By Matthew Lawson, Foreign Legal Advisor and Scott Colvin, Lawyer
Picture this. After long, gruelling negotiations you’ve finally managed to wet the ink on a deal to merge your company with a key competitor. All the grand standing and the stress — the deal is finally over the line. You are free to begin work under your new guise.
Or so you think.
Often the temptation is to consider a deal complete after the agreements have been signed. But if the transaction hasn’t formally ‘completed’ under those agreements, including with respect to any regulatory approval process, parties may be ‘Gun Jumping’ — breaching prohibitions on cartel behaviour by combining entities or coordinating conduct while still formally competitors.
The Australian Competition and Consumer Commission (ACCC), the country’s competition/anti-trust regulatory body, is showing an increased interest in this discrete area of law. This interest serves as an important reminder that parties to a transaction must take care to ensure that they continue to act as competitors and remain independent at all times until completion of the transaction.
Areas of focus to avoid ‘gun jumping’
By way of background, in Australia (as with many jurisdictions), anti-trust conduct generally falls into the following categories:
- cartel conduct, where competitors conspire to (for example) fix prices, rig bidding/tender processes, or restrict outputs;
- exclusive dealing, where competitors arrange with one another for customers to be restricted in whom they can transact — in a merger context, particularly where a customer is forced to make use of the services of the other merger party;
- resale price maintenance, where an entity acts to force another party further down a supply chain to charge for a product below a certain price; and
- general anti-competitive conduct — a broad term intending to catch any contract, arrangement, understanding, or concerted practice between competitors that has the effect of substantially lessening competition in a market.
How would this arise in the M&A context?
Put yourself into the shoes of a company that has just merged with another entity from your market (either horizontally or vertically related to your own). The first few thoughts that popped into your head probably related to how you could work with that new arm of your business to further your own — and likely in all of the ways you were previously prohibited by anti-trust law.
Were any of those ideas to be actioned between the date of signing and the date of formal completion of the transaction the parties would be ‘gun jumping’. And the temptation to act during this window can be strong.
We see examples in the market of competitors agreeing that all customers captured by one entity must be referred to the other. We see horizontally-related competitors pitching for tenders together, on the basis that they will shortly be one entity. We also see horizontally-integrated competitors fixing prices between them for the same reason.
Just because the conduct will shortly be hidden beneath one banner doesn’t matter in the eyes of the regulator: all of this would breach anti-trust law.
Penalties for breach
In Australia, breaches of anti-trust laws can attract significant civil and criminal penalties for both individuals and corporations. Corporations face fines of up to $10 million or three times the total value of benefits from the breach, or 10% of the corporation’s annual turnover. Individuals face fines up to $317,140 or a term of imprisonment of up to 10 years, or both.
Parties to a transaction must maintain their independence as separate competitors until full completion occurs, as anti-trust laws apply exactly the same right up until that moment.
To reduce the risks of “gun jumping”, parties to a prospective transaction should:
- obtain legal advice on what information may be exchanged between the parties prior to completion;
- continue to operate as independent competitors by dealing independently with their own customers and suppliers until completion;
- if in doubt, seek confirmation from the ACCC that the regulator will take no steps to oppose the transaction, and include that confirmation as a condition precedent to deal completion;
- draft a condition that the parties refrain from working together until completion;
- ensure that entities do not in any way coordinate pricing, supply, production, marketing or other competitive activities before completion;
- ensure that no amalgamation of assets, staff and customers occurs prior to completion; and
- not represent themselves as a single integrated entity; and
- undertake to abide by their obligations under anti-trust law, particularly in relation to confidentiality and disclosure of commercially sensitive information.
Recent Australian regulatory action forms part of an increasing trend of competition authorities worldwide seeking to punish companies for gun jumping. Anti-trust agencies in the United States have historically been active enforcers of anti-trust law with respect to gun jumping, but authorities in Europe and elsewhere (including Australia) are now taking a more aggressive approach.
Parties to a business combination transaction need to implement strategies to balance the limitations imposed by anti-trust law and the commercial need for early integration planning.
Being fully informed of your legal obligations at the earliest stages of a business combination transaction can play a vital role in mitigating future risks
The Mills Oakley Corporate Advisory team has vast experience in all aspects of a commercial transaction, including Australian anti-trust law issues in the M&A context. To avoid a prospective transaction running afoul of these and other laws, reach out to a member of our team for expert advice.
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