Compliance with antitrust laws was never a pressing issue for private equity firms. Antitrust compliance briefly came to the forefront of the industry in 2007, when the U.S. Department of Justice briefly investigated the industry and a series of private lawsuits were filed against private equity firms. However, the DOJ’s investigations stalled, the private lawsuits languished for the most part, and the private equity industry was able to turn its head away from the antitrust laws once again. Today, with the issuance of a recent court decision and increased government activity, it would be wise for private equity firms to once again educate themselves on the antitrust laws.
Recently, private equity firms were able to achieve a partial dismissal in a “buying club” lawsuit alleging violations of the Sherman Act. In March, the U.S. District Court for the District of Massachusetts issued a decision on summary judgment partially dismissing a lawsuit brought against private equity firms alleging, in part, that the formation of buying clubs by the private equity firms violated the antitrust laws. In Dahl v. Bain Capital Partners LLC, No. 07-12388-EFH (D. Mass. Mar. 13, 2013), shareholders of companies acquired by private equity “clubs” from 2003 to 2007 filed a lawsuit against 10 prominent private equity firms alleging violations of the antitrust laws. The plaintiffs alleged that the firms conspired to suppress competition and hold down the prices in bidding for 28 target companies. While the plaintiffs offered no direct evidence of any such agreement, they argued that an agreement not to compete could be inferred from the various collaborative practices employed by the clubs. The district court found that the majority of the collaborative practices in question employed by the clubs did not support an inference of a conspiracy to suppress competition, but the court nevertheless allowed a portion of the claims to proceed.
A club arrangement is when two or more private equity firms join together to bid jointly on a target company. Because those private equity firms are most likely competitors, the antitrust laws are implicated. Section 1 of the Sherman Act, the primary antitrust law, prohibits illegal contracts, combinations, or conspiracies that unreasonably restrain trade. Specifically, Section 1 addresses agreements between competitors and potential competitors, thus implicating club deals. Certain agreements are considered so anti-competitive that they are deemed per se illegal under Section 1, but courts have found that other agreements among competitors could be legal if there is a sufficient business justification.
In the case of Dahl, the court held that the club arrangements in question did not constitute an agreement among competitors in violation of Section 1 of the Sherman Act. Specifically and most notably for private equity firms, the court refused to infer an anti-competitive agreement from the formation of bidding clubs despite evidence that one of the motives for forming the club was to prevent rival bids by inviting the bidders to join the club. In reaching its conclusion, the court found that the private equity firms have independent reasons and legitimate business justifications for joining the clubs. Specifically, private equity firms joined bidding clubs to minimize cost and reduce risks of the transaction, as well as share expertise. Thus, club arrangements between private equity firms are not necessarily illegal, but they walk a fine line with respect to the antitrust laws. The structure of a club and the conduct of the competitors are crucial in preserving the legality of the arrangement.
While the court’s decision contains favorable language for private equity clubs, the fact that the court allowed certain claims to proceed to trial cannot and should not be ignored. Although the court found that most of the collaborative practices were insufficient to support an inference of a conspiracy to suppress competition, the court nevertheless allowed a portion of the claims to proceed because of certain carelessly-worded emails. The court found that evidence of extensive collaboration among private equity firms in the bidding practices was not enough to infer an agreement to reduce competition, but carelessly-worded emails by an executive were enough to show that the firms were acting in agreement when they refrained from jumping proprietary deals. Similarly, carelessly-worded emails by executives led to the court’s conclusion that a claim regarding one firm’s decision not to compete on one proprietary deal decision should be allowed to go to trial. The court’s ruling does not mean that the defendants will be found liable, but it does mean that the plaintiffs will have their day in court. The defendants will also have to face the risk of a jury trial and incur the cost of defending themselves at trial.
It is becoming increasingly commonplace for private equity firms to enter into clubs when bidding on a target company. As evidenced by the recent decision in Dahl, such clubs are not necessarily illegal, but because they are collaborations among competitors, they risk violating the antitrust laws. When private equity companies form bidding clubs, the collaboration should be structured with the antitrust laws in mind to minimize legal risks.
Private equity firms should also consider the antitrust laws when analyzing potential acquisitions, even transactions that are not reportable under the Hart-Scott-Rodino Antitrust Improvements Act. In addition to scrutinizing club deals, the DOJ and the Federal Trade Commission have increased their review of nonreportable transactions. Although the FTC and DOJ have always had the authority to review and challenge nonreportable transactions, in the past several years the agencies have challenged more transactions that fall below the HSR threshold than typical. Some of these reviews are the result of intense scrutiny of certain industries, such as health care. Some are simply the result of the Obama administration’s continued aggressiveness with regard to antitrust issues. And others are the result of complaints from other companies and customers. Companies are increasingly approaching the agencies with complaints regarding transactions and conduct of their competitors. These complaints can result in the agencies reviewing small acquisitions that otherwise may have gone unnoticed.
Given the recent decision in Dahl and the government’s increased review of nonreportable transactions, the antitrust laws have become increasingly relevant to the private equity industry once again. Private equity firms can legally engage in club deals if they are knowledgeable of and comply with the antitrust laws when they are forming those arrangements. Similarly, private equity firms can conduct nonreportable transactions with limited risk of agency scrutiny, if they consider basic antitrust principles when analyzing and structuring the deal. •
Lesli C. Esposito is a partner with DLA Piper in Philadelphia, where she focuses her litigation practice on antitrust and consumer protection matters. She was formerly a senior attorney with the Federal Trade Commission’s Bureau of Competition.