“Crackdown on buyout deals coming, warns top US antitrust enforcer. [He] Jonathan Kanter fears hollowing out of American economy amid private acquisition spree.” – Headline in Financial Times, May 18, 2022
Kanter is the Assistant Attorney General in charge of the Antitrust Division at the Department of Justice. His message captures the mindset among federal antitrust agencies.
For example, in a memo, Chairperson of the Federal Trade Commission Lina Khan hammered:
“The growing role of private equity and other investment vehicles invites us to examine how these business models may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations.”
Recently with the US Senate confirmation of Alvaro Bedoya, the FTC shifted to having a progressive majority of its members. That means it can be more aggressive in its scrutiny and enforcement.
Targeted are potential competitive issues in private equity deals. The key ones are:
- Roll ups.
- The involvement of private equity in divestiture remedies
- Enforcement of the law concerning interlocking directorates.
PAUL WEISS CONNECTS THE DOTS
Wall Street law firm Paul Weiss, chaired by Brad Karp, examines this focus on private equity dealmaking for antitrust issues. Here is that Client Memorandum.
ROLL UPs
The Paul Weiss analysis zeroes in on Kanter’s assessment of the roll up strategy as a “business model [that] is often very much at odds with [antitrust laws] and very much at odds with the competition we’re trying to protect.”
Therefore, Kanter indicates that a proposed deal will not be approached as a stand-alone. Instead it will be investigated in terms of the private equity firm itself.
Consequently, funds or their portfolio companies can expect broad-based questions in merger reviews about strategies. Paul Weiss posits that private equity roll ups will be addressed in the formation of future merger guidelines.
On January 17, 2022, the FTC and the DOJ issued a call for comments on those agencies’ merger guidelines. The question asked essentially is if the guidelines approach to private equity acquisitions is adequate.
ACQUISITIONS OF DIVESTITURE ASSETS
Historically, Kanter has been skeptical of divestitures as remedies in merger matters. In late January 2022, Paul Weiss had analyzed that stance. Here is that Client Memorandum.
More recently Kanter increased that concern. For example, he noted in a speech:
“divestitures may not fully preserve competition across all its dimensions in dynamic markets … [as for private equity investors] too often partial divestitures ship assets to buyers like private equity firms who are incapable or uninterested in using them to their full potential.”
Kanter added to that in that Financial Times interview:
“Very often settlement divestitures [involve] private equity firms [often] motivated by either reducing costs at a company, which will make it less competitive, or squeezing out value by concentrating [the] industry in a roll-up."
Therefore, the Paul Weiss takeaway is this: Those involved in deals where a private equity fund is part of a potential remedy should take Mr. Kanter’s assertions into account when advocating for the remedy.
INTERLOCKING DIRECTORATES
First, Paul Weiss presents the traditional way Section 8 of the Clayton Act played out. It prohibits a person from simultaneously serving on the board of two competing corporations unless the criteria for de minimis exceptions are met. When the DOJ became aware of potential Section 8 issue, frequently the matter was resolved by the director resigning from a board. In certain matters, the DOJ published a statement about it.
That was then.
In a speech last month, Kanter suggested Section 8 violations would be treated differently. Explicitly, he said:
“[the DOJ would] not hesitate to bring Section 8 cases to break up interlocking directorates.”
Later in the Financial Times he made it clear that there was going to be enforcement of Section 8.
Paul Weiss looks at this willingness of Kanter to litigate. Therefore Paul Weiss warns that Section 8 issues may be more difficult to resolve moving forward. The law firm speculates that the DOJ could now insist on a consent decree. That would require a court filing, a period for public comment, and eventual approval by a judge.
Consequently, concludes Paul Weiss, private equity funds should pay particular attention to possible Section 8 issues when structuring deals. Also they should periodically evaluate their portfolios for these issues as companies’ businesses change. Here is a scenario Paul Weiss presents: Companies that are not initially competitors may become competitors as product and service lines change.
FOR MORE CLARIFICATION
On the Client Memorandum, Paul Weiss experts in these issues are listed, with their contact information. The law firm has a Private Equity Practice.
Connect with Editor-in-Chief Jane Genova at janegenova374@gmail.com. Now and then she does freelance assignments for professional services firms such as Paul Weiss.