Recent settlements in private litigation and the robust levels of M&A activity are a good opportunity to remind Private Equity (PE) and other bidders in M&A auctions that the antitrust laws apply to corporate bidding competitions and that straying from best practices can be costly
We first wrote on this topic eight years ago when it was reported that the Antitrust Division of the US Department of Justice was investigating the conduct of certain PE firms in auction bidding, including the forming of bidding consortia. As is often the case, those reports spawned private US antitrust litigation. In essence, the complaint charged that a number of PE firms conspired to reduce auction competition such that sellers and shareholders received less for the target than would have been the case in the absence of such conduct. Over the last few months – and nearly seven years later – seven PE firms have now settled the litigation for a collective amount of almost $600 million (not including the legal fees they incurred in defense). Three firms settled in early August for a combined $325 million, whereas the last PE defendant agreed to settle on August 29 for approximately $115 million.
As a broad principle, antitrust laws apply equally to anticompetitive behavior in a corporate auction process and to other practices that may appear more directly anti-competitive (for example, collusive fixing of prices for the supply of goods or services). The concern is whether the “market clearing” price in any particular transaction has been affected by anti-competitive behavior. Although we are aware of only US antitrust litigation relating to corporate auctions, there is broad convergence in international antitrust around prohibitions on competitor collusion; thus, as a general matter, these principles and best practices should be regarded as applicable globally.
For example, on 1 April 2014, the UK amended its criminal cartel offence by removing the requirement to prove that an individual acted dishonestly in agreeing certain specified restrictions with another person. One of those restrictions relates to parties agreeing the terms on which they will bid to supply products or services in the UK, or agreeing not to bid.
What is permitted?
There are clearly very real commercial reasons for forming bidding consortia, whether at the outset of a transaction or during the auction process, that are in no way connected with a desire to reduce competition and deflate the sale price. As a general principle, if the members of a consortium would not otherwise have bid or continued to bid individually, they are very likely to have entirely legitimate reasons to cooperate, such as: raising sufficient capital to participate or continue to participate in an auction; or spreading risk across a number of participants where the exposure to one transaction or one sector would be unattractive for a single participant.
A consortium formed for legitimate reasons may put in place reasonable arrangements to ensure it can perform its purpose, such as agreeing that if a participant leaves the consortium the participant will not bid either by itself or be interested in another bid in the same auction (i.e., agreeing exclusivity arrangements). Of course, a member of a consortium may always decide unilaterally to withdraw from an auction because the price has become too rich or the terms unappealing.
What is not permitted?
- The overarching principle is that bidders cannot agree not to compete, either before or during an auction. The following types of behavior in particular would raise serious risk of infringing antitrust laws: potential or actual competing bidders agreeing (whether formally or by tacit understanding) which auctions they will participate in (or continue to participate in) and which they will not, including agreeing to withdraw in return for a promise by a continuing party not to bid against the withdrawing bidder in another auction;
- potential competing bidders agreeing in a particular auction the price at which they will bid or a maximum price over which they will not bid;
- competing bidders agreeing to join up so as not to bid the price up against one another; or
- a bidder agreeing to withdraw from an auction in return for another (winning) bidder agreeing to sell to the withdrawing bidder a minority interest or a part of the acquired business after completion of the main deal.
As a practical matter, the risks increase for bidders who form a consortium during an auction, rather than at the outset, particularly if they have already submitted independent bids or indications of interest.
Some practical steps
Individual bidders and consortia should maintain contemporaneous written records (in board or steering committee minutes, for example) of relevant decisions. Particular attention should be paid to recording the commercial rationale underlying the following decisions: cooperating with another bidder in the auction or inviting them into the consortium, including where other bidders are invited to co-invest following a successful bid; withdrawing from an auction in which the consortium has submitted a bid or participated to a material degree; or declining to increase a bid in response to a competing bid.
Individual bidders and consortia should ensure care is taken regarding communications with other actual or potential participants in an auction, including adopting policies and procedures for managing such communications and consulting legal and financial advisers before initiating or reacting to them. It has been reported that, in the private litigation, email correspondence was produced between PE houses suggesting that they would not “jump” another’s deal and that competing bids could “cost each other a lot of money.”
Openness with vendor
Wherever possible be transparent with the vendor and its financial adviser – co-operating with another bidder with the vendor’s “consent” or at least prior knowledge will make it less likely to be regarded as anti-competitive. In most circumstances, the terms of any confidentiality agreement will in any event make this necessary.