Private Equity Under The Microscope: Taking Stock Of The Antitrust Enforcement Environment – Corporate and Company Law

Highlights

• Antitrust enforcers from the Federal Trade Commission and the
  Antitrust Division of the U.S. Department of Justice are taking a
  closer look at private equity companies and their acquisitions for
  perceived or imagined impacts on competition.




• These agencies have indicated that their principal areas of
  concern are so-called “roll-up” strategies, whether
  firms’ focus on cost cutting and short-term returns
  disqualifies them as divestiture purchasers, and “interlocking
  directorates” that can violate the Clayton Act and allow
  inappropriate sharing of competitively sensitive information.




• Given the current enforcement environment, private equity
  companies should not assume that any transaction is too small to
  attract attention and should involve experienced antitrust counsel
  early on to evaluate potential risks.

The Biden Administration’s aggressive antitrust enforcers
have trained their sights on private equity companies. They have
signaled through enforcement activities, formal policy statements
and informal interviews and speeches that they are considering all
options to address perceived or imagined impacts on competition
from the acquisition by private equity companies of portfolio
companies that compete with one another. Private equity companies
should be aware of heightened attention from the Federal Trade
Commission (FTC) and U.S. Department of Justice’s Antitrust
Division (DOJ) as they make investment decisions.

The antitrust agencies have, through their words and actions,
revealed the following as their principal areas of concern:

• So-called “roll-up” strategies, under which private
  equity firms acquire a significant share of an industry through a
  series of small transactions that, because of their size, are
  overlooked by the antitrust agencies. The agencies have threatened
  retroactive action to undo prior transactions that produced a level
  of market concentration they find inappropriate.




• Focus by private equity companies on cost cutting and
  short-term returns, an approach the agencies regard to be
  inconsistent with robust competition and innovation. This concern
  arises principally when private equity companies are under
  consideration as purchasers of assets to be divested to address
  antitrust concerns with larger transactions.




• “Interlocking directorates” that can violate the
  Clayton Act and, because they can involve one private equity
  company having representatives on boards of multiple competitors,
  can allow inappropriate sharing of competitively sensitive
  information and lead to reduced incentives to compete.

In the current enforcement environment, where the agencies
appear to be in constant search for new enforcement targets and new
ways to convey the seriousness (or recklessness) with which they
are approaching their missions, these concerns are not going away.
Private equity companies should not assume that any transaction is
too small to attract antitrust attention and should involve
antitrust counsel at earliest stages to evaluate potential risks.
Holland & Knight’s antitrust attorneys have the experience
to evaluate those risks and the knowledge to help clients to
mitigate risks and achieve their goals.

Attacks on “Roll-Up” Strategies

Both agencies have expressed concern about so-called
“roll-up” strategies by private equity firms that acquire
multiple players in a single industry. They have asserted that,
even if each individual acquisition avoids antitrust scrutiny or
would be unlikely standing alone to provide a basis for an
antitrust challenge under Section 7 of the Clayton Act (which
prohibits mergers or acquisitions that might “substantially
… lessen competition [or] tend to create a monopoly”),
the agencies might still challenge the cumulative effect of
multiple separate acquisitions.

Andrew Forman, Deputy Assistant Attorney General at the
DOJ, in a speech in June
2022 (specifically about healthcare markets, but with
comments that are applicable generally) stated that the DOJ is
“thinking a lot about enhancing antitrust enforcement around a
variety of issues surrounding private equity,” and referred
specifically to “private equity ‘roll-ups,’ namely
whether … a series of smaller transactions can cumulatively
or otherwise lead to a substantial lessening of competition or
tendency to create a monopoly.” Forman’s boss, Assistant
Attorney General Jonathan Kanter, observed in an interview with
the Financial Times that

“[m]any of the mergers we’re confronting are a result of
[private equity] roll ups,” and stated that “[i]f [the
DOJ is] going to be effective, we cannot just look at each
individual deal in a vacuum detached from the private equity
firm.”

FTC Chair Lina Khan echoed Kanter’s and Forman’s
comments in another interview with
the Financial Times, stating that “[e]very
individual transaction [by a private equity firm] might not raise
problems, but in the aggregate you’ve got a huge private equity
firm controlling, say, veterinary clinics. So that’s a
concern.” Khan’s veterinary clinic example referred to
the FTC’s antitrust
enforcement action against private equity firm JAB Consumer
Partners based on JAB’s acquisition of a series of
veterinary clinics. According to Holly
Vedova, Director of the FTC’s Bureau of Competition,
“Private equity firms increasingly engage in roll up
strategies that allow them to accrue market power off the
Commission’s radar.” In order to prevent JAB from
continuing with that strategy – which the FTC characterized
as “serial acquisitions or ‘buy and buy’ tactics”
– the FTC demanded that JAB agree to obtain prior approval
from the FTC before acquiring any further veterinary clinics within
25 miles of any other clinics the company owned in California or
Texas and to provide prior notice to the FTC of any clinic
acquisitions anywhere in the U.S. (even if not reportable under the
Hart-Scott-Rodino Act (HSR)). The FTC’s prior approval demand
in the JAB matter followed its controversial policy decision in
October 2021 to once again insist on such provisions in merger
settlements, returning to a position it had abandoned 25 years
earlier. The FTC has since sought to insert such a provision in all
merger settlements. Although ostensibly generally applicable, this
requirement might fall most heavily on private equity companies
with likely more frequent involvement in mergers and acquisitions
(M&A) activities.

