Merger reform broadens the risk of gun jumping

The introduction of the new mandatory and suspensory merger control regime will result in a number of consequential and less obvious changes, including a new explicit "gun jumping" prohibition that will operate together with the existing prohibitions which have traditionally been used to enforce gun jumping in Australia.

Under the new regime, parties that implement a transaction prior to completion may breach a new procedural "standstill obligation" and be subject to enforcement action by the Australian Competition and Consumer Commission (ACCC). This procedural prohibition applies in addition to the new mandatory notification requirements.

Even after signing, merger parties will need to be vigilant to ensure that conduct engaged in prior to completion does not implement the transaction and breach the standstill obligation.

Transactions that are not closed prior to 1 January 2026 will be subject to the new regime. Parties to a proposed transaction should be conscious of whether their transaction will close before that date and if not, avoid conduct that may "put into effect" the transaction prior to completion.

Merger parties should be aware that conduct that may amount to "putting into effect" a transaction prior to completion is likely to be broader than conduct to which the existing provisions apply. For example, terminating employment is likely to be prohibited under the new regime.

As always, merger parties will also need to ensure they continue to comply with the existing prohibitions against cartel conduct, making or giving effect to an agreement containing an anti-competitive provision or engaging in a concerted practice, in the period between signing and completion.

Gun jumping in Australia – traditional enforcement

"Gun jumping" refers to the premature implementation of a merger between competing firms prior to completion. Australia does not currently have a specific prohibition against gun jumping.

However, the Competition and Consumer Act (CCA) prohibitions of cartel provisions, anti-competitive agreements and concerted practices apply to any conduct that occurs between signing and completion that coordinates or integrates the parties, in place of them continuing to operate independently.

To date, only one gun jumping case has been enforced by the ACCC, in the matter of ACCC v Cryosite [2019] FCA 116.

Cryosite admitted that a clause in its asset sale agreement with Cell Care Australia Pty was designed to restrict or limit the supply of core blood and tissue banking services by Cryosite and to allocate potential customers to Cell Care. Cryosite gave effect to this clause by ceasing to supply private cord blood and tissue banking services to new customers and by referring potential customers to Cell Care, in breach of the cartel provisions of the CCA.

The Federal Court ordered Cryosite to pay $1.05 million in penalties for engaging in cartel conduct. At the time the ACCC stated:

"When companies jump the gun and coordinate or integrate competing businesses before finalising an acquisition between them, this can lead to permanent structural change in the market.

Such cartel behaviour, which had the effect of 'gun jumping', undermines the effective functions of the ACCC and the merger process."

A new prohibition – no need for any cartel conduct, anti-competitive purpose or effect

The Treasury Laws Amendment (Mergers and Acquisitions Reform) Act 2024 (Merger Reform Act) introduces a new procedural prohibition against "putting into effect" or purportedly^[1] putting into effect a "stayed" acquisition (s 45AY).

What is a "stayed acquisition"?

As set out in the Explanatory Memorandum, an acquisition is "stayed":

• if the acquisition is required to be notified, but has not been;
• if the acquisition has been notified, but has not been "finally considered";
• if the ACCC has determined that the notified acquisition must not be put into effect, but the ACCC has not subsequently determined that the acquisition is of public benefit (where a notifying party applies for such a determination to be made); or
• if the acquisition has been notified and the most recent notification is stale (that is, the acquisition has not closed 12 months after the ACCC makes a final determination).

This framework aligns with the "standstill obligation" (or "suspension rule") observed in other jurisdictions.

If an application to the ACCC is materially incomplete, misleading or false, or there is a material change in facts, then the review period (and therefore when an acquisition is a "stayed acquisition") may be extended.

Expected increase in gun jumping enforcement

The new merger regime may lead to a rise in gun jumping enforcement cases because of:

• Expanded notification requirements: the Government is introducing a mandatory notification requirement, meaning that transactions that may previously have not been the subject of a clearance application to the ACCC (and may have been implemented at a time chosen by the parties) will now be notifiable under the low notification thresholds and therefore subject to the standstill obligation.
• Expanded scope of the prohibition: as mentioned, under the existing legal regime, merger parties that are competitors and implement a transaction prior to completion may risk engaging in cartel conduct or a concerted practice. However, cartel conduct is limited in scope (to price fixing, customer or territorial allocation, restricting outputs and bid rigging conduct) and for the parties to engage in a concerted practice or an anticompetitive arrangement in contravention of the CCA requires a purpose, effect or likely effect of substantially lessening competition. The standstill obligation prohibits conduct that may fall outside the scope of cartel conduct and may also capture unilateral action of a party that falls short of substantially lessening competition.

