Running feet first into cartel conduct: when jumping the gun can lead to biting the bullet

It is a commercial fact of life that businesses will seek to merge with each other. Combining the efforts and resources of two previously separate competitors in an industry can lead to a more successful business. However, the businesses must be well advised to not be too eager. After prosecution by the ACCC, the Federal Court of Australia has ordered Cryosite Ltd (Cryosite) to pay $1.05 million in penalties for cartel conduct for "gun jumping" in an asset sale agreement.

 

Companies joining bodies

Cryosite is in the business of storage and logistics with respect to pharmaceutical products and biological materials, including collecting, processing, storing, and releasing stem cells. It was one of two private suppliers in Australia of stem cells, the other being Cell Care Australia Pty Ltd (Cell Care). Cell Care held approximately 20% of the shares in Cryosite, but had no presence on the board of directors and no voting rights.

In June 2017, Cryosite signed an asset sale agreement with Cell Care to sell its blood and tissue banking business. Notably, the asset sale agreement required that between execution and completion, Cryosite would refer all sales enquiries into its stem cell banking service to Cell Care.

The ACCC investigated, and ultimately the parties decided not to proceed to completion with sale. The question arose as to whether the parties had engaged in cartel conduct.

Cartel conduct

The Competition and Consumer Act 2010 (Cth) prevents someone from entering into, or giving effect to, an agreement that includes a "cartel provision". This is essentially where competitors enter into an agreement together in their collective interests.

Where two businesses take steps to integrate or coordinate prior to the competition of a merger or acquisition, colloquially referred to as "gun jumping" this can run afoul of the cartel conduct provisions of the Act.

Cryosite ultimately admitted to breaching the relevant provisions, and the question of the penalty was to be determined by the Federal Court of Australia. On the question of the important role of deterrence with respect to gun jumping, Beach J of the Federal Court of Australia stated:

"Market sharing, including when it is undertaken in the context of a proposed or anticipated sale of business, is cartel conduct. And cartel conduct of its nature causes serious harm to consumers, other businesses and the economy.

In addition, cartel conduct involving the coordination or integration of competing businesses prior to the completion of a sale can result in permanent structural change to the market… Accordingly, the penalty imposed for cartel conduct of the kind I am considering ahead of a proposed sale or its completion needs to be sufficiently high to deter businesses…

Further, any penalty must be sufficient to overcome the broader incentives to businesses to prematurely coordinate or integrate their businesses ahead of the completion of a sale in a manner which has an anti-competitive purpose or effect."

The Court ultimately agreed with the penalties proposed by the ACCC, which was $1.05 million in pecuniary penalties and $50,000 in costs.

What does this mean for you?

While the $1.05 million penalty incurred by Cryosite fell on the lower end of the maximum penalty that could have been awarded, it should be noted that findings of cartel conduct can leave a business exposed to significantly higher penalties – in Australian Competition and Consumer Commission v Yazaki Corporation [2018] FCAFC 73, for example, $46 million in penalties were incurred by Yazaki Corporation, where the ACCC successfully established that it engaged in cartel conduct.

Businesses must keep this in mind before getting too eager after the execution of a business sale agreement or a merger. Advice should be obtained at an early stage to ensure that the parties conduct themselves at arm's length. Where companies jump the gun to coordinate or integrate competing businesses or resources prior to finalising the relevant acquisition, this can leave them open to significant liability.

McCabe Curwood is experienced in advising its clients in relation to mergers and acquisitions, and litigation arising out of the Competition and Consumer Act. Get in contact with us today.

Contributors

Luke Dominish Lawyer
Ethan Aitchison Law Graduate