Jumping the gun – ACCC sues for implementing a merger too soon

The Australian Competition and Consumer Commission (ACCC) has instituted proceedings against Cryosite Limited (Cryosite) for alleged cartel conduct in relation to an asset sale agreement with competitor Cell Care Australia Pty Ltd (Cell Care).¹ Prior to entering the agreement, Cryosite and Cell Care were the only private suppliers of storage services for umbilical cord blood and tissue in Australia. Cord blood and tissue are a vital source of stem cells which are used in an increasing number of medical applications.

On signing the asset sale agreement in June 2017, Cell Care made a non-refundable payment of $500,000 to Cryosite. Under the agreement, Cryosite was then required to refer all customer enquiries received post signing but prior to completion to Cell Care, while Cell Care was restrained from continuing to deal with any customer who had cord and blood tissue stored with Cryosite in the previous 5 years. The ACCC alleges that the companies also came to an agreement ancillary to the asset sale that Cell Care would not market to existing customers of Cryosite.

Cryosite and Cell Care first came to the ACCC’s attention last year following their entry into the agreement. The ACCC was concerned by the failure of the parties to seek clearance from the ACCC ahead of entering the agreement given the highly concentrated market in which they operated.² Cryosite had further ceased competing with Cell Care for new customers, although it continued to provide services to existing customers. The ACCC commenced a public merger review in September 2017 but discontinued the review in December without making a decision, although it continued to investigate the circumstances surrounding the entry into the agreement. The acquisition was never completed, Cryosite announcing in January 2018 that it would not proceed. Cryosite has not re-entered the market and has retained the $500,000 received from Cell Care.

The ACCC alleges that Cryosite and Cell Care’s behaviour amounted to “gun jumping”, a term which refers to where parties to a merger exchange too much confidential information or coordinate their conduct prior to completion or approval of the transaction.

The proceedings against Cryosite mark the first time the ACCC has taken action in relation to gun jumping, which is becoming an increasing focus of competition regulators globally. Pre completion behaviour has been closely scrutinised by regulators in Europe in particular, who have ruled that illegal gun jumping behaviours may include:

• Merging business units and operations, or exchanging competitively sensitive information, prior to receiving authorisation from regulators. Altice was fined $US88 million by French regulators for doing so in its acquisition of SFR and Virgin Mobile France³;
• Implementing the preliminary steps of a multi stage transaction without informing regulators. Canon’s acquisition of Toshiba Medical Systems was found to have breached EU merger control rules as it only informed authorities of its intention to make the acquisition after completing the first of two steps in the acquisition process⁴; and
• Implementing ineffective international carve outs – international mergers may require the approval of regulators in multiple jurisdictions. Parties may choose to complete the deal but exclude certain business locations until local approval is obtained. Cisco Systems Inc. and Technicolor S/A were fined the equivalent of $10 million by Brazilian authorities for completing a global transaction before receiving regulatory approval in Brazil. A carve out intended to preserve competitive conditions in Brazil pending regulatory approval did not prevent a finding of gun jumping, with regulators voicing concerns about the effectiveness of such clauses and difficulties in monitoring compliance.⁵

Under Australian competition laws, if the exchange of sensitive information between parties prior to a merger has potential to substantially lessen competition (eg, as part of due diligence processes or processes to identify and quantify synergies), this could contravene the new prohibition in the Competition and Consumer Act (CCA) against ‘concerted practices’. Such exchanges can also give rise to suspicions of illegal price fixing or market sharing. It is therefore important to carefully manage such exchanges of information, including by considering the detail of information that needs to be exchanged, putting non disclosure agreements (NDAs) in place to confirm how information is allowed to be used, and restricting who will be allowed to access information.

Parties to a merger must remain independent and continue to act as competitors until completion – to do otherwise risks breaching prohibitions on cartel conduct. Even normal vendor restraints in a business or share sale agreement may technically constitute cartel provisions on the basis that they constitute agreements between potential competitors restricting what one of those parties may do. It is therefore important to ensure that such restraints meet the criteria set out in section 51(2)(e) of the CCA, which provides an exemption from cartel laws for restraints that are solely for the protection of a purchaser in respect of the goodwill of the business. Restraints that have some ancillary purpose or go beyond what is necessary to protect the purchaser’s goodwill could expose the parties to prosecution for cartel conduct.

Parties need to be aware of this not only in the context of their sale agreement, but also under any other related documents such as NDAs / confidentiality agreements as well as the way in which they exchange sensitive information. Significant sanctions attaching to cartel conduct include financial penalties of up to $10 million or 10% of annual group turnover for companies, and up to $500,000 or up to 10 years imprisonment for individuals.

This article was written by Teresa Torcasio, Partner, Richard Westmoreland, Partner, Marian Ngo, Senior Associate and Katherine O’Brien, Solicitor.

^1. ACCC Media Release, ‘ACCC institutes proceedings against Cryosite for alleged cartel conduct’ (12 July 2018) https://www.accc.gov.au/media-release/accc-institutes-proceedings-against-cryosite-for-alleged-cartel-conduct.
^2. ACCC Media Release, ‘ACCC discontinues merger review of Cell Care’s acquisition of Cryosite assets’ (21 December 2017) https://www.accc.gov.au/media-release/accc-discontinues-merger-review-of-cell-cares-acquisition-of-cryosite-assets.
^3. European Communications, ‘Altice accepts fine for jumping the gun on SFR, Virgin Mobile acquisitions’ (9 November 2015) https://www.eurocomms.com/industry-news/11938-altice-accepts-fine-for-jumping-the-gun-on-sfr-virgin-mobile-acquisitions.
^4. European Commission Press Release, ‘Mergers: Commission alleges Merck and Sigma-Aldrich, General Electric, and Canon breached EU merger procedural rules’ (6 July 20170) https://europa.eu/rapid/press-release_IP-17-1924_en.htm.
^5. Administrative Council for Economic Defense, ‘Cisco and Technicolor admit practice of gun jumping in global transaction’ (21 January 2016)  https://en.cade.gov.br/press-releases/cisco-and-technicolor-admit-practice-of-gun-jumping-in-global-transaction-1.