On Dec. 15, 2008, a federal district court judge in Massachusetts denied the motion to dismiss filed by several private equity firms alleged to have engaged in joint-bidding for leveraged buyout (“LBO”) target companies. The defendants in this case, Dahl, et al. v. Bain Capital Partners, et al., proceeded on two grounds in their motion to dismiss the suit: (1) The antitrust laws did not apply to the allegedly illegal conduct because they are preempted by Securities and Exchange Commission (“SEC”) regulation; (2) The plaintiffs failed to state a claim under §1 of the Sherman Act. Both were rejected by the court.
The plaintiffs in this class action antitrust suit are shareholders in companies purchased by the defendants, which include The Carlyle Group, Goldman Sachs, Kohlberg Kravis Roberts and Co., and The Blackstone Group. While joint-bidding by private equity firms conducting an LBO is legal (such transactions are known as “club deals”), the plaintiffs allege that defendant private equity firms engaged in additional, illegal agreements to bid below fair value for companies and to illegally allocate the LBO market. According to the plaintiffs, the conspiracy was effectuated by, among other things, the submission of sham bids and agreements not to bid.
In evaluating the motion to dismiss, the court was unconvinced that SEC regulation of this area preempted application of antitrust laws. Under the standard set forth in Credit Suisse Securities (USA) LLC v. Billing, 127 S.Ct. 2383 (2007), the securities laws and antitrust laws must be “clearly incompatible” in order for the doctrine of preemption to apply. Applying the test established in Billing to determine whether clear incompatibility existed with respect to the challenged conduct, the court found that securities laws do not govern private equity LBOs, and, as such, the SEC is not empowered to regulate this conduct. Furthermore, rejecting an argument made by the defendants, the court determined that regulatory filings related to an LBO do not constitute substantial regulation within the meaning of Billing. In sum, because the SEC has no substantive authority to regulate private equity LBOs, the securities laws do not preempt the antitrust laws.
Next, the court considered whether the plaintiffs failed to properly plead their claim under §1 of the Sherman Act. Applying the standard set forth in Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007), the court concluded that the plaintiffs had “plausibly” suggested an illegal agreement. The court was convinced largely because plaintiffs’ complaint included nine specific transactions and because the allegations “tie[d] the…firms together” by alleging an “overlap” in firms bidding in multiple transactions.
Finding no grounds on which to dismiss the case, the court has ordered discovery regarding the transactions specified in the complaint to proceed.
Importantly, this is the second significant private equity joint-bidding case ruled on by a federal court in the past year. In February, the U.S. District Court for the Western District of Washington dismissed an antitrust suit brought by shareholders of an acquired company against two private equity firms that initially bid separately for the target company before one firm withdrew its bid. See Pennsylvania Avenue Funds v. Borey, 569 F.Supp.2d 1126 (W.D. Wash. 2008). After the remaining firm’s bid was accepted—at a price lower than the original joint bid—the withdrawing firm acquired half of the successful bidder’s interest in the target company. Ultimately, the court concluded that the plaintiffs could not adequately allege that the defendants had market power and thus failed to state an antitrust claim.
The contrasting results in these cases are perhaps attributable to the differing levels of specificity of the two claims. While Borey challenged joint-bidding practices in a particular transaction involving only two private equity firms, Dahl is a broader attack on private equity “club deals” and alleges nine transactions as examples of the illicit conduct. These results might provide guidance to future plaintiffs seeking to challenge joint-bidding practices, insofar as they demonstrate that when the court must accept factual allegations as true, it is beneficial to frame those factual allegations as broadly as possible. Of course, it is also possible that these cases simply illustrate the divergent approaches to reviewing motions to dismiss under the standards set forth in Twombly.
Private equity firms should take note of the challenged conduct in these two cases when deciding to engage in joint-bidding with other firms.