Federal Court Concludes that Private Equity Funds'
"Joint Bidding" Not Illegal under the Antitrust Laws
February 22, 2008
On February 21, 2008, a federal district court dismissed, with prejudice, an antitrust case brought against two private equity funds in connection with their joint agreement to acquire a publicly traded corporation in a context where the two previously had submitted separate bids. The decision—the first to ever conclude that the practice of combining bids for corporate control does not violate the Sherman Act—is an important precedent for private equity funds contemplating joint-bidding agreements, and is significant in its application of the antitrust laws to such arrangements.
Wilson Sonsini Goodrich & Rosati's antitrust team argued the winning motion that resulted in the court's precedent-setting ruling.
In the case, the plaintiff, on behalf of a putative class of investors who held the stock of a publicly traded technology company, WatchGuard Technologies Incorporated (WatchGuard), brought suit against two private equity funds in connection with the private equity funds' joint bid for, and acquisition of, WatchGuard. In 2005, WatchGuard's board of directors decided to engage in a strategic transaction—either merge with another company or be acquired. WatchGuard retained bankers, who engaged in a process to encourage potential purchasers to bid for the company. According to the plaintiff's complaint, as many as 50 potential suitors expressed some level of interest in acquiring (or merging with) WatchGuard. The two private equity fund defendants participated in that process.
Along with other suitors, the private equity funds made separate, individual bids to acquire the shares of WatchGuard. Over time, and after diligence was conducted, the private equity funds lowered their bids, and eventually one dropped out. According to the plaintiff's complaint, the funds then "entered into a contract . . . to artificially fix the price, refrain from bidding, or rig the tender offer bids for WatchGuard shares," which had the effect of depressing the bid price for the company. According to the complaint, this "secret arrangement" resulted in the companies offering a combined bid lower than the price that either one would have offered individually; this was said to have harmed WatchGuard shareholders, who, as a result of the alleged conspiracy, did not receive full value for their shares.
The plaintiff alleged, first, that the agreement was "per se" illegal because it constituted bid rigging between the private equity funds, activity that the plaintiff alleged always should be illegal. If not per se illegal, then the plaintiff alleged in the alternative that the agreement violated the Sherman Act under traditional antitrust "rule of reason" analysis, alleging that it had the actual anticompetitive effect of lowering the selling price for the company, thereby ultimately harming the plaintiff, who claimed it received less money for its shares of WatchGuard than it should have received.
In its conclusion that the combined bid was not per se illegal, the court stated, as an initial matter, that "no court has applied the rule to a price-fixing agreement in a contest for corporate control." In addition, the court concluded that joint bidding for corporate control "is not uncommon" and in some instances, actually "can promote rather than suppress competition." The court noted that in some instances "in a corporate auction involving numerous well-heeled bidders, less wealthy bidders cannot compete. By joining forces, and thus combining resources, poorer contestants can gain access to the contest, thus increasing competition." In addition, according to the court, joint bidding allows bidders to spread the risk among themselves. Thus, as an aggregate, such "price fixing" better allocates resources and manages risk tolerance. The per se rule was inapplicable because the combining of independent bids can result in more favorable pricing for the target company, and may lead to bids that otherwise would not have been made at all.
Having concluded that the joint bid was not per se illegal, the court then asked whether it violated the Sherman Act under the rule of reason—the normal mode of analysis in a Section 1 case. To establish a rule-of-reason claim under Section 1, the court noted that the plaintiff must allege the existence of (a) a relevant market, (b) the defendants' possession of market power in that relevant product market, and (c) the exercise of that market power to result in anticompetitive effects.
Although it did not decide whether the plaintiff had pleaded a legally cognizable market, the court expressed doubt whether the "market for corporate control" of just one company could constitute a relevant product market. The court found that, regardless of the contours of the relevant product market in the case, the plaintiff could not demonstrate that the defendants had market power, holding that "plaintiff[s] err in focusing on the conclusion of the contest for control of WatchGuard, in which [the private equity funds] were the only bidders remaining." Instead, the court reasoned that "dozens of other suitors who expressed interest in WatchGuard refused to make bids. . . . The result was a contest for corporate control in which it appeared that there were only two bidders, but the appearance is a mirage. An acquiror who believed that WatchGuard was worth more than [the] bid could have made a topping bid. The agreement between [the funds] would have had no effect on such a bid. Moreover, had WatchGuard's shareholders believed that the  bid was too low, they retained power to reject the merger by voting it down." In short, the court reasoned that the price was accepted because there was a "lack of market interest in WatchGuard"—not because of any illicit agreement between the private equity funds.
The court thus dismissed the plaintiff's complaint with prejudice, finding that no amount of repleading could save the plaintiff's antitrust claims.
Separately, the court concluded that the challenged conduct, although lawful, was not impliedly immune from the antitrust laws by operation of the securities laws. The court in this respect declined to follow the Second Circuit's decision in Finnegan v. Campeau Corp., 915 F.2d 824 (2d Cir. 1990), notwithstanding the Supreme Court's recent expansion of this implied immunity in Credit Suisse Securities (USA) LLC, v. Billing, 127 S. Ct. 2383 (2007).
There has been a lot of press—and a number of other lawsuits—regarding joint-bidding activity, and whether such actions violate the antitrust laws. "Club deals," the joint decision-making process among private equity funds to bid or refrain from bidding for certain businesses, have come under scrutiny by the Department of Justice and are the subject of other pending lawsuits. This case is the first to address whether such activity violates the antitrust laws.
For those companies engaging in joint bidding in the securities context, this case is precedent setting, as it is the first court decision to conclude that such joint bidding does not violate the antitrust laws. For private equity funds engaged in joint bidding, this case should provide some comfort that such activity, without more, should not be considered illegal under the antitrust laws.
Wilson Sonsini Goodrich & Rosati briefed and argued the antitrust issues in this case. For any questions relating to this case, or other questions concerning the application of the antitrust laws in the context of securities regulations, please contact Jonathan Jacobson, Scott Sher, or another member of the firm's antitrust practice.
Notably, in a separate order, the court also dismissed the securities law claims alleged against the private equity defendants. The Wilson Sonsini Goodrich & Rosati securities litigation team, led by David Berger, Barry Kaplan, and Bahram Seyedin-Noor, successfully briefed and argued those issues on behalf of the defendants.