In the Australian Competitor and Consumer Comission’s (ACCC) first ‘gun jumping’ case, the Federal Court of Australia has ruled that Cryosite Limited (Cryosite) is to pay penalties for engaging in cartel conduct through entering into an asset sale agreement with competitor company Cell Care Australia Pty Ltd (Cell Care).

What is gun jumping?

When merger or acquisition parties are competitors and they combine or coordinate their conduct before the actual completion of the transaction, this is known as gun jumping.

What happened?

Cryosite is a bio-tech company that is involved in the supply of cord blood and tissue containing stem cells (CBT) services.  Cell Care is the other private supplier of CBT banking services in Australia, being the only two suppliers of CBT banking services in the country.  Cell Care also held 19.7% of the issued capital in Cryosite but did not have any board representation and did not exercise its voting rights.

In June 2017, Cryosite signed an agreement to sell its assets in its CBT banking business to Cell Care.  On signing the agreement, Cell Care made an upfront, non-refundable payment of $500,000 to Cryosite.

The agreement required Cryosite to refer all customer enquiries to Cell Care after it was signed, but before the acquisition was completed.  Cryosite then:

  • Established and implemented a process by which Cryosite staff would refer customer enquiries to Cell Care;
  • Referred customers who contacted it to Cell Care;
  • Reported to Cell Care in relation to customers that it had referred to Cell Care; and
  • Ceasing to provide CBT banking services to new customers.’[1]

The ACCC alleged that this amounted to cartel conduct, as it restricted or limited Cryosite’s supply of CBT banking services and allocated potential customers from Cryosite to Cell Care.

Why is this an issue?

“Such cartel behaviour, which had the effect of ‘gun jumping’, undermines the effective functioning of the ACCC and the merger process.” – Sarah Court, ACCC Commissioner

The ACCC claimed this conduct amounted to gun jumping, as parties to a transaction must remain independent and continue to act as competitors, even if a merger or acquisition agreement has been signed, until the deal is completed.

Cryosite admitted that:

  • Cryosite and Cell Care were likely to be, or would have been likely to be in competition with each other in relation to the CBT banking services;
  • A restraint provision of the agreement had the purpose of directly or indirectly limiting Cryosite’s supply of CBT banking services and allocating customers from Cryosite to Cell Care.
  • It gave effect to the Cryosite restraint during the period from 23 June 2017 to August 2017 and thereby gave effect to a cartel provision in contravention of s 44ZZRK(1) of the Competition and Consumer Act 2010 (Cth) (CCA) as it was in force at the time.

The decision

The Court held that Cryosite had engaged in cartel conduct in contravention of s 44ZZRK as it was in force at the time of the CCA.

Cryosite was ordered to pay over $1 million of pecuniary penalties to the Commonwealth of Australia and a sum of $50,000 to the ACCC for the costs of the proceeding.

“This outcome should be a strong reminder to competing companies that they must conduct themselves at arm’s length until a deal has been completed.” – Sarah Court, ACCC Commissioner

What does this mean?

  • Parties to a transaction must remain independent and continue to act as competitors.
  • A clear understanding of the provisions within an agreement are paramount, for a company to not knowingly contravene the modern provision s 45AK CCA.

[1] Australian Competition and Consumer Commission (ACCC) v Cryosite Ltd [2019] FCA 116 [93].

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article