The Road Ahead for Private Equity: Antitrust and Merger Control

Recent actions by antitrust agencies globally deliver on their promises for increased scrutiny of private equity sponsored transactions and strategies in at least three ways.

Scrutiny of Roll-ups

First, as part of its goal to prevent “stealth roll-ups”, the Federal Trade Commission (FTC) challenged a series of acquisitions of localized anesthesiology providers that spanned more than a decade by Welsh, Carson, Anderson & Stowe, a private equity sponsor. Although we have seen the FTC challenge past acquisitions as violations of the antitrust laws (e.g., FTC v. Meta), the FTC included a novel basis to challenge Welsh Carson’s acquisitions. The FTC claimed that certain of its acquisitions in question amounted to an unfair method of competition under its own statute, the FTC Act, which, if sustained in court, would permit the FTC to pursue merger enforcement under a lower burden of proof (for example, the FTC did not define an antitrust market to support its claims).

Subsequently, the agencies finalized Merger Guidelines that include a specific section aimed at these so-called “roll-up” strategies and explain that the agencies will examine a firm’s history of acquisitions and its current and future incentives to determine whether the practice is illegal. 

The U.K. Competition and Markets Authority (CMA) has also had private equity on its radar over the past year or so, particularly in relation to the increase in private equity investments in the consumer-facing areas of veterinary services, animal health, dentistry and health care more broadly.

Indeed, last year the CMA CEO noted that that the Mergers Intelligence Unit has “[t]aken quite a conscious strategy” to look out for “roll-up” acquisitions. The CMA wants to “make sure the boardrooms are aware of the kind of deals that should or shouldn’t be going ahead” and that it is “sending a clear message this is a sector … going to come in for very close scrutiny”.

Divestiture Buyers

Second, the FTC and the Department of Justice (DOJ) have extended their scrutiny of private equity-backed transactions into private equity’s ability to restore competition as divestiture buyers, even going so far as litigating the adequacy of a divestiture that eliminated the horizontal overlap in United/Change because the divestiture buyer was private equity instead of an industry participant. The parties overcame the DOJ challenge, in part, because of strong testimony from the divestiture
buyer, but private equity should expect similar skepticism in the future. 

Historically, the European Commission (EC) had not allowed the acquirer to include pure private equity or financial sponsor players (i.e., those without existing investments) in an auction process for divestment businesses in complex industrial sectors that require industry-specific expertise (see, for example, Linde/Praxair and Ball/Rexam). 

More recently, we have seen less resistance to private equity divestiture purchasers in appropriate cases. For example, the EC accepted a consortium of financial investors, including Meridiam, GIP and CDC Group, as divestiture purchasers of assets that allowed Veolia’s takeover of Suez to close, with the CMA allowing EQT’s Saur to acquire U.K. assets.

Interlocking Directorates

Finally, the agencies’ efforts to invigorate enforcement of the antitrust law’s prohibition on interlocking directorates have resulted in greater scrutiny of private equity. Specifically, Section 8 of the Clayton Act prohibits any “person” from simultaneously serving as a director or officer of two competing corporations. The agencies have construed “person” to include entities, not just natural persons, which would mean that an entity that appoints board directors on competing entities would violate the antitrust laws. This interpretation affects private equity firms because they often focus investments within
an industry and protect their investments with rights to appoint board members.

In fact, many of the DOJ’s actions to enforce Section 8 have required private equity firms to relinquish board representation to cure alleged violations. Even more, the agencies’ proposed changes to the HSR form, if implemented as currently drafted, would require all filers to identify officers and directors, including information about other boards on which they serve, which would improve the agencies’ ability to detect violations and would likely result in more Section 8 enforcement.

EC and CMA Priorities

In Europe, relatively few private equity acquisitions have gone to an in-depth Phase II EC or CMA review, but as portfolios continue to expand we are seeing more substantive issues arising. Concerns about common ownership, interlocking directorships and information exchange are becoming more acute. This year EC and CMA enforcement priorities will continue to focus on digital markets, including artificial intelligence (AI), energy, as well as health care/life sciences and consumer-facing products/services more broadly. 

Investment Regimes

The proliferation of foreign investment laws across Europe—and the EU cooperation mechanism allowing member states and the EC to exchange information on national FDI cases, which spurred call-ins from other member states—was a key area of regulatory friction in many private equity transactions. Ministries and other FDI authorities were particularly keen
to understand the upstream LP make-up, as well as the extent to which sovereign wealth fund co-investors had rights beyond typical minority protections in club deals. That said, private equity acquirers were subject to relatively few vetoes or conditional approvals. Further, the EU’s new Foreign Subsidies Regulation, introduced to allow the EC to identify and police any distortive effects of foreign subsidies in European markets, has added an additional layer of screening and potential delays to M&A transactions and necessitated a new layer of information-gathering protocols for private equity firms at both fund and portfolio company levels.

Overall, the agencies’ actions demonstrate that private equity-backed transactions remain on their radar, and private equity firms can expect the agencies to be watching their activities in a wide range of contexts.