Competitors are natural acquirers of any target business up for sale. Therefore, the potential for gun jumping exists in a large number of merger deals that occur in the Australian market. Gun jumping is an issue that is high on the ACCC’s radar, whether a merger clearance is being sought or not. Despite this, we are not convinced this issue is getting the attention it deserves by M&A parties. For parties involved in a merger, it is more important than ever to ensure that they remain independent and act as true competitors until the merger has completed and don’t lose sight of this need for independence just because a sale agreement has been signed.
What is ‘gun jumping’?
‘Gun jumping’ is where parties to a merger or acquisition start to co-ordinate their activities or begin the integration of a target’s business before completion has actually occurred. This will be particularly problematic where the buyer and the target are competitors and the conduct before completion involves market sharing or price fixing in breach of the Australian competition laws.
It doesn’t matter how likely it is that any conditions precedent to completion will be satisfied or what the probability is that a signed deal will ultimately reach completion. Even if completion is an absolute slam dunk, the law requires that regular competition between the parties continues unaffected by the transaction right up to the very last minute at which completion occurs.
ACCC’s history of enforcement
There has only been one successful prosecution by the ACCC for gun jumping in Australia. In February 2019, the ACCC successfully brought proceedings against Cryosite Limited in the Federal Court. The Court ordered Cryosite to pay $1.05 million in penalties for engaging in cartel conduct in relation its sale agreement with Cell Care Australia Pty Ltd.
In this case, the sale agreement required Cryosite to refer cord blood and tissue banking sale enquiries to Cell Care during the pre-completion period. In effect, Cryosite ceased to supply its cord blood and tissue banking services from the point of exchanging sale agreements, which had a significant effect on competition given that Cryosite and Cell Care were the only participants in that market. Cryosite eventually conceded that the provision in the sale agreement was designed to divert customers to Cell Care pre-completion and paid a hefty price for jumping the gun.
Whilst there may not be a long list of prosecutions by the ACCC, we know that the ACCC has been active in recently investigating gun jumping by merger parties which may be a sign that Australia is set to follow in the footsteps of its European and US counterparts where regulatory authorities have regularly enforced gun jumping laws for some time.
Current market practice
Our experience is that gun jumping is not an issue that has really become top of mind for parties involved in M&A transactions. It is common place for sale agreements to contain a section that regulates the conduct of the parties between signing and completion. Typically, this section will include a list of prohibited actions that the seller must refrain from doing without the buyer’s consent in order to avoid any potential destruction of value in the target. This list is often also coupled with an obligation on the seller to provide the buyer with complete open-book access to the target’s books and records. In our view, these provisions deserve a lot more attention than they currently get with the issue of gun jumping specifically in mind.
Practical Do’s and Don’ts
Here are some practical tips for buyers and sellers as to what they can and cannot do before completion to avoid gun jumping perspective.
Before completion, buyers and sellers should not:
- share the target’s competitive information beyond what is necessary for due diligence purposes and integration planning;
- place unreasonable restrictions on the target’s business activities or ability to compete in the relevant market or exert control over the target’s business decisions;
- take practical steps to commence the integration of the target’s business before completion has occurred;
- take any steps to co-ordinate pricing to customers or suppliers by the target and the buyer;
- take any steps to co-ordinate dealings with the target’s customers e.g. by referring the target’s customers to the buyer.
Before completion, buyers and sellers can:
- participate in a due diligence process in respect of the target’s business for the purpose of the buyer determining whether or not to proceed with the acquisition; and
- undertake integration planning provided that the activities are confined only to planning for the integration of the target’s business after completion and no practical steps towards integration take place.
Buyers and sellers, particularly those that are competitors, should always:
- carefully review the provisions of their sale agreement to ensure it does not permit or promote gun jumping conduct by the parties;
- implement strict gun jumping protocols to make sure their activities are not coordinated; and
- carefully consider the nature and commercial sensitivity of any information being shared in due diligence or otherwise.
If you require any advice on gun jumping or preparing gun jumping protocols, please do not hesitate to contact us for more information.
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