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Price fixing rules hit M&A market

Price fixing by suppliers has probably been going on ever since the world has
had markets. However, today, suppliers sharing pricing information among
themselves is against competition law across the developed world.

The regulatory authorities in the UK and in the European Commission are
determined to stamp it out and the fines given to offending organisations are
steep. The maximum fine is capped at 10% of an organisation’s turnover.

Even if an organisation has never engaged in cartel-type activity, if it buys
a company that is either under the shadow of a cartel investigation, or which
turns out to have been a party to a cartel, the responsibility rests with the
acquiring company. So checking for cartel involvement is now very much a
standard part of due diligence activity in mergers and acquisitions work.

The main point to grasp, as Catriona Munro, EU and competition partner with
the law firm Maclay Murray and Spens explains, is that it is extremely easy for
companies to be deemed to be ‘price sharing’. Any of a number of activities
could lead to a judgment that a company is part of a cartel. For example:

• Sales teams from competitors meet informally and discuss pricing;

• An individual gathers pricing information on a sector and makes it
available to a select group of competing companies;

• Telephone/email exchanges between rival companies where pricing is

• Any and all collaboration on pricing by suppliers;

• Anything that compromises market uncertainty where pricing is concerned.

Because cartels are inherently secretive by nature, the regulators adopt the
attitude that if a company is caught up in a cartel investigation, the burden of
proof is on it to show that it is not benefiting from price fixing. The
regulators assume guilt and the company has to prove its innocence.

Ever decreasing leniency

Moreover, the regulators have a well constructed plan to encourage
whistleblowing and assist evidence gathering for cartel prosecutions. The first
company in a cartel to approach the regulator gets 100% leniency, provided they
make a full confession. The next one through the door gets a discount on the
fine. The next one to come into the leniency programme gets a bit less leniency,
and so on down the line.

This practice is destabilising to cartels. The members cannot know when one
of their number is going to be the first whistleblower and so claim full
leniency. Despite reassurances, there is always the chance that one of them
will. So there is great pressure on cartel members to break their silence.

This puts a company that acquires a business that is part of a cartel in an
extremely difficult position. The options are:

• ‘Confess’ to the OFT and claim leniency;

• Approach clients who might have suffered and discuss reparation;

• Continue in the cartel and hope to remain undiscovered and that none of the
members opts for leniency;

• Stop engaging in price fixing and keep silent, hoping that the cartel will
escape regulatory scrutiny until too much time has passed for the regulators to
prosecute successfully.

Customer litigation

Munro points out that there is another major consideration for everyone in a
cartel, including those going for leniency. This is that, as a result of the
regulator’s action, they will almost certainly end up facing claims for
compensation from customers.

The point here is that price sharing amounts to price fixing and the
prevention of the free play of market forces. As such, it amounts to a fraud
perpetrated on the customers of cartels. If a company is convicted and fined, it
can be certain that it will face litigation. Even those ‘in leniency’ cannot be
protected against customer claims for compensation.

However, it is important to realise that customers have to be able to prove
loss. Munro points out that if they have been able to pass the increased cost of
the cartel activity on to their customers, then they have not suffered loss and
can’t claim, though their customers may be able to raise an action.

“It is quite difficult at present to press damages claims because much of the
evidence will be privileged information in the hands of the regulators and will
be hard to get at,” Munro says. The EC is keen to make it easier for victims of
cartel activity to claim damages and has published a green paper calling for
comment as to how it can be made easier for customers to sue cartel members.

The EC is interested in making it easier for individuals to raise joint
actions (to lower the cost of litigation) and to bring punitive damages (a
notion not recognised in UK law or by many euro zone states). It will take time
for this to work its way into law, but it is another factor to focus the mind of
anyone involved in M&A work under the shadow of a cartel investigation.


It might seem odd that companies would do detailed commercial due diligence
on a business they want to acquire and then get themselves into difficulties
with a poorly drafted contract. But according to PricewaterhouseCoopers forensic
accounting partner John Fisher, it is only in the past two years that companies
involved in M&A work have really started to call in forensic accounting
experts to run a health check on the final sale and purchase document.

What has made the difference, Fisher says, is that there is a great weight of
private equity money driving corporate deal-making right now. This is putting
pressure on buyers and vendors not to mess up when it comes to the sales

“The big point we would want to get across to finance directors is that, in
an increasingly competitive M&A market, you cannot leave the detail of the
sale and purchase agreement – the completion mechanism – to chance,” Fisher

According to Fisher, typical problems include:

• The use of the word ‘appropriate’, as in ‘an appropriate price will be paid
for stock’. It is not inappropriate to do a word search-and-replace in the sale
and purchase document, deleting ‘appropriate’ and replacing it with ‘disputed’.

It is axiomatic that the purchaser’s ‘appropriate price’ will generally not be
the vendor’s ‘appropriate price’.

• Failure to be specific about the basis for valuing items such as stock.
Again, this can be a perfectly innocent clash of assumptions. The buyer assumes
the valuation will be based on method A, the seller has always valued using
method B, or thinks method C is more appropriate on the present occasion. Unless
the contract specifies an agreed method, this is a fertile ground for dispute to

• Failure to be specific about the basis for drawing up the settlement
accounts. This is the set of accounts that the vendor draws up for the period
from the last statutory accounts to the date when the keys are handed over and
the buyer gains access. Many people do not realise that these are not statutory
accounts and so do not need to follow generally accepted accounting principles.
There is nothing in law that says that they should, unless the contract
stipulates that they should.

• Lack of clarity on bad debt provisions, provision for contingencies or
disclosure of onerous leasing provisions.

• Differences in interpretation over a word like ‘consistent’, as in ‘the
accounts will be prepared on a basis consistent with the vendor’s previous

If the vendor has ‘consistently’ undervalued property, then wants to revalue
for the purposes of sale, the purchaser will resist this, but the vendor may
claim that the revaluation is ‘consistent’ with good accounting practice. There
is no substitute for the contract being explicit on all significant valued

These are all basic for a forensic accountant, but they are also easy
mistakes for lawyers and business people to make – and they are made all the
time. “People miss the fact that the closing accounts that are prepared by the
seller are special purpose contract accounts, not statutory accounts. They are
only governed by what is said or specified in the contract,” Fisher says.

He points out that the normal due diligence process has nothing in common
with an audit. Due diligence will not, in general, pick up problems with the
final sale and purchase document. It is only when the final accounts are
presented that misconceptions and misunderstandings concealed in the document
transform into cash values.

At this point the implications are there for all to see. This is when the
concealed failures of understanding between buyer and seller rise up and bite
the participants and matters that could have been settled very easily in
advance, become intractable issues after the fact.

The only fall-back for a purchaser, without a properly agreed sale and
purchase document, is to rely on warranties. The problem here is that enforcing
warranties generates a High Court action that is expensive, time-consuming and
uncertain as to outcome. It also creates a public ‘event’, and dealmakers do not
like leaving a string of court actions for warranty claims behind them. They
want successful deals.

To achieve this, due diligence has to extend to the sale and purchase
document. Where there is disagreement, both parties should agree in advance,
Fisher says, to expert determination of all issues.

This means that in the contract, both sides agree to be bound by the expert’s
decision, with no right of appeal. Best of all, get the sale document reviewed
by a forensic accountant.

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