Australia: Penalties ordered in first ACCC case against gun jumping in M&A deal

On 13 February 2019 the Federal Court has ordered Cryosite Limited (Cryosite) to pay penalties of $1.05 million for agreeing to refer customers, and actually referring customers, to a competitor before a sale of business assets was completed.

This is the first time the ACCC has brought a case of gun jumping before the court and was successful. "Gun jumping" occurs when merger or acquisition parties who are competitors, combine or coordinate their conduct before the actual completion of the transaction and prior to obtaining merger control clearance. This behaviour may amount to cartel conduct or, since the introduction of changes in November 2017, a concerted practice, which is prohibited under the Competition and Consumer Act 2010 (CCA) and exposes both involved parties to significant penalties under the Australian competition law.

The relevant facts

• On 23 June 2017, Cryosite entered into a sale agreement with its competitor, Cell Care Australia Pty Ltd (Cell Care).
• The sale transaction related to assets used in Cryosite's cord blood and tissue (CBT) banking services business.
• Cryosite received a non-refundable upfront payment of $500,000.
• On entering into the sale agreement, Cryosite and Cell Care agreed that during the period between the execution date of the agreement and completion of the proposed sale, Cryosite would refer all sale enquiries in relation to its CBT banking services to Cell Care, (referred to as the 'Cryosite restraint' by the Court).
• In complying with the restraint, during the period between the execution date of the agreement and completion, Cryosite ceased supplying CBT banking services to any customers with whom it had not already entered into a contract and implemented a process of referring customer enquires to Cell Care.
• In August 2017, after the ACCC raised concerns, Cryosite and Cell Care ceased to give effect to the restraint.

The law

This case involves multiple breaches of cartel provisions contained in section 44ZZRJ and 44ZZRK of the CCA.

• Section 44ZZRJ, as it was in force at the time of the contravening conduct, provided that a corporation contravenes that section if the corporation:
• • makes a contract or arrangement, or arrives at an understanding; and
  • the contract, arrangement or understanding contains a cartel provision.

• Section 44ZZRK, as it was in force, provided that a corporation contravenes that section if:
• • a contract, arrangement or understanding contains a cartel provision; and
  • the corporation gives effect to the cartel provision.

• The term 'cartel provision' is defined in section 44ZZRD, as then in force. That section sets out two conditions that have to be satisfied in order for a provision of a contract, arrangement or understanding to be a cartel provision:
• • Firstly, either the "purpose/effect" condition in section 44ZZRD(2) or the "purpose" condition in section 44ZZRD(3) must be satisfied. These sections are broad and capture a variety of conduct. More specifically to this case, section 44ZZRD(3) provided that the 'purpose' condition is satisfied if the provision has the purpose of directly or indirectly:
  • • preventing, restricting or limiting the supply, or likely supply, of goods or services to persons or classes of persons by any or all of the parties to the contract arrangement or understanding; or
    • allocating between any or all of the parties to the contract, arrangement or understanding the persons or classes of persons who have acquired, or who are likely to acquire, goods or services from any or all of the parties to the contract, arrangement or understanding.
  • The next condition that must be satisfied in relation to a "cartel provision" is the "competition condition" set out in the then section 44ZZRD(4). This condition is satisfied if at least two of the parties to the contract, arrangement or understanding:
  • • were, or were likely to be, in competition with each other in relation to the supply, production or acquisition of the goods or services the subject of the impugned provision; or
    • would, or would be likely to, be in competition with each other in relation to the supply, production or acquisition of the goods or services the subject of the impugned provision, but for any contract, arrangement or understanding.

The maximum penalty for breaching the provision described above is the greater of:

• $10 million;
• if the total value of the benefits that have been obtained by one or more persons and that are reasonably attributable to the act or omission – 3 times that total value;
• if the Court cannot determine that total value of those benefits – 10% of the annual turnover of the corporation during the period of 12 months ending at the end of the month in which the act or omission occurred.

The statutory maximum applies to each contravention, not to each course of conduct.

The outcome

Cryosite made admissions of contraventions of the CCA in the following respects:

• the Cryosite restraint was a cartel provision within the meaning of section 44ZZRD(1); and
• by entering into the sale agreement, Cryosite made a contract which contained a cartel provision, and thereby contravened section 44ZZRJ; and
• by giving effect to the Cryosite restraint during the period from 23 June 2017 and August 2017, Cryosite thereby gave effect to a cartel provision in contravention of section 44ZZRK.

As a result, Cryosite was ordered to pay $1.05 million in penalties, which was allocated as follows:

• $600,000 for making the sale agreement containing the restraint which was deemed to be a cartel provisions, and
• $450,000 for giving effect to the restraint.

Cryosite was also ordered to pay the ACCC's towards the costs of proceedings in the sum of $50,000.

A number of factors were relevant in the Court's decision to deliver penalties at the lower end of the available maximum penalty. These included:

• the parties were not able to quantify the value of the benefits from the contravening conduct, other than the upfront payment of $500,000;
• Cryosite's annual turnover was expected to be in the order of $1 million. The maximum penalty per contravention if the Court applied the maximum penalty would be $10 million.
• Cryosite's size and weak financial position were taken into account;
• Crysoite's cooperation with the ACCC in relation to the proceedings;
• the internal and confidential nature of the conduct between Cryosite and Cell Care;
• Cryosite's commercial benefits from the breach;
• the conduct deprived consumers of a choice of provider; and
• the competitors did not seek merger clearance from the ACCC.
• Interestingly, it did not matter that in January 2018 Cryosite and Cell Care announced that they would not go ahead with the proposed acquisition. Consequently, Cryosite ceased all CBT services leaving Cell Care as the only available private supplier of CBT banking services.

What this means for your business

In any purchase and sale transaction involving competitors, parties need to be mindful of their conduct throughout the entire process of the deal and conduct themselves at arm's length until a deal has been completed.

To reduce the risks of gun jumping, parties should:

• continue to operate as independent competitors, including making independent competitive decisions;
• ensure they are doing everything reasonably and practically possible to maintain independence prior to the completion of the deal, regardless of whether a merger filing is necessary;
• establish robust confidentiality protocols to ensure that any commercial sensitive information is held separate prior to the completion of the transaction;
• seek legal guidance on what legitimate information that can be shared between parties; and
• consider whether a proposed transaction raises competition concerns and whether to seek any form of merger clearance from the ACCC.

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.