Tuesday, March 11, 2008

A Private Equity Joint Bid ("Club Deal") for Acquisition of a Target Company held Not per se Illegal under the Sherman Act

We just received in the mail a Paul|Weiss article about a private equity antitrust class action collusion suit (Pennsylvania Avenue Funds v. Edward Borey, et al., No. C06-1737RAJ, W.D. Wa.) which was dismissed on February 21, 2008 by Judge Richard Jones in what appears to be a case of first impression, holding that a joint bid by private equity firms (a so-called "club deal") is legal under the circumstances of that case, so we pass on more links relating to that decision: a WSJ Deal Journal article by Peter Lattman, a Linklaters Technical Bulletin, the HRO Antitrust Alert, the DLA Piper Antitrust Alert and the Truth on the Market blog, which discuss the decision.

The DLA Piper summary of the decision by Paolo Morante writes:

"After initially submitting independent bids, two of the private equity bidders, Vector Capital (Vector) and Francisco Partners (FP), remained as the only bidders in the running. According to the complaint, brought on behalf of a putative class of WatchGuard shareholders, in the final stages of the bid process Vector and FP agreed that Vector would drop its bid, allowing FP to purchase WatchGuard at a reduced price, and then that Vector would fund half of FP’s acquisition in exchange for a 50 percent interest in WatchGuard after the merger. The plaintiffs claimed, among other things, that the agreement between Vector and FP restrained competition in violation Section 1 of the Sherman Act."

Linklaters writes:

"Last week, a US federal district court became the first to conclude that an agreement by private equity funds to submit a joint takeover bid does not violate Section 1 of the Sherman Antitrust Act. If followed by other US courts, the decision may have important implications for private equity funds considering potential joint-bidding arrangements. See Pennsylvania Avenue Funds v. Borey, No. C06-1737 (W.D. Wash.)."

Paul|Weiss writes:

"While this result is promising for private equity firms, it is uncertain whether other courts will uphold this decision or apply the same reasoning as the district court did in this case. There is, however, little doubt that these issues will be revisited in other antitrust class actions against private equity firms."

McDermott, Will & Emery write:

"The decision is controversial and may well turn out to be overruled on appeal or distinguished by courts that address joint bids in the future. As such, companies should not take undue comfort in this lone district court opinion. This case is of interest, however, because it is the first opinion in several cases that have been filed challenging joint bids, or “club deals,” in corporate acquisitions."

Holme, Roberts & Owen LLP write:

"The decision, although one by only a single federal district court in the Western District of Washington, is nonetheless an important ruling for the buyout industry which has been targeted with antitrust suits around the country after the Department of Justice opened an inquiry into possible anticompetitive conduct related to club deals in 2006."

Truth on the Market writes:

"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. It's just one decision, but this one seems pretty dismal for plaintiffs in these private equity collusion suits."

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