The Federal Court has issued a rebuke of competitors involved in a merger which cooperate or coordinate their conduct before the merger is complete. Organisations must be wary of their conduct and potential cooperation while a transaction is progressing. Cooperation between competitors prior to the effective date of the transaction, even if an agreement has been signed, is referred to as "gun jumping" and may constitute cartel conduct or concerted practices, which can be subject to significant penalties.
After the collapse of StemTech in 2016, Cryosite and Cell Care Australia ("Cell Care") were the only two private suppliers of cord blood and tissue services ("CBT banking services") in Australia.
On 23 June 2017, Cryosite entered into an agreement with Cell Care to sell assets used in Cryosite's CBT banking services. During the period between execution of the sale agreement, and the targeted completion date, Cryosite and Cell Care agreed that Cryosite would refer all new sales enquiries in relation to CBT banking services to Cell Care, despite having the ability to provide those services. Cryosite staff would advise potential customers that Cell Care supplied CBT banking services, and if agreed to by the customer, would send details of the enquiry to Cell Care.
In January 2018, the parties decided that the proposed sale would not proceed.
Cryosite continued to provide CBT banking services to pre-existing customers, but did not re-commence supplying CBT banking services to new customers. Cell Care became the only private supplier of CBT banking services in Australia. This constituted a detriment to the competitive process for the supply of CBT banking services in Australia.
Cryosite was held to have contravened sections of the CCA which prohibit:
- the making of a cartel, and
- giving effect to a cartel.
Cryosite was ordered to pay $1.05 million in penalties:
- $600,000 for making the sale agreement containing a cartel provision, and
- $450,000 for giving effect to the restraint.
Additionally Cryosite was ordered to pay the ACCC's costs of $50,000.
Through the penalty the Court sought to achieve both specific and general deterrence of the contravening conduct, noting that:
- cartel conduct of this nature causes serious harm to consumers, other businesses and the economy; and
- coordination or integration of competing businesses prior to the completion of a sale can result in permanent structural change to the market.
The penalty size was influenced by:
- the internal and confidential nature of the conduct (as it was not obvious to consumers that Cryosite's conduct was prompted by a contract with Cell Care);
- the involvement of Cryosite's senior management;
- Cryosite obtaining a commercial benefit (including an upfront payment of $500,000); and
- the economic effect on the CBT banking market in Australia.
In terms of ameliorating the penalty, the Court positively noted Cryosite's cooperation with the ACCC from the time that the ACCC made inquiries.
While Cryosite's financial position (at 1 July 2018 Cryosite had a negative net asset position, and a loss before tax in the financial year ending 30 June 2018) was taken into account for the purposes of determining sufficient specific deterrence, the court noted that a penalty having an adverse consequence on the contravener does not prevent the court from awarding it.
Implications for companies considering a merger with a competitor
(1) Acquiring assets from, or merging with, a competitor or potential competitor
Cryosite and Cell Care each supplied the full range of CBT banking services to new and pre-existing customers. But for the sale agreement, Cryosite was or was likely to be in competition with Cell Care. Competing businesses must not prematurely coordinate or integrate their businesses ahead of the completion of a sale, or clearance from the competition regulator.
(2) Cooperation with ACCC
Prompt, ongoing, and voluntary cooperation with ACCC once it raised potential contravention of the CCA with Cryosite was rewarded with a discount in penalty. Cryosite made admissions, agreed to the making of appropriate orders, and joined in the making of submissions reflecting the seriousness of its wrongdoing.
(3) Calculation of penalties
Businesses should be aware of the significance of the penalties that may be awarded. Although a person is not liable to more than one pecuniary penalty in respect of the same conduct, the Court restated that the statutory maximum penalty applies to each contravention, not to each course of conduct. The maximum penalty for each contravention is substantial (the smallest method of calculation still yields a maximum penalty of $10m), and Cryosite was held to have made a contravention each time a staff member advised a potential customer to seek the services of Cell Care.
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