Investments in life science companies by venture capitalists, hedge funds, private equity firms, consultants, and others have become increasingly common in recent years. These investments often give the investors in question board representation or other influence over management in the company in question, as well as access to confidential and competitively sensitive information about the company. Many such investments raise few, if any, antitrust risks. As a recent Federal Trade Commission (FTC) consent agreement shows, however, significant antitrust issues may arise where an investor holds an interest and plays a management role in two or more companies that are significant competitors.
The case in question involved an attempt by a group of private equity firms and the management of Kinder Morgan Inc., a publicly held petroleum terminaling firm, to take Kinder Morgan private. Two of the proposed investors – Carlyle Group and its affiliate Riverstone Holdings LLC – proposed to acquire a combined 22.6 percent interest in Kinder Morgan and to hold the right to nominate two of the 11 directors on the Kinder Morgan board. Carlyle and Riverstone already held a 50 percent interest, the right to board representation, and certain veto rights regarding actions by the board of Magellan Midstream Holdings L.P., a Kinder Morgan competitor.
The FTC Complaint alleged that Magellan Midstream and Kinder Morgan compete to provide petroleum terminaling services in several markets and that Carlyle and Riverstone’s overlapping interests and management influence in those two companies could reduce competition in the markets at issue and lead to reduced output and higher petroleum prices. The FTC’s Decision and Order, made final on March 14, 2007, seeks to resolve these competitive concerns by requiring Carlyle and Riverstone to remove their representatives from the Magellan board if they want to exercise their rights to nominate members to the Kinder Morgan board. The consent agreement also requires Carlyle and Riverstone to establish firewalls to prevent sharing of non-public information between the two competing companies. Thus, rather than requiring them to divest their interest in one of the two competitors, the consent agreement effectively requires Carlyle and Riverstone to become passive investors in one competitor (Magellan Midstream) as a condition of acquiring their minority interest and board seats in the other (Kinder Morgan).
The consent agreement confirms that the FTC will scrutinize private equity and other financial acquisitions when such transactions result in common ownership and influence in the competitive decision making of competing businesses. However, it also signals that remedies short of divestiture of stock or assets may sometimes suffice if the investors are willing to accept limitations on the extent to which they can influence management decisions of one of the competing businesses and on access to and sharing of competitively significant information.
Financial investors who have accumulated a significant holding in a particular economic sector and are contemplating a further investment in another participant in the sector will need to assess the potential antitrust implications of any overlaps between the companies in question and the role the investors will play in those companies. Likewise, investors should consider the investment portfolios of their investment partners that could trigger antitrust issues and prolong antitrust review of a transaction. Finally, targets should consider a potential investor’s existing investment portfolio for purposes of assessing antitrust risks associated with that investment. Such reviews would assist companies and investors in evaluating antitrust risks and enable them to take preemptive actions to avoid unnecessary regulatory complications and complete timely closings.
Companies should also recognize that similar issues may arise when competitors share officers or directors even if those common officers or directors do not own an interest in the affected companies. Congress and the antitrust enforcement agencies have long recognized that competition between competing companies may be reduced not only by agreements between them but also by the presence of common officers or directors who have access to competitively sensitive information about each company, who participate in or influence their competitive decision making, and who may be in a position to dampen whatever competition would otherwise exist between the companies. Subject to a number of exceptions for de minimis overlaps, Section 8 of the Clayton Act prohibits such interlocking officers and directors among competitors as a way of avoiding such direct or indirect coordination before it has an opportunity to arise. Moreover, even where Section 8 does not apply, Section 1 of the Sherman Act generally forbids any implicit or explicit anti-competitive agreements that might result between the interlocked companies. Thus, life sciences and other companies will want to be attentive to the potential risks of sharing officers or directors with a competitor even if those officers or directors do not have an ownership interest in the interlocked companies.