Bid-rigging is a form of cartel conduct prohibited under the Competition and Consumer Act 2010 (Cth) (CCA),3 in circumstances where:
- the parties make or give effect to a contract, arrangement or understanding;
- the parties are, or likely to be, in competition with each other in relation to the acquisition or supply of goods or services; and
- the contract, arrangement or understanding contains a “cartel provision” being a provision that has the purpose of ensuring that in the event of a request for bids, one or more of the parties to the contract arrangement or understanding bid but the other parties do not or otherwise do not submit genuine bids.^Back to top
Unpacking these issues in a M&A context
A contract, arrangement or understanding for the purpose of rigging bids
Where there is an opportunity to acquire services (which may include an interest in assets or shares)4 and some or all of the potential bidders agree amongst themselves that one party’s bid will be:
- lower than all other bids; or
- the only bid containing terms that will be acceptable; or
- the only bid submitted or not withdrawn,
absent an applicable exception, there is a real risk that such conduct could contravene the CCA.
Consortium bidding may also be caught by the prohibition against bid-rigging. It is implicit that if a consortium agrees that only one party will submit a bid or they will jointly submit only one bid, that there is also an agreement that the other parties will not individually participate.
The Court construed the course of direct communications between Bradken and Castle Harlan as being an arrangement that Bradken would not bid to acquire shares in NWS, and that, accordingly the requisite contract, arrangement or understanding was reached for the requisite purpose.
To be successful in its bid-rigging claim, Norcast was required to establish that Bradken and Castle Harlan were in competition, or likely to be in competition, with each other.
It is relevant to the consideration of whether or not consortium parties are competitors to ascertain whether they would have or could have submitted independent bids if it weren’t for the consortium. With significant capital investment and risk involved in the acquisition of an asset, it may be that parties would not be willing or able to compete in the bidding process without pooling their resources.
If it could be shown that due to the size of the shares or asset to be acquired, the capabilities of the parties involved or some other condition affecting how the sale process is answered, it was not possible for all parties to submit independent bids, it may be possible to argue that the parties are not competitive and accordingly any resulting arrangement does not constitute bid-rigging.
In this case, both parties were found to be capable of independently bidding and had both expressed interest in doing so. The Court was satisfied that there was a not remote possibility that but for the arrangement between them, they would have competed with each other bidding for NWS. The fact that Bradken might have understood itself not to be able to participate in the process was found to be insufficient to oust the finding that the parties were competitors.
Request for bids
It was Bradken’s submission that there was never a relevant ‘request for bids’ as required by the CCA, as Bradken was never formally invited to bid on NWS. The Court rejected this argument, finding that the CCA did not require an individual invitation to bid to meet this requirement. The Court broadly interpreted this element of bid-rigging, requiring only the existence of a request for bids. In this regard, the prohibition is not necessarily limited to bidders or potential bidders within a defined process, it also includes parties who are not invited into to bid, such as Bradken and Castle Harlan.
That there be a ‘request for bids’ still has a limiting effect on the application of the bid-rigging prohibition. The Court in Bradken acknowledged that where there is an offer uninitiated by, or not responsive to, a call for bids, there would be no relevant request. However, collusive bidding may still be constitute another form of cartel conduct such as price fixing, or market sharing. It may also be said to constitute exclusionary conduct if it can be said to have the purpose of restricting or limiting the acquisition of services by one or more parties to the arrangement.
Extraterritorial scope – international transactions beware
In Bradken, the Court found that there is no extraterritorial limit imposed on the bid-rigging prohibition. Therefore the request for bids did not have to have occurred in Australia to be caught by the CCA. Furthermore, the Court found that the request for bids did not need to relate to the supply or acquisition of goods or services in Australia.
Until the commencement of the cartel provisions in July 2009, the drafting of the prior law was generally understood to require cartel participants to have been in competition with each other ‘in a market in Australia’. Although, there continues to be some debate as to the meaning and implications of such a phrase, it is seen as having at least some limiting effect on the extraterritorial application of the relevant provisions of the CCA.
