When is collaboration collusion?
The recent Federal Court case of Norcast v Bradken has raised the bar on the risk of breaching cartel laws and engaging in misleading and deceptive conduct for competitors entering into bidding arrangements with each other in the purchase of a company.
In particular, while it is well known that competitor collusion in merger and acquisition (M&A) transactions is prohibited under the Competition and Consumer Act, this case has broadened the understanding of when collaborating parties will be considered ‘in competition’.
In 2011, Norcast began the process of selling its subsidiary, Norcast Wear Solutions (a Canadian mining consumables company) through a bidding arrangement.
Due to the fact Norcast and Bradken were competitors (Bradken being an Australian mining consumables company), and for a number of other reasons, Norcast did not inform Bradken of the sale, and did not provide it with any documentation about the bidding process.
After hearing of the proposed sale, Bradken contacted Castle Harlan, a private equity fund in the United States, and arranged for Castle Harlan to become Bradken’s front for the purchase of Norcast Wear Solutions. Bradken and Castle Harlan agreed that Castle Harlan would bid for Norcast Wear Solutions, and upon purchasing it, would on-sell the company to Bradken for a significant fee.
The two companies succeeded in this arrangement, with Castle Harlan paying US$190 million for the purchase, and then receiving US$22.4 million from Bradken upon transferring Norcast Wear Solutions into Bradken’s name.
Justice Gordon of the Federal Court found that Bradken and Castle Harlan had engaged in bid-rigging by acting in concert with each other to acquire Norcast Wear Solutions.
The Competition and Consumer Act provides that where there is an arrangement between parties who are in competition (or likely to be in competition) with each other, any agreement in which one party bids for an acquisition and the other does not, will be considered a breach of the cartel provisions in the Act.
Importantly, her Honour emphasised that to be competitors or ‘likely to be in competition’ can include a ‘possibility that is not too remote’. Accordingly, even though there was no direct evidence to show that Castle Harlan would have put in a bid but for Bradken’s request for it to do so, her Honour found that it was at least possible that Bradken and Castle Harlan would have been in competition with each other for the acquisition of Norcast Wear Solutions.
Consequently, it was held that the arrangement between the two companies was a breach of the cartel provisions.
In addition, the secrecy surrounding Bradken and Castle Harlan’s dealings, and their efforts to conceal their communications from Norcast, resulted in a finding of misleading and deceptive conduct.
This case is expected to go on appeal.
Implications for businesses
This case may have broad implications for businesses. For example, while this case involved an M&A transaction, the principles applied could be equally relevant to the tendering process. If one party in a tender process agreed with another to selectively abstain from bidding on the tender, the parties would be in breach of the Competition and Consumer Act cartel provisions.
In addition, businesses should be aware that to be in breach of the cartel provisions, there does not need to be a contract in place between the parties, merely an agreement or understanding, and a desire to manipulate the bidding process.
Further, as this case shows, the bidding and acquisition process does not have to occur in Australia for it to fall under Australian law. It is sufficient that one of the parties is an Australian company.
If you have concerns about your company’s arrangements in acquisition or tender processes, or would like further information on the implications of the Competition and Consumer Act on your company, please contact Certus Legal Group.