Merger pre-completion - ACCC takes action on ‘gun jumping’
Yesterday in the Federal Court of Australia, the Australian Competition and Consumer Commission(ACCC) instituted against Cryosite Limited (Cryosite), its first ‘gun jumping’ proceeding for alleged cartel conduct. The allegations concern the terms upon which Cryosite agreed to sell its assets to Cell Care Australia Pty Ltd (Cell Care).
Gun jumping explained
The term ‘gun jumping’ uses the metaphor of a race, in which the merger parties, who are also competitors, move to consummate a merger before completion. From a competition law perspective, before a merger of competitive businesses becomes effective (i.e. completes), the parties are still competitors and must continue to operate as such until completion.
As a result, neither party should ‘cheat’ the competitive process and have any influence over the running of the other party’s competitive business. Risks are particularly acute in relation to the pricing, supply and acquisition decisions of each party, and other matters of competitive strategy.
ACCC’s case against Cryosite
Cryosite and Cell Care were the only private suppliers of cord blood and tissue banking services in Australia.
Cryosite entered into an agreement to sell its assets to Cell Care. The allegations raise concerns that before the acquisition was completed:
the asset sale agreement required Cryosite to refer all customers to Cell Care; and
an ancillary arrangement was reached that Cell Care would not market to Cryosite’s existing customers.
This, the ACCC alleges, resulted in in Cryosite ‘jumping the gun’ and, by virtue of the parties not yet being one entity, engaging in cartel conduct to restrict or limit its supply of cord blood and tissue banking services, and to allocate potential customers.
Gun jumping danger zones
The ACCC’s proceeding serves as a timely reminder to merging entities not to be tempted to engage in premature coordination pre-completion to:
market products jointly;
attempt to divide up markets or customers between them in any way, including by geography or product;
share pricing information, fix, or otherwise control the level of prices to be charged by each company;
share or agree to offer the same terms and conditions in agreements or tenders, including deciding that one party may bid while the other does not; or
jointly acquire goods or services.
It can seem counter-intuitive to ring-fence businesses when a legally binding commitment to merge has been inked. However, until they are legally merged, the parties are viewed as independent competitors and the removal of any competitive tension between them raises competition law concerns.
Moreover, sometimes deals do not proceed (as occurred with Cryosite and Cell Care). Competitively sensitive information about pricing, strategy or customers that has been shared could result in a dampening of future competition between those parties.
The arrangement alleged to have occurred between Cryosite and Cell Care to divide business is an overt example of gun jumping. However, the issue can arise in more subtle circumstances. A gun jumping arrangement can be inferred from an exchange of competitively sensitive information.
To manage gun jumping risk, an acquirer must exercise caution in relation to receiving or using competitively sensitive information relating to the target business pre-close. Steps often taken include the instatement of “clean teams” to receive and contain confidential information and the promulgation of guidelines and information sharing protocols.
The concept of gun jumping is not new and the tactics for managing the risks are well-rehearsed in many jurisdictions, with specific rules pertaining to “gun jumping”.1 We are accustomed to guiding our clients through these matters and regularly work with them to develop appropriate protocols accordingly.
The first Australian gun jumping case does, however, underscore the importance of vigilance in this regard.
We will carefully monitor the progress of the proceeding and follow up with any substantive developments. In the meantime, if you have any queries in relation to these issues, including whether the sharing or use of particular documents or information in the context of a transaction is prohibited, please contact us at the details set out below:
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