On February 21, 2008, the federal district court for the Western District of Washington found that the practice of combining bids for corporate control does not violate the Sherman Act. The decision in Pennsylvania Avenue Funds v. Borey et al. is believed to be the first addressing the antitrust implications of joint bidding arrangements in the private equity M&A context.
In 2005, WatchGuard Technologies, Inc. (“WatchGuard”) solicited offers for purchase of the company. Private equity fund defendants, Vector Capital and Francisco Partners, along with other bidders, made separate bids. After conducting due diligence, these two private equity funds each lowered their bids. Plaintiffs alleged that, at this point, Vector and Francisco agreed that Vector would drop out of the bidding in return for a right to buy a 50% interest in WatchGuard if Francisco was the successful bidder. Francisco then lowered its bid. This lowered bid was accepted by WatchGuard’s board of directors and shareholders. Vector announced pre-closing that it would fund half of Francisco’s acquisition of WatchGuard in exchange for a 50% interest in the company. The deal subsequently closed with Vector and Francisco splitting ownership of WatchGuard.
One of WatchGuard’s shareholders filed a class action suit against the two private equity funds, alleging that they had violated Section 1 of the Sherman Act by agreeing to “artificially fix the price, refrain from bidding, or rig the tender offer bids.” Plaintiff alleged that the agreement was “per se” illegal because it constituted bid rigging. In the alternative, plaintiff alleged that if the agreement was not “per se” illegal, it still violated the Sherman Act under the “rule of reason,” because it resulted in the lowering of WatchGuard’s selling price.
In dismissing the antitrust claim, the court said that the combined bid was not “per se” illegal, noting that “no court has applied the [per se] rule to a price-fixing agreement in a contest for corporate control.” The court also acknowledged that such joint bidding in some cases promotes competition, particularly because by allowing less wealthy bidders to combine resources, “poorer contestants can gain access to the contest, thus increasing competition.”
As to whether the combined bid violated the Sherman Act under the rule of reason, the court found that the plaintiff had failed to allege the existence of a relevant market in which the two private equity funds had market power. Even if the market could be defined as narrowly as the market for control of WatchGuard, “[a]ny acquiror who believed that WatchGuard was worth more than [the] bid could have made a topping bid. The agreement between [the funds] would have had no effect on such a bid. Moreover, had WatchGuard’s shareholders believed that the [Francisco] bid was too low, they retained power to reject the merger by voting it down.” In short, it was “lack of market interest in WatchGuard” that set the price, not illicit collusion by dominant players.
The decision, although one by only a single federal district court in the Western District of Washington, is nonetheless an important ruling for the buyout industry which has been targeted with antitrust suits around the country after the Department of Justice opened an inquiry into possible anticompetitive conduct related to club deals in 2006.