Originally published in Blakes Bulletin on
Competition Law, April 2008
Can a joint bid for control of a business (also referred to
as a 'club bid') constitute an illegal price fixing
arrangement under Canada's "Competition
Act"? The underlying reasons set out in a recent U.S.
judgment would seem to suggest that this type of enforcement
action would not be likely to succeed.
The decision of the U.S. District Court, dated February 21,
2008, in Pennsylvania Avenue Funds v. Edward J. Borey, et
al., sheds light on whether a club bid could constitute a
conspiracy, in this case under section 1 of the U.S.
Sherman Act. The case was brought against two U.S.
private equity funds, Vector Capital Corporation (Vector) and
Francisco Partners LP (FP) that, having made several
independent bids for WatchGuard Technologies Inc. (WatchGuard),
entered into a two-stage agreement to jointly take control of
the company. Under the agreement, Vector agreed to stop
pursuing WatchGuard and stand aside while FP made a lower bid
for the company. After FP's bid was accepted by
WatchGuard's board of directors, FP and Vector announced
that Vector would fund 50% of the acquisition in exchange for a
50% interest in WatchGuard. The plaintiffs alleged that Vector
and FP had "entered into a contract, combination or
conspiracy to artificially fix the price, refrain from bidding,
or rig the tender offer bids for WatchGuard shares."
In dismissing the plaintiff's claim, the U.S. Court held
that price agreements between competitors in a corporate
control context are not per se illegal. In this
regard, the Court noted that price fixing among rival bidders
in a contest for corporate control is not generally
anticompetitive and, in fact, "can promote rather than
suppress competition." The Court noted that in some cases
"in a corporate auction involving numerous well-heeled
bidders, less wealthy bidders cannot compete. By joining
forces, and thus combining resources, poorer contestants can
gain access to the contest, thus increasing competition."
The Court then considered whether the agreement violated U.S.
antitrust law under the rule of reason. In this context, the
Court found that even if the relevant market was limited to the
market for corporate control of WatchGuard alone, the plaintiff
had failed to show that FP and Vector had market power. In
support of this conclusion, the Court noted that there were
dozens of other suitors who had expressed interest in
WatchGuard, that any acquirer who believed that WatchGuard was
worth more than FP's bid could have made a topping bid, and
that had WatchGuard's shareholders believed that the FP bid
was too low, they retained the power to reject the merger.
In Canada, club bids are subject to potential scrutiny under
Canada's Competition Act as either illegal bid
rigging or conspiracy. The risk of a case being brought as bid
rigging can be eliminated by the members of a club bid by
making their agreement known ahead of time. In particular, the
Competition Act provides a defence to bid rigging
where the parties to the impugned agreement have made their
agreement known to the party calling for tenders at or before
the time the bid is made. Consequently, club bids, if they are
to raise issues under the Competition Act, are most
likely to be an illegal conspiracy.
The Competition Act prohibits agreements and
arrangements that are likely to prevent or lessen competition
unduly or to otherwise restrain or injure competition unduly.
Accordingly, the entering into a club bid agreement in and of
itself is not illegal. The undueness element must too be
established. The decision in Pennsylvania Avenue Funds v.
Edward J. Borey, et al. demonstrates just how difficult it
would be to meet this requirement.
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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