Antitrust & Private Equity

Josh Wright —  24 February 2008

WSJ Deal Journal reports some important movement on the antitrust and private equity front.  Specifically, Judge Richard Jones (W.D. Washington) granted the defendants’ motion to dismiss in Pennsylvania Avenue Funds v. Borey, dismissing the plaintiffs’ allegations that two private equity firms had violated the Sherman Act by bidding jointly on the target company (Watchguard Technologies) in order to “artificially fix the price … or rig the tender offer bids for WatchGuard shares” after initially submitting independent bids.

Wilson Sonsini, who argued the successful motion, has posted an informative Client Alert summarizing the highlights of the decision.  Apparently, the Court rejected the per se characterization of joint bidding because it recognized the potential for joint bidding to increase rather than suppress competition in some circumstances.  The court found that the bidding arrangement could not survive a motion to dismiss on the alternative rule of reason characterization because “dozens of other suitors who expressed interest in WatchGuard refused to make bids. . . . The result was a contest for corporate control in which it appeared that there were only two bidders, but the appearance is a mirage. An acquiror who believed that WatchGuard was worth more than [the] bid could have made a topping bid. The agreement between [the funds] would have had no effect on such a bid. Moreover, had WatchGuard’s shareholders believed that the [] bid was too low, they retained power to reject the merger by voting it down.”  Finally, it is worth noting that Judge Jones did find that the bidding arrangement was not impliedly immune from the antitrust laws because of overlapping securities regulations.

Private equity deals have been the subject of a good deal of speculation in antitrust circles in the past several years as bidding arrangements are the subject of pending litigation and have come under the scrutiny of the Department of Justice.  Its just one decision, but this one seems pretty dismal for plaintiffs in these private equity collusion suits.  Judge Jones’ decision seems to suggest that in the post-Twombly world, and with the market definition problems inherent in a rule of reason type case in the “market for corporate control,” plaintiffs are going to have a difficult time surviving the pleading stage without a plausible story that a specific “club deal” is tainted by collusion with a tangible impact on acquisition price.   I just don’t know if that kind of evidence is out there.  Its certainly tough to get without the benefit of discovery.  Anyway, I thought that the “club deal” collusion story was about facilitating tacit or explicit collusion on a series of deals (you don’t bid here, I won’t bid there).  That might be much harder to identify in practice.

But this is not the last of these suits.  It will be interesting to see how the plaintiffs antitrust bar adjusts to this ruling in future cases.

3 responses to Antitrust & Private Equity

  1. 

    While the original complaint has been dismissed, an amendment has been filed on the two other outstanding issues: breach of fiduciary duty and insider trading. See http://thedealsleuth.wordpress.com/2008/05/19/watchguard-private-equity-antitrust-litigation-the-sequel/

  2. 

    I don’t know about “never.” I tried not to say never. Its really early in the development of this line of cases to go out on that much of a limb. The rule of reason case here is very difficult to make out (both in terms of market definition and proving effects in that market). As far as a per se style analysis goes, yes, I am saying one would need some pretty compelling information (“inside” or otherwise) to survive a motion to dismiss.

    And yes, I think that this is an area where economic analysis might be especially useful in demonstrating the competitive effects of a particular club deal or series of deals. In fact, it strikes me that this might be an important component of these cases in the future. It strikes me that this kind of evidence will be almost necessary for a “plausible” per se story.

  3. 

    When you say that in a post-Twombly world, “I just don’t know if that kind of evidence is out there. It is certainly tough to get without the benefit of discovery” do you mean that absent a whistleblower (or some other source of “inside” knowledge) that these cases can never get past the motion to dismiss stage? Do you think that there could ever be some sort of economic analysis of a particular club deal that would survive a motion to dismiss?