Gun-Jumping: Cowboys and Cartels in the Merger Business

The Australian Competition and Consumer Commission (ACCC) recently launched an unprecedented “gun-jumping” civil prosecution against clinical trial logistics company Cryosite Limited.

‘Gun-jumping’ is the term given to conduct in M&A transactions where the parties to the proposed merger are competitors, and they engage in conduct which is integrated or co-ordinated – and thus, under competition law, cartel behaviour – prior to the completion of the transaction.

In the current case, Cryosite (C) aimed to sell some of its assets to Cell Care (CC). It is understood that C and CC were the only two private suppliers in the Australian cord blood and tissue banking market and were also competitors.

An ACCC review of the transaction found that there were provisions in the sale contract requiring C to send its new customers to CC after the agreement was signed but before the acquisition had settled; and also that the agreement restrained CC from access to C’s existing customers.

The public consultation phase of the ACCC’s review was discontinued, and ultimately the deal fell over. But the ACCC pressed on with its investigation. “We are concerned by the closure of Cryosite’s cord blood and tissue marketing, collection and processing operations for new customers,” said ACCC Chairman Rod Sims, “and the failure of the parties to approach the ACCC for clearance.”

What does the Competition and Consumer Act 2010 (Cth) (the CCA), and hence the ACCC, require of competing entities when they merge? The Cryosite proceedings offer an insight: the behaviour will be scrutinised with an eye to the requirement that parties act as independent, competing businesses until completion. The period most likely to present a danger to the parties is the time between signing and completion.

And the stakes are high. The ACCC may elect to proceed criminally or civilly when it pursues gun-jumping conduct. In the Cryosite case, the proceedings are civil; but a party found to have engaged in cartel conduct may face severe sanctions, including company fines of up to 10% of annual turnover, and up to ten years’ jail and individual fines of AUD$500,000 for directors.

So what’s our role?

When we examine an M&A transaction, Clarendons look closely over all of the pre-completion conduct: both our client’s, and their counter-party’s. This includes ensuring that any restrictions on the acts of a party between signing and completion are enforceable and not in breach of the Australian Consumer Law.

Any change of position by either party between signing the deal and completing it must be rigorously assessed. Is this action independent of the other party, and unrelated to the pending merger?

Conduct that should be avoided, and which may contravene the CCA, includes:

  • any alignment of customers, cost structures or strategies;
  • the transfer of any property, whether real or intellectual, between the parties;
  • placing constraints on product marketing; and
  • adopting agreed controls over the supply of product or targeting of customers.

For example, if the target and the buyer were both tendering for the same project, there would be an issue if the target shared details of their tender with the buyer, or if the target was told not to submit a tender by the buyer.

Care must be exercised in the wording of documents such as share sale or asset sale agreements, in light of the ACCC’s comments, to ensure they do not facilitate “jumping the gun”, particularly where the buyer is able to influence decisions of the target prior to completion.