Private Equity in the Antitrust Enforcement Crosshairs

The rules of the road for corporate mergers are still being rewritten by the Biden administration’s new antitrust regulators, but one thing is already clear: they’re getting tougher.

In addition to industry-focused challenges, regulators plan to scrutinize transactions by private equity firms and other institutional investors, stating that the firms may be exerting economic influence in anticompetitive ways. This interesting turn of the wheel was the subject at hand as lawyers with Vinson & Elkins led Practising Law Institute’s briefing “Private Equity in the Antitrust Enforcement Crosshairs” on Nov. 30, 2021.

While private equity deals of the past were largely viewed as financial transactions, that perspective is changing. The shift is due to two factors: the Federal Trade Commission and the Department of Justice’s antitrust division have widened their scopes and become more aggressive and PE firms are partaking in more strategic deals, said Craig Seebald, a Washington, D.C.-based partner and leader in the global Antitrust Group at V&E.

Other forum participants included W. Matthew Strock, Houston-based partner and co-head of V&E’s Mergers & Acquisitions and Capital Markets practice; Lindsey Vaala, Washington-based counsel and member of the Antitrust and Global Cartel Defense and Coordination team at V&E; and Tasneem Chipty, a Boston-based managing director at consulting firm AlixPartners.

“The bottom line is that horizontal deals are getting harder and harder to get through the government in this administration,” Seebald said. “There’s really been a major concern by the new regulators that previous administrations have been too lax in their review of mergers that have added concentration to the market.”

Participants agreed that the FTC, in particular, has signaled a stricter approach under Chair Lina M. Khan, both in policy decisions and statements including an early condemnation of Berkshire Hathaway Energy’s proposed $1.7 billion purchase of Questar Pipeline from Dominion Energy.

The deal was called off in July amid concern that the agency wouldn’t approve it. Berkshire already owned the Kern River pipeline, one of only two that supply natural gas from Rocky Mountain production sites to central Utah, the agency noted.

“It is disappointing that the FTC had to expend significant resources to review this transaction when we previously filed suit in 1995 to block the same combination,” the agency said after the two parties walked away from the deal.  In the earlier case, Questar dropped its attempt to buy a 50 percent stake in Kern River because of the FTC’s suit.

“Given our prior action, and the even closer competition that developed between the pipelines since then, this is representative of the type of transaction that should not make it out of the boardroom,” the agency said.

Khan, whose bipartisan support is evidenced by her 69-28 confirmation vote in a Senate where Democratic control is far narrower, according to forum participants, defined her approach even more clearly in a September statement urging a holistic examination of antitrust issues in mergers. While government analysis has typically focused on potential harm to consumers, primarily through price increases, Khan said the agency must also consider damage to workers and independent businesses.

Private equity, she said, deserves particular scrutiny since it and similar investment vehicles “may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations.”

The agency’s shifting stance is occurring at a time when growth in the private equity industry has spurred the creation of smaller and mid-market funds that specialize, at least initially, in a particular industry because of its managers’ deep expertise in that field, Strock explained. A more targeted approach than that of larger firms such as Blackstone and Kohlberg Kravis Roberts, it often leads to holdings in firms that compete with each other, he said. Strock pointed out that the degree to which coordination is allowed between such firms turns on the degree of a private equity firm’s ownership of each.

The panel then discussed best practices as it relates to managing competing businesses within the same fund. The U.S. Supreme Court held in Copperweld v. Independence Tube in 1984 that parent companies and wholly-owned subsidiaries are incapable of conspiring with each other in violation of the Sherman Antitrust Act, the 1890 law that serves as the bedrock of anti-competition regulation in the country.

Coordination between a wholly-owned company and one in which a private equity firm held only a minority stake, however, would be problematic, Seebald said. The minority firm would have to be treated as a separate entity with appropriate firewalls established, he added.

Such separations would, of necessity, extend to board memberships because Section 8 of the Clayton Act prohibits people serving as officers or directors of competing companies simultaneously, Vaala noted.

Frequently, violations of that rule are accidental, Strock said. “It often comes out of a situation where a fund holds a controlling position in one or more investments that are in competition with one another,” appoints board members, and its ownership position later sinks below a majority level, he said.

Such a drop can occur for a variety of reasons – from going public to significant mergers that change the firm’s ownership percentage and spinoffs – and a firm may fail to recognize the directorship conflict that’s created as a result, he said. “These are the kinds of issues that counsel always needs to be really attuned to and understand how you can slip into a situation where you get out of the Copperweld protection as a result of various transactions,” Strock said. “You need to be really sensitive to and looking for these kinds of interlocking directorates.”

More broadly, forum participants advised against presuming that heightened enforcement of antitrust laws is merely a product of a Democratic administration and the party’s narrow control of Congress.

Right-wing populism combined with liberal skepticism toward business expansion led not only to broad support for Khan’s confirmation but similar backing for Biden’s appointment of Jonathan Kanter, a Paul Weiss alum who became a partner at boutique antitrust firm The Kanter Law Group, to lead the Justice Department’s antitrust division.

Kanter was confirmed by a 68-29 majority on Nov. 16, 2021, and the department’s antitrust team is “just now getting in place,” Seebald said. The Senate vote came just two weeks after the department filed a lawsuit in federal court in Washington, D.C., to block publisher Penguin Random House’s purchase of rival Simon & Schuster.

The two companies are among the top five publishers in the U.S., and their merger would substantially curb competition for – and compensation to – authors, the department claimed. “There was very little concern in the complaint for pricing to the end consumer,” which may indicate a shift away from the government’s previous reliance on that as the best measure of competitive harm, Vaala said.

“We’re looking at different rules of the road,” Seebald explained. “The publishers deal is a very interesting one, which really isn’t focused on harms by higher prices to consumers, but rather to authors. It’s really a different environment. Lots of things have changed in the past few months.