In late February 2008 in litigation involving the acquisition of a public company that had put itself up for sale, a federal district court held that that no antitrust claim was stated where, out of all potential buyers solicited by the company, two private equity buyers who were the only bidders to make an actual offer to buy the company entered into a joint bid agreement to purchase the target.

The decision, Pennsylvania Avenue Funds v. Borey (Ca. No. C06-1737RAJ, W.D. WA Feb. 21, 2008), involved a claim by a mutual fund that Vector Capital Corporation and Francisco Partners had entered into an unlawful combination to fix the acquisition price for publicly traded Watchguard Technologies Incorporated in violation of the Sherman Act. The court noted in its opinion that the bidders individually had submitted initial bids as high as US$5.10 per Watchguard share, followed by lower respective individual bids of US$4.60 and US$4.65 per share. Ultimately, Watchguard was sold at US$4.25 per share to Francisco Partners, which reached a deal with Vector for Vector to fund 50 percent of the purchase price in exchange for a 50 percent interest in the target.

The court made three main holdings in the decision.

First, it "declined to decide" that federal securities laws preempted the antitrust claim. The court applied the US Supreme Court's four factors test from its 2007 Credit Suisse Securities decision to analyze the issue: 1) whether the US Securities and Exchange Commission (SEC) had regulatory authority over the conduct; 2) whether the SEC had exercised that authority; 3) whether there was any clear conflict between securities and antitrust laws; and 4) whether the conduct in question was "heartland securities activity." The court did not apply preemption because, while it found that the authority of the SEC to regulate related disclosure was clear, it was not satisfied that the SEC had authority substantively to regulate takeover offers by prohibiting joint acquisition bids.

Second, the court held that the joint acquisition bid was not a per se antitrust violation because it could not be shown that the conduct was "manifestly anticompetitive" or that it "lack[ed] any redeeming virtue." The court explained its reasoning: in certain situations such joint bids could promote rather than suppress competitive bidding for a target by permitting joint bids among bidders that individually would be unable either to finance or bear the risk of a takeover bid on their own.

Finally, after finding no per se antitrust violation, the court went on to apply a "rule of reason" analysis of the conduct and found no antitrust violation under that standard. The court held that the plaintiff could not show that Vector and Francisco Partners had market power over the market for corporate control of Watchguard because "[a]ny acquirer who believed that Watchguard was worth more...could have made a topping bid." In reaching this conclusion, the court did not address whether any deal protection measures or takeover defenses had potential to deter such bids.

The court's ruling in this case may prove to be an important precedent at a time when issues involving joint private equity bidding for target companies are being much debated, and press reports indicate that federal antitrust authorities are investigating such activity.