“Gunjumping” and voluntary merger control: ACCC challenges pre-completion cartel conduct

The Australian Competition and Consumer Commission (ACCC) has brought proceedings against Cryosite[1] for implementing parts of a proposed transaction prior to completion. This reinforces the compliance rule that deal parties must remain independent until completion, even after signing transaction documents. Parties must also be aware of competition risks related to:

• contractual restrictions on business conduct prior to completion;
• organisational or transitional implementation teams, joint business plans and joint approaches or communications to customers; and
• pre-completion exchanges of confidential or competitively sensitive information.

The matter also shows that the ACCC pays close attention to competition issues which are trending globally, and will use its enforcement toolbox to take action if similar fact patterns arise in Australia.

What’s the controversy?

“Gunjumping” refers to either a failure to notify a transaction which triggers one or more jurisdictions’ merger control thresholds, and/or implementing a transaction before receiving merger clearance or completion occurs. The greatest competition risks arise where transaction parties are competitors and they combine or coordinate their conduct before a transaction’s completion.

Gunjumping can be subject to substantial fines or penalties in jurisdictions where merger control notifications are mandatory (subject to transaction or asset values, or market shares, exceeding certain thresholds) and have “standstill” obligations built into their merger rules (most notably in the EU).

But what are the risks in Australia, which operates a voluntary, non-suspensory merger control system? The below discusses these issues with reference to the Cryosite matter in which the ACCC has targeted pre-completion conduct between two merging competitors by using the “cartel provisions” of the Australian Act.[2]

Applicable law

The Act prohibits the completion of acquisitions of shares or assets that would have the effect, or be likely to have the effect, of substantially lessening competition in any market in Australia.[3] However, there is no compulsory notification requirement for transactions in Australia and there is no bar on closing transactions pending merger control review by the ACCC.

The Act does prohibit “cartel conduct”, which arises where competitors agree to act together as opposed to competing with each other. The Act prohibits cartel conduct strictly, whether or not there is any effect on competition. The cartel activities which the Act prohibits are contracts, arrangements or understandings between competitors which have the:

• purpose or effect of fixing, controlling or maintaining prices; or
• purpose of restricting or limiting capacity, production or supply; allocating markets, customers or territories; or rigging bids.

The Act also prohibits contracts, arrangements or understandings which have the purpose or likely effect of substantially lessening competition and “concerted practices” which have the purpose or likely effect of substantially lessening competition.[4]

Corporations and individuals may be fined large amounts for breaches of the Act. Corporations may be fined up to 10% of the annual turnover of the corporate group (for each breach); and officers or employees may face fines of up to $500,000 per contravention and (in some circumstances) jail time or other penalties.

The Cryosite matter

On 11 July 2018, the ACCC instituted 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). This is the first time the ACCC has enforced against gunjumping of this type.

Cryosite and Cell Care are the only private suppliers of cord blood and tissue banking services in Australia. In June 2017, Cryosite signed an agreement to sell its assets in its cord blood and tissue banking business to Cell Care – a potentially major concentration, raising material completion risk from a merger control perspective. The parties agreed that, prior to completion:

• Cryosite would close its operations for new customers;
• Cryosite would refer new customer enquiries to Cell Care;
• Cell Care would be restrained from dealing with certain customers of Cryosite; and
• Cell Care would not market to certain of Cryosite’s existing customers.

The cartel conduct provisions are engaged because those arrangements may be expected to restrict Cryosite’s and/or Cell Care’s supply of cord blood and tissue banking services to potential customers and allocate customers between Cryosite and Cell Care.

The ACCC said that Cryosite and Cell Care “undercut the competitive process” by this conduct, and “undermine[d] the effective functioning” of the ACCC’s merger review process.[5]

Why now?

While the parties had chosen not to notify the ACCC, the ACCC commenced a merger control review in September 2017, which it discontinued in December 2017. The ACCC continued to investigate the circumstances of the proposed transaction because it was concerned by both the closure of Cryosite’s operations for new customers and the failure of the parties to approach the ACCC for clearance in a highly concentrated market.[6] It is clear that the ACCC felt that this was the right fact pattern against which to test the application of the cartel provisions in the merger control context.

However, it is also the case that the ACCC pays close attention to competition issues which are trending globally and will take action if it identifies similar facts in Australia. While this is the ACCC’s first enforcement action against this type of conduct, it follows enforcement actions taken by regulators around the world, which have recently investigated a range of gunjumping conduct in recent years.

In the EU, an obligation to notify the EU Commission of a transaction prior to implementation and a “standstill obligation” are laid out in the EU merger rules.[7] In April 2018, the EU Commission imposed a EUR 125 million fine on Altice[8] for taking steps to implement an acquisition of Portugal Telecom prior to completion. The EU Commission seems to have taken issue with (at least) certain exchanges of competitively sensitive information and inappropriate intervention in some marketing activities prior to completion. This follows a 2014 EU Commission decision in which it levied a fine of around EUR 20 million for similar actions against a Norwegian company.[9]

In announcing the fines on Altice, EU Commissioner Margrethe Vestager said: "if companies jump the gun … they undermine the effective functioning of the EU merger control system.” This language strongly echoes the ACCC Chair’s rationale for opening the Cryosite matter.

Other international regulators have taken similar significant actions recently. For example, the US Department of Justice (DOJ) in 2014 obtained a US$5 million settlement from FlakeBoard and SierraPine, after SierraPine closed certain operations which competed with FlakeBoard’s while the DOJ’s merger control review was underway.[10]

Agencies in Brazil, China, Denmark, France, Japan, Norway and Portugal have taken similar actions in a variety of recent matters, in some cases levying fines in the millions of US dollars.

Takeaways

In short, these matters reinforce the compliance rule that parties to a transaction must remain independent and continue to act as competitors until completion of a deal, even though they may have signed transaction documents.

It will also be important to ensure that:

• any contractual restrictions on the business conduct of the target or acquirer (or similar obligations) do not extend too far and raise a risk of coordinated conduct between the parties prior to completion or transfer control over the parties’ commercial operations before completion;
• organisational or transitional implementation teams are fully aware of the risks of preparing joint business or organisational plans prior to completion and that any approaches or communications to customers in that period are managed appropriately; and
• any exchanges of confidential or competitively sensitive information between the parties prior to completion are managed appropriately. Is the information exchange necessary and for what purpose? Are any “clean teams” designed to manage competitive sensitive information properly constituted and are their clean team materials ringfenced?