More recently, the FTC adopted a formal policy
statement concerning the purported scope of its powers
under Section 5 of the FTC Act and, in that November 2022
statement, claimed the power to challenge private equity
companies’ “roll-up” strategies even if the FTC could
not prove under Section 7 of the Clayton Act that those
acquisitions might substantially lessen competition. The FTC’s
statement observed that it would be an “unfair method of
competition” for a company to engage in “a series of
mergers, acquisitions, or joint ventures that tend to bring about
the harms that the antitrust laws were designed to prevent, but
individually may not have violated the antitrust laws.”

Concerns About Private Equity Firm Practices and
Incentives

The heightened attention the antitrust agencies are directing to
acquisitions by private equity companies appears to be driven by
more than merely the potential for increased market concentration,
the traditional focus of any antitrust analysis of a proposed
acquisition. The antitrust agencies instead also appear to be
considering how the incentives and past behavior of private equity
companies might affect competition in the market in which an
acquisition occurs. In her interview with
the Financial Times, Khan referred to a study
showing an increase in mortality rates after cost cutting that
followed private equity company acquisitions of nursing homes,
causing the FTC to take private equity acquisitions “very
seriously.” The DOJ’s
Forman also suggested that the DOJ considers whether an
acquisition by a private equity company might cause the acquired
company to curtail maverick or disruptive market practices as it
focuses “solely on short-term financial gains and not on
advancing innovation or quality.”

The agencies are also increasingly questioning the suitability
of private equity companies as acquirers of assets that merging
parties divest in order to address potential antitrust concerns
with a transaction. Former FTC Commissioner (and current Consumer
Financial Protection Bureau Director) Rohit Chopra was a vocal
opponent of private equity companies as divestiture purchasers
based on what he regarded to be past behavior and incentives that
were inconsistent with the intended purpose of divestitures as
remedies for anticompetitive mergers, the restoration of
competition that would be lost from the merger. Chopra observed, for
instance, that “opportunistic asset sales” and other
behavior by private equity firms might be inconsistent with the
“long-term competition” that is the goal of any antitrust
divestiture.

The DOJ recently made its skepticism with the incentives of the
proposed purchaser of assets a central part of its unsuccessful
challenge to the acquisition by UnitedHealth Group of
Change Healthcare Inc. To address the DOJ’s concerns with the
transaction, UnitedHealth proposed to divest a competing business
line owned by Change to private equity firm TPG Capital. The DOJ
argued at trial that the proposed divestiture would not cure the
problems with the transaction because “private equity firms
can have incentives that run different to the strategic
buyers” and that they are not committed to innovation.
Although the court rejected the DOJ’s view, finding that
TPG’s incentives were “geared toward preserving, and even
improving, [the divested company’s] competitive edge,”
skepticism by the antitrust agencies of private equity companies as
purchasers of divestiture assets will surely remain. As the
DOJ’s Kanter explained to
the Financial Times, where settlement
divestitures involve private equity firms, the motivations of the
purchaser to reduce costs at the acquired company “will make
it less competitive. … In many instances, divestitures that
were supposed to address a competitive problem have ended up
fueling additional competitive problems.” (The DOJ appears for
now to have abandoned altogether the use of divestitures to remedy
alleged anticompetitive mergers but, if it revisits that decision,
will likely continue to question the appropriateness of a private
equity company as a potential purchaser of divested assets.)

Interlocking Directorates

One tool the DOJ has employed recently to address concerns with
private equity company ownership of (or involvement with) competing
companies is Section 8 of the Clayton Act, which prohibits
“interlocking directorates” – simultaneous service
as an officer or director of competing companies. Section 8 had
received little enforcement attention for decades, but both
antitrust agencies have committed publicly to a renewed focus, and
the DOJ in October 2022
announced the resignation by seven directors of five
companies in response to DOJ concerns about potential interlocking
directorates. Among the resignations were representatives of Thoma
Bravo who served on the boards of competing software providers.
Based on these resignations, the DOJ interpreted Section 8 broadly
to prohibit not only the same individual from serving on the boards
of both competitors, but also the service by different
people representing Thoma Bravo on the competitors’
boards. This broad interpretation of the scope of Section 8’s
prohibition on interlocking directorates will be of obvious
interest to private equity companies with stakes in competing
companies that might come with board representation.

Stepped-Up Scrutiny of HSR Filings

In his speech in June 2022, the DOJ’s Forman
noted as a possible further concern that private equity
firms “may not be taking seriously enough their obligations
under the HSR Act” when making premerger filings. Although the
antitrust agencies have, for now, taken no public actions in
response to Forman’s statement, it likely calls for increased
attention to HSR filing requirements and the details of any HSR
filings.

Takeaways

Statements by the antitrust agencies make clear that private
equity companies are under the antitrust microscope. Where
antitrust review in the past might have been regarded as merely an
inconvenient possibility, firms should consider from the outset of
any exploration of a potential acquisition that antitrust review
(and its associated delays and risks) could be likely and bring in
experienced antitrust attorneys to evaluate potential risks at a
transaction’s earliest stages.

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