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Australia – Landmark Bid-Rigging Cartel Conduct Case.

9 May, 2013

 

WHAT YOU NEED TO KNOW

 

  • The Federal Court (single judge) has handed down its first landmark decision on the bid-rigging cartel provisions of the Competition and Consumer Act 2010 (Cth) (CCA) in Norcast S.Ár.L v Bradken Limited (No 2) [2013] FCA 235.

 

  • Gordon J found that Bradken and Castle Harlan engaged in a bid-rigging cartel where Bradken would not bid and Castle Harlan would bid to acquire shares in NWS, a subsidiary of Norcast. Norcast was awarded damages of US$22.4 million.

 

  • The main Bradken executives involved were found to be accessories to the contravention of the CCA. Gordon J also found that Bradken had engaged in misleading and deceptive conduct by deliberately not disclosing its direct involvement in Castle Harlan's acquisition of NWS. It also held that Castle Harlan engaged in similar conduct through its silence, and by positive representations made during the sale process.

 

  • Bradken has announced its intention to appeal the decision.

 

  • This decision demonstrates the potential for a very broad application of the bid-rigging prohibitions.

 

The Federal Court has handed down a landmark decision on the bid-rigging cartel provisions of the CCA, in Norcast S.Ár.L v Bradken Limited. This is the first case where a company has been held liable for bid-rigging.

 

The applicant, Norcast, offered for sale (through a bidding process) its subsidiary NWS, a Canadian mining consumables company. Bradken (an Australian mining consumables company) and NWS were two of four global manufacturers of grinding mill liners although Bradken was the sole domestic manufacturer of these liners in Australia. Norcast did not include Bradken in the potential buyers' list as it did not consider Bradken a serious bidder and was concerned that Bradken might use information acquired in the bidding process against NWS. Bradken formed the view that it had been deliberately excluded from the bid process as retaliation for anti-dumping action it had taken against Norcast/NWS in 2002.

 

Bradken alerted Castle Harlan (a private equity fund with whom Bradken had a long history) that NWS was for sale and assisted Castle Harlan to bid for NWS. Communications between Bradken and Castle Harlan were to the effect that Castle Harlan would buy NWS and then sell it to Bradken with an internal rate of return of 25% or possibly less. Castle Harlan acquired NWS for US$190 million and, on the day the sale completed, sold NWS to Bradken for US$212.4 million.

 

The bid-rigging cartel prohibition

 

Norcast alleged that there was an illegal bid-rigging arrangement (contrary to section 44ZZRD(3)(c) of the CCA)
between Castle Harlan and Bradken.

 

To satisfy the bid-rigging cartel provision of the CCA, Norcast had to establish:

 

 

  • the "purpose element" – that Bradken and Castle Harlan entered into a contract, arrangement or understanding with the purpose of ensuring that, in the event of a request for bids, one party bids and the other does not in relation to the acquisition of services (ie shares in NWS); and
  • the "competition element" – that Bradken and Castle Harlan were competitors, or likely competitors, with one another for the acquisition of shares in NWS.

 

Findings

 

Purpose

 

Gordon J found that the evidence (or the inferences to be drawn from the circumstances that existed) established that Bradken and Castle Harlan entered into an arrangement which had the purpose of directly or indirectly ensuring that Castle Harlan would bid, and Bradken would not bid, for NWS. Bradken's communications with Castle Harlan were critical in establishing the relevant purpose because they showed that Bradken wished Castle Harlan would bid – this was Bradken's stated purpose. It was inconceivable that Bradken would state its wish for Castle Harlan to bid, and that Castle Harlan would have agreed to bid for NWS at Bradken's suggestion and assistance, if Bradken still reserved the right to bid for NWS itself.

 

Competition

 

Gordon J rejected Bradken's submission that, because neither Bradken nor Castle Harlan were included in the original sales process they were not in competition, or likely to be in competition, with each other in relation to the acquisition of shares in NWS. "Likely" included a possibility that was not too remote. Without the arrangement between them, it was possible they would have competed with each other in bidding for NWS.

 

Anti-overlap provision

 

Section 44ZZRU of the CCA provides that the cartel offence provisions are not engaged if the cartel provision in the contract, arrangement or understanding provides directly or indirectly for the acquisition of any shares in the capital of a body corporate or any assets of a person. Gordon J found that the arrangement between Bradken and Castle Harlan did not provide directly or indirectly for the acquisition of any shares because the acquisition of shares did not occur in the factual circumstances until after Castle Harlan was successful in its bid for NWS at which point the arrangement was already complete.

 

Comment

 

Likely to be in competition

 

Gordon J's approach in relation to whether two parties are "in competition or likely to be in competition" for the acquisition of services sufficient to engage in the cartel provisions of the CCA is consistent with the low threshold applied by the court in other cases (for example in Tillmans Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 42 FLR 331 as per Bowen CJ at 339 and as per Deane J at 346).

 

Whilst it was clear that Bradken wanted to acquire NWS, Gordon J had to conclude that it was "possible and not too remote", that despite Bradken's strong belief that it had been excluded from the bid process, absent the arrangement with Castle Harlan, Bradken would have tried to bid for NWS.

 

What is even more problematic is the question of whether Castle Harlan would possibly have been in competition with Bradken when prior to Bradken's communication with Castle Harlan, Castle Harlan did not even know that NWS was for sale. At this point, the possibility that Castle Harlan would compete with Bradken must be very remote. Gordon J does not address this question in her judgment.

 

Tellingly, also, Gordon J does not identify any point in time at which Bradken was realistically contemplating making a bid for NWS concurrently with Castle Harlan. The facts seem to disclose that by the time Bradken alerted Castle Harlan to the possibility of acquiring NWS, Bradken knew, or at least assumed, that it had been excluded from bidding by the vendor.

 

Anti-overlap provisions

 

Gordon J's reasoning, as to why the "anti-overlap" provision which provides that the bid-rigging prohibition does not apply to a provision in so far as that provision provides for the acquisition of shares or assets, is consistent with the authorities (for example, Visy Paper Pty Ltd v Australian Competition and Consumer Commission [2003] HCA 59 and SST Consulting Services Pty Ltd v Rieson [2006] HCA 31). Essentially, if one party "agrees" with another that it would not bid in a sale process and the other would, that "agreement" does not directly or indirectly involve the acquisition of shares in a company because that acquisition of shares in a company does not occur, and cannot occur, until that other party is in fact successful in acquiring the shares.

 

Issues on appeal

 

As the first judgment under the bid-rigging prohibitions in the CCA, the parties will explore many points on appeal. Critically, the judgment fails to grapple persuasively with what was really going on. Had it not been for Bradken reaching out to Castle Harlan (after Bradken had determined that it was realistically not able to bid), it is hard to see how one could find that there was even a possibility that Castle Harlan would bid for NWS. That is, asking the question as at the commencement of the chain of events, the prospects of Castle Harlan bidding for NWS must be considered to have been remote. The Full Federal Court will have to consider at what point in time one must ask and answer the question – but for the arrangement would the parties have been in competition with each other?

 

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For further information, please contact:

 

Liza Carver, Partner, Ashurst
liza.carver@ashurst.com

 

Angela Lin, Ashurst
angela.lin@ashurst.com

 

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