Reducing the risk of violating competition law

This article was first published in PEI Alternative Insight’s Private Fund Dispute Resolution, a practical guide to managing and reducing litigation risk at the fund, investor and portfolio-company level. November 2014.


In today’s world of heightened regulatory and anti-trust scrutiny, there are increased competition law risks for funds and their portfolio companies. These risks arise in all areas of business, from discussions with competitors, due diligence and information sharing during potential acquisitions, to exclusionary or exploitative conduct by dominant portfolio companies and cartel behaviour.

This chapter sets out a broad outline of the key areas of risk for the private equity sector in light of US, UK and European anti-trust law. It The chapter draws attention to the potential pitfalls by reference to case studies and considers ways in which these risks can be mitigated so as to avoid exposure to disputes or adverse regulatory intervention in this area.

Agreements among competitors

US Legislation: The Sherman Act

“US antitrust laws forbid any ‘contracts, combinations or conspiracies in restraint of trade’ under section 1 of the Sherman Act (codified as Title 15 of the United States Code (U.S.C.)). Violation of this can subject private equity firms to serious civil liability in lawsuits brought by both the US Government and affected private parties (who are entitled to treble damages) and to criminal penalties, including large fines and, increasingly, imprisonment. The very broad language seems difficult to apply in practice as virtually any business agreement restrains trade to some degree. However, it has been judicially interpreted to apply to a more limited universe of agreements in two classes:

  1. Per se violations. These are agreements between competitors, which are so likely to harm competition, that they are always illegal without further inquiry into their effect on competition in a particular case or any justification that may be offered.
  2. ‘Rule of Reason’ violations. These are agreements that may or may not significantly affect competition, judged under the ‘rule of reason’. This means that based on the evidence, the court determines whether the anti-competitive aspects outweigh the pro-competitive aspects. If so, the agreement violates section 1 of the Sherman Act.

Per se illegal agreements

There are a number of per se illegal agreements relevant to private equity firms. These are set out here:

  • Any agreement with one or more competitors directly or indirectly affecting prices to be paid or charged for services, or prices to be offered or accepted for any securities or business assets, or any terms of doing business generally or of particular transactions, including particularly (but not limited to) credit terms.
  • Any agreement allocating customers, clients or potential transactions, or agreeing to refrain from participating in transactions at any stage.
  • In general, any agreement among competing private equity firms that would lessen the rigor of competition in some way, or make life easier or more certain for the firms involved, is potentially a per se violation of US antitrust law and should be avoided unless advised otherwise by knowledgeable competition counsel.

Basis of an illegal agreement

An agreement among competitors can be found not only where there is an express oral or written agreement. An implied agreement can also be inferred from conduct, such as consciously parallel behaviour that firms would not engage in absent an agreement or understanding. On the other hand, if parallel behaviour has a rational explanation other than a tacit agreement, an agreement will not be found based on parallel behaviour alone.

Case study: Dahl v. Bain Capital[1]

Alleged per se illegal agreement among private equity firms

Dahl v. Bain Capital is a putative class action on behalf of shareholders of companies acquired by major private equity firms such as Bain Capital, KKR, the Carlyle Group and others, alleging that the major firms conspired to hold down the prices of companies targeted for purchase.

The originally wide-ranging allegations of various agreements and conduct alleged to depress prices have been trimmed down, after over five years of litigation, to a claim that the private equity firms had an agreement that they would not ‘jump’ on each other’s deals once they had been announced (for example, by offering the shareholders a better price, in accordance with an alleged set of rules referred to as ‘club etiquette’. Stripped to its essentials, the illegal conduct alleged would be a variety of customer allocation agreements, which fall into the illegal per se category.

The private equity companies were expected to defend the case by contending that no agreement should be construed from their actions. However, given the high stakes, and the emergence in discovery of some reportedly troubling emails, all of the defendants have settled the case.

