Since October last year the US Department of Justice has been probing possible anti-competitive behaviour by some of the world's largest private equity houses, particularly the potential impact of so-called 'club' deals.
As the scale and scope of private equity deals has increased, so has the popularity of club deals in which two or more private equity firms pool their resources to pursue a public target, allowing deal risk to be better spread, expertise to be shared and improved access to financial backing.
Following the regulatory investigation in the US, private class actions were commenced last month against 13 private equity defendants, including several that have been active in Australia such as Kohlberg Kravis Roberts, Carlyle Group, Blackstone Group, Bain Capital and Texas Pacific. Those actions provide a neat summary of the three basic types of competition concern that may arise. The outgoing shareholders of companies acquired by private equity firms have claimed:
private equity firms conspired to not outbid each other by sharing information about their bids
firms came together in 'clubs' to submit single bids, thereby reducing competition for the target with bidders dropping from an auction and joining the winning bidder in a final buying 'group', and
firms made exclusive arrangements with lenders to deprive competitive bidders of financing.
In the US those issues arise under section 1 of the Sherman Act which prohibits contracts, combinations and conspiracies in restraint of trade.
In Australia the issues arise in the slightly different context of the Trade Practices Act which prohibits price fixing, exclusionary provisions (market sharing, collusive tendering or boycotts) and more generally arrangements with the purpose, effect or likely effect of substantially lessening competition. With the changes to the Act shortly to take effect, the penalties for breaching those rules will become even more significant, amounting to the greater of $10 million, three times the gain from the breach or 10 percent of the company's annual turnover in the year the breach occurred.
Actions in the US, combined with an increasing concern about the high level of gearing underlying some private equity transactions in Australia, may encourage the ACCC to look more closely at possible anti-competitive conduct amongst private equity firms in Australia. There would be a number of options available to it; ranging from an informal information gathering approach (used by the Department of Justice in its probe) to formal compulsory production of documents, examinations or even raids. One other possible approach would be for the ACCC to write to private equity firms, drawing their attention to Australia's cartel whistleblower immunity policy, and inviting anyone to come forward with information. That is never something to take lightly because the ACCC's amnesty policy encourages cartel participants to break ranks in a 'race to the confessional' (see our
news alert of 31 August 2005).
To minimise the risks, private equity firms should:
be prepared to respond appropriately to any ACCC investigation – an early response can often set the tone for the investigation
remind all staff of the requirements of the Trade Practices Act, and that communications with other private equity houses should be carefully considered on that basis
ensure that Trade Practices Act requirements are complied with when documenting relationships within a consortium, and
monitor communications with other private equity firms (as to bidding strategies, due diligence etc) and avoid sharing confidential information to minimise inferences of collusion.
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