According to recent press reports, the U.S. Justice Department has launched an investigation into the bidding activities of private equity investors involved in recent buyout opportunities, including the formation of "clubbing arrangements" to bid jointly for companies. While the Justice Department has not yet filed any civil or criminal complaints against financial investors relating to this investigation, these reports indicate that the government is closely examining several issues, including:
- whether clubbing arrangements are being used to limit bidding wars among large private equity funds,
- whether competing investors or investor groups agreed with one another to refrain from submitting topping offers after another investor had reached definitive terms with a target company,
- whether investors are promising to include competing bidders in their investor group or consortium to reduce their incentive to submit higher competing bids, and
- whether competing investors are sharing information (possibly in violation of confidentiality agreements executed with the sellers) regarding their bids or bidding strategies in order to stifle or limit competition among one another.
There are a number of legitimate and procompetitive business reasons for investors to collaborate with each other regarding their potential interest in acquiring all or part of a target company (e.g., spreading risks, pooling capital to submit competitive bids). Thus, the antitrust laws do not prohibit legitimate forms of investor collaboration over potential acquisition and buyout opportunities. Indeed, the growth in funds available to private equity investors has likely enhanced the competition that takes place in the capital markets to acquire attractive investment opportunities. Joint investment activities often enable investors to increase the value or attractiveness of their proposals to firms looking to raise capital or sell their business. Thus, the antitrust laws consider this type of joint conduct to be lawful and beneficial to competition.
The antitrust laws, however, are also designed to protect all forms of competition, including competition in the market for corporate control. Accordingly, agreements among individual investors or groups of investors without a legitimate business purpose that stifle this competition and depress the purchase price of a target company’s stock or assets could potentially be unlawful in some circumstances. For example, if investors agreed with competing bidders to limit the size of their offers or refrain from bidding on an acquisition or buyout opportunity in order to prevent a bidding war with one another, this agreement may be considered anticompetitive and harmful to the selling firm. Furthermore, because certain types of "bid rigging" agreements are considered per se unlawful under the antitrust laws, the enforcement agencies may conclude that this type of agreement is illegal even if there is no clear proof that the target company or its shareholders were ultimately harmed.
Although most forms of investor collaboration are likely to be procompetitive and lawful, determining whether certain collaborative efforts or activities violate the antitrust laws will likely depend on the specific facts and circumstances surrounding a particular acquisition or investment opportunity, including:
- whether there is clear competitive relationship between separate investors or investor consortiums,
- the precise nature of any agreements or information exchanged between such investors, and
- whether there is any evidence to suggest that the seller would have received a higher price from bidders in the absence of any such agreements.