In a case of first impression, a federal district court found that an agreement by two private equity funds to bid jointly for the acquisition of a publicly traded company, after initially submitting separate bids, did not violate federal antitrust laws. On February 21, 2008, the U.S. District Court for the Western District of Washington dismissed, with prejudice, claims brought under Section 1 of the Sherman Act by a putative class of all persons that held WatchGuard Technologies Incorporated (“WatchGuard”) stock at the time it was acquired by defendant funds Francisco Partners LP (“FP”) and Vector Capital Corporation (“Vector”).
In 2005, WatchGuard’s board of directors decided that the time was right to sell the company and began to solicit bids from potential purchasers. After expressing interest in the “auction” for WatchGuard, Vector and FP made individual formal bids. Subsequently, Vector stepped aside while FP made a bid lower than any of its or Vector’s previous individual bids. This bid was accepted by WatchGuard’s board, and its shareholders later ratified the acquisition, which closed in October 2006. Prior to the closing, Vector announced an agreement whereby it would fund half of the acquisition and retain a 50 percent interest (the other 50 percent interest to be acquired by FP) after consummation of the acquisition. The plaintiffs claimed the agreement between Vector and FP to effect the acquisition of WatchGuard violated the Sherman Act.
According to their complaint, the plaintiffs alleged that Vector and FP “entered into a contract, combination or conspiracy, to artificially fix the price, refrain from bidding, or rig the bids for WatchGuard shares.” The plaintiffs contended that this “contract” was a per se violation of the Sherman Act, as well as an anticompetitive agreement that should fail under a “rule of reason” analysis. The court disagreed. According to the court, analysis of Vector and FP’s agreement under the per se rule of antitrust liability would be “presumptively inappropriate” because it had never been applied in this context before. Indeed, the court found that the challenged conduct was “not uncommon” and “yet…no court has considered whether it is per se unlawful, much less applied a per se rule.” Furthermore, the court highlighted the procompetitive effects and efficiencies to be gained by engaging in such bidding arrangements. First, the court noted that the practice is procompetitive because joining forces allows “poorer contestants” to gain access to the competition against wealthier bidders, which leads to an overall increase in competition. Second, the court observed that it is efficient because it allows joint bidders to spread the risk associated with acquiring corporate assets, thereby enabling them to compete where alone the risk would have been too much to bear. Thus, the court reasoned that, because price agreements between entities vying for corporate control are not “invariably anticompetitive,” the defendants’ agreement should be subject to the rule of reason.
Turning to the rule of reason analysis, the court observed that the plaintiffs must allege “that the defendant has market power within a relevant market” and that the defendant has exercised that market power in an anticompetitive fashion that “actually injures competitors or consumers.” The plaintiffs’ definition of the relevant market proved “fatal” to its claim, according to the court. Defining the relevant market as “the market for corporate control of WatchGuard and other technology companies[,]” the plaintiffs failed to make any allegations that could establish the defendants’ power in this market. The court noted that the plaintiffs’ own complaint stated that in 2006 “nearly $159 billion has poured into private equity funds[,]” yet they alleged nothing to suggest that the combined resources of FP and Vector constituted anything more than “a miniscule fraction of this market.”
Even if the relevant market was defined as narrowly as the “market for corporate control of WatchGuard alone[,]” the court found that plaintiffs’ claim would fail. This, the court reasoned, was because Vector’s and FP’s positions as the final bidders for WatchGuard was not a reflection of their market power or anticompetitive conduct, but rather of a general lack of interest by other potential purchasers. In this regard, the court described the appearance of only two bidders as a “mirage,” and it correctly noted that any acquirer believing that WatchGuard was worth more could have come in with a higher bid. In addition, WatchGuard’s shareholders had the opportunity to vote to reject the acquisition, but instead voted in favor of it. Thus, the facts made clear that Vector and FP were in no way able to wield market power in an anticompetitive manner that injured the plaintiffs.
Given the prior press and antitrust scrutiny surrounding “club deals” by private equity funds, including other lawsuits, the holding in this case sets a positive precedent and represents a promising development for private equity funds engaging in, or considering, late-stage joint bidding. Nonetheless, it is important to recognize that the decision may be appealed, that courts in other jurisdictions have yet to consider similar claims, and that the federal enforcement agencies may reach an independent view on late-stage joint bidding.