Dealmakers and their counsel should be prepared for antitrust scrutiny that may follow an announcement of a club deal or joint bid. Early planning and risk assessment by M&A and antitrust counsel is essential.
Companies that have participated in or plan to participate in joint bidding practices in the context of corporate acquisitions (otherwise known as “club deals”) may risk some unwanted antitrust scrutiny from shareholders and others. A recent decision by the United States District Court for the District of Massachusetts allowed shareholders of entities acquired by such practices to proceed with lawsuits against the acquirers. The Court in Dahl v. Bain Capital Partners LLC1 denied a motion to dismiss an antitrust claim alleging that private equity firms that had jointly participated in a number of the same acquisitions violated Section 1 of the Sherman Act by engaging in a wide-scale conspiracy to allocate the leveraged buyout market. The Court found that the presence of the same private equity firms in multiple transactions, coupled with allegations that the firms conspired to prevent competitive bidding for target companies, plausibly suggested a violation of the antitrust laws.
DOJ Investigation and Prior Antitrust Claims
Until the recent ruling in the Dahl case, antitrust challenges to club deals seemed unlikely to succeed. The US Department of Justice Antitrust Division commenced an investigation into joint bidding practices in 2006, but has taken no action and the current status of the investigation is unclear. Early last year, in a case filed shortly after the DOJ investigation became public, a federal court in Washington State dismissed an antitrust claim in a case involving accusations of bid-rigging in a merger transaction. In the case, Pennsylvania Avenue Funds v. Borey,2 stockholder plaintiffs alleged that two private equity firms violated antitrust laws by exchanging information regarding bid pricing and jointly bidding in a corporate auction. The court dismissed the complaint, finding that the actions in question were not per se illegal and that such actions could be procompetitive because joint bidding practices allow less wealthy bidders to compete and to share risk. Last month, in ruling on the motion to dismiss, the Dahl Court came to the opposite conclusion.
Complaint against Club Deals Moves Forward
In Dahl, shareholders of the acquired companies filed a lawsuit as a purported class, alleging that seventeen private equity firms engaged in an illegal conspiracy to dominate and control the largest leveraged buyouts in the market and to fix pricing at artificially low levels through a bid-rigging scheme. Specifically, they alleged that the private equity funds “(1) submit[ed] sham bids, (2) agree[d] not to submit bids, (3) grant[ed] management certain incentives, and (4) include[ed] “losing” bidders in the final transaction.” The Dahl case did not raise the issue of the legality of club deals generally.
The private equity firm defendants moved to have the case dismissed, arguing that club deals should not be subjected to antitrust scrutiny because the SEC regulates corporate acquisitions, and such regulation should preempt allegations of antitrust violations. Additionally, they argued that the stockholder plaintiffs had failed to present enough facts to the Court to support allegations of antitrust violations.
The Court denied the motion to dismiss, first ruling that for preemption to apply, the securities and antitrust laws must be found to be “clearly incompatible” with one another according to a four-factor test established by the Supreme Court in Credit Suisse Securities (USA) LLC v. Billing.3 The Dahl Court found that none of the necessary factors for preemption existed with the club deals at issue, and therefore the case should not be dismissed on preemption grounds.
The Court then concluded that allegations met the standard established in Bell Atlantic Corp. v. Twombly 4 that “a claim [must] have enough facts plausibly suggesting an illegal agreement.” In reaching its conclusion, the Court noted that the involvement of the same private equity firms in multiple transactions was a relevant factor in finding the plausible suggestion of an illegal agreement. This ruling is not a final determination of the legality of the club deals at issue, but rather merely allows the case to move forward to the next stage of litigation. In early January 2009, the private equity firms petitioned for interlocutory appeal to challenge the Court’s ruling.
Minimizing Antitrust Risk
Although the apparent inaction of the Department of Justice investigation coupled with the ruling in the Borey case seemed to signify that antitrust scrutiny of club deals had run its course, the recent ruling in the Dahl case refocuses the antitrust spotlight on joint bidding practices for the foreseeable future, encouraging private plaintiffs and possibly federal and state antitrust authorities to bring antitrust claims against deal participants. Unfortunately for such participants, this increased scrutiny comes at a time when the current economic climate may necessitate joint bidding practices to get deals done.
Dealmakers and their legal counsel should carefully plan for heightened antitrust scrutiny by putting forth a coordinated effort to involve M&A and antitrust counsel early in the negotiation and planning stages of a joint deal. Careful planning of deal negotiations, communications, and information exchanges between firms can help to effectively minimize potential antitrust exposure.