SEATTLE — A federal court decision last month throwing out antitrust claims against two private equity firms that joined to buy a computer security company could give private equity firms at least moral support for future club deals.
But it's anyone's guess whether two new cases filed in Massachusetts against a who's who of the buyout world and a two-year-old U.S. Department of Justice investigation will give buyout firms additional comfort.
On Feb. 21, the U.S. District Court in Seattle dismissed antitrust allegations against Vector Capital Corp. and Francisco Partners, which teamed up to buy Watchguard Technologies Inc., a Seattle-based technology security company, after first competing for the company.
Two years ago, the explosion of super-sized buyouts brought with it an escalation of the so-called club deal, a consortium of private equity firms that joined together to buy a company. These club deals made buyouts of S&P 500-sized companies like Home Depot and Dell possible. However, in October 2006, the U.S. Department of Justice sent informal letters to Kohlberg Kravis Roberts & Co, Silver Lake Partners, The Carlyle Group, Clayton Dubilier & Rice and Merrill Lynch & Co. asking for information about these consortium-led deals. The Department of Justice expressed concern that the big buyout firms may be “colluding” to artificially reduce the prices of the companies they were aiming to buy. It could not be confirmed by press time whether the investigation is ongoing.
“This is the first decision on the merits since the issue broke,” said Robert Schlossberg, partner at Freshfields Bruckhaus Deringer, a Washington law firm not involved in the case. “The judge set out a standard that is favorable to buyers wanting to form a consortium.”
Although the decision is not binding outside the trial court's jurisdiction, it is the first opinion in a private equity consortium case and is likely to be cited in other cases, he said.
Institutional investors are far from uninterested bystanders. Although investors have no say in the deals their buyout managers strike or how they are structured, legal experts say the firms' limited partners could end up suffering for it. Investors could face the lion's share of any penalties and fines levied by the Department of Justice because they financially benefit from the purportedly wrongful behavior of their managers through their fund investments, according to an article in the Winter 2007 edition of law firm Nixon & Peabody's “Private Equity Newsletter.”
The Seattle class-action lawsuit was filed by Pennsylvania Avenues Funds, an alternative investment mutual fund that invested in Watchguard. It was not the first antitrust case brought since the issue broke two years ago when news surfaced about the Justice Department investigation.
A case filed in U.S. District Court in New York against 13 private equity firms, including Kohlberg Kravis Roberts & Co. and Blackstone Group LP, in June 2007 was dismissed without prejudice, which allows the plaintiffs to refile.
A U.S. Supreme Court decision toughening standards of proof in antitrust cases came down after the New York suit was filed that made it more difficult for plaintiffs' lawyers to state a claim.