In March, an Australian federal judge delivered her verdict on one of the quickest ‘flips’ in private equity history: Castle Harlan’s $212.4 million sale of Canadian mining group Norcast Wear Solutions to Australian listed group Bradken, just seven hours after buying it for $190 million from Swiss investment firm Pala.
Pala was not amused, suing Castle Harlan and Bradken in the US and Australia respectively. And at least in the latter case, it seems to have been entirely vindicated. Bradken – along with its chief executive Brian Hodges and chairman Nick Greiner (an influential former politician) – was found guilty of ‘bid rigging’ and ‘misleading or deceptive conduct’. It has been ordered to pay Pala a fine of $22.4 million, the difference between the two prices paid.
This won’t be the end of the story, at least legally speaking: Bradken announced its intention to appeal immediately (it filed the appeal on 18 April, although it didn’t specify on what grounds, and declined a request to provide further comment), while the US case remains ongoing.
But there’s no doubt that the extensive written judgment delivered by the judge (all 45,000 words of it) was fairly damning for the defence’s case – and for that of Castle Harlan too. Although the latter was not on trial here, the judge chose to rule on its behaviour as part of her assessment of Bradken, Hodges and Greiner’s behaviour. As it turned out, she accepted Pala’s version of events almost entirely, while expressly rejecting several different aspects of the Bradken/Castle Harlan version.
There were two legal points at issue here. The first related to the anti-cartel provision contained within Australia’s Competition and Consumer Act 2010 (which is so new that there was no real case law to go by). The question here was simply whether Bradken and Castle Harlan had come to some sort of arrangement whereby the latter would bid for NWS and the former would not. And while there was no smoking gun identified, the judge concluded from the balance of evidence – including email traffic, contemporary records, patterns of behaviour, sworn testimony and so on – that there was indeed some sort of informal understanding in place. (Bradken attempted to argue that it was effectively excluded from the sale process, but the judge dismissed this suggestion.)
In ruling on the second question – whether the defendants deliberately misled the vendor (also related to the CCA) – the judge specifically addressed the question of Castle Harlan’s conduct. She argued that not only did Castle Harlan mislead Norcast/Pala by concealing the extent of Bradken’s involvement in the original deal; it also openly denied any plan to involve Bradken during site visits conducted as part of the due diligence process, and claimed in its offer letter that its funds would stump up the entire equity cheque for the deal, despite coming to an alternative arrangement with Bradken. “In all of the circumstances, the representations were misleading or deceptive,” the judge decreed.
It’s important to reiterate that Castle Harlan – which declined to comment for this article – was not on trial here, and as such has arguably not had the opportunity to provide a full defence. Nonetheless, it will clearly be worried about the reputational damage of such a damning verdict.
Indeed, according to Greiner’s testimony, it raised the issue of reputational risk at an early stage of its negotiations with Bradken. And no wonder: thanks partly to Greiner’s involvement, this trial has received plenty of coverage in Australia – to which Castle Harlan has close ties through its affiliate CHAMP Ventures, which it part-owns and has co-invested with in the past (one of the reasons why the judge decided it was reasonable to consider the firm’s activities as part of this trial).
It’s not just the ‘quick flip’ nature of the deal – although purely financial private equity plays are not exactly in vogue at the moment. Perhaps the bigger issue is the judge’s suggestion that Castle Harlan deliberately misled the management team of NWS about its intentions for the business (which was obviously significant to management because their jobs were more likely to be at risk if the ultimate buyer was a competitor). If the management teams of future Castle Harlan target companies become less likely to trust their potential acquirer as a result, that could potentially be a significant competitive disadvantage, given how important this relationship is to getting deals done.
The one good bit of news for Castle Harlan was that the judge ruled it wouldn’t be liable for any of the fine imposed in Australia – and Pala is not allowed to be awarded those damages twice.
However, the still-ongoing US case has one element that could potentially involve triple damages (in which case Pala could get the two-thirds it hasn’t been awarded already) and another that involves uncapped damages. So this isn’t over yet. The question now is whether Castle Harlan will take the opportunity to put its side of the story forward in court.
Either way, it has to be a positive step that Australia has drawn a clear legal line in the sand about acceptable behaviour during a bid process. Let’s hope other jurisdictions – particularly in Asia – take it upon themselves to follow suit.