Man in violation of privacy law

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Antitrust Law Daily, July 19, 2013

Major private equity firms may have colluded to avoid competing on leveraged buyouts

By Tobias J. Gillett, J.D., LL.M.

In an action brought by shareholders of formerly publicly-traded companies that were purchased by private equity firms, claiming that the firms colluded to fix the prices of the leveraged buyout transactions (LBOs), eight of the firms could be connected to a conspiracy to avoid competing with each other on the transactions, the federal district court in Boston has ruled (Dahl v. Bain Capital Partners, LLC, July 18, 2013, Harrington, E.). The court denied the eight firms’ motions for summary judgment, but granted the motions of two other firms because it found insufficient evidence to connect them to the conspiracy.

Prior order. In a prior order, the court had declined to enter summary judgment for the private equity firms, finding that there was an issue of fact as to the existence of an overarching conspiracy between the firms to avoid “jumping” each other’s announced proprietary deals. In 2006, a consortium—including The Blackstone Group L.P., The Carlyle Group, and Texas Pacific Group (TPG)—engaged in a LBO of Freescale Semiconductor, Inc., while a second consortium—including Kohlberg Kravis Roberts & Company, L.P. (KKR) and Bain Capital Partners, LLC—engaged in a LBO of Healthcare Corporation of America (HCA).

According to the plaintiffs, Goldman Sachs Group, Inc., Blackstone, Carlyle, and TPG stood down from the HCA deal after the deal was signed, and after KKR “asked the industry to step down on HCA.” Moreover, the members of the Freescale consortium allegedly reacted with shock when KKR, Bain, and Silver Lake Partners sent an indication of interest to Freescale’s Board, disrupting their deal. The Freescale consortium allegedly considered mounting a competing bid for HCA in response, but the consortiums communicated with each other and stood down from each other’s respective deals.

The court found the evidence was sufficient to create an issue of fact as to whether the firms had followed “club etiquette” and conspired to refrain from “jumping” each other’s announced proprietary deals. In particular, the court identified (1) an e-mail from a TPG executive stating that “KKR has agreed not to jump our deal since no one in private equity ever jumps an announced deal,” (2) a Goldman Sachs executive’s statement that “club etiquette prevails” after KKR decided to withdraw from the Freescale transaction, and (3) “[t]he fact that no defendant ever ‘jumped’ an announced proprietary deal during the ‘go-shop’ period.” However, the court left open the issue addressed in its present decision—whether each defendant private equity firm was connected to the overarching conspiracy.

Connection to the conspiracy. The court concluded that the evidence was sufficient to create an issue of fact as to whether Goldman Sachs, Carlyle, TPG, and Blackstone agreed with KKR and Bain to “stand down” on the HCA transaction, and as to whether KKR, Bain, and Silver Lake agreed with Blackstone, Carlyle, and TPG to “stand down” on the Freescale transaction. The court found the same three pieces of evidence that supported its previous decision also connected each of the firms to the alleged conspiracy, and “suggest[ed] that ‘standing down’ was the practice of the industry instituted pursuant to a code of conduct agreed to by the Defendants.”

Although Silver Lake was not involved in the HCA transaction, the alleged evidence was still sufficient to connect it to the conspiracy. Evidence suggested that Silver Lake executives participated in a strategy with Bain and KKR to restore peace with Blackstone, Carlyle, and TPG, and that Silver Lake was motivated to do so by its concern about its position in a separate transaction in which some of the other firms were involved. Moreover, a Silver Lake statement that “we did not jump an almost signed deal” indicated “that Silver Lake understood the conspiracy to allow for bidding on deals that were not signed, but that once a deal is signed, it was not to be ‘jumped.’”

The alleged evidence also linked Thomas H. Lee Partners, L.P. (THL) to the conspiracy, according to the court. A THL executive, in an e-mail discussing a deal for Harrah’s Entertainment, in which some of the other firms were involved, stated “I know we typically don’t bust things up” and that he was trying to find out “what the status of the deal is—early or late stage.” Another executive responded “I hate ambulance chasing someone else’s deal if it’s pretty baked.” The evidence was sufficient to create “an issue of fact as to whether THL did not pursue Harrah’s because of an agreement to refrain from ‘jumping’ another Defendant’s proprietary deal.”

However, the court found insufficient evidence to connect Providence Equity Partners, Inc. and Apollo Global Management, LLC to the conspiracy. Although the plaintiffs argued that Providence had “made no effort to ‘jump’” the HCA and Freescale transactions, no evidence suggested that Providence was involved in the transactions, and the evidence did not “exclude the possibility” that Providence was acting independently in deciding not to “jump” them. Although Apollo did show interest in the HCA transaction, the evidence suggested that Apollo had considered jumping the transaction long after the other firms stood down, a fact the court found “inconsistent with the overarching conspiracy,” and that it saw “itself as an outsider to any potential conspiracy.” Apollo did apparently speculate that it could be offered a benefit to stand down, but no evidence showed that it had actually received such a benefit, and the evidence did not “tend to exclude the possibility that its decision was independently arrived at.”

