07 Nov 2013
Risks arising in private equity transactions involving consortia bidding and flipping
by Michael Corrigan, Stephanie-Kate Bratton
Although consortium bidding and flipping are not always unlawful, the Bradken case shows the care needed to correctly structure such arrangements and avoid misleading conduct.
Recent cases such as Norcast v Bradken have shown that Australian competition laws can have a very broad reach, applying to a tender sale conducted in North America for sale of a Canadian entity. This note briefly describes the Australian competition law issues for private equity bidders, considering consortium bidding, and/or "flipping", if one or more of the parties conduct business in Australia.
For example, legal issues can arise where:
- bidders form a consortium to bid jointly on a company; or
- bidders arrange to on-sell (or "flip") the target company to another buyer who may or may not be involved in the bid.
What is flipping?
The process of flipping occurs when a private equity firm buys a target company and then sells the target company within a relatively short period of time.
The Bradken case: Competition issues arising out of flipping
Norcast S.ár.L v Bradken Limited is a case that demonstrates the risks involved for private equity companies that intend to flip a target company or bid on behalf of a consortium with another company.
Norcast was selling a Canadian mining consumables company and had engaged UBS to conduct the sales process. Bradken Limited, an Australian mining consumables company, was not contacted as a potential buyer. Bradken believed it had been excluded and did not directly participate in the sale process.
When Bradken became aware that the target company was being sold, it contacted Castle Harlan and asked Castle Harlan to inform it of the sales process.
Ultimately, Norcast sold the target company to a subsidiary of Castle Harlan for US$190 million. Castle Harlan then on-sold the target company to Bradken on the same day for US$212.4 million.
An Australian court subsequently awarded damages to the vendor equating to the lost profit by reason of the higher price that Bradken paid for the asset
The Bradken transaction was notable for two reasons:
- The Court controversially inferred Bradken and Castle Harlan were competitors in the sale process on the basis this was possible. In other cases, a consortium may be lawfully formed on the basis the parties are not likely to be competing with each in relation to the process.
- The flip involved a large degree of co-ordination between the parties which was concealed from the vendor. In fact, Bradken and Castle Harlan were found to have communicated extensively about the acquisition of the target company and were found to have taken deliberate steps to conceal Bradken’s involvement in the sale process.
The Bradken decision demonstrates the risks in flipping – potential breaches of Australian cartel laws and potential liability for misleading and deceptive conduct.
The Court's decision was under appeal but this will not proceed, as the parties have just reached a confidential settlement.
However, other consortium bids may not necessarily attract the same risks. Critical to the legal issue is whether, but for the arrangement, the consortium members would have been likely to compete with each other in the bidding. This is a question which may vary in each case, and the law will look to the commercial realities of the bidder's position and the surrounding circumstances.
Potential breaches of Australian laws
Under Australian law, bid rigging simply consists of a contract, arrangement or understanding between parties, at least two of whom are "in competition" or "likely to be" in competition with each other "in relation to" the bidding, where a purpose of the arrangement is to control which party bids and which does not, or the terms of a bid.
The Bradken case shows that
- an arrangement or understanding between potential competing bidders may contravene Australian bid-rigging provisions, even if:
- the arrangement is informal and unenforceable;
- the arrangement is not in writing ; and
- either party can withdraw from the arrangement or act inconsistently with it.
- if one of the parties to the arrangement is incorporated in or carries on business in Australia, the cartel provisions will apply if the parties are found to be in competition in the process. This is the case even if the transaction or conduct is entirely outside Australia and no market in Australia is affected;
- an arrangement concealed from a vendor may give rise to liability for misleading and deceptive conduct under Australian law. The risk of such a claim will be heightened if the bidders take deliberate steps designed to deceive the vendor by concealing the ultimate purchaser's identity; and
- vendors may still have a cause of action even where they have general awareness of the likelihood that a private equity firm will resell a company which it has acquired. A court may find that, the vendor has suffered a loss of a profitable opportunity
Lessons for private equity firms
The Bradken case provides a constructive lesson for private equity firms. Although consortium bidding and flipping are not always unlawful, the case shows the care needed to correctly structure such arrangements and the overriding need to avoid misleading conduct towards the vendor.