Buyouts firms that get too clubby on their club deals risk running afoul of section one of the Sherman Antitrust Act.
Section one prohibits contracts, combinations and conspiracies that serve to unreasonably restrain trade. The law, designed with the break-up of the Standard Oil trust in mind, was intended to prevent collusions among companies that could result in higher prices for consumer goods.
In the world of large-scale leveraged buyouts, the Act would be applied to prevent collusions among deal sponsors that artificially depress the price sellers obtain for their companies.
Thane Scott, co-chair of antitrust group at Edwards Angell Palmer & Dodge, says that it’s fine for buyout firms to come together in clubs for the right reasons—the right reasons being that none of them alone has the capital to buy a company, or the capacity to shoulder the full risk of a transaction. But if the purpose of the club is to reduce the number of bidders or suppress price competition, the Department of Justice “will have a field day with that,” Scott says.
Here is some advice from a few antitrust and private equity lawyers on how to remain well beyond the reach of the antitrust division of the DOJ:
• Make sure that you and other senior professionals involved in a transaction have a mindset that is pro-competitive. Ask yourself: Is the seller better off with cooperation among buyers, or worse off? If the answer is worse off, you had better go it alone.
• If you do form a club on a particular deal, document the pro-competitive reasons that you’re joining together. Make sure to create the records contemporaneous with decisions and events. Documents created after the fact won’t look as convincing.
• Prevent anyone on your staff—from senior professionals to the most junior—from putting anything in writing (including emails) that would suggest anti-competitive reasons for linking up with other bidders. antitrust cases, cautions Scott, are almost always proven using a defendant’s own ill-considered emails and other documents.
For more on what constitutes antitrust activity, go to the Federal Trade Commission primer at http://www.ftc.gov/bc/compguide/antitrst.htm. Reach Thane Scott of Edwards Angell Palmer & Dodge at 617-239-0154. Reach John LeClaire, chair of the private equity group of Goodwin Procter LLP, at 617-570-1144.—D.T.