Equity funds considering consortium or joint bids can take comfort in a recent U.S. District Court decision. In Pennsylvania Avenue Funds v. Borey, the U.S. District Court for the Western District of Washington dismissed federal antitrust claims brought by shareholders of WatchGuard Technologies, Inc. ("WatchGuard") against two separate private equity investors, Francisco Partners LP ("FP") and Vector Capital Corporation ("Vector"), who had joined together to bid for WatchGuard. FP and Vector had originally entered separate bids for WatchGuard. Ultimately, however, Vector pulled out of the bidding, and FP's final bid, which was accepted by the WatchGuard Board, was lower than the original FP and Vector bids. Prior to closing, Vector announced that it was acquiring 50% of WatchGuard from FP. The plaintiff shareholders claimed that these facts showed that FP and Vector had engaged in an unlawful agreement to "artificially fix the price . . . or rig the tender offer bids" for WatchGuard in violation of Section 1 of the Sherman Act. However, even taking these allegations as true, the District Court found that Plaintiffs' complaint failed to state a Sherman Act claim under either the per se or rule of reason analysis and dismissed the antitrust claims with prejudice.
The Court first rejected Plaintiffs' claim that the alleged agreement should be analyzed as per se illegal. Emphasizing that no other court had applied the per se rule to a price agreement between competitors in a corporate control context, and that joint bidding is "not uncommon," the District Court concluded that in general, "[p]rice fixing among rival bidders in a contest for corporate control is not . . . anticompetitive." The Court reasoned that joint bids spread the risks of acquisitions among bidders, allow poorer bidders to participate, and increase rather than suppress competition.
The Court then turned to Plaintiffs' rule of reason claim, which required allegations that FP and Vector had enough market power within a relevant market to injure competitors or consumers. Plaintiffs had alleged both a market for control of technology companies like WatchGuard, and a market for corporate control of only WatchGuard. The Court concluded that in neither case could Plaintiffs show that FP and Vector had market power. With respect to the broader technology company market, the Court used the Plaintiffs' allegations of "nearly $159 billion poured into private equity funds" to conclude that FP and Vector were only "a miniscule fraction of this market," making a market power finding impossible. With respect to the narrower relevant market defined based on WatchGuard alone, the Court rejected the idea that FP and Vector had enough power to force out some other potential bidder or to otherwise exercise power over WatchGuard's shareholders. The Court deemed the "appearance" that FP and Vector were the only two bidders for WatchGuard as a "mirage" because any third party bidder could have submitted a higher bid for WatchGuard. Similarly, the Court emphasized that the WatchGuard shareholders could have rejected the final bid. "The illusion of market power arose not from defendants' anticompetitive conduct, but from the lack of market interest in WatchGuard." Accordingly, the District Court dismissed the antitrust case.
As to the defense presented by Defendants that securities laws precluded the application of antitrust laws in this case pursuant to the Supreme Court's decision in Credit Suisse Securities (USA) LLC v. Glen Billing, 127 S. Ct. 2383 (2007), the Court explained that Credit Suisse preclusion requires a showing that the Securities and Exchange Commission ("SEC") possesses, and has exercised, authority over "all of the activities" that are challenged as anticompetitive. The Court noted that "all parties concede that the SEC has sweeping power to regulate disclosure of bidding agreements like the one between [Defendants]... [but] no party...has put forth a compelling argument that the SEC has authority to prevent bidders...from joining forces." Thus, the Court declined to decide whether securities laws precluded Plaintiffs' antitrust claims.
Pennsylvania Avenue Funds certainly sets a positive precedent for joint bidding arrangements, but its impact may be limited. Not only is the decision subject to appeal, but other courts and jurisdictions may disagree, as may the U.S. federal enforcement agencies.
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