The same limiting wording does not appear in the new law prohibiting cartel conduct applying from 24 July 2009. This was observed by the Court in Bradken. It was accordingly also held that competition does not need to be shown in respect of a market in Australia.
Bradken confirms that the new cartel laws have a greater extraterritorial reach than the old law. For reasons of international comity, there must still be some degree of connection with Australia for conduct to be contravene Australian law. The Court’s finding in Bradken requires only a nexus based on section 5 of the CCA. For corporations, this requirement will be met where:
- the corporation is incorporated in Australia; or
- the corporation is carrying on business in Australia.
The Court found that Castle Harlan, a New York-based private equity fund was a corporation carrying on business in Australia for the purposes of the CCA. In light of the this finding, it is likely that a foreign corporation will be considered to be “carrying on business in Australia” where:
- it owns of 50% of an Australian-based corporation;
- the foreign corporation undertakes various activities together with the Australian-based corporation, including buying and selling businesses, and raising capital together with the Australian company;
- many of the events surrounding the disputed acquisition take place in Australia; and
- there are “practical links” between the foreign corporation and the Australian-based corporation, including both companies sharing common executives.
It is likely that we can expect more developments on the extraterritoriality front as we grapple with the international reach of the new cartel laws in an ever-globalising world. Also, Bradken is appealing the Court’s decision.
Managing this issue
Consortium bidding in M&A transactions is common but needs to be managed carefully. If there is any possibility that parties collaborating to bid would be considered to be competitors, parties should explore the following two key mechanisms.
Joint venture exception
An exception to cartel conduct is available for joint ventures. The exception is available where:
- there is a contract containing a cartel provision, or at least that the parties intended that there be a contract and reasonably believed there was a contract;
- the cartel provision is for the purposes of a joint venture;
- the joint venture is for production and/or supply of goods or services; and
- the joint venture is carried on jointly by the parties to the contract or by means of joint ownership or control of a body corporate formed by the parties to carry on the activity.
A party engaging in consortium bidding and other collaborative arrangements with competitors should ensure that the venture can be classified as a joint venture in accordance with the limbs outlined above.
Whilst not a condition of the joint venture exception to cartel conduct, it is a condition of the defence to exclusionary conduct that the impugned provision not have an anti-competitive purpose and that there will be no meaningful anti-competitive effect.
An assessment of competitive impacts will therefore also be necessary to endeavour to prevent falling foul of this provision of the CCA and, indeed the general prohibition on contracts, arrangements or understandings that have the purpose or effect of substantially lessening competition contained in the CCA.
In the event that a joint venture or other arrangement between competitors risks breaching the CCA, it is possible to apply to the Australian Competition and Consumer Commission (ACCC) for authorisation to make and give effect to that arrangement. If authorisation is granted, engaging in the conduct will not constitute a contravention of the CCA.
The ACCC has the power to authorise conduct where it is satisfied that the public benefit from the arrangements or conduct outweighs any anti-competitive detriment.
Given the uncertainties associated with the joint venture exceptions, there may be utility in applying to the ACCC for authorisation of horizontal arrangements with competitors. Authorisation will provide comfort that the relevant conduct does not contravene the CCA.
Authorisation does, however, have its downsides including revealing the terms of the proposed arrangement to the public and the ACCC. It can also be a lengthy process.
In light of the above, the Court determined that Bradken had engaged in bid-rigging in contravention of the CCA. The Court also found that Castle Harlan and Bradken had engaged in misleading or deceptive conduct by not disclosing the fact that Castle Harlan was not a genuine bidder and effectively bidding as proxy for Bradken.
Damages of $22.4 million were awarded to the seller of NWS, being the difference between Bradken’s acquisition price and the initial purchase price paid by Castle Harlan.
Although the findings in this case are the subject of an appeal, the message to be taken is that bidders must act cautiously when collaborating with other actual or potential acquirers of shares or assets so as not to fall foul of the CCA. Bradken was a civil case for damages. Cartel conduct is also capable of attracting very significant civil penalties and, as of July 2009, criminal sanctions.