19 July, 2018
Gun jumping in the cross hairs of the ACCC
What you need to know
Court action by the Australian Competition and Consumer Commission (ACCC) sends a warning shot to companies planning mergers or acquisitions with competitors, about the risk of integrating businesses before completion.
Such conduct is referred to as "gun jumping" and the ACCC action shows that this could amount to cartel conduct under Australia's competition laws.
What you need to do
Seek advice from competition counsel where it is proposed, in a transaction involving competitors, that prior to completion:
- any party be restricted in any way from making independent decisions about how it will run its business; or
- the parties otherwise coordinate their behaviour or make collective decisions with respect to their competitive activities.
What's the conduct of concern to the ACCC?
The ACCC has commenced Federal Court proceedings against Cryosite Limited (Cryosite) for alleged cartel conduct in relation to its entry into an asset sale agreement with Cell Care Australia Pty Ltd (Cell Care). The merger parties are competitors in the supply of cord blood and tissue banking services in Australia.
The parties signed a sale agreement in June 2017 but subsequently abandoned the transaction after the ACCC launched an investigation.
The ACCC alleges that the sale agreement required Cryosite to refer all customer enquiries to Cell Care after the agreement was signed but before the acquisition completed (and before clearance from the ACCC had been obtained).
The agreement also restrained Cell Care from dealing with any Cryosite customers who had cord blood and tissue stored with Cryosite in the five years before the proposed acquisition. The ACCC further alleges that ancillary to the agreement, the parties also agreed that Cell Care would not market to Cryosite's existing customers.
The ACCC says the conduct constitutes "gun jumping" – where parties to a proposed merger combine or coordinate their conduct before completion – and that, if such conduct involves competitors, it is (automatically illegal) cartel conduct under Australian competition law, because:
- it restricted or limited the supply of cord blood and tissue banking services; and
- it allocated potential customers between Cell Care and Cryosite.
The ACCC is seeking declarations, pecuniary penalties, a compliance training program and costs against Cryosite. It is not clear from publicly available material why the ACCC has not also commenced proceedings against Cell Care.
Why is this important?
While prosecutions for gun jumping have a long history in overseas jurisdictions, particularly in Europe, this is the first ever court action by the ACCC for alleged gun jumping in a merger transaction.
It serves as an important reminder that parties to a transaction that are competitors must continue to compete independently of each other and not coordinate their competitive activities until the transaction has closed – or risk engaging in cartel conduct.
Companies found to have engaged in cartel conduct can face very substantial penalties, including pecuniary penalties that are up to the greater of $10 million, three times the value of the benefits obtained from the conduct or 10% of the annual turnover of the company in the previous year – for each contravention.
In addition, companies and the individuals involved could be pursued for a criminal cartel offence (although this is not being pursued in the current case) and could face private Court actions for damages by those affected by the conduct.
What should you do?
Merger parties should seek advice from competition counsel if it's proposed, in a transaction involving competitors, that prior to completion:
- any party be restricted in any way from making independent decisions about how it will run its business (ie the parties agreeing a list of permitted or restricted acts in carrying on business pre-completion, including decisions about sales activities, entry into or termination of contracts, acquisition or disposal of assets, business strategy, etc); or
- the parties otherwise coordinate their behaviour or make collective decisions with respect to their competitive activities.
Of course, competition law risk arises not only in what is agreed in sale documentation but what is agreed orally or otherwise between the parties.
This does not mean that parties to transactions, even if they are competitive with each other, cannot plan for integration ahead of completion – they can continue to do so but must stop short of actual integration or coordination prior to completion.
It will be key for merger parties to have in place robust integration planning protocols to govern the pre-completion exchange of commercially sensitive information, to ensure only information that is strictly necessary is being exchanged and appropriate restrictions and safe guards (including clean team arrangements) are in place regarding the use of that information.
For further information, please contact:
Ross Zaurrini, Partner, Ashurst
ross.zaurrini@ashurst.com
