First ‘gun jumping’ prosecution in Australia

Developments in Australia provide a timely reminder about the care needed when mergers are on foot but clearance from the Commerce Commission has not yet been obtained.

In its first ‘gun-jumping’ prosecution, the ACCC is pursuing two stem cell storage companies on the basis that one company assumed responsibility for the other’s customer services before completing the asset transaction. The ACCC alleges that the asset sale agreement requiring Cryosite to refer all customer enquiries to Cell Care after the agreement was signed but before the acquisition was completed, as well as ancillary arrangements, breaches Australia’s cartel laws. The ACCC said gun-jumping occurs when:

… merger or acquisition parties are competitors and they combine or coordinate their conduct before the actual completion of the transaction.

The ACCC has sought a declaration that the alleged conduct breaches the Competition and Consumer Act 2010, penalties, costs and an order that both parties complete competition compliance training programmes.

Relevance to New Zealand

In 2010 the New Zealand Commerce Commission (NZCC) secured total penalties of $100,000 against Waikato pathology services providers who agreed to a moratorium on competition with each other. The moratorium occurred in the context of a prospective merger which never eventuated. The High Court agreed with the NZCC that parties which propose to take steps towards merger must not in the meantime enter into anti-competitive arrangements or understandings.

The issue

Where a merger is conditional on regulatory approval, merging parties must continue to operate as independent competitors until approval is given. To do otherwise risks breaching the cartel provisions of the Commerce Act. Penalties for cartel conduct are already significant (the greater of $10m, 10% of turnover or 3 times the commercial gain). Businesses also face the real possibility of criminal liability – with a current bill proposing criminal penalties, including 7 years’ imprisonment, the risk of gun-jumping is only heightened.

Ensuring compliance

Any steps taken to combine or align competing businesses before a clearance is granted by the NZCC expose merging parties and the responsible individuals to the risk of breaching the Commerce Act. The key question in any pre-completion conduct is, would the company do this absent the merger? This approach supports a prudent treatment of sensitive commercial information, particularly price-relevant information. Establishing protocols for handling this information, particularly during pre-merger negotiations and due diligence is key to reducing risk.

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