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Focus: Bid-rigging – a first look at the cartel provisions

27 March 2013

In brief: Even where no market in Australia is affected, a recent Federal Court decision highlights that certain conduct may breach the new cartel provisions of Australia's competition and consumer legislation. Partner Michael Schoenberg (view CV), Senior Associate Tim Maxwell and Lawyer Angela Gibbs provide an overview of the decision.

How does it affect you?

  • The decision – which is the first to apply the cartel provisions of the Competition and Consumer Act 2010 (Cth) (the CCA) – demonstrates that the provisons may apply very broadly to conduct outside Australia, even if no market in Australia is affected. Here, the offending conduct involved an arrangement between an Australia company and a US private equity firm concerning a bid made in North America for the acquisition of a Canadian company owned by a Swiss private equity firm.
  • A company coordinating with any possible competitor in a competitive sale process will risk breaching the CCA's prohibition on bid-rigging as cartel conduct.
  • Arrangements for one entity, such as a private equity firm, to bid on behalf of another will be particularly risky, especially if the ultimate purchaser is intentionally disguised. In this context, remaining silent about the ultimate purchaser's participation is also likely to be misleading or deceptive, a further contravention of the CCA.
  • It is important to draft sale process non-disclosure agreements carefully, as potential buyers may seek to exploit provisions allowing disclosure to 'representatives', 'consultants' or similar third-party advisers.
  • Senior executives may breach competition laws by virtue of their involvement in the contravention of such laws by others.

Facts and background

In early 2011, Norcast S.ár.l, which is controlled by Pala Investments, a Swiss private equity firm, decided to sell its portfolio company, Norcast Wear Solutions, Inc (NWS), a Canadian mining consumables company. Through UBS, an investment bank, it conducted a wide-reaching competitive sale process.

Norcast identified Bradken Limited, an Australian ASX-listed mining consumables company and competitor of NWS, as the most obvious acquirer of NWS and therefore ensured Bradken was made aware of the sale process. Bradken did not attempt to contact Norcast or UBS in relation to the sale of NWS, later claiming that it believed it was excluded from the sale process.

Bradken did, however, contact Castle Harlan, Inc (Castle Harlan), a US private equity investment firm, on 28 February 2011 to inform them of the sale process. Castle Harlan is affiliated (including through equity) with an Australian private equity firm, Castle Harlan Australia Mezzanine Partners Pty Limited (CHAMP). On 2 March 2011, Castle Harlan approached UBS to express an interest in acquiring NWS.

Over the next several months, Bradken and Castle Harlan communicated extensively about the acquisition of NWS. These communications continued throughout the sale process, despite Castle Harlan having signed the sale process' non-disclosure agreement. Bradken and Castle Harlan entered into a consultancy agreement which, in their view, overcame Castle Harlan's confidentiality obligations, as the non-disclosure agreement permitted disclosure to its 'representatives'. Through this arrangement, Bradken 'entered the bid process through the back door',1 and effectively conducted its own due diligence on NWS. Bradken and Castle Harlan took steps to keep this indirect involvement secret.

On 6 July 2011, Norcast sold NWS to Castle Harlan for US$190 million. Approximately seven hours after the sale was finalised, Castle Harlan sold NWS to Bradken for US$212 million.

In May 2012, Norcast commenced proceedings in the Federal Court of Australia against Bradken and two of Bradken's directors, Mr Nicholas Greiner (Chair) and Mr Brian Hodges (CEO). Norcast claimed that Bradken and Castle Harlan had engaged in cartel conduct, namely bid rigging,2 and misleading or deceptive conduct.3 Norcast also claimed that Mr Greiner and Mr Hodges were involved in illegal activities of Bradken and Castle Harlan, and Bradken was involved in the illegal activities of Castle Harlan.4

Proceedings are also underway in the United States against Castle Harlan.

The decision

On Monday 25 March, Justice Gordon published her reasons for judgment. Her Honour found for Norcast on each claim, and concluded that Norcast had suffered loss or damage of US$22.4 million, being the difference between the amount Bradken paid to acquire NWS and the amount Norcast received for NWS.

Cartel conduct

The CCA prohibits bid-rigging as cartel conduct. To determine whether Bradken and Castle Harlan had engaged in bid-rigging, Justice Gordon was required to consider whether:

  • there had been a request for bids in relation to the supply or acquisition of goods or services;
  • but for a contract, arrangement or understanding (bid-rigging arrangement), it was likely Bradken and Castle Harlan would have been in competition with each other in relation to the acquisition of NWS; and
  • Bradken and Castle Harlan made or arrived at, and gave effect to, a bid-rigging arrangement in relation to bidding for NWS, which contained a provision that had the purpose of ensuring Castle Harlan would bid for NWS and that Bradken would not.5

An event of a request for bids

Her Honour found that the competitive sale process conducted by UBS for NWS was 'an event of a request for bids in relation to the supply or acquisition of goods or services'. Her Honour therefore rejected Bradken's contention that this element could not be satisfied because it did not receive a request for a bid, finding that the CCA does not require that the request for bids be made 'directly or individually' to each party to the alleged bid-rigging arrangement. Her Honour also held that a request for bids does not need to be a request for bids in Australia. No such limitation is expressed in the provisions, and none should be implied.

Likely to be in competition

Her Honour found that it was at least possible that Bradken and Castle Harlan would have been in competition with each other in bidding for NWS but for the bid-rigging arrangement,6 and that this was sufficient, as the CCA's definition of 'likely' includes a possibility that is not remote.

Further, her Honour rejected an argument that the CCA requires the parties to be in competition with each other in a market in Australia before the cartel provisions are enlivened. Again, no such limitation is expressed in the provisions, and none should be implied.

