UK: Private Equity Comment: Avoiding Anti-Trust Issues

Last Updated: 27 June 2008
Article by Jonathan Blake and Simon Witney

Recently, a court in the US analysed for the first time whether "club deals", where private equity firms join forces to bid for a target company, can be anti-competitive. The concerns arose because of competition law rules on collusive bid-rigging and sharing sensitive information between bidders. The good news for the private equity community is that the US District Court in Seattle did not consider that the specific practices under review in that case were anti-competitive.

Of course, there are a number of reasons why club deals may in fact be pro-competitive rather than anti-competitive. For instance, clubbing together may enable several private equity firms, none of whom may have the financial resources to bid for the target alone, to bid together thereby increasing the number of bidders. In addition, club deals enable the private equity firms to spread risks and make the most of complementary skills and management experience that members of the consortia may have.

However, the anti-trust risks of private equity club deals moved firmly into the spotlight when it emerged in late 2006 that the US Department of Justice ("DOJ") had requested information on deals done by several large buyout houses in the US. Investment banks and sellers then tightened their auction procedures to reduce the risk of collusive bid rigging between bidders.

In this case decided by the US court, a shareholder in the PC security company WatchGuard sued two US-based private equity firms, Vector Capital and Francisco Partners, that had initially submitted bids separately and subsequently joined forces, ultimately winning the auction at a lower bid price than the separate bids. In declaring the shareholder's action unfounded, the Court made three key points: first, it was the number of bidders at the outset, rather than in the final round, that was relevant when assessing competition; second, where clubbing together increased the number of bidders, this would normally be pro-competitive; and third, it was important that the vendor remained free to reject the bid if it was too low. The ruling will no doubt impact on other cases in the pipeline.

Although the DOJ's investigation continues (and this case clearly does not settle the argument once and for all), this judgment offers some comfort to private equity firms who may have been concerned at the increased anti-trust scrutiny, particularly given the proliferation of class actions seeking damages soon after news of the US investigation broke. And similar legal issues apply in Europe, where such conduct could potentially breach European rules prohibiting market sharing and bid-rigging, depending on the circumstances. However, there is no indication - at least not publicly - that the competition authorities in Europe are particularly concerned about this point, and no investigations have been initiated so far.

Despite this development, there are a number of precautions that private equity firms should always consider when discussing a joint approach to a target company. First, where possible, any intention to bid jointly should be clear from the outset and transparent to the seller and the investment bank running the sale process, and sensitive commercial data (for example on exit strategies) must not be disclosed to other actual or potential consortium members. Secondly, it will be easier to justify club deals between smaller firms who are less likely to be able to bid by themselves. Thirdly, it is also important to note that the more other bidders (in addition to the consortium members) that are involved in the sale process, the less risk there is of falling foul of the anti-trust rules.

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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