If the federal government is indeed mounting a case against club deals, the argument got a whole lot shakier late last month.
A federal court judge in Seattle ruled in favor of two buyout firms that went in together on a take-private deal after each had first submitted competing solo bids. The decision, handed down on Feb. 21, marks the first time that a court has ruled that combining bids for corporate control doesn’t on its face violate federal antitrust law, according to law firm Wilson Sonsini Goodrich & Rosati, which won the case for the two buyout shops. The ruling doesn’t protect buyout firms from instances where there actually is collusion.
In 2005, publicly traded tech company WatchGuard Technologies put itself on the block and received a host of bids, some 50 in all, including separate offers from LBO shops
WatchGuard shareholders cried foul and filed suit. They contended that the pair of buyout shops colluded to rig bids and lower the sale price, according to a client alert from Wilson Sonsini. This, in turn, shortchanged stockholders, according to the lawsuit.
Judge Richard Jones, however, found that joint bidding for corporate control “is not uncommon” and in some instances “can promote rather than suppress competition,” according to Wilson Sonsini. Teaming up can help less well-endowed bidders compete against better funded opposition, and it can allow bidders to spread risk, according to the decision. The judge also ruled that the joint bid didn’t violate antitrust law because dozens of other firms could have made bids; moreover, if shareholders didn’t like the price or the process, they could have rejected the takeover offer.
To be sure, Judge Jones’s ruling doesn’t mean the U.S. Department of Justice won’t follow through with its sotto voce investigation of club deal-making. But, as Wilson Sonsini noted, “For private equity funds engaged in joint bidding, this case should provide some comfort that such activity…should not be considered illegal under the antitrust laws.”