An Australian bid-rigging case shows that competition rules can apply to corporate finance

Generally, the concerns of competition authorities relate to the supply of goods and services. It is rare that the "market" for corporate control – i.e. the acquisition and sale of companies, shareholdings and businesses – is itself regarded as a matter for applying competition or antitrust rules. An EU Court of Justice case from the mid-1980s, before merger control was introduced as part of EU competition law, concluded that the EU prohibition on anti-competitive agreements could not easily be applied to the acquisition by the cigarette supplier Philip Morris of a shareholder in its competitor Rothmans:

"The fact that Philip Morris, without itself gaining control of Rothmans International, is now in a position to prevent any other competing company from gaining control cannot itself amount to a restriction of competition."50

It was partly as a result of this judgment that the EU authorities realised that they had to introduce specific merger control legislation if they were to apply the competition rules to M&A transactions. The result was the EU Merger Regulation, introduced in 1990.

But now a judgment by Australia's Federal Court has applied the country's competition laws to the market for corporate control – and shows that anti-competitive arrangements and conduct in M&A and corporate finance markets will not necessarily be immune from antitrust scrutiny. The case – Bradken, on which the Australian Federal Court issued its judgment in March 2013 - related to bid-rigging. As explained elsewhere in this issue, bid-rigging is regarded as a serious infringement of competition law by antitrust authorities and courts worldwide52. The difference in this case was that the competitive tender was a bidding process for the acquisition of a company, but nevertheless the Court held that such a process was within the scope of the competition prohibition on bid-rigging on the basis that "shares" came within the definition of a "service" under the competition legislation. The case gives a clear warning against any form of coordination or collusion between bidders in M&A transactions, even those with limited connection with Australia, as such conduct could be construed as bid-rigging in breach of Australia's prohibition against anti-competitive agreements.

What happened in the Bradken case?

The Australian company Bradken Ltd competed globally in the manufacture and supply of grinding mill liners, including with Norcast Wear Solutions, Inc. In late 2010, the owners of Norcast embarked on a competitive sale process where potential buyers were invited to bid to acquire 100 per cent of the shares in Norcast. Despite historical expressions of interest by Bradken to acquire Norcast, Bradken was not invited to participate in the initial bidding process.

When Bradken was eventually made aware of the sale, it considered either that it was excluded from the sale process altogether or that any bids made by it would not be successful. Consequently, rather than seeking to bid for Norcast 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 Norcast. Specifically, the two parties entered into a consultancy agreement to ensure that Bradken had access to confidential information about Norcast 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 Norcast. Eventually Bradken reached an informal understanding with Castle Harlan that, if Castle Harlan were successful in purchasing Norcast, Bradken would buy Norcast from Castle Harlan at a higher price.

On July 6, 2011, Castle Harlan purchased Norcast for US $190 million (about £120 million or €140 million). Later that day Castle Harlan on-sold Norcast to Bradken for US $212.4 million (about £135 million or €160 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 Australia's Competition and Consumer Act 2010.

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 were not 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 the Bradken case, however, 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 real (i.e. not remote) possibility that, but for the arrangement between them, they would have competed with each other bidding for Norcast. 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

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 (although collusive bidding might still constitute another form of cartel conduct such as price fixing, or market sharing).

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 prohibition in Australia's Competition and Consumer Act. Moreover, the request for bids did not need to relate to the supply or acquisition of goods or services in Australia.

Until amendment of the legislation in 2009, Australia's cartel law was generally understood to require cartel participants to have been in competition with each other "in a market in Australia". The same limiting wording does not appear in the new law prohibiting cartel conduct applying from July 24, 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 contravene Australian law. The Court's finding in Bradken requires only a nexus based on section 5 of the Competition and Consumer Act. For corporations, this requirement will be met where the corporation is:

  • incorporated in Australia; or
  • carrying on business in Australia.

The Court found that Castle Harlan, the New York-based private equity fund, was a corporation carrying on business in Australia for the purposes of the Act. In the light of this finding, it is likely that a foreign corporation will be considered to be "carrying on business in Australia" where:

  • it owns more than 50 per cent 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 such as both companies sharing common executives.

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 doing so by way of a joint venture or seeking specific authorisation from the Australian competition authority, the ACCC.

But, as always, it is concealment that render bid-rigging unlawful. The Court 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 were awarded to the seller of Norcast, for a sum representing 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 Australia's competition law. Bradken was a civil case for damages. Cartel conduct is also capable of attracting very significant fines and, as of July 2009, criminal sanctions.

Wider implications beyond Australia – the position in other jurisdictions

And what of other countries' antitrust and competition laws? As we noted at the beginning of this article, 25 years ago the EU Court, in the Philip Morris case, expressed doubts that EU competition law could apply to the market for corporate control. But the Bradken case in Australia will be noted by competition authorities worldwide, and even outside Australia, it would be prudent for companies that are secretly colluding in competitive tenders to acquire companies or businesses to take advice on the antitrust and competition implications.

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50Joined Cases 142 and 156/84, British-American Tobacco Company and RJ. Reynolds Industries v Commission [1987] ECR 4487, paragraph 56.
51Federal Court of Australia, Norcast v Bradken (no 2) [2013] FCA 235 – concerned bid rigging or collusive tendering, which is the practice under which, when there is a competitive tender, the competing bidders conceal from the party running the tender that they are in fact colluding.
52See the article in this issue, " It's worse because it's secret: Bid rigging, why it matters, and what it tells us about the essence of competition law".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.