Potential penalties

Contravention of the standstill obligation may attract a civil penalty of up to the greater of:

• $50 million for corporations or $2.5 million for individuals;
• three times the total value of benefits obtained that are reasonably attributable to the act; or
• for corporations, 30% of annual turnover.

The applicable penalties are designed to deter non-compliance. At the annual CEDA event in February, the ACCC Chair stated when announcing the ACCC's enforcement priorities for FY25-26:

• "The new merger regime establishes statutory obligations, and it will operate most effectively where the merger parties approach the ACCC early and co-operatively. Some parties may be tempted to test the boundaries to avoid notification of transactions or genuine compliance with the regime. Ensuring compliance with the mandatory requirements will be a key focus for the ACCC, and we will be closely monitoring this when the new regime comes into effect next year."

In determining penalties, the Federal Court may consider:

• the seriousness of the related contravention of the suspension rule;
• the impact of the contravention on third parties;
• whether voiding the acquisition does not ensure a just outcome, or avoid a perverse outcome; and
• any other orders which ameliorate the impact of the voiding in "appropriate circumstances".

The Federal Court may also make other orders including Australian divestiture orders (as an alternative to voiding an acquisition) and disqualification of directors.

Defining "put into effect"

Determining whether an acquisition has been "put into effect" requires consideration of the practical circumstances of each matter and does not require legal ownership to have transferred. Non-exhaustive examples of what may amount to "putting into effect" an acquisition include terminating the employment of key employees, closing essential facilities or integrating IT systems.

The prohibition against putting into effect a stayed acquisition applies to "a person" and it may be possible that both parties to the transaction could be exposed to penalties (which has occurred in the EU – see Illumina / GRAIL below).

Cases considered in the EU provide examples of what may amount to putting an acquisition into effect, which include where:

• there is a premature transfer of beneficial ownership of the target to the buyer by allowing the buyer to acquire the equity or assets of the target;
• parties conduct their business jointly and merge their decision-making processes (eg. submitting terms offered to customers to the buyer's approval);
• the acquirer operates on the target's assets such as the manufacturing facilities;
• the acquirer takes control of the target's inventory, machinery and customer and supplier lists; or
• the parties transfer the target's employees to the buyer's facilities, including giving the target's employees new business cards with their new title and the future business name.

What does the European experience tell us?

Marine Harvest / Morpol:

In 2012, Marine Harvest acquired Morpol ASA, a listed Norwegian producer and processor of salmon in three stages:

• first, it acquired 48.5% of the shares from two legal entities controlled by Morpol’s founder;
• secondly, it acquired another 29.6% of the shares through a public bid; and
• finally, it acquired all remaining shares and completed the purchase.

Marine Harvest did not notify the European Commission (EC) of the first transaction (in which its exercise of voting rights was conditional upon clearance of the transaction) and notified it only after full takeover.

The EC found that:

• the transactions could not be considered one single unitary transaction;
• the acquisition of a 48.5% shareholding provided Marine Harvest with a stable majority at shareholders' meetings due to the widespread minority holding of remaining shares, which in turn gave Marine Harvest de facto control over Morpol; and
• the taking of the shares constituted implementation in breach of the notification and standstill obligations.

Altice/PT Portugal (Case M.7993):

In 2014, Altice acquired control of PT Portugal, a telecommunications service provider. The transaction was notified to the EC and granted merger approval in 2015.

However, the EC found that prior to EC approval, Altice:

• acquired decisive influence over PT Portugal by having a veto right over its ordinary business decisions;
• gave instructions to PT Portugal's management concerning the renewal of campaign contracts; and
• sought and received commercially sensitive information of PT Portugal on a regular basis.

Illumina / GRAIL (C-611/22 P, EU:C:2024:677):

In July 2023, the EC imposed its largest ever gun jumping fine against Illumina when it and GRAIL closed their transaction while the EC was still investigating. The EC described this as blatant and intentional defiance of the mandatory standstill provision.

The EC found that by closing the transaction Illumina was able to (and did) exercise a decisive influence over GRAIL.

The EC also fined the target for assisting in enabling the transaction to be closed (which was the first time a target had been fined), however, the penalty was symbolic in quantum. The fine imposed on Illumina was the maximum possible under the regulations – 10% of Illumina's global annual turnover, being EUR 432 million.

However, in September 2024, the European Court of Justice (on appeal from the General Court) overturned the fine on jurisdictional grounds in respect of the EC's power to consider acquisitions on referral from member states.