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March 14, 2013

Claims that Major Private Equity Firms Illegally Colluded to Fix Leveraged Buyout Prices Advance Past Summary Judgment

By E. Darius Sturmer, J.D.

Former shareholders of public companies that were subject to leveraged buyout (LBO) transactions between 2003 and 2007 sufficiently demonstrated that many of the financial firms involved in 27 different transactions over that period could have illegally colluded to artificially fix the sales prices of the companies in violation of federal antitrust law, thereby depriving the shareholders of the true value of their stock, the federal district court in Boston has ruled (Dahl v. Bain Capital Partners, LLC, March 13, 2013, Harrington, E.).

The defending financial firms' omnibus motions for summary judgment in their favor with respect to the complaining shareholders' claims of an overarching conspiracy across all of the transactions, and of unlawful conduct related to one particular transaction, were therefore denied. Likewise, individual motions by all 10 of the defending private equity firms for summary judgment as to the overarching conspiracy claim were also turned away. However, an eleventh firm—which was not a private equity firm but provided financing and advice for some of the transactions at issue—was entitled to summary judgment, the court held.

Shareholders' allegations. In their fifth amended complaint, the plaintiffs alleged that the defending financial firms—Apollo Global Management LLC, Bain Capital Partners, LLC, The Blackstone Group L.P., The Carlyle Group, LLC, Goldman Sachs Group, Inc., Kohlberg Kravis Roberts & Company, L.P. ("KKR"), Providence Equity Partners, Inc., Silver Lake Technology Management, L.L.C., TPG Capital L.P. ("TPG"); and Thomas H. Lee Partners, L.P. ("THL")—engaged in a continuing agreement to allocate the market for and to artificially fix prices of securities in "club LBOs" beginning as early as mid-2003 and continuing until 2007. This "overarching conspiracy" resulted in suppressed competition in 19 of the largest LBOs that closed during this period, as well as 6 non-LBOs and 2 deals that were never consummated.

The transactions as issue concerned: (1) PanAmSat; (2) AMC; (3) SunGard; (4) Neiman Marcus; (5) Michaels Stores; (6) Aramark; (7) Kinder Morgan; (8) HCA; (9) Freescale; (10) Toys 'R' Us; (11) Texas Genco; (12) Education Management; (13) Univision; (14) Harrah's; (15) Clear Channel; (16) Sabre; (17) Biomet; (18) TXU; (19) Alltel; (20) Philips/NXP; (21) Loews; (22) Vivendi; (23) Community Health Systems; (24) Nalco; (25) Cablecom; (26) Susquehanna; and (27) Warner Music.

According to the plaintiffs, the financial firms employed practices or rules they referred to as "club etiquette" and "professional courtesy" within the industry to acquire the target companies either through auction or a proprietary deal. The "rules" allegedly played out beginning with the defendants' formation of bidding clubs or consortiums that would band together to put forth a single bid for a target company. They allegedly monitored and enforced their conspiracy through "quid pro quos"—the exchange of lucrative deals—and by threatening rule-breakers with retaliatory action in the form of mounting competition against the offending conspirator's deals. Further, the complaining shareholders claimed, the defendants manipulate auction outcomes by agreeing, for example, to give a piece of the company to the losing bidders. The defendants also refused to jump (or compete for) each other's proprietary deals during those transactions' 50-day "go shop" periods, so that they knew they could negotiate without the risk of competitive bidding, it was claimed.

A second count of the complaint charged a conspiracy involving Bain, Blackstone, Carlyle, Goldman Sacks, KKR, and TPG to rig bids and not to compete for the LBO of one of the target companies, HCA, in 2006. Bain and KKR, however, had been released from the claim, the court noted.

"Overarching conspiracy" claim. Although the plaintiffs' factual assertions did not uniformly suggest unlawful collusion, they did present sufficient evidence to create a genuine issue of fact as to the existence of an overarching conspiracy to allocate the market for large LBOs, the court found.

