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DOJ, FTC Scrutiny Tests Private Equity Firms

Sept. 23, 2022, 11:31 AM

Skepticism of private equity’s impact on competition and concerns that previous administrations were lax with enforcement prompted the Biden administration to roll out new enforcement priorities that target private equity.

Andrew Forman, Deputy Assistant Attorney General of the US Department of Justice Antitrust Division, announced that the agency is “thinking a lot about” enhancing antitrust enforcement around issues in private equity, especially in health care.

His remarks aligned with similar statements recently made by his boss, Assistant Attorney General Jonathan Kanter, and Lina Khan, chair of the Federal Trade Commission.

The trend started more than two years ago, when then-FTC Commissioner Rohit Chopra released a statement alongside the agency’s annual report to Congress that was critical of private equity, especially its use of so-called “roll-up transactions.”

These remarks are part of a significant shift away from the previous administration’s stance. Former Assistant Attorney General Makan Delrahim’s 2020 Merger Remedies Manual was supportive of private equity, and went so far as to state that “in some cases a private equity purchaser may be preferred” over strategic buyers for divestiture assets.

Forman warned in his recent remarks that the DOJ is “thinking” more about enforcement in four key areas—rollup transactions, competition, interlocking directorates, and filing deficiencies.

Key Enforcement Areas

First, the DOJ shares former FTC Commisioner Chopra’s concerns regarding private equity’s use of “roll-up transactions”—a strategy involving acquisition of multiple smaller players in an industry in order to create a single large player.

Often, a private equity firm will make an initial acquisition of a business that can serve as the platform and subsequently “bolt-on” and “tuck-in” acquisitions can be used to grow the business.

The DOJ is concerned that roll-ups can cumulatively or otherwise cause a substantial lessening of competition that may lead to a monopoly. Similarly, Forman warned that the DOJ “will analyze whether private equity companies may violate the antitrust laws with investments creating or enhancing power across a ‘stack’ of technology or other products/services.”

Second, the DOJ is “focused on whether certain private equity investments may chill fierce competition on the merits.” Specifically, the DOJ is concerned about certain private equity investments that may “blunt the incentive of the target company to function as a maverick or a disruptor in health care markets” or “cause the target company to focus solely on short-term financial gains and not on advancing innovation or quality.”

Current DOJ leadership is concerned that private equity firms are more interested in consolidating competitors than in promoting competition.

Third, the DOJ has repeatedly announced the potential for significant new enforcement of the prohibition of interlocking directorates. Subject to certain exceptions, a prohibited interlocking directorate can occur when the same person serves as an officer or director of two or more competing companies.

Importantly, and particularly relevant for private equity investors, the requirement for an interlocking “person” should be read as “representative,” not an individual person.

The FTC and DOJ take the position that an interlocking directorate can exist if different persons serve on different boards or officer slates, but those different persons are representatives of the same corporation (that is, both are officers of the same private equity firm).

To the extent that private equity investments in competitors lead to interlocking directorates, Forman stressed that the DOJ is committed to taking “aggressive action” including the possibility of initiating litigation against violators.

Finally, Forman said that the DOJ has recently become aware of some Hart-Scott-Rodino premerger notification “filing deficiencies in the private equity space.” As a result, the DOJ is concerned that private equity firms “may not be taking seriously enough their obligations under the HSR Act” and will be evaluating what, if any, next steps to take to increase compliance.

Unfortunately, Forman did not provide any further details regarding these “filing deficiencies,” but given all the other areas of increased focus on private equity transactions, private equity firms should expect increased scrutiny on their HSR filings.

Increased Scrutiny

Private equity purchase transactions may previously have been considered unlikely to raise significant antitrust concerns, but under the current DOJ and FTC leadership that is changing.

Private equity firms—particularly those with health-care investments—should be aware that antitrust enforcers will carefully scrutinize their portfolio board appointments and transactions, regardless of whether they make a filing pursuant to the HSR Act.

The DOJ’s and FTC’s primary focus will remain on how the transaction or conduct impacts competition, but the current administration seems determined to broaden the scope of that inquiry to include who specifically engages in the competition.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Austin A.B. Ownbey is counsel at Foley Hoag in Washington, D.C. He focuses his practice on representing and counseling clients on a range of antitrust issues, including review of mergers and other enforcement matters before competition agencies in the US, EU, and around the world.