Issuing or selling shares through a bookbuild process is a common and effective mechanism of selling large quantities of stock in Australia and around the world. The process, conducted by managers for their clients, involves seeking bids into the book for allocations, or to determine both the final price and allocations. It can be a fluid and nerve-racking process for many companies, and even their managers when things are tight or demands are high.
So the last thing an issuer and its manager want to know is that the bidders could be talking behind their back, indirectly or even directly disclosing bid tactics or pricing thoughts.
It's something the UK Financial Conduct Authority tackled in a recent decision by invoking a competition law preventing "concerted practices" to object to a practice of would be investors disclosing the likely price they might pay to buy shares in a capital raising, in this case an IPO.
In the European Union and United Kingdom, a concerted practice may consist of a one off event or a pattern of conduct, usually involving the disclosure of sensitive information between competitors which can have the effect of reducing competition between them.
In the FCA matter, four asset management firms were accused of sharing their pricing expectations shortly before the share prices were set. The information sharing generally occurred on a bilateral basis and allowed the firms to know the other’s plans during the placing process, when the FCA says they should have been competing for shares.
Australia's new laws
The alleged conduct in the UK provides a useful example of the type of behaviour that may now be caught by Australia's new "concerted practice" laws that came into effect on 6 November 2017.
No Australian definition of concerted practice
While "concerted practice" is not defined in the Competition and Consumer Act 2010 (Cth) (CCA), the Explanatory Memorandum describe them as:
"any form of cooperation between two or more firms (or people) or conduct that would be likely to establish such cooperation, where this conduct substitutes, or would be likely to substitute, cooperation in place of the uncertainty of competition."
The ACCC has also published Interim Guidelines which are designed to assist companies determine what concerted practices are. The ACCC gives a number of examples including brokers and traders who share market information through private online chat rooms.
It's easy to see how these laws could assist issuers and their managers in the capital raising bookbuild process, particularly with large or influential bidders, or even in a less formal process where there is competition for stock.
The ACCC's Interim Guidelines explain that a concerted practice may be thought of as:
- any form of cooperation or coordination between two or more persons, or conduct that would be likely to establish such cooperation or coordination; or
- cooperative behaviour which falls short of meeting the cartel threshold of there being a "a contract, arrangement or understanding", and
where such cooperation or coordination removes the risks that would otherwise exist in a competitive market.
Generally, a concerted practice involves some type of communication between competitors which indicates future behaviour. Signalling can be either public or private and the new law applies to both situations. The breadth here is important as signalling or indirect communication of an intention or plan could be enough to achieve a bidder's purpose in talking to another bidder who is participating in a bookbuild process.
For parties to engage in a concerted practice the sharing of information is the crux. There is no need to go further and show that they subsequently:
- acted in the same way or at the same time; or
- altered their behaviour in response to the communication.
Is an independent response to market conditions or information still lawful?
Yes. concerted practices don’t restrict the case of an independent response to market conditions, which is lawful. For example, where one competitor announces that its prices are increasing to customers, other competitors may respond immediately. Acting on generally available market information is not likely to be a concerted practice because, in a highly competitive market, competitors may independently respond almost immediately to each other’s changes in pricing. This is part of competition and is not the product of coordination or cooperation. However, where patterns of cooperative behaviour are present, the chances of the ACCC commencing an investigation for a concerted practice increase.
In a bookbuild process, there is nothing wrong for example with a bidder adjusting their bid in response to updated information about the coverage or clearance of the book communicated to investors by the manager.
Concerted practices are different to cartels
It is easier for the ACCC to prove a concerted practice than a traditional cartel.
To establish a cartel, amongst other things, the ACCC must prove that the participants in the cartel committed to behave in a certain way . Over time, Australian courts have interpreted these concepts as requiring proof that there was a "meeting of the minds" of the competitors and that there was an adoption by at least one participant of some commitment to act, or not act, in a particular way.
However, where two or more persons have not entered into a cartel arrangement, it may not always be clear whether they have nevertheless engaged in a concerted practice.
Under the new laws, a concerted practice might be shown through demonstrating some acts of cooperation or coordination between competitors, or conduct that would be likely to establish such cooperation or coordination, where this is likely to reduce or soften the competition one would otherwise expect to occur.
Practical impact on bookbuilds
The Recent UK Decision is provisional and not a finding but it does show a continuance of the recent trend to apply competition laws to financial services, and now to pricing structures around capital raisings including IPOs.
Bookbuild processes may have procedures governing participation, for example the Master ECM Terms used in most public Australian capital raisings, which include requirements on bidders to keep their participation in the bookbuild confidential. In many cases however, these procedures do not directly target concerted actions. The new laws will underpin the competitive nature of the bidding process to the advantage of issuers and their managers ‒ enhanced of course where bidders are reminded of these laws. Issuers and their managers should consider express mention of these laws in their bidding procedures to promote a competitive bidding process for their stock.
See, for example: ACCC v Australian Egg Corporation Ltd  FCA 69 (White J); ACCC v Australian Egg Corporation Ltd  FCAFC 152 (Besanko, Foster and Yates JJ); ACCC v Leahy Petroleum Pty Ltd  FCA 794; Apco Service Stations Pty Ltd v ACCC  FCAFC 161.Back to article