As we reported in the last issue of Private Equity Perspectives, European Competition law is applicable to private equity houses, in particular for attributing liability for the anti-competitive behaviour of an investment to the private equity house parent fund. This article examines the competition law risks that may arise for private equity houses when bidding for a potential investment target and how those risks may be mitigated.
Article 101(1) of the Treaty of the Functioning on the European Union (Article 101) prohibits any agreement that has the object or effect of preventing, restriction or distorting competition between EU Member States. Such agreements do not need to be in writing to fall within this provision and can be verbal, taking the form of an “understanding” or tacit “gentlemen’s agreement”. Behaviour that is prohibited includes price fixing, market sharing and the direct or indirect exchange of commercially sensitive information between competitors; it is worth noting that an agreement does not need to be implemented by any party in order to be anti-competitive. A regulator will regard any discussion between competitors as being capable of raising competition law concerns and, if investigated, not only will any agreement that is found to infringe Article 101 automatically be void and unenforceable, parties to the agreement may be fined up to 10% of their worldwide turnover. Any fine imposed on a private equity house for anti-competitive behaviour is therefore likely to be significant.
Risks of joint bids
The exchange of sensitive information means that companies are able to adjust their commercial strategies and pricing (for example) to those of their competitor, which has the effect of distorting the market. Once parties are aware of another competitor’s future intentions, there is reduced incentive to compete fairly as it easier and more effective to align conduct with that of their competitors. Bidding for an investment target may therefore give rise to competition concerns in a number of ways, with the most likely to occur where private equity houses either form a “club” through which to bid jointly for a target or agree with each other not to bid, or the level at which to bid, for a target. In the first scenario, the bidders join together to make a bid for a particular investment, which reduces the number of potential bidders on the market. In turn, this has the effect of reducing the bid price as there are fewer parties to bid against. In the second scenario, all parties know who is bidding or the (usually uncompetitive) level at which bids are placed and are able to adjust their own bids accordingly. This has the effect of reducing competition and the level of the remaining bids.
Mitigating the risks
Inevitably, meetings between competitors do take place and agreements are made. There is, however, a risk that any such discussion between competitors could lead to a potentially anti- competitive information exchange so care should be taken at any meeting in which a competitor is present, or if communicating with competitors more generally, to ensure that the discussions and topics raised do not infringe competition law.
- Discussions involving joint bidding for a target should be carefully documented, setting out strict parameters for the meetings and any joint behaviour. Get legal advice on the topics that may be discussed and the agreements reached, but parties should at all times ensure that information that is discussed relates only to the transaction at hand, and that it does not relate to independent bid pricing, strategy or any other information that may influence the market. In addition, the parties must inform the seller and target of the proposed joint bid at the earliest opportunity.
- Any agreement either not to bid or the level at which to bid for a target (other than in a joint bidding scenario as set out above) is likely to be a significant infringement of Article 101. Please seek legal advice if this is suggested or if you have any similar agreements in place.
- When attending a meeting where competitors are present, wherever possible ensure that there is an agenda that is adhered to and minuted. Check these minutes carefully afterwards. If no minutes are to be produced, take a full set of your own meeting notes.If, during the meeting, you are concerned that anti-competitive discussions/conduct is being suggested or is taking place, do not participate in the discussions and immediately withdraw from the meeting. If you do leave the meeting, ensure this is recorded in the minutes and make a full note of what was said and how you reacted.
- All documents (including presentations, emails, and other correspondence) relating to the potential agreement or meeting with competitors may be discoverable in court proceedings or reviewed by regulators if investigated. Care should therefore be taken to ensure that a “paper trail” is in place for any decisions that are made, including reasoning behind entering into any agreements, to ensure that any decisions are fully justified and cannot be considered anti-competitive.