A race with no winners: “gun-jumping” in the context of a merger or an acquisition

It is natural for merging businesses to want to take as many steps as possible in advance of settlement to ensure a smooth handover.  However, proceedings filed last month by the Australian Competition and Consumer Commission (ACCC) against Cyrosite Ltd serve as a salient reminder that merging parties must continue to treat each other as arms-length competitors until the transaction formally concludes.

In the Cryosite proceedings, the ACCC alleges that two merging parties agreed to engage in illegal collusive activities prior to settlement – a form of cartel conduct sometimes referred to as “gun jumping”.

While this is the first prosecution that the ACCC has bought in respect of pre-merger collusion, it is part of a current crackdown on “gun jumping” by competition agencies around the world.

In this article, we look at:

  • What “gun-jumping” is;
  • The background to the proposed acquisition by Cell Care Australia Pty Ltd of Cyrosite and, in the eyes of the ACCC, what allegedly constituted “gun-jumping” in that case; and
  • The approach that overseas competition regulatory authorities have taken to “gun-jumping”.

What is “gun-jumping”?

“Gun-jumping” in a competition law context occurs when, prior to the actual completion of a merger or acquisition, the parties (being competitors) combine their activities or coordinate their conduct. Some examples of “gun-jumping” in the pre-merger period include parties sharing competitively sensitive information (such as pricing or other strategic information), agreeing not to compete for each other’s customers, or assigning suppliers between themselves.

The term “gun-jumping” draws upon the idiom “jump the gun”, first used to describe the situation where competitors in a foot race leapt off the starting block in the preparatory race phase and before the starting gun went off.  Though “gun-jumping” in a foot race refers to prematurely acting against competitors, in a competition context “gun-jumping” refers to prematurely acting without competitive constraints.  It is worth noting that substantive “gun-jumping” can occur even where parties formally notify a relevant competition agency of a transaction, but nonetheless coordinate or combine their activities prior to actual completion of that transaction.

In the eyes of competition authorities such as the New Zealand Commerce Commission and the ACCC, parties to a transaction must remain at arms-length and continue to act as competitors until completion of any deal.  One rationale behind the prohibition of “gun-jumping” is that if parties collude with one another prior to closing, they undercut the competitive process and undermine the effective functioning of competition law and the merger process.  Further, “gun-jumping” can conceivably harm future competition in a market in the situation where a deal is signed off on but, for one reason or another, does not actually close.

What happened in the Cryosite case?

In June last year, Cyrosite (as vendor) entered into an agreement to sell its assets to Cell Care (as purchaser).  Prior to entry into the agreement, the vendor and purchaser were the sole suppliers of cord blood and tissue banking services in Australia.

The asset sale agreement contained terms that:

  • Required all customer enquiries received by the vendor to be referred to the purchaser, after the agreement was signed but before the deal was completed; and
  • Restrained the purchaser from dealing with any customer of the vendor who had goods stored with the vendor in the five years prior to the agreement.

Outside of the agreement, the ACCC contends that the two parties also agreed that the purchaser would not market to the vendor’s existing customers.

It is important to note that in January 2018, the vendor announced that the proposed acquisition would not go ahead.  However, the vendor did not re-enter the market and kept the non-refundable deposit of $500,000 paid by the purchaser under the agreement.

On 12 July 2018, the ACCC formally alleged that the vendor “effectively jumped the gun” by referring all customer enquiries received to the purchaser prior to the deal was complete.  The ACCC contended that this amounted to cartel conduct, because it restricted the vendor’s supply of services, and allocated customers from the vendor to the purchaser.  The ACCC further alleged that the restraint term and the agreement not to market to existing customers amounted to cartel conduct for similar reasons.

The ACCC is seeking penalties, declarations that the conduct breached the Competition and Consumer Act 2010 (Cth) (AU), and a requirement that Cell Care implement a compliance training programme.

What is the approach of overseas competition regulatory authorities to “gun-jumping”?

There has been a recent global trend of national competition regulators towards bringing prosecutions against “gun-jumping”:

  • On 31 May 2018, the European Court of Justice delivered its judgment on whether the acquisition by Ernst & Young Denmark of KPMG Denmark violated the “gun-jumping” prohibition (while the Danish Competition Council found a violation of the “gun-jumping” prohibition, the European Court of Justice held that there was no such breach).
  • On 8 November 2016, the French competition authority issued a $138 million penalty to two related telecommunications companies for “gun-jumping” before receiving competition clearance.
  • On 20 January 2016, Brazil’s competition authority fined two companies in the global broadband technology development market a total of approximately $15 million in relation to “gun-jumping”.

In terms of New Zealand’s approach, in 2008 the Commerce Commission brought “gun-jumping” proceedings against a group of community pathology testing service providers in relation to an alleged moratorium not to compete to win customers.  In this case, the High Court adopted the penalties recommended by the Commerce Commission of $65,000 against New Zealand Diagnostic Group Limited and Hamilton Medical Laboratory Holdings Limited jointly, and $35,000 against Pathology Associates Limited.

Concluding remarks

If you are a director or senior representative of a company and are in the process of negotiating a merger or an acquisition, or may conceivably do so in future, take heed:  competition regulators worldwide do monitor pre-merger activity and are prepared to bring enforcement action in respect of “gun-jumping” where the circumstances warrant it.

There are a number of steps that a business can take to guard against “gun jumping” in the context of a merger or acquisition, including implementing information sharing protocols and using “clean teams”. Taking competition advice prior to signing the agreement for sale and purchase is critical – both to ensure that the merger is permissible in terms of its likely impact on competition generally, and also in terms of ensuring that the merger parties will not be price fixing, market sharing or engaging in other illegal activities in the period prior to settlement.

With maximum penalties under the Commerce Act 1986 being the greater of $10 million, 10 per cent of turnover, or three times’ commercial gain – and the Economic Development, Science and Innovation Select Committee due to report back today on a proposal to criminalise cartel conduct – the stakes have never been higher.

Business Law team

If you need any assistance with the sale or purchase of your business, do not hesitate to get in touch with the Business Law team at Lane Neave.

Gerard DaleClaire EvansGraeme CrombieEvelyn JonesAnna RyanJoelle Grace,  Peter OrpinEllen SewellMatt TolanCarlo WanKristina SutherlandJacob NuttWhitney MooreAlex StoneBen Cooper, Lisa Catto

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