By William Dolan, Rule Garza Howley LLP
A key component in President Biden’s platform was enhanced antitrust enforcement, reiterated through an executive order and the appointments of Lina Khan and Jonathan Kanter to head the Federal Trade Commission and the Antitrust Division of the Department of Justice, respectively. Since then, Khan and Kanter each have publicly supported heightened antitrust scrutiny of private equity firms.
Early in her tenure, Khan identified “private equity” as a business model that could “strip productive capacity and may facilitate unfair methods of competition” and subsequently has reiterated that position. In November, FTC released a Policy Statement taking an expansive view of potentially “unfair methods of competition,” including acquisitions of nascent/potential competitors or a series of mergers that tend to “bring about the harms that the antitrust laws were designed to prevent.”
Similarly, Kanter has commented on the potential for private equity to exercise anticompetitive “command and control over markets.” Kanter’s claim that enforcers cannot “look at each individual deal in a vacuum detached from the private equity firm” suggests that antitrust authorities are willing to expand merger investigations to encompass prior transactions, even those outside the product markets at issue. Not only has Kanter said transactions involving private equity firms are “top of mind” for him, but he has also expressed skepticism toward remedy proposals that would divest assets to private equity firms.
In July 2021, FTC announced a broad intention to impose prior approval provisions on parties and divestiture purchasers in future consent decrees, including for transactions outside the specific market of the acquisition under investigation. A year later, FTC approved two consent agreements with private equity firm JAB Partners regarding acquisitions of specialty and emergency veterinary clinics – requiring JAB to divest six clinics in California and Texas in connection with its acquisition of SAGE Veterinary Partners and then five more clinics in Virginia, Colorado, and California in connection with its acquisition of Ethos.
Notably, both agreements require JAB to obtain prior FTC approval for future acquisitions of specialty and emergency veterinary clinics within 25 miles of a JAB clinic in California, Texas, or Colorado, and notify FTC of all future acquisitions of specialty and emergency veterinary clinics within 25 miles of a JAB clinic in the United States for the next 10 years. Additionally, the divestiture purchasers must obtain FTC approval before divesting any clinics acquired as a result of the consent order for the next 10 years. Khan stated that these provisions enable FTC to “address stealth roll-ups by private equity.”
After DOJ challenged UnitedHealth Group’s acquisition of Change Healthcare, the companies contracted to divest the ClaimsXten business (the area of horizontal overlap) to TPG Capital. DOJ alleged the divestiture was insufficient because TPG, as a private equity company, would not replace the competition lost. US district judge Carl Nichols rejected DOJ’s argument, citing internal TPG documents evidencing intent to invest heavily in the business rather than simply strip costs then exit. DOJ has since appealed this UnitedHealth decision.
Kanter has expressed a willingness to lose in litigation to advance antitrust case law. Skepticism toward the competitive sufficiency of private equity firms as purchasers of divested assets doesn’t mean enforcers will never accept such remedies. Despite Khan’s wariness of private equity, FTC has allowed private equity firms to purchase assets as part of a consent decree.
Recent antitrust enforcement actions involving private equity haven’t been limited to mergers and other transactions. Upon threat of enforcement action, seven directors resigned from corporate boards in response to DOJ concerns they violated the Clayton Act by serving simultaneously on the boards of competitors. Of those seven, four represented private equity and investment firms. DOJ suggested that additional enforcement of board interlocks is possible, and such questions regarding interlocks can often expand into broader conduct investigations.
Potential for business impact
Antitrust enforcers may issue more requests seeking information and documents when reviewing transactions by private equity sponsors and portfolio companies, including historical information regarding prior transactions in the same or adjacent industries.
Similarly, private equity should expect increased scrutiny of their governance practices and board appointments across holdings, including minority holdings, and should be prepared for investigations of interlocks even unrelated to the relevant markets at issue.
More intense antitrust scrutiny may also impact deal valuation and timelines. A more robust investigation by FTC or DOJ may necessitate the use of industry experts to develop evidence that proposed transactions wouldn’t result in a substantial lessening of competition.
William Dolan is a partner at Rule Garza Howley LLP, a boutique antitrust law firm based in Washington DC