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Comment: Antitrust in me

by Contributor 28 March 2023

By David Harrison, Mark Hills, Tom Panoff, Rachel Lamorte and Jean-Maxime Blutel at Mayer Brown

Private equity firms face a complex and challenging merger enforcement environment in the US, EU and UK, particularly in the tech, life sciences and defence/security sectors where antitrust authorities may sense that certain past mergers have slipped through the cracks. Rollups are also increasingly hitting roadblocks. Jonathan Kanter, the top antitrust enforcer at the US Department of Justice, recently stated that PE was an “extremely important part of our enforcement programme” and closer scrutiny “top of mind”.

This results in increased deal risk, with the possibility of PE transactions being blocked, or cleared only subject to significant divestments. It also increases compliance risk, with large fines being imposed for rule breaches.

There are actions all PE firms can be taking now to minimise these risks:

1. Think about antitrust early

First, all companies under common management will be considered part of the same economic group, regardless of their ownership by different underlying funds (even where evidence can be presented of their separate management). PE firms should therefore consider their overall market position when weighing up the likely substantive antitrust hurdles for a particular investment.

Next, plan ahead and factor in enough time to convince authorities of the case for clearance. For example, be aware that there is no automatic carve-out for distress situations; the normal rules apply. Consider also that authorities have highlighted rollups as particularly problematic. We expect sceptical authorities to focus additionally on assessing non-price aspects of competition such as quality, range and service, which may take additional time (and resource) to evidence.

Remember that the fundamental antitrust-related building blocks in the deal documentation need to be aligned with your risk appetite. This includes not only conditionality but also what position should be taken as regards divestments (and hell-or-high-water requirements to complete the deal, come what may). What would you be prepared to divest and who would buy it? Consider also appropriate warranties to manage historical risks while flushing out items relevant to the antitrust assessment (and, of course, valuation).

Consider with your legal counsel whether the deal could be structured in such a way as to fall within (or outside) the jurisdiction of merger control. For instance, accepting a lesser degree of control over the target could avoid triggering mandatory filing requirements. However, merger clearance provides certainty that the transaction will not be subject to challenge under rules prohibiting anti-competitive arrangements.

2. Structure and operate consortia arrangements carefully

The possible antitrust issues that arise in relation to consortia or clubs are twofold. First, under EU rules, the turnover of the acquirer parents alone can lead to notifiable acquisitions, no matter how small the target.

Second, they are open to allegations that the fund managers should instead be competing with one another, to ensure that the seller obtains the best price for a given asset. This issue has been raised in cartel enforcement in the UK and civil litigation in the US. We therefore recommend you document the reasons for joining consortia at the outset in case they are ever challenged.

Similarly, be aware of increased scrutiny of interlocking directorships and minority shareholdings. Wherever there is active involvement by investors in competing investee companies, there is a risk that possible anti-competitive information exchange or coordination could occur. The DoJ has been particularly vocal, with Kanter recently saying the DoJ is “ramping up efforts to identify violations” and that it will “not hesitate to bring… cases to break up interlocking directorates”. Indeed, in October, seven executives stepped down from five corporate boards following DoJ concerns.

Where a fund has minority shareholdings in competitor companies, compliance with antitrust rules should be paramount: information controls should be put in place to ensure that the independent companies are not sharing information through an investor; and directors should be given enhanced training regarding antitrust risks.

3. Mitigate general antitrust risk pre-completion

There are two separate but related risks that need to be guarded against in the pre-completion period. First, ‘gun-jumping’, which occurs where a transaction is implemented (including by exerting influence meeting the relevant definition of control), without the required clearance or approvals under merger control rules. This is often punishable by large financial penalties. The utmost care should, therefore, be taken not to implement a transaction inadvertently.

Second, there is a risk of sensitive information being shared during due diligence and/or integration planning – during which the parties must continue to operate independently. In M&A relating to a competitor (including a fund manager on behalf of a portfolio company), the key principle is that it is only appropriate to share information that is absolutely necessary to allow the buyer to make a decision on whether to acquire the target (and at what price). This will often not extend to pre-completion integration planning. Enforcers now expect that information will only be shared under a suitable non-disclosure agreement addressing the purpose of review of information and subsequent destruction/return on conclusion of negotiations. In addition, where competitively sensitive information needs to be shared, this will often need to be carried out with a "clean team" agreement in place.

4. Prepare for a clean exit

PE managers investing in the EU and UK should be aware that they (i.e. the management company) can be held directly liable for antitrust infringements by portfolio companies during their period of ownership, even many years after they have been sold. All an authority needs to show is that the manager controlled the company – this is presumed for wholly-owned companies. Disgruntled customers – including through collective actions backed by funders – can equally pursue the parent for cartel damages in court. By contrast, in the US, PE managers may be held liable only if there is evidence that they “independently participated” in the antitrust infringement; mere ownership is not sufficient.

Finally, undertake a risk assessment for each new investment to confirm its antitrust compliance framework is adequate and operating effectively.

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