Defining the Scope of ‘Bid Rigging’: A Robust Approach to Cartel Prohibitions – Norcast S.ár.L v Bradken Ltd (No 2) [2013] FCA 235

Defining the scope of ‘Bid Rigging’: a robust approach to cartel prohibitions – Norcast S.ár.L v Bradken Ltd (No 2) [2013] FCA 235

On 19 March 2013 the Court handed down its decision in Norcast S.ár.L v Bradken Ltd (No 2) (Bradken). The decision included a finding that Bradken and its directors had breached the prohibition against bid rigging contained in sections 44ZZRD(3)(c)/(4) the Competition and Consumer Act 2010 (Cth) (CCA).

The case is significant for multiple reasons: it is the first instance the Courts have considered the application of the ‘cartel provisions’ introduced to Australian competition law in 2009. It is particularly significant to businesses seeking to acquire an interest in a company or acquiring business assets where a third party is involved in the acquisition.

The decision in Bradken demonstrates that the ‘bid-rigging’ cartel prohibition of the CCA is broadly applicable to parties working together in the acquisition of a third entity. The decision confirms that the Courts will look to a broad spectrum of conduct both in Australia and abroad in deciding whether parties have arrived at an agreement or understanding to act as a cartel.

Background Facts and Issues

The facts of Bradken were highly complex. In essence:

• In 2011 Norcast S.ár.L (Norcast) a Canadian mining goods producer circulated material to various parties with a view to selling a subsidiary arm of its global business, Norcast Wear Solutions Inc (NWS). One of those prospective purchasers was the Castle Harlan group of companies (CHG) which included Castle Harlan’s Australian subsidiary CHAMP Pty Ltd, and its parent company, Castle Harlan Ltd in New York.
• Bradken was an Australian based competitor of NWS, and had been considering acquiring the company for some time.
• Over time Bradken became aware of Norcast’s intention to sell NWS, and CHG’s interest in acquiring it.
• Bradken approached CHG with a proposal to purchase the company from it. The parties were aware that Norcast did not wish to sell NWS to Bradken but were considering the mutually profitable possibility of CHG acquiring NWS and on-selling the acquisition to Bradken.
• Through the course of discussions between Bradken and CHG it was determined that CHG would acquire NWS through a subsidiary entity, BC Ltd (BC).
• Bradken entered an option agreement with BC entitling it to acquire BC’s shares following the transaction. Norcast were not made aware of this agreement, and the parties took steps to ensure that the transaction remained confidential between them.
• The sale of NWS went ahead, and Bradken subsequently exercised its option to acquire the shares in BC, effectively acquiring NWS.
• Norcast became aware of the sale of the subsidiary to Bradken and proceeded to bring a claim against CHG (both CHAMP and Castle Harlan Ltd), Bradken and their respective directors arguing amongst other things that the arrangement made between the parties had been a contravention of the bid-rigging prohibition contained in Pt IV of the CCA.
• Gordon J found that as a matter of fact Bradken and CHG’s conduct had amounted to bid rigging.
• Gordon J’s decision is the first detailed response from a Court on the interpretation of the bid rigging provisions. It is also a useful up to date statement of what conduct the Court will consider as bid rigging.

 
Interpreting the Bid-Rigging Provision

The Court made a number of significant findings in response to arguments by Bradken that the bid rigging provision should be read narrowly. Relevantly:

• The prohibition requires that the seller makes an offer to sell (makes a request for bids). Unsolicited offers by a prospective purchaser will not attract the prohibition. However, a request for bids does not need to be a personal invitation to cartel members to bid. If there is any competitive sale process (private or public), a request for bids will likely be established. The Court noted that even if a party were not made aware of bids to other potential private purchasers, this was no obstacle to finding that the party had engaged in cartel conduct.
• A request for bids may include bids in Australia and abroad.
• The parties to a cartel must be ‘otherwise in competition with each other’. The Court in Bradken applied a very broad definition of ‘otherwise in competition’. Whilst CHG and Bradken did not produce similar products or compete for customers the mere fact that they were both interested in acquiring NWS was enough to satisfy the competition condition.
• This signals a novel approach by the Court: under other prohibitions where the Court has had to determine whether parties share a nexus of ‘competition’ (for example in the case of a misuse of market power under section 46, or where the merger of two companies ‘in competition’ will have adverse effects on competition in a market under section 50) the Court has traditionally defined the relationship of parties by reference to market dimensions, and focussed upon the conduct’s impact on consumers (i.e. whether conduct amounts to a ‘substantial lessening of competition’).
• In the present case, the Court readily adopted an alternative approach, defining competition by reference to an asset or entity rather than to traditional market factors. The fact that the cartel parties had no other connection to each other in the traditional sense of competition did not prevent a finding that they were ‘in competition’ for the purpose of the prohibition.
• Cartel members must have a connection with Australia: registration of a company in Australia satisfies this criterion. The Court also found that an unregistered foreign company could be liable under the prohibition if it has a sufficient connection with an Australian business or an Australian company. In the present case the fact that Castle Harlan Ltd (a private equity fund in New York) engaged in joint ventures with its Australian subsidiary, and controlled its Australian subsidiary was sufficient to attract accessorial liability for conduct engaged in by its subsidiary in Australia.

