Private Equity Comment: Avoiding Anti-Trust Issues

Recently, a court in the US analysed for the first

time whether "club deals", where private equity firms

join forces to bid for a target company, can be

anti-competitive. The concerns arose because of competition law

rules on collusive bid-rigging and sharing sensitive

information between bidders. The good news for the private

equity community is that the US District Court in Seattle did

not consider that the specific practices under review in that

case were anti-competitive.

Of course, there are a number of reasons why club deals may

in fact be pro-competitive rather than anti-competitive. For

instance, clubbing together may enable several private equity

firms, none of whom may have the financial resources to bid for

the target alone, to bid together thereby increasing the number

of bidders. In addition, club deals enable the private equity

firms to spread risks and make the most of complementary skills

and management experience that members of the consortia may

have.

However, the anti-trust risks of private equity club deals

moved firmly into the spotlight when it emerged in late 2006

that the US Department of Justice ("DOJ") had

requested information on deals done by several large buyout

houses in the US. Investment banks and sellers then tightened

their auction procedures to reduce the risk of collusive bid

rigging between bidders.

In this case decided by the US court, a shareholder in the

PC security company WatchGuard sued two US-based private equity

firms, Vector Capital and Francisco Partners, that had

initially submitted bids separately and subsequently joined

forces, ultimately winning the auction at a lower bid price

than the separate bids. In declaring the shareholder's

action unfounded, the Court made three key points: first, it

was the number of bidders at the outset, rather than in the

final round, that was relevant when assessing competition;

second, where clubbing together increased the number of

bidders, this would normally be pro-competitive; and third, it

was important that the vendor remained free to reject the bid

if it was too low. The ruling will no doubt impact on other

cases in the pipeline.

Although the DOJ's investigation continues (and this

case clearly does not settle the argument once and for all),

this judgment offers some comfort to private equity firms who

may have been concerned at the increased anti-trust scrutiny,

particularly given the proliferation of class actions seeking

damages soon after news of...