Hearsay. The court also concluded that the statements cited by the plaintiffs to demonstrate the existence of the conspiracy were not inadmissible hearsay, because they fell within the co-conspirator exception to the hearsay rule.

Releases of claims. Nor did the facts that Carlyle, TPG, Blackstone, and Goldman Sachs had been released from claims arising out of the Freescale transaction, and that KKR and Bain had been released from claims arising out of the HCA transaction, mean that those firms could not be connected to the overarching conspiracy. “A release by one group of shareholders does not, thereby, bind another group of shareholders for damages sustained pursuant to the overarching conspiracy,” the court found. Moreover, each firm’s connection to the conspiracy was not based on the transactions for which they had been released, but rather for standing down on other transactions.

Independent action. Although each defendant presented evidence that they had “independent, legitimate reasons for not pursuing each proprietary deal,” that evidence only served to create an issue of fact as to their reasons for not “jumping” the transactions, and did not render the plaintiffs’ theory implausible.

Arguments of specific firms

KKR, Bain, and Silver Lake. The court rejected an argument by KKR, Bain, and Silver Lake that their conduct in submitting an indication of interest in the Freescale transaction demonstrated that they could not be part of the conspiracy. The court noted that the evidence showed the firms believed they were acting in conformity with “club etiquette” because the Freescale consortium’s deal had not yet been announced, and the firms believed the deal was still open.

Goldman Sachs. The court also dispensed with an argument by Goldman Sachs that participation in the conspiracy would not be in its economic interest because it had both an investment banking side and a private equity side, and the investment banking side sought to maximize the price of target companies. The court observed that Goldman Sachs’ private equity side would still have “an incentive to prevent other companies from ‘jumping’” its deals, and the question whether its investment banking side sufficiently diminished that incentive was one for the jury.

Silver Lake. Finally, the court rejected Silver Lake’s contention that it could not be part of the conspiracy because it limited its investments to the technology industry, and therefore the other conspirators would not have an incentive to include it where it was already contractually bound not to compete for most deals. The court observed that Silver Lake still “had incentive to prevent other Defendants from jumping its technology-focused deals and other Defendants, conversely, had incentive to prevent Silver Lake from jumping their technology-focused deals.”

Moreover, Silver Lake could be part of a market-wide agreement, despite its inability to participate in six of eight transactions at issue, because there was “evidence tending to show that Silver Lake was involved in the ‘stand down’ agreement on Freescale,” and that the agreement “was in compliance with an industry-wide code of conduct.”

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

Attorneys: Charles N. Nauen (Lockridge Grindal Nauen P.L.L.P.) for Robert Zimmerman. Brian Philip Murray (Glancy Binkow & Goldberg LLP) for Kirk Dahl. Damien Riehl (Robins, Kaplan, Miller & Ciresi L.L.P.) for Police and Fire Retirement System of the City of Detroit. Craig S. Primis (Kirkland & Ellis LLP) for Bain Capital Partners, LLC. Abram J. Ellis (Simpson Thacher & Bartlett LLP) for The Blackstone Group L.P. Benjamin R. Walker (Sullivan & Cromwell LLP) for Goldman Sachs Group, Inc. James R. Carroll (Skadden, Arps, Slate, Meagher & Flom LLP) for JP Morgan Chase & Co. Joseph F. Tringali (Simpson, Thacher & Bartlett LLP) for Kohlberg Kravis Roberts & Company, L.P. Daniel M. Segal (Shearman & Sterling LLP) for Merrill Lynch & Co., Inc. Dane A. Drobny (Winston and Strawn LLP) for Permira Advisors LLC. Alexis K. Brown-Reilly (Weil, Gotshal & Manges LLP) for Providence Equity Partners, Inc. Nicole M. Naples (Willkie Farr & Gallagher LLP) for Silver Lake Partners. Anne Mullins (Susman Godfrey LLP) for Texas Pacific Group. Richard R. Cook (Weil, Gotshal & Manges LLP) for Thomas H. Lee Partners, L.P. Alexander Maltas (Latham & Watkins, LLP) for TC Group III, L.P. Abby F. Rudzin (O'Melveny & Myers, LLP) for Apollo Global Management, LLC.

Companies: Bain Capital Partners, LLC; The Blackstone Group L.P.; Goldman Sachs Group, Inc.; JP Morgan Chase & Co.; Kohlberg Kravis Roberts & Company, L.P.; The Carlyle Group; Merrill Lynch & Co., Inc.; Permira Advisors LLC; Providence Equity Partners, Inc.; Silver Lake Partners; Texas Pacific Group; Thomas H. Lee Partners, L.P.; TC Group III, L.P.; Apollo Global Management, LLC

MainStory: TopStory Antitrust MassachusettsNews

Antitrust Law Daily

Introducing Wolters Kluwer Antitrust Law Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.