The long-running antitrust class action litigation challenging club deals and certain other practices was recently downsized, but is still alive. A Boston federal judge’s March decision in Dahl v. Bain Capital Partners, LLC, et al. (on summary judgment motions) allows plaintiffs to proceed to trial against most defendants but narrows the grounds on which they may attempt to prove their “overarching conspiracy” theory, allegedly involving twenty-seven separate transactions. While allowing that claim to go forward, the court made clear that it did not find anything inherently unlawful in joint bidding by different private equity groups.
Club deals became a relatively common phenomenon during the period from 2003 through 2007. While private equity firms justified them as a necessary element of increasingly large transactions, which were often beyond the capacity of most private equity sponsors to pursue on their own, some observers questioned whether the joint bids were being used to restrict competition and thus reduce the prices paid in acquisitions of public companies. In late 2006, media reports indicated that the Department of Justice was investigating whether joint bids violated the antitrust laws. Although that investigation never led to any criminal or civil government proceedings, the Dahl lawsuit was filed by private plaintiffs in Boston federal court. The initial complaint was brought on behalf of former public shareholders of nine corporations that were the subject of joint bids. After several years of discovery, plaintiffs’ current complaint challenges twenty-seven proposed acquisitions and seeks damages on behalf of former shareholders of seventeen of the acquired companies. The complaint alleges a single overarching conspiracy among ten private equity firms and JPMorgan to allocate the purported market for large LBOs among themselves.
Plaintiffs contended, in opposing summary judgment, that the alleged conspiracy affected transactions in which the target’s board solicited bids in an auction, as well as other “proprietary” deals in which the target negotiated with a single buyer or consortium of buyers, after which better offers were solicited in a go-shop period. Plaintiffs alleged that the anticompetitive agreement was carried out through a variety of mechanisms: (1) “club deals,” in which a pre-arranged group of firms bid together in a group; (2) “quid pro quos,” in which private equity firms purportedly agreed to allocate acquisition opportunities among themselves to limit competition and ensure that each firm was able to participate in its share of the bids; (3) improper auction conduct, including communicating with each other in breach of confidentiality agreements and sharing price information; and (4) refusing to “jump” each other’s proprietary deals. During the second day of hearings on the summary judgment motions, after Judge Harrington expressed skepticism concerning the sufficiency of the evidence offered, the plaintiffs largely abandoned all of their arguments in support of the alleged overarching conspiracy other than the claim of an agreement not to jump a signed deal or a deal where the price reached a pre-agreed level.
The court’s ruling on the motions confirmed the wisdom of plaintiffs’ decision to focus on the alleged agreement not to jump deals. Judge Harrington rejected plaintiffs’ other proffered evidence of an overarching conspiracy, ruling that “joint bidding and the formation of consortiums” [sic] are “established and appropriate business practices in the industry” and are beneficial to bidders “for a number of reasons that are unrelated to any alleged overarching conspiracy, including the fact that such partnerships minimize the cost and risk for each partner.” The judge also found that the “occasional inclusion of a losing bidder in a final deal” may have the same benefits and, “on its own, does not support an overarching conspiracy.” Similarly, frequent communications and the existence of quid pro quo arrangements in terms of bringing a firm into a deal in return for later being invited into one of its deals “does not tend to exclude the possibility that they are acting independently across the relevant market” (the evidentiary standard needed for a conspiracy claim to survive summary judgment).
The court further found that “[e]ven where the evidence suggests misconduct related to a single transaction; there is largely no indication that all the transactions were, in turn, connected to a market-wide agreement.” Because the court had held, on a previous motion, that plaintiffs were bound by their repeated allegations (through five amended complaints) of a single overarching conspiracy, they were not permitted to go to trial on a changed theory of separate conspiracies relating to individual deals. The one exception is a claim against some defendants concerning the acquisition of HCA, which plaintiffs had alleged in a separate count.
Despite holding for defendants on all of these issues, the court found sufficient evidence to let plaintiffs proceed to trial based on several pieces of evidence:
(1) a statement by a TPG executive that “KKR has agreed not to jump our deal [to acquire Freescale Semiconductor] since no one in private equity ever jumps an announced deal” (emphasis added); (2) the fact that none of the announced, proprietary deals involved in the litigation were ever “jumped” during the go-shop period; (3) a Goldman Sachs executive’s statement that “club etiquette prevail[ed]” in the Freescale transaction; and (4) several other similar statements from which an agreement not to jump announced deals could be inferred. Judge Harrington held that this evidence “tends to exclude the possibility of independent action” and thus enabled plaintiffs to proceed to trial, but “solely on this more narrowly defined overarching conspiracy.” He therefore denied all defendants’ motions for summary judgment, except the motion of JPMorgan, as to which the evidence did not show that it was in the business of bidding for target companies or had otherwise participated in the narrowed conspiracy.
Because the plaintiffs narrowed their theory following the briefing of the motions, and the court accepted only this narrowed theory, the judge ruled that each remaining defendant could file a separate renewed motion for summary judgment “contending that the evidence does not create a genuine dispute as to their participation in the more narrowly-defined overarching conspiracy.” Those renewed motions are still in the process of being briefed, so it remains to be seen whether any of the claims will proceed to trial and, if so, whether the plaintiffs will prevail.
Judge Harrington’s decision is consistent with the limited number of other decisions addressing this issue, which have held that joint bids for public companies do not, in themselves, violate the antitrust laws. Such bids can have the procompetitive effect of allowing or encouraging more bidders to participate. However, coordinated activity between competitors, especially agreements not to compete, may also have anticompetitive effects that render them unlawful. The decision provides a renewed warning that private equity firms must take great care in all communications, including emails, not to make statements that may create the impression (whether or not accurate) that they have agreed with competitors not to compete or otherwise to restrict competition beyond a particular transaction.