Antitrust Law Daily Wrap Up, ANTITRUST—DMass: No reconsideration of decision that major private equity firms may have illegally colluded to fix leveraged buyout prices, (Jun 24, 2013)

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

Former shareholders of public companies that were subject to leveraged buyout (LBO) transactions sufficiently alleged that various financial firms involved in the transactions had conspired to avoid competing with each other on the LBOs to survive summary judgment, the federal district court in Boston has ruled (Dahl v. Bain Capital Partners, LLC, June 20, 2013, Harrington, E.). The court denied reconsideration of its previous order refusing to grant summary judgment to the financial firms.

The shareholders had filed suit alleging that the financial firms conspired to fix the sales prices of the companies, thereby depriving the shareholders of the true value of their stock. One of the counts in the shareholders’ complaint charged a conspiracy involving Bain Capital Partners, LLC, The Blackstone Group L.P., The Carlyle Group, Goldman Sachs Group, Inc., Kohlberg Kravis Roberts & Company (KKR), and TPG Capital L.P. to rig bids and not to compete for the LBO of one of the target companies, Healthcare Corporation of America (HCA), in 2006.

KKR and Bain (later dismissed from the case due to shareholder releases) formed a consortium which ultimately consummated the HCA LBO. Meanwhile, a consortium including Carlyle, TPG, and Blackstone negotiated and eventually completed an LBO of Freescale Semiconductor, Inc. In its prior decision, the court found a disputed issue of fact regarding whether Goldman Sachs, Carlyle, TPG, and Blackstone (the HCA defendants) agreed with KKR and Bain to refrain from competing for HCA.

According to the court, the “the evidence suggested at least two instances, one in July of 2006 and one in September of 2006, where an agreement to refrain from ‘jumping’ HCA was reached between the HCA defendants and the winning HCA consortium.” When viewed in the light most favorable to the plaintiffs, the evidence showed the HCA defendants had complied with a request from the winning HCA consortium “to step down on HCA.” The evidence also showed that the HCA and Freescale consortiums “communicated with each other and abruptly stood down from each other’s respective deals.” The court therefore denied the HCA defendants’ motions for summary judgment. In the present decision, the court addressed the HCA defendants’ motion for reconsideration.

The court rejected the HCA defendants’ contention “that there could not have been an exchange for Freescale in either July or September and that without such an exchange an agreement to stand down on HCA would have been implausible.” The evidence of KKR’s request to the industry to stand down on HCA, and of each HCA defendant’s “precipitous stand down” in response, was sufficient, even in the absence of evidence that the HCA defendants discussed the Freescale transaction with KKR or Bain, “to suggest that the HCA defendants did not pursue the HCA transaction because they had previously agreed to do what KKR had asked, namely to step down on HCA.”

Moreover, contrary to the HCA defendants’ contention, the evidence did “support an inference that an exchange for Freescale occurred in July.” The evidence “showed that Carlyle had an expectation of reciprocation with respect to Freescale after KKR asked the industry to step down on HCA,” and that KKR had previously told Blackstone that it would not compete for a signed deal.

Finally, the court observed that it did not “matter whether or not an exchange was made specifically for Freescale.” The court noted that “[t]he exchange could have been made for the next signed deal or for all future signed deals.” It was enough that the evidence showed that Carlyle considered KKR’s pursuit of Freescale in September to be “a breach of an agreement that had required Carlyle to stand down on HCA in July,” and that KKR had previously told Blackstone that it would not compete for its signed deals.

The evidence also permitted an inference that a second agreement to stand down on HCA had occurred in September, according to the court. After the Freescale board accepted a bid from the Freescale consortium before KKR, Bain, and Silver Lake could complete their due diligence, KKR internal communications expressed anger at Freescale because KKR had “told the company that we would not compete with a signed deal.” It could also be inferred that the HCA consortium notified the Freescale consortium that it was standing down on Freescale “at least in part, for the purpose of obtaining an agreement from the winning Freescale consortium to stand down on HCA.” Moreover, other communications between the consortiums indicated “that a mutual stand down occurred on September 15th,” in the court’s view.

The evidence also supported a finding that Goldman Sachs, which acted as a financial advisor to Freescale during that transaction, stood down from the HCA transaction when KKR requested the industry to do so. Communications between Goldman Sachs and KKR conveyed Goldman Sachs’ intent to stand down on HCA, despite previously showing an interest in it.

Other communications failed to conclusively establish that Goldman Sachs had attempted to put together a competing consortium, according to the court. A Carlyle email stating that “Goldman Sachs is in a frenzy trying to organize a competing consortium (they have reached out to us, TPG and Blackstone as potential leads and have spoken with Warburg, GS PIA, Thomas Lee, Madison Dearborn as well)” only “create[d] an issue of fact as to whether, in the face of the other evidence, Goldman Sachs had ceased its pursuit of HCA upon KKR’s request that the industry stand down.” Other communications “merely show[ed] that Goldman Sachs was exchanging information it had collected about HCA with private equity firms” or that “Goldman Sachs discussed a rumor that a potential consortium involving other private equity firms was forming to pursue HCA.”

Finally, depositions and contemporaneous communications did not sufficiently demonstrate “that each HCA defendant stood down on HCA because a pursuit of the deal would have been costly and/or futile.” According to the court, the “evidence, while strong, merely create[d] an issue of fact as to whether an agreement to stand down on HCA existed.”

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

Attorneys: Craig S. Primis (Kirkland & Ellis LLP) for Bain Capital Partners, LLC. Abram J. Ellis (Simpson Thacher & Bartlett LLP) for The Blackstone Group L.P. Casey A. Vaughn (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. Nicole M. Naples (Willkie Farr & Gallagher LLP) for Silver Lake Partners. 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.

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

Cases: Antitrust MassachusettsNews