The importance of not "jumping the gun"
The Australian Competition and Consumer Commission (ACCC) has today announced it is bringing proceedings against a vendor in a business sale for what is colloquially known as "gun jumping", but is technically a form of cartel conduct. The ACCC alleges that as part of the sale agreement the vendor agreed to refer customer enquiries to the purchaser in the period between signing and completion. This is the first time the ACCC has taken proceedings in relation to "gun jumping". As similar laws apply in New Zealand it is an important reminder for those involved in M&A activity with a trade purchaser that coordinating competitive conduct prior to completion can give rise to serious concerns.
The ACCC's proceedings
Cryosite Limited (Cryosite) is an Australian company specialising in clinical trials logistics, and storage of biological material, at a range of temperatures. In June 2017, it signed an agreement to sell its cord blood and tissue banking business assets to Cell Care Australia Pty Ltd (Cell Care), the only other competing private cord blood and tissue banking company in Australia.1
The ACCC alleges that:
- as part of the asset sale agreement:
- Cryosite was required to refer all customer enquiries to Cell Care after signing of the agreement, but prior to completion of the acquisition; and
- Cell Care was restrained from dealing with any Cryosite customer who had stored cord blood and tissue with Cryosite in the five years before the proposed acquisition; and
- outside of the asset sale agreement, the parties had also agreed that Cell Care would not market to Cryosite's existing customers.
In announcing its proceedings, the ACCC outlined its view that "these restraints and the ancillary agreement amount to cartel conduct because they restricted or limited the supply of cord blood and tissue banking services and allocated potential customers between Cell Care and Cryosite" prior to completion when Cell Care and Cryosite should have continued to be operating as independent competitors. This is known as "gun jumping":2
Gun jumping occurs when merger or acquisition parties are competitors and they combine or coordinate their conduct before the actual completion of the transaction.
Parties to a transaction must remain independent and continue to act as competitors, even though they may have signed a merger or acquisition agreement, until completion of the deal.
The New Zealand position
The New Zealand Commerce Commission (NZCC) has brought gun jumping proceedings before, in 2008.
In that case the High Court ordered that the merger parties pay penalties together totalling $100,000.3
The NZCC position is that "while parties to proposed mergers must naturally engage with each other to explore the merits of a transaction prior to binding themselves and consummating a deal", pre-merger discussions and coordination concerns can arise if:4
- the parties exchange competitively sensitive information through negotiations without appropriate protections in place, which may "be used to dampen continuing competition between them." The NZCC's view is that:
detailed knowledge of a competitor’s pricing, costs, strategic plans and other core material can hamper the competitive dynamic that once prevailed, especially in markets where the parties to a proposed merger are each other’s closest competitors or where the information exchanged can be used readily with long term anticompetitive consequences.
- the parties agree that "one party [will cede] control over pricing decisions" to the other, or reach "an agreement not to compete for each other’s customers" in the period before completion. The NZCC's view is that "prior to completion of a merger, such conduct is effectively collusion."
Key takeaways
Businesses contemplating any M&A transaction with their competitors need to bear in mind important competition law considerations. That includes:
- ensuring there are appropriate protections in place for the exchange of competitively sensitive information; and
- ensuring that until their transaction has completed – and the merger parties become a single entity – the parties continue to operate as separate competitors.
This has important implications for structuring due diligence discussions, drafting pre-completion "conduct of business" and "material adverse change" clauses, and for engaging in pre-completion integration planning activities.
If you have any questions on whether these developments have implications for your business, please contact one of the authors below.