Halloween has come early this October, as the U.S. Department of Justice has raised the somewhat spooky prospect of a federal investigation into possible anticompetitive behavior among U.S. private equity firms. This development certainly is surprising for those who experience first-hand how fiercely competitive the private equity and buyout world can be for deals of all sizes. Nevertheless, the DOJ has sent out requests to some of the industry’s largest and most well-known firms, asking that these firms provide information and documents relating to company auctions since 2003. The DOJ’s requests are typical in that they describe only in general the subject matter of the DOJ’s investigation. Notably, the DOJ doesn’t identify any possible allegations or even what types of firms within the industry the DOJ may be pursuing. Some media outlets have speculated that the DOJ in fact may be more interested in the role and behavior of certain investment banks involved in larger buyout deals.
At this point, the DOJ’s investigation is in its earliest stages, and no one can predict what its focus or outcome will be. Indeed, it is not uncommon for the DOJ to begin inquiries like this one, only to abandon the matter after its initial requests reveal no evidence of wrong-doing. We will learn more in the coming months as the DOJ’s course becomes more clear through the additional actions it takes (or fails to take). It also is not clear whether the DOJ understands that market conditions and bidding conventions necessarily vary depending on the sector of the private equity market being considered. For example, for large cap buyouts the size of the transaction by definition limits the number of firms with the wherewithal to bid and requires collaboration, as financing the whole transaction could leave any single firm overconcentrated relative to the size of its fund. In the middle market, joint bids are less common and sale processes typically involve many firms that compete fiercely and that can underwrite the equity without partnering. Finally, in venture capital, large syndicates of investors often share risk, expertise and funding at different stages of a portfolio company’s growth.
The legal standards for evaluating allegedly anticompetitive behavior, however, largely do not vary by market sector. Even if the DOJ’s investigation ultimately proves to be a passing matter, there are key points regarding the parameters of U.S. antitrust law that all private equity firms should be familiar with. At one end of the spectrum are many forms of procompetitive and output-enhancing joint bids that are permissible, such as when two firms work together to share risk and pool capital on a deal because neither has the resources to fund a particular project alone. At the other end of the spectrum are collusive and illegal arrangements between bidders designed to eliminate or lessen competition such as a payment to a competitor to drop out of the bidding process or a market allocation scheme. The DOJ’s investigation also raises novel legal questions as to whether the application of antitrust laws to some private equity buys is preempted in whole or in part by securities laws and regulations. If you have not reviewed the applicable standards with your counsel, it is recommended that you promptly do so.
Overall, the DOJ’s investigation is yet another reminder that, as the private equity industry has grown, it increasingly is in the public eye and subject to public scrutiny. In this environment, private equity firms should take the time to work proactively to assess their business practices and risk management strategies across the full scope of their operations. Doing so will help to ensure that, if governmental regulators like the DOJ ever come knocking, their visit will be brief and uneventful.
Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.
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