Contract, arrangement or understanding

Her Honour set out the applicable legal principles relating to arrangements and understandings,7 and concluded that Bradken and Castle Harlan had made or arrived at a bid-rigging arrangement in relation to bidding for NWS, even though the bid-rigging arrangement was informal and unenforceable, and either party could withdraw from it or act inconsistently with it. Her Honour found that several direct and express communications between Bradken and Castle Harlan were consistent only with an arrangement that Castle Harlan would bid and Bradken would not.

Her Honour also held that, even if the direct and express communications were insufficient, a bid-rigging arrangement could be found on the basis of inferences drawn from the circumstances that existed. These circumstances included:

  • Bradken's interest in the UBS sale process, ongoing analysis of NWS' value to Bradken, and its Board's authorisation of a capital raising;
  • Bradken's efforts to keep its indirect involvement in the UBS sale process secret;
  • Castle Harlan making false statements to NWS about its involvement with Bradken in the process;
  • Bradken and Castle Harlan continually communicating about the process, and entering into confidentiality, deposit and other agreements during the process to facilitate Bradken's ultimate purchase of NWS; and
  • Bradken in fact acquiring NWS from Castle Harlan at a premium shortly after Castle Harlan acquired NWS from Norcast.

Purpose provision

Justice Gordon was satisfied that the bid-rigging arrangement contained a provision that had the purpose of ensuring that Castle Harlan would bid for NWS but that Bradken would not. Her Honour accepted that the relevant purpose must be 'subjective and operative', a difficult standard to meet; however, the purpose may be inferred from the nature of the relevant arrangement, the circumstances in which the arrangement was made and its likely effect.

Bradken contended that it believed it had been excluded from the sale process, and so could not have had the requisite subjective purpose. However, her Honour found that a 'natural corollary' of this belief was that Bradken would not bid. It was also demonstrated that Castle Harlan had agreed to bid, at Bradken's suggestion and with Bradken's assistance. Her Honour found that, in these circumstances, Bradken's and Castle Harlan's only conceivable subjective, operative purpose was 'to ensure that Bradken would not bid.'8

Misleading or deceptive conduct

Her Honour found three instances of misleading or deceptive conduct. They were:

  • Bradken's failure to disclose the provision in the bid-rigging arrangement that Castle Harlan would bid but that Bradken would not;
  • Castle Harlan's failure to disclose facts and matters relating to Bradken; and
  • positive representations made by Castle Harlan that it was the acquiring entity and would not require funding from non-associated entities.

Her Honour therefore reaffirmed that silence is capable of being misleading or deceptive, if the circumstances give rise to a legitimate expectation that the matters not stated would be disclosed. A positive obligation to disclose those matters is not required. Here, in the circumstances of the sale process and Bradken's knowledge of that process, its silence concerning the bid-rigging arrangement with Castle Harlan was intended to, and did, deceive Norcast.

Her Honour was satisfied that Norcast had relied upon the misleading or deceptive conduct and, had Norcast known of the true position, it would have sought to negotiate a sale of NWS with Bradken for a significantly higher sum than Castle Harlan paid. Her Honour further stated that, even if reliance was not established, there is a sufficient nexus between Norcast's loss or damage and each instance of misleading or deceptive conduct. The silence regarding the bid-rigging arrangement was deliberately deceptive, and was combined with Castle Harlan's express misrepresentations.

Finally, in order for the CCA to apply to the misleading or deceptive conduct, which occurred outside Australia, it must have occurred within trade or commerce between Australia and places outside of Australia. Her Honour found that the conduct occurred in the context of the intended sale of NWS by Castle Harlan, outside Australia, to Bradken, within Australia, and so the requirement was satisfied.

Accessorial liability

Justice Gordon also found that Bradken, Mr Greiner and Mr Hodges were each involved in Castle Harlan's contraventions, and that Mr Greiner and Mr Hodges were involved in Bradken's contraventions. These findings were based on the extensive evidence of communication and coordination between the companies and these individuals.

As a preliminary step to the finding that Bradken, Mr Greiner and Mr Hodges were involved in Castle Harlan's contraventions, her Honour was required to consider whether Castle Harlan had a sufficient connection to Australia for the CCA to apply to its conduct. If Castle Harlan's conduct was not capable of constituting a breach of the CCA, no other person could be involved in such a breach.

Her Honour determined that there was a sufficient connection. Castle Harlan was carrying on business within Australia itself and, further or alternatively, through CHAMP. This was demonstrated by many connections between the two private equity firms, including their jointly managing funds and using those funds to invest in Australia, and sharing directors.

Conclusion

Parties to cross-border transactions in which an Australian company is a party should consider carefully the possibility that the CCA's cartel and misleading or deceptive conduct provisions will apply. In the context of a competitive sale process, coordination with a possible competitor will be very risky, particularly if one entity arranges to purchase on behalf of another, and the intended ultimate purchaser is intentionally disguised.

Investment banks and others managing sale processes should ensure non-disclosure agreements are carefully drafted, as potential buyers may seek to exploit provisions allowing disclosure to 'representatives', 'consultants' or similar third-party advisers.

Note: Allens acted for Norcast in this matter.

Footnotes
  1. See [116] of her Honour's reasons.
  2. In breach of ss 44ZZRJ and 44ZZRK of the CCA.
  3. In breach of section 18 of schedule 2 to the CCA.
  4. The meaning of 'involved' is in s75B of the CCA.
  5. These are the requirements of s44ZZRD of the CCA.
  6. This was based on the definition of 'likely' in s44ZZRB.
  7. See [263] of her Honour's reasons.
  8. See [275] to [277] of her Honour's reasons.

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