Court Holds Price-Fixing in Corporate Control Context Not Per Se Illegal and Dismisses Unsupported Complaint
On February 21, 2008, the U.S. District Court for the Western District of Washington dismissed, with prejudice, allegations that private equity firms violated Section 1 of the Sherman Act by entering "into a contract, combination or conspiracy to artificially fix the price, refrain from bidding, or rig the tender offer bids for" shares in a company in which the plaintiffs held stock. Pennsylvania Ave. Funds v. Borey, 2:06CV01737 (W.D.Wash. Feb. 21, 2008), Slip. Op. at pp. 2, 13. Ultimately fatal to plaintiff's contentions was the fact that defendants could not have been shown to have market power. Id. at 11-12.
Plaintiff Pennsylvania Avenue Funds was a former shareholder in WatchGuard Technologies Incorporated ("WatchGuard"), which had been sold with the approval of the WatchGuard board of directors. Plaintiff alleged that two groups of defendants, FP and Vector, among 35 or more potential buyers of WatchGuard, had conspired to fix the bid offered for WatchGuard. More specifically, plaintiff alleged that Vector agreed to cease to bid so that FP could obtain WatchGuard for an artificially deflated price — half of which would be funded by Vector in exchange for Vector receiving a 50% interest in WatchGuard after the merger. Id. at 2-3.
The Court analyzed the FP/Vector agreement under the rule of reason after stating, "Price agreements between competitors in a corporate control context are not per se illegal." Id. at 10. Under the rule of reason analysis, plaintiff alleged that the relevant market was "the market for corporate control of WatchGuard and other technology companies." Id. at 11. The Court found, though, that FP and Vector had only minor stakes in the enormous private equity market and, therefore, did not have market power — the antitrust term for the ability to control price. Id. at 11-12. The Court concluded that the defendants would lack market power even if the market were defined as limited to bidding for control of WatchGuard, because although only FP and Vector ultimately bid for the company, many other suitors had looked at the company and were available to bid if the asset was worth more money than FP and Vector were offering. The Court correctly observed that, if the defendants' bid was too little for the value of the asset as a result of the alleged conspiracy, then other bidders would have bid more. The Court stated that one cannot count the non-participating bidders as not being in the market merely because they did not bid — noting that the fact that they did not bid likely only meant that the asset was not worth more. Id. at 12.
In so holding, the Court declined to determine whether plaintiff's antitrust claim was precluded by securities laws. Id. at 4-8. The Court held that defendants' "attempt to invoke Credit Suisse [Securities (USA) LLC v. Billing, 127 S. Ct. 2383, 2392 (2007)] preclusion founder[ed] on their inability to show that the SEC ha[d] regulatory authority over the conduct of" the defendants and distinguished between the SEC's recognized authority "to regulate disclosure of bidding agreements like the one between" the defendants and the lack of recognized authority for the SEC to prevent bidders from joining forces. Pennsylvania Ave., at 5 (emphasis in original).
Although the conspiracy alleged in this case was narrower than those that have been alleged in other actions that have recently been brought against private equity firms, this decision might, nonetheless, indicate that plaintiffs in such cases may well have difficulty demonstrating market power in cases where there are multiple potential bidders — particularly where the conspiracy is only alleged against a small number of players in the market. This does not, however, provide any real safe harbor, because were a plaintiff able to plead a case in which, for credible reasons, there are few potential bidders for a target, the reasoning of Pennsylvania Avenue would not apply. Moreover, there are other pending actions against private equity firms that might yield different results than Pennsylvania Avenue, the Pennsylvania Avenue decision might be appealed and, according to court papers filed in a different case, there is currently a federal antitrust investigation pending regarding joint bidding by private equity funds. Therefore, any company contemplating discussing bids with other actual or potential bidders should consider the structure of the market and the potential effect of cooperation in considering whether to do so.
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