Following the recent case in Australia (Norcast v Bradken Limited (No 2) [2013] FCA 235 (appeal pending to be heard over four days from 4 November 2013) alleging anti-competitive bid arrangements between private equity firms, similar issues continue to rise to prominence under US antitrust laws as well. See Dahl v Bain Capital Partners LLC 07-12388, United States District Court, District of Massachusetts.

Dahl v Bain Capital Partners is an antitrust class action proceeding commenced by shareholders of various companies that were acquired by consortiums comprised of private equity (PE) firms between 2003 and 2007.  The shareholders claim that rather than compete, the PE firms agreed to work together to allocate deal outcomes and purchase the target companies at artificially suppressed prices, allegedly depriving shareholders of billions of dollars.

Earlier this year, the PE firms sought an interim decision by the Court to have the case dismissed on the basis that the evidence fails to establish any anti-competitive arrangements between the firms.  The PE firms argued that joint bidding and the formation of consortiums are established and appropriate business practices in the industry to enable firms to share risk on an acquisition price that they alone would not be able to justify, and that frequent communications between PE firms, including friendly relationships and communications to exchange business opportunities, is a natural consequence of those partnerships. 

Ultimately, the Court determined that the plaintiffs were required to narrow their overarching conspiracy case as the evidence, even at a preliminary level, did not support such broad allegations.  In arriving at this conclusion, the Court stated that “the mere fact that PE firms are bidding together, working together, and communicating with respect to a specific transaction does not exclude the possibility that they are acting independently across the relevant market”.

Despite this significant narrowing of the case against the PE firms, further interim decisions have been issued by the Court, on 20 June and 16 July 2013, permitting aspects of the case to proceed. 

The allegations

The plaintiffs allege that the conspiracy spans 19 leveraged buy-outs (LBOs) of large publicly-listed companies and eight related transactions between 2003 and 2007.  The shareholders claim that these LBOs and transactions were not separate, isolated events; rather, they were interconnected deals and were planned, coordinated and tracked as part of an ongoing conspiracy.  It is alleged that the PE firms agreed to be bound by certain rules and conduct, referred to as “club etiquette”, and that they operated to suppress price competition for large LBOs, resulting in the target companies being sold for lower prices than had the PE firms been vigorously competing.

The plaintiffs allege two primary courses of conduct in violation of Section 1 of the Sherman Act, namely:

  • The PE firms engaged in a continuing agreement, understanding and conspiracy to allocate the market for and artificially fix, maintain, or stabilise prices of securities in club LBOs, including an agreement that ensured no PE firm “jumped” deals.  “Jumping a deal” occurs when a potential purchaser enters the sale process at a late stage of the negotiation when the target and another potential purchaser are close to a deal. 
  • Certain of the firms (the HCA Defendants) agreed to rig bids and not to compete with respect to the LBO transaction of hospital operator, Hospital Corporation of America (HCA), one of the relevant target companies (the HCA transaction).

The facts of the HCA transaction allegation

The circumstances of the HCA transaction in late July 2006 involved a consortium of PE firms (the Winning HCA Consortium) negotiating a deal for the $US33 billion LBO of HCA.  It is alleged that the HCA transaction took place in the context of another transaction, the LBO of Freescale which occurred in September 2006 (the Freescale transaction) through a different consortium of PE firms (the Winning Freescale Consortium).  The plaintiffs allege that the Winning HCA Consortium had “asked the industry to step down on HCA” and that, despite strong interest in HCA, the HCA Defendants “stood down” and communicated their decision to “stand down” to the Winning HCA Consortium shortly after the deal was signed, but before it had closed, and in circumstances where it remained open for additional bids.

Then, in September 2006, the Winning Freescale Consortium was close to securing a deal to purchase Freescale when another consortium, which included some of the Winning HCA Consortium, sent an indication of interest to the Freescale Board resulting in disruption to the Winning Freescale Consortium’s deal.   It is alleged that the Winning Freescale Consortium began mounting, as retaliation, a competing bid for HCA despite the prior request to “stand down”.  The plaintiffs allege that due to the threat of competing bids, the consortiums communicated with each other and “stood down” from each other’s respective bids.

Decision not to dismiss the proceedings is upheld

In their application to have the proceedings dismissed, the PE firms argued that there was insufficient evidence to create a genuine issue for determination by the Court.  On 13 May 2013, the Court rejected the PE firms’ attempt to dismiss the case.

First, the Court held there was evidence that the practice of not “jumping” each other’s proprietary deals may not be the result of mere independent conduct.  The Court relied on various email evidence including one contemporaneous email written by an executive of a relevant PE firm that “no one in private equity ever jumps an announced deal”.  Whilst the Court agreed there was a genuine issue in respect of “jumping”, it required the plaintiffs to narrow their overarching conspiracy claim to a more confined allegation of conspiracy between the PE firms to refrain from “jumping” each other’s proprietary deals. In that respect, the Court held:

“… the evidence shows a kaleidoscope of interactions among an ever-rotating, overlapping cast of Defendants as they reacted to the spontaneous events of the market.  While some groups of transactions and Defendants can be connected by “quid pro quo” arrangements, correspondence, or prior working relationships, there is little evidence in the record suggesting that any single interaction was the result of a larger scheme.”

Second, the Court held that the available evidence made it possible to infer that there may have been an agreement to “stand down” regarding the HCA transaction.  Again, the Court relied on the email communications of the relevant PE firms to make this finding.

An appeal of the decision not to dismiss the proceedings was filed by the PE firms but only in relation to the HCA transaction allegation.  The appeal was denied on 20 June 2013 with the Court again finding that the evidence before it created a genuine issue as to whether an agreement to “stand down” on HCA existed.

A further challenge by the PE firms was again denied more recently, with the Court handing down a decision on 16 July 2013. In that decision, the Court held that there was evidence to support that each PE firm defendant (apart from two firms who were dismissed from the proceeding) may have been connected to the alleged overarching conspiracy not to “jump” another bank’s proprietary deals.

These preliminary rulings have narrowed the scope of issues that will proceed to trial for determination as to whether the PE firms have breached the antitrust laws.

Key takeaway

This ongoing case highlights the need for PE firms to carefully analyse circumstances in which joint bidding activities may be legitimate and to mitigate the risks of any competitor interactions where that would seem to serve no lawful purpose.  It also highlights the use of email communications in litigation and the risk that potentially legitimate communications can be subsequently mischaracterised.