For at least the third time in recent months, the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) (collectively, "the agencies") have signaled increased scrutiny of the private equity industry, highlighting interlocking directorates, roll-up strategies, and divestiture transactions as areas for tougher enforcement.1 Given the frequency with which the agencies are commenting on these topics, as well as the general desire for increased antitrust enforcement, private equity firms and their portfolio companies should take heed. Below is a summary of each of these issues and key takeaways for clients.
Interlocking Directorates
Interlocking directorates exist where a person serves as an officer or a director of two competing corporations and can be challenged by the agencies under Section 8 of the Clayton Act. In rare cases, the agencies have also challenged interlocking directorates under Section 1 of the Sherman Act as enabling a conspiracy among competitors through the exchange of competitively sensitive information.
Section 8 also prohibits any single firm from appointing two different people to serve as an agent, officer, or director of competing corporations. This prohibition applies equally to private equity firms, which often appoint employees (e.g., partners, principals) to the boards of their portfolio companies. Jonathan Kanter, Assistant Attorney General of the DOJ's Antitrust Division, has repeatedly declared his intent to bring more cases against interlocks, stating that "[f]or too long … Section 8 enforcement has essentially been limited to our merger review process," and that the DOJ "will not hesitate to bring Section 8 cases to break up interlocking directorates."2 Most recently, in an interview with the Financial Times relating to the private equity industry, AAG Kanter stated that "interlocking directorate" is an area the agency is focusing on.3
Roll-Up Transactions
"Roll-up" transactions relate to a strategy where a private equity firm combines two or more portfolio companies in an industry over a short period of time. In his most recent interview, AAG Kanter said that the motives for a private equity firm are sometimes "designed to hollow out or roll up an industry and essentially cash out," further explaining that such a strategy "is often very much at odds with the law and very much at odds with the competition we're trying to protect." FTC Chair Lina Kahn agreed with this sentiment in the DOJ and FTC's joint announcement on the agencies' new merger guidelines, highlighting "roll-up plays by private equity firms" as a point of focus.4
Private Equity Divestiture Buyers
Private equity firms are often ideal buyers of assets in the context of agency-mandated merger divestitures. However, AAG Kanter recently stated that the DOJ would pay closer attention to private equity firms as divesture buyers, reasoning that "[v]ery often settlement divestitures [involve] private equity firms [often] motivated by either reducing costs at a company, which will make it less competitive, or squeezing out value by concentrating [the] industry in a roll-up." He added that "[i]n many instances, divestitures that were supposed to address a competitive problem have ended up fueling additional competitive problems."5 Further the agencies have already made private equity purchases of divestiture assets more difficult; in November 2021, the FTC announced a rule change that requires divestiture buyers to obtain prior agency approval for at least 10 years before reselling the acquired assets, making these acquisitions less practical for private equity firms.6
Key Takeaways
- Interlocking Directorates - Private equity firms and their portfolio companies should develop a compliance program to assess antitrust risk associated with potential interlocks. These questions can easily be integrated into existing conflict-of-interest screens for directors and officers. The first step in identifying potential interlock issues is to identify portfolio companies (if any) that compete with each other or operate in the same industry.
- Roll-Up Transactions - Private equity buyers should expect regulatory scrutiny when making multiple acquisitions in the same industry. To avoid a costly merger review process, private equity firms should engage antitrust counsel early when assessing potential acquisition targets and understand not only whether a specific transaction raises risk, but also whether a series of transactions would be viewed as problematic.
- Divestiture Buyers - Proposed divestiture buyers must be prepared for heightened scrutiny, if they can be approved at all. At a minimum, they must demonstrate the ability to operate a competitive standalone business. Private equity divestiture buyers should work with antitrust counsel to ensure business plans that reflect their specific plans to ensure that the divested business will remain competitive.
For more information on antitrust enforcement in the private equity industry, please contact Jamillia Ferris, Ben Labow, Michelle Hale, or another member of Wilson Sonsini's antitrust and competition practice.
[1] Chris Cumming, “Antitrust Regulators Fix Their Sights on Private Equity,” The Wall Street Journal (Sep. 30, 2021), https://www.wsj.com/articles/antitrust-regulators-fix-their-sights-on-private-equity-11632999600; Siri Bulusu, “Private Equity Firms Facing More Questions in FTC Merger Reviews,” Bloomberg Law (Jan. 13, 2022), https://news.bloomberglaw.com/antitrust/private-equity-firms-facing-more-questions-in-ftc-merger-reviews; Stefania Palma and James Fontanella-Khan, “Crackdown on buyout deals coming, warns top US antitrust enforcer,” Financial Times (May 18, 2022), https://www.ft.com/content/7f4cc882-1444-4ea3-8a31-c382364aace1.
[2] “Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers Summit,” Department of Justice (Apr. 4, 2022), https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.
[3] Stefania Palma and James Fontanella-Khan, “Crackdown on buyout deals coming, warns top US antitrust enforcer,” Financial Times (May 18, 2022).
[4] “Remarks of Chair Lina M. Khan Regarding the Request for Information on Merger Enforcement Docket No. FTC-2022-0003,” Federal Trade Commission (Jan. 18, 2022), https://www.ftc.gov/system/files/documents/public_statements/1599783/statement_of_chair_lina_m_khan_regarding_the_request_for_information_on_merger_enforcement_final.pdf.
[5] Stefania Palma and James Fontanella-Khan, “Crackdown on buyout deals coming, warns top US antitrust enforcer,” Financial Times (May 18, 2022).
[6] Siri Bulusu, “Private Equity Deals at Risk After FTC Prior Approval Rule Shift,” Bloomberg Law (Nov. 19, 2021), https://news.bloomberglaw.com/antitrust/ftc-prior-approval-rules-risk-chilling-some-private-equity-deals.
