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First Australian M&A gun-jumping prosecution: ACCC v Cryosite Limited
While commonly prosecuted in other jurisdictions around the world, last week the Australian Competition and Consumer Commission (ACCC) for the first time brought cartel proceedings for “gun-jumping”, that is, for coordination of business activities, including by restricting competitive conduct and illegitimate information exchanges, between a buyer and a target prior to regulatory approval and completion of a merger, while they are still independent competitors.
While parties to a proposed merger will often need to plan for the integration of their businesses ahead of completion and prior to obtaining clearance from the ACCC (particularly in relation to back office and IT functions), and the buyer will want to ensure that the value of the target’s business is preserved until after completion, the ACCC’s civil prosecution of Cryosite Limited (Cryosite) and Cell Care Australia Pty Ltd (Cell Care) illustrate the care that must be taken to ensure that doing so as to not give rise to “gun jumping” concerns under the Competition and Consumer Act 2010 (Cth) (CCA).
The ACCC explained the rationale for prohibiting gun-jumping in a media release: “When parties implement a transaction before the regulatory approval process is finalised, they undercut the competitive process. Gun jumping undermines the effective functioning of the ACCC and the merger process.”
The ACCC’s allegations
The ACCC’s civil action has been brought in the Federal Court against Cryosite, a publicly listed company that provides cord blood and tissue (CBT) banking services in Australia. According to the ACCC, the alleged cartel conduct occurred in the course of Cryosite and Cell Care entering into an asset sale agreement (ASA) for the sale of some of Cryosite’s assets used in its CBT banking services business.
The ACCC claims that Cryosite and Cell Care were, until August 2017, the only two private suppliers in Australia for services involving the collecting, processing, storing and releasing of CBT, which is sourced from a newborn child's umbilical cord. CBT is rich in stem cells and may be used for later treatment.
Negotiations between Cryosite and Cell Care
Between January and June 2017, Cryosite and Cell Care allegedly negotiated the sale of certain assets used in Cryosite’s CBT banking services and, during this time, Cryosite did not make any public announcements about the future of its CBT banking services. It is claimed the parties were aware that the ACCC might scrutinise their proposed transaction.
The parties entered into an ASA on 23 June 2017, however it is alleged that earlier that month the parties discussed Cryosite announcing that it had decided to close part of its CBT banking business before entry into the ASA occurred. The ACCC claims this extended to Cell Care proposing Cryosite amend its announcement of entry into the ASA to state it had entered into the ASA “consequently” to a decision to cease marketing, selling, collecting and processing CBT.
Further, the ACCC claims the parties agreed Cryosite’s announcement would state that this “transaction delivers attractive financial returns to Cryosite shareholders for exiting the challenging aspects of the Cord Blood and Tissue business". The ACCC claims this announcement is the first time that Cryosite publicly announced that it would cease marketing, selling, collecting and processing CBT banking services.
Following the announcement of the entry into the ASA, the ACCC commenced a review of the proposed asset sale under the ASA. The ACCC began conducting a public merger review of the proposed sale under the ASA in October 2017 before discontinuing its review in December 2017.
In the course of its public merger review, the ACCC raised concerns that cartel conduct may have been engaged in by the parties. As a result, in September 2017, the parties executed a deed of variation deleting certain clauses, including clause 5.1 of the ASA.
When it discontinued its public merger review, the ACCC noted that it was both concerned that the parties to an acquisition in a highly concentrated market did not contact the ACCC and that it was continuing its investigation into the ASA. In January 2018, Cryosite announced the proposed acquisition would not be completed.
The alleged cartel conduct
According to the ACCC, there were two clauses in the ASA that contained cartel provisions:
- clause 5.1: During the period between execution of the ASA on 23 June 2017, and the date of completion, Cryosite agreed to refer all sales inquiries in relation to its CBT banking business to Cell Care (Customer Referral Requirement); and
- clause 18: Cell Care undertook not to seek or accept an approach from any Cryosite customers who had CBT stored with Cryosite in the five years preceding completion of the ASA. This restraint applied for a period commencing five years from the date of execution of the ASA and ending 6, 12 or 18 months later. It applied at its narrowest in relation to conduct in New South Wales and, at its broadest, in relation to conduct in Australia. (Non-Compete Clause)
The ACCC alleges that Cryosite gave effect to the Customer Referral Requirement in essentially three ways:
- first, by establishing a process where Cryosite staff would refer customer inquiries, and customers who made contact with Cryosite, to Cell Care;
- second, by Cryosite reporting to Cell Care on the customers which were referred to Cell Care; and
- third, by Cryosite ceasing to provide CBT banking services to new customers.
The ACCC alleges that Cryosite and Cell Care also reached an understanding or arrangement in June 2017 for Cell Care not to market to Cryosite’s existing customers. The ACCC alleges this understanding or arrangement was given effect to by Cryosite requesting that Cell Care amend information on its website which related to an offer for Cryosite customers to obtain a particular genetic test.
The ACCC claims that the purpose of the Customer Referral Requirement, the Non-Compete Clause and the alleged understanding or arrangement reached in June 2017 was to directly or indirectly restrict or limit the supply or likely supply of CBT banking services, or, to allocate potential customers between Cryosite and Cell Care.
Finally, the ACCC claims that Cryosite has not since re-entered the market and has retained $500,000 it received from Cell Care upon signing the ASA.
Reduce the risk of gun-jumping
These proceedings illustrate how “gun-jumping” can lead to competition law risks in a merger or acquisition. Parties must remember that until their transaction is completed they remain independent competitors (or, possibly, potential competitors), and are subject to the same rules under the CCA that apply to all competitors.
To reduce the risks of "gun-jumping", parties to a proposed transaction should:
- Seek legal guidance on what legitimate information can be exchanged between the parties.
- Implement an information sharing protocol that confirms their commitment to abide with their obligations under the CCA and which sets out the rules and procedures as to how they will share any confidential and competitively sensitive information necessary for due diligence or to engage in transition planning (eg IT systems, human resources).
- Continue to operate as independent competitors, including making independent competitive decisions. They should not in any way coordinate their pricing, marketing or other competitive activities, or have any “approval” rights over the other party’s conduct.
- Continue to deal with customers and suppliers independently and make their own decisions about these relationships.
- Not represent themselves (eg. to customers) as being a single firm or being integrated.