On February 21, 2008, the U.S. District Court for the Western District of Washington dismissed antitrust claims against two private equity funds that allegedly conspired in their joint bid for corporate control of a publicly traded company. In Pennsylvania Avenue Funds v. Borey, et al., Case No. C06-1737RAJ (W.D. Was. Feb. 21, 2008), the plaintiff, an allegedly aggrieved shareholder of the target, alleged that at the end of a bidding process, the two previously competing bidders conspired to withdraw one of the bids and then substantially lower the only remaining bid. In its opinion dismissing the action for failure to state a claim under Rule 12(b)(6), the court held the defendants’ conduct was not unlawful per se under the antitrust laws and determined that the plaintiff’s allegations failed to satisfy the requirements of a rule of reason analysis.
The decision is controversial and may well turn out to be overruled on appeal or distinguished by courts that address joint bids in the future. As such, companies should not take undue comfort in this lone district court opinion. This case is of interest, however, because it is the first opinion in several cases that have been filed challenging joint bids, or “club deals,” in corporate acquisitions.
In 2005, the board of directors of WatchGuard Technologies Incorporated (WatchGuard), a provider of network security solutions, decided to sell WatchGuard. Two private equity funds, Vector Capital Corporation (Vector) and Francisco Partners L.P. (FP), were among numerous parties that expressed interest in acquiring WatchGuard. Vector and FP initially submitted competing bids for WatchGuard shares. At the end of the process, according to the complaint, Vector and FP conspired and decided to withdraw Vector’s bid and lower FP’s remaining bid. Vector also agreed to fund half of FP’s acquisition in exchange for a 50 percent interest in WatchGuard.
On behalf of the shareholders of WatchGuard, plaintiff filed suit against Vector and FP, as well as individual directors of those entities, for anticompetitive conduct in violation of the Sherman Act. The plaintiff alleged that Vector and FP entered into a contract in which the parties agreed to fix prices, to refrain from bidding or to rig their tender offer in an effort to keep the bid price low for WatchGuard. FP and Vector were the final two bidders competing to acquire WatchGuard before the alleged collusion occurred. The collusion between defendants allegedly depressed the bid price of WatchGuard shares by 18 percent. The plaintiff contended it suffered injury by not receiving full value for its shares.
Joint Bidding Practice Survives Court Review
The court first addressed whether securities laws precluded the application of antitrust law in this case. Citing the 2007 Supreme Court of the United States decision in Credit Suisse, the court stated that only a “clear repugnancy” between the securities laws and antitrust laws would enable the securities law to preclude application of the antitrust laws. The court found no such conflict between the legal regimes, because the U.S. Securities and Exchange Commission (SEC) was not authorized to regulate the bidding of private equity funds. According to the court, securities laws “regulate disclosure of bidding agreements like the one between FP and Vector.” The court reasoned the securities laws do not empower the SEC to regulate whether FP and Vector, or any other entities, can submit a joint bid. Because the securities laws limit the SEC’s authority to require disclosure, and disclosure is not a remedy for or defense to an antitrust violation, there is no “clear repugnancy” under Credit Suisse, and antitrust laws are not preempted.
In analyzing plaintiff’s allegations under the antitrust laws, the court refused to employ per se treatment to joint bidding practices in connection with corporate acquisitions. The court concluded that a category of conduct, such as joint bids for control of a company, is not unlawful per se unless it is clear that there can be no pro-competitive benefits associated with the conduct. The court cited several instances in which joint bidding could improve competition among parties bidding for corporate control. For example, joint bidding has the potential to afford less wealthy parties an opportunity to combine resources and enhance their competitiveness by increasing their bid amount. In addition, interested parties can spread the risk of acquiring corporate assets through joint bidding, which may allow a party that would not otherwise participate in the auction process to submit a bid. This analysis of the court did not evaluate the facts of this case, but instead evaluated and rejected the proposition that joint bids can have no redeeming value.
After rejecting per se treatment, the court evaluated plaintiff’s claim under the rule of reason. The rule of reason requires a plaintiff to establish (1) a relevant market, (2) defendants’ possession of market power in that market and (3) that defendants’ use of market power resulted in anticompetitive effects. In this case, plaintiff proposed that the relevant market consisted of only those companies bidding for control of WatchGuard. The court stressed that plaintiff’s focus on the end of the bidding process was improper for determining the relevant product market. Although it appeared that FP and Vector had a “stranglehold” on the asserted submarket, this power was due to the refusal of dozens of other potential suitors to bid for WatchGuard. The court determined that the relevant market instead consisted of all potential buyers available to acquire corporate control of businesses. According to the court, any bidder could have entered the process at any time and made a “topping bid.” The court also reasoned that the shareholders were free to reject the FP/Vector joint bid and rebid the business. In conclusion, the court stated that “the illusion of market power arose not from Defendants’ anticompetitive conduct, but from the lack of market interest in WatchGuard.” Because the plaintiff could not satisfy its burden for establishing market power in a relevant market, the court dismissed its antitrust claims with prejudice.
The court’s rule of reason analysis is probably the most controversial portion of the opinion. The court’s finding that there could not be market power even though the plaintiff alleged that the combination of Vector and FP involved the only two remaining bidders and reduced the price significantly raises significant questions. This issue likely will be developed further, whether on appeal of this case or as other courts address the legality of joint bidding arrangements.
Future Implications for Joint Bidding in Corporate Acquisitions
This district court decision may well be appealed, and parties will continue to challenge the practice of joint bidding by private equity funds. Notably, this issue has not escaped the scrutiny of antitrust enforcement agencies. In recent years, the U.S. Department of Justice initiated investigations against private equity firms that engaged in the practice of joint bidding, and those investigations appear to be ongoing. Notwithstanding the court’s decision in this case, the legality of joint bidding for companies remains uncertain. Parties considering a joint bid should assume that the bid could be reviewed under the antitrust laws. Parties can reduce their antitrust risk by engaging in joint bids for pro-competitive reasons, such as allocating risk or pooling financial resources together, and not just to depress the price to be bid for the target.