Led by antitrust officials in the US appointed by President Biden, authorities around the world have turned a critical eye towards private equity (PE), making PE the latest target in the global trend toward increased antitrust scrutiny. The most recent sign of enforcers’ focus on PE came with the US Department of Justice (DOJ) making good on its promise to “reinvigorate” rules against interlocking directorates by announcing the resignation of seven directors from the boards of five companies, including several directors affiliated with PE firms. But some other actions taken by US authorities, such as arguing that PE firms are ill-suited divestiture buyers, have been brushed back by the courts. Calls for more vigorous scrutiny of PE are resonating with authorities outside the US as well, making it even more important for PE firms to think about ways to anticipate and mitigate global antitrust risk.
Key Takeaways:
- PE is in the antitrust crosshairs so greater care should be taken in anticipating and preparing for questions from sellers and regulators.
- PE firms should make sure they have a deep and current understanding of their portfolios—including non-controlling minority stakes—in order to identify potential competition concerns early in a deal process.
- PE firms should be mindful of potential interlocking directorates and the risk that an authority might perceive those positions as facilitating unlawful information exchange or coordination.
DOJ and FTC have strongly criticized PE firms’ commercial strategies
Antitrust enforcers at the Federal Trade Commission (FTC) and DOJ increasingly have criticized PE firms in recent months, asserting that their business model is “very much at odds with the law and very much at odds with the competition we’re trying to protect.” The Chair of the FTC and the head of the DOJ’s Antitrust Division have criticized PE firms for engaging in so-called “roll-up” transactions involving the combination of smaller players in the same industry to “accrue market power” without the antitrust authorities noticing.
The FTC’s enforcement action against one PE firm requiring divestitures of certain health care clinics is emblematic of the agencies’ approach to these deals; there the FTC alleged the PE firm was “gobbling up competitors in regional markets that are already concentrated.” To mitigate risk, PE firms should have a detailed understanding of their portfolios so that they can identify potential competition issues early in the deal process.
DOJ reinvigorating enforcement against interlocking directorates
In the US, Section 8 of the Clayton Act prohibits directors from serving on the boards of two competitors at the same time, so-called “interlocks.” While interlocks typically have been uncovered incidentally as part of a merger review process, the DOJ has for the first time said it would proactively look for potentially unlawful interlocks. The DOJ also appears to be taking a newly expansive view of which companies typically would be considered competitors and therefore are prohibited from having overlapping directors.
Maybe most significantly, in addition to breathing new life into Section 8 and looking to deter future violations, the DOJ is using these investigations to search for other potential antitrust violations—specifically, inappropriate information exchanges and evidence of explicit or implicit coordination between competitors. And the DOJ has promised that the recent enforcement actions are only the first salvo of a “broader review of potentially unlawfully interlocking directorates.” To minimize potential risks, PE firms should make sure they understand their portfolios, the industries in which those portfolios participate now (and may in the future), and which portfolios have a director representative. PE firms also should consider developing clear antitrust guidelines for director representatives regarding information sharing and other activities.
US Court issues helpful precedent approving PE firm as qualified divestiture buyer
While PE deals continue to get done despite the strong rhetoric, US antirust officials also have attempted to take a stricter stance against PE firms in the context of their role as buyers of divestiture assets to remedy transactions that otherwise raise antitrust concerns. The head of the DOJ’s Antitrust Division has argued that PE firms “are incapable or uninterested in using [divested assets] to their full potential” and therefore are not able to restore and preserve competition that may be lost from the transaction.
At least one court has blocked efforts by the DOJ to oppose these transactions. Earlier this year, a district court denied the DOJ’s attempt to block UnitedHealth Group’s $7.8 billion acquisition of Change Healthcare. The merging parties entered into an agreement to sell the Change assets that competed against UHG to a PE firm. Despite that proposed divestiture, the DOJ persisted with its challenge, arguing the PE buyer was ill-suited to run the business and restore competition. The district court rejected the DOJ’s arguments and found that the PE buyer, among other things, had the experience and financial resources necessary to run the business effectively and to compete vigorously.
Calls for more vigorous enforcement are resonating with other regulators
The focus on PE in the US may inspire other regulators, in particular across the Atlantic. In Germany, a draft law is being discussed which would grant the Federal Cartel Office broad powers to address perceived “disruptions” of competition. Those powers are likely to include oversight of cross-ownerships and interlocking directorates. In 2020, the European Commission requested a study on the effects of common shareholdings by institutional investors and asset managers on European markets. While no major enforcement action has been taken since the report, the headlines generated by the DOJ may inspire the European Commission to have a renewed look at these issues in Europe. And in the UK, while the Competition and Markets Authority has recognized that highly leveraged private equity acquisitions are unlikely in themselves to impact competition, it has demonstrated a willingness to follow the European Commission in pursuing private equity owners for potential antitrust violations by their portfolio companies, as demonstrated most recently in relation to its case against excessive pricing for thyroid drugs.
Moreover, the proposed new EU merger notification forms, which are currently under discussion, would mandate disclosure of all material shareholdings (including non-controlled) and directorships in competing undertakings or undertakings active in vertically related markets for each notifiable transaction. They also would include an obligation to disclose information on significant (non-controlling) shareholdings held by customers and competitors of one or more of the parties. In addition, we expect that the effect on competition of non-controlling minority stakes in portfolio companies active in the same sector as the target will be more heavily scrutinized in future substantive merger reviews and that these may more frequently require ring-fencing measures.
Finally, the European Commission, in common with the Competition and Markets Authority, has in recent years similarly become somewhat more skeptical of PE firms as suitable remedy purchasers and, like the DOJ did in its challenge to the UHG/Change related divesture to a PE buyer, is raising more questions during merger review as to whether a PE firm would have the incentive and industry know-how to vigorously compete through ownership of the remedy business. As a result, careful planning is required to successfully demonstrate that a PE firm is a qualified buyer.
Conclusion
Recent court rulings likely will not dampen US antitrust officials’ skepticism of PE anytime soon. Nor are enforcers outside the US likely to ignore the recent attention antitrust officials in the US have directed towards PE firms. But there is much PE firms can do to proactively identify likely risk areas as they consider transactions, to strengthen their antitrust defenses, and to mitigate overall risk in the current regulatory climate.