 
Conduct Amounting to a Contract, Agreement or Understanding

Having considered the construction of the prohibition the Court then turned to the issue of whether the parties conduct amounted to a contract, agreement or understanding (CAU) to act as a cartel.

The Court found that in the present case:

• Proof that one party acted on the belief that there is an agreement will not amount to a CAU – there must be a ‘meeting of minds’.
• What evidence is necessary to substantiate a meeting of minds, and at what point the prohibition is contravened will be a matter of fact which differs from case to case.
• In the present case, although informal and unenforceable (the agreement that Bradken would not bid for NWS was never reduced to a formal contract) the circumstances surrounding the actions of the parties and their directors pointed to an underlying agreement having been reached, given:
  • CHG immediately passed information about the sale process of NWS to Bradken;
  • Bradken had undertaken detailed analysis of NWS’s market value, and had provided this to Castle Harlan;
  • Bradken played a continuous and significant role in the preparation of preliminary reports and the eventual bid to Norcast for NWS;
  • CHG had negotiated with NWS to remove of a disclosure clause in the Sale Agreement relating to its ‘advisors’ – effectively, to remove CHG’s obligations to disclose its discussions with Bradken;
  • Both parties had signed confidentiality agreements regarding the on-sale of NWS, including indemnities against disclosure. The Court did not find that this agreement amounted to a contract for bid rigging, however did infer that it pointed to an intention to keep the on-sale of NWS a secret; and
  • CHG had made deliberately misleading statements to Norcast about Bradken’s involvement in its purchase of NWS.

Acquisition of Shares Defence Restricted

Notably, the Court also found that whilst the bid rigging provision contains a specific carve out for the acquisition of shares the agreement between Bradken and CHG was not solely for the acquisition of shares. The Court resisted the argument that the agreement was exempt from the bid rigging provision on the basis that the share acquisition only formed part of the bid rigging agreement.

By distinguishing the elements of bid rigging from the elements of share acquisitions in the bid rigging agreement the Court indicated that the prohibitions against cartel conduct and against other prohibited market conduct contained in the CCA can exist concurrently in one transaction. This effectively removes the previously assumed defence that the cartel provisions would not apply where they overlapped with the other less onerous market prohibitions that apply a substantial lessening of competition test, rather than strict liability.

Market Impacts

The decision in Bradken telegraphs a harsher and more deterrent based approach by the Court to cartel conduct. The readiness of the Court to apply the cartel provisions broadly and the language used by Gordon J indicates that this new approach is policy driven. Consequently Bradken raises a concern for parties considering acquiring a company or business with another where the parties must negotiate third party interests in the purchase.

The Court’s findings of fact in Bradken regarding the parties conduct provides a valuable insight into what purchasers should be aware of in future acquisitions:

• Information provided between parties can be perceived as collusive, even when this is not intended. Parties should make it very clear to each other what purpose information is given for and approach advice or suggestions from potential competitors at arms-length;
• Parties should ensure independence when developing bid proposals. It may be prudent to seek an independent assessment of market analysis information given by a third party, both to verify the accuracy of data and demonstrate independence;
• Disclosure of third party interests in acquisitions may be necessary where the third party could be a potential purchaser/competitor. Transparency may sometimes be the best defence; and
• Where it is not commercially prudent to disclose a third party agreement to a vendor then the terms of the third party agreement should avoid any reference to the primary sale, and a reasonable degree of separation should be maintained in negotiations.

 
For further information on how Pointon Partners can assist you in structuring your acquisitions please contact Michael Bishop of our office on 03 9614 7707.

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