The court observed that many of the defendants' alleged practices—including joint bidding, the formation of consortiums, and the inclusion of a losing bidder in a final deal—were established and appropriate business practices in the industry. The existence of their partnerships was therefore "just as consistent, if not more consistent, with a widely-accepted and independent business strategy as it was with a vast price fixing conspiracy." Their frequent communications, friendly relationships, and "quid pro quo" arrangements could also be thought of as nothing more than the natural consequences of these partnerships and, thus, did not tend to exclude the possibility that the firms were acting independently across the relevant market, the court added. Moreover, the evidence of each specific transaction, for the most part, failed to connect to a "larger picture" of an overarching conspiracy, revealing instead a "kaleidoscope of interactions among an ever-rotating, overlapping cast of defendants as they reacted to the spontaneous events of the market."

However, a pair of statements made by firm executives regarding the firms' practices provided a permissible inference of a more limited overarching conspiracy: first, a TPG executive's statement, regarding one of his firm's proprietary deals, that "KKR has agreed not to jump our deal since no one in private equity ever jumps an announced deal"; and second, a Goldman Sachs executive's observation, with respect to the same deal, that "club etiquette prevail[ed]." Viewed in combination and in the light most favorable to the plaintiffs, the statements suggested that the practice of not jumping deals was not the result of mere independent conduct. "Rather," the court stated, "the term 'club etiquette' denote[d] an accepted code of conduct between the defendants." The evidence suggested that, when KKR "stepped down" on the transaction, it was adhering to some code agreed to by the defendants not to jump announced deals.

Therefore, the court allowed the plaintiffs to proceed solely on a more narrowly defined overarching conspiracy among the defendants not to jump each other's announced proprietary deals. Furthermore, the court concluded that such a conspiracy constituted "a continuing agreement, understanding, and conspiracy in restraint of trade to allocate the market for and artificially fix, maintain, or stabilize prices of securities in club LBOs."

JP Morgan's individual motion. The court allowed JP Morgan's individual motion for summary judgment on the claim, explaining that the evidence did not establish that the firm "was in the business of bidding on target companies" and "[did] not otherwise support its participation in the narrowed overarching conspiracy."

HCA transaction claim. Evidence establishing that Blackstone, Carlyle, Goldman Sacks, and TPG each showed interest in buying HCA, promptly "stepped down" from making a bid topping the KKR consortium's offer for HCA soon after commencement of the "go-shop" period, and then lamented having forgone a potentially lucrative deal sufficed to support an inference of conspiracy as to HCA, the court also held. While the uniform conduct could not on its own support such an inference, it did when considered in combination with several statements made by the executives of the companies that had stepped down.

One of these statements came in an email exchange among Carlyle executives after learning that KKR had decided to compete on a deal for which Carlyle was close to an agreement. It read: "And just think, KKR asked the industry to step down on HCA." This suggested that the four remaining defendants to the HCA claim chose not to pursue the transaction because they had previously agreed to do what KKR had asked, the court explained, adding that the shock conveyed in the statement indicated that KKR's decision was a breach of its agreement not to pursue that deal, which concerned Freescale.

The other statement, made by a Blackstone executive after KKR ultimately decided to pass on Freescale, alluded to a KKR executive acknowledging that his company was "standing down because he had said before they would not jump a signed deal of ours." The statement implied there was a previous agreement not to jump Freescale to which KKR had decided to adhere. In combination with the rest of the evidence, the court concluded, it provided an inference that the decision by the remaining HCA defendants to "step down" on HCA was in exchange for KKR not competing for Freescale.

The case is Civil Action No. 07-12388-EFH.

Attorneys: George C. Aguilar (Robbins Arroyo LLP) for the plaintiffs. Kevin M. McGinty (Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, PC) for the defendants.

Companies: Apollo Global Management LLC; Bain Capital Partners, LLC; The Blackstone Group L.P.; The Carlyle Group, LLC; Goldman Sachs Group, Inc.; Kohlberg Kravis Roberts & Company, L.P.; Providence Equity Partners, Inc.; Silver Lake Technology Management, L.L.C.; TPG Capital L.P.; Thomas H. Lee Partners, L.P.; JP Morgan Chase and Co.

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