Antitrust authorities around the world are increasingly collaborating with each other in an effort to unearth anticompetitive behavior such as cartels, and are devoting greater resources to doing so. As a result, PE houses face an increased risk of becoming associated with the wrongdoings of their portfolio companies.
Last year a financial sponsor was fined in a European Commission decision regarding an alleged cartel in underground and submarine high voltage power cables. As the former owner of Prysmian, an alleged cartel participant, the sponsor was held liable by the European Commission because the sponsor had ‘exercised decisive influence’ over one of the cartel members. The sponsor received a significant fine and may now face the possibility of private damages actions, which are increasingly commonplace in the EU.
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Beyond direct financial liabilities, the discovery of anticompetitive behavior could also have a material impact on the value of the portfolio company, particularly around the time of an exit.
Antitrust concerns, such as possible anticompetitive behavior within the target company, should be a high priority when purchasers are undertaking a due diligence process. PE buyers should clearly do their due diligence on a target to seek to ensure that there are no potential liabilities. If any notable risks emerge the PE house should ensure that the infringement has ceased, consider the implications for deal value and seek an appropriate post-completion strategy — for example leniency applications, the implementation of an effective compliance program, and appropriate representations and warranties. PE firms could consider other protections in particular cases, such as the forfeiture of management shares in the event of any undisclosed cartel participation.
The PE house should also consider possible liabilities even after it sells an asset, as happened to Prysmian’s former owner. When selling a portfolio company, the PE house should retain rights to access the company’s books and assets — if required to defend itself during any investigation and against any damages claim — and seek agreement to mutual cooperation in respect of any future enforcement action. The PE house should also request that the new purchaser includes the house in any future immunity application to an antitrust agency.
We think that as antitrust authorities continue to collaborate, particular industries such as financial services will come under even greater scrutiny. PE houses will need to be ever more mindful of the risks as they diligence, execute and dispose of their investments.
8 Antitrust Questions Bidders Should Ask About Their Targets
- Is there any indication that the company, or any of its competitors, is or was involved in any antitrust investigation or litigation? Is any such investigation/litigation ongoing in the relevant sector?
- If so, to what extent is the target involved in any alleged anticompetitive behavior and what defenses does it have? Consider the potential impact of follow-on damages claims (e.g. the moves towards introducing collective actions in the EU)
- Do company personnel regularly engage in non-public fora with competitors, e.g. via an industry association or through chat rooms?
- Are there regular exchanges of market information, including via any such industry association, and/or any regular public announcements of, e.g., price increases?
- Is there a history of cartel activity and/or regulatory interest in the industry in question?
- How concentrated is the market? If concentrated, do senior employees regularly move between the relevant players? How commoditized is the product or service that the company sells?
- Is there any evidence of exchange of non-public information which would normally be kept confidential with competitors or with third parties, including one-way disclosures or receipts?
- Is there any evidence of any agreement(s) with any competitor(s) — including references to agreements or understandings which are not written?