This update briefly outlines some implications for lenders’ syndication arrangements of the recent amendments to the Trade Practices Act (TPA) criminalising cartel conduct and narrowing the joint venture defence to what would otherwise be unlawful cartel conduct between would-be competitors.
The primary purpose of the amendments, which commenced on 24 July 2009, was to introduce criminal sanctions for cartel behaviour, but in doing so:
The new provisions apply to any arrangements currently in place and also prohibit making new cartel arrangements as defined. There is no "grandfathering".
What are "cartel provisions"?
A cartel provision is a provision of a contract, arrangement or understanding between two or more competitors which:
has the purpose, or has or is likely to have the effect, of directly or indirectly fixing, controlling or maintaining prices (including interest rates); or
has the purpose of:
preventing, restricting or limiting the production or supply of goods and services or the capacity to supply services;
allocating customers or geographical areas of operation; or
controlling the bidding by competing parties in a tender process.
The phrase "contract, arrangement or understanding" includes both formal and informal arrangements between competitors, as well as unwritten "understandings" such as a "nod and a wink" or other covert messages.
What is the relevance of this to syndicated lending?
There are two main TPA questions for a lending syndicate to consider:
- are the syndicate members likely to be "in competition with each other" for the proposed lending opportunity, but for their syndicate arrangement? and
- if yes, will the joint venture exception in the Act save the members from any risk of unlawful conduct?
Are syndicate members "competitors" with respect to the borrower?
The threshold question is whether the syndicate members would be "competitors" or "potential competitors" against each other for the borrower's loan requirements, but for their agreement to form the syndicate.
For major banks, the answer is often yes.
One could imagine a case that one lender would not have lent any funds to the borrower, other than by means of a syndicate. This might be because of the size of the loan or the risk features of the borrower.
Such a lender could take the position that it was not, in relation to this particular borrower, ever "competing" with or a "potential competitor" of other banks considering whether to lend to that borrower.
This could get factually complicated if there were various different potential syndicates under consideration - ie. Bank A might be considering whether to join consortium X or consortium Y to make the loans (even if it is clear that A will never offer to lend 100 percent of what the borrower is seeking).
In such a case Bank A may be a potential competitor to an extent against other potential lenders for this borrower's business.
For the provisions to apply to arrangements between two market participants, it appears the better view is that you need to be satisfied that they were, in relation to the particular lending in question, competitors of each other or potential competitors.
Does the joint venture defence apply?
The joint venture defence is that the cartel provisions do not apply in relation to a "contract" containing a cartel provision if:
- the cartel provision is for the purposes of a joint venture;
- the joint venture is for the production or supply of goods or services; and
- either the joint venture is carried on jointly by the parties to the contract (ie. is unincorporated); or the joint venture is incorporated and carried on by a body corporate formed by the parties to carry on the joint venture.
In a syndicate lending arrangement, where the members have a "meeting of minds" over the terms, including rates to be offered to a borrower, the consortium is essentially coming together to act as a "single lender" on those terms.
The TPA analysis would be different, and simpler, if each syndicate member provided its loan to the borrower separately as a share of the total financing, on terms which were negotiated separately with the borrower and not discussed between the syndicate members.
It is also a simpler situation if the lead lender provides all the finance to the borrower and merely has "back to back" arrangements with a syndicate of lenders who provide some or all of the money.
But, in a joint lending situation where the same terms are offered by each syndicate participant, it may be that the syndicate members have internally decided to form essentially a "joint venture" for that financing, even if they do not describe it as such.
Whether they describe their syndicate in that case as a "joint venture" is not essential, provided the syndicate, as formed, meets the definition in section 4J of the TPA of a "joint venture", namely:
- (lending) activity to be "carried on jointly" by the members, whether or not in partnership, or
- if a corporate vehicle was adopted by the consortium as the vehicle (to make the loans), that corporation was expressly agreed to be formed for the purpose to carry on that activity jointly, by means of the parties' "joint control of", or shareholding in, that vehicle.
What is also important, to attract the new joint venture defence in the TPA, is that the syndicate members' joint commitment or understanding with each other as to the terms of the loan to be made to the borrower is reflected explicitly or "contained in" their syndicate agreement.
Some commentators suggest it is enough for the exception to apply, if the "common terms" are contemplated by the syndicate agreement as being decided jointly by the syndicate at some point, even if those terms are not set out in that agreement. This is unclear and the drafting of the Act suggests it is prudent to set those terms out explicitly.
Sanctions and consequences of contravention
Liability under the TPA is strict and does not requires any intent to reduce competition nor any awareness of wrongdoing.
The penalty for breaching these provisions can be significant: corporations may be liable for criminal fines or civil penalties for up to the greatest of:
- $10 million, or
- three times the value of the benefits obtained from the activities, or
- if the value cannot be determined, 10 percent of the corporation's annual turnover.
For executives and others personally involved who had knowledge of the elements of the offence, jail terms of up to 10 years can be imposed.
The TPA also operates retrospectively to apply to cartel provisions which were in place before the amendments to the TPA became effective, to the extent that a corporation gives effect to a cartel provision after 24 July 2009.