Bain Capital, Goldman Sachs and Silver Lake Partners settled for a combined total of $150.5 million. More recently, Blackstone Group and TPG Capital settled for a combined $325 million. After vowing to go to trial, the remaining defendant, Carlyle Group, announced on August 29, 2014 that it would settle for $115 million. The trial, scheduled to begin November 3, 2014, was thus avoided. As the only remaining defendant, the pressure on Carlyle to settle was crippling. The plaintiffs’ estimated damage claim was $11.97 billion. If it lost at trial, under US antitrust law the damages would be trebled before deduction of the other firms’ settlements, so Carlyle had potentially faced a $35.4 billion loss.

Practical advice for private equity firms

To avoid action for per se illegal agreements, private equity firms should:

  • Avoid any discussion at any time with competitors concerning asset valuation, pricing of any potential assets, pursuing or refraining from pursuing the acquisition of potential assets or business tactics that should be considered fair or unfair.
  • Investigate, as part of the due diligence process, whether potential investment targets have engaged in any anti-competitive conduct with their competitors. This could become a burdensome liability in the event the firm acquires the target and either government enforcement or private litigation ensues.

UK/EU competition law

Article 101 of the Treaty on the Functioning of the European Union prohibits companies agreeing to act together in a way that would have the aim, intention or effect of restricting competition in the market.

Anti-competitive agreements and concerted practices can come in many different forms. However, they all involve two or more businesses and arise when those businesses (or their employees) agree to act in a way that is intended to restrict competition or simply has that effect.

These types of concern are not simply relevant for the business of investee companies and will also apply to dealings and discussions between partners of a private equity house, its funds and investor competitors, leading to potential issues, similar to those identified in the section on US law above.

Essentially, the concept of ‘agreement’ covers any type of formal or informal cooperation, written and verbal agreements and gentlemen's agreements. It also covers any form of direct or indirect arrangement or understanding, which has the deliberate or even unintentional effect of influencing the conduct of a competitor in the market. Competition law concerns can arise from an exchange of emails, text or other instant messaging system. The communication does not even need to be reciprocal and it is possible to infringe competition law just by listening to information relating to cooperation without actually sharing any information.

Cartels are the most serious type of anti-competitive behaviour. The very agreement reached by way of cartel is, in principle, illegal. It does not matter if the parties involved failed to implement the agreement or if the cartel does not have an effect on the market to result in a breach of competition law. All forms of cartel behaviour are illegal and can result in serious fines and imprisonment for individuals (in some European jurisdictions such as the United Kingdom). The most common forms of cartel agreements are:

  • Price fixing.
  • Market sharing.
  • Bid-rigging – this is perhaps the most sensitive area for the private equity industry and extreme care should be taken when engaging in discussions with competitors or co-investors whether for club deals or otherwise.
  • Exchanging commercially sensitive information.

Consequences of Article 101 breach

The consequences of breaching Article 101 can be severe and companies infringing it may face a range of penalties in addition to wider commercial consequences, which include the following:

  • Agreements may become void and unenforceable.
  • Fines can be levied up to 10 percent of worldwide turnover (in some cases multiplied by a number of years), whether the illegal purpose was achieved or not.
  • Third parties, which suffer loss, can sue for damages.
  • Adverse publicity and damage to reputation.

In addition to financial costs for the company, individuals who are involved in breaching competition law can be disqualified from acting as a director, fined and/or imprisoned (depending on the jurisdiction concerned).

Regulatory review of acquisitions – advice for private equity firms

Mergers and acquisitions that meet certain criteria must be reviewed prior to consummation by competition authorities such as the Federal Trade Commission or the Department of Justice (DoJ) in the US and/or the European Commission.

Acquisitions by private equity firms of interests in any target company engaged in activity affecting US commerce must be reviewed and pre-cleared if certain tests are met. Likewise, acquisitions of interests in undertakings within the EU must be notified to and approved by the European Commission if certain jurisdictional and substantive thresholds are met. In addition, there will almost always be an obligation to notify regulatory authorities at national level as well.

Private equity firms should pay particular attention to whether acquisitions of increased stakes in existing investments or conversion of non-voting securities into voting securities may trigger additional regulatory review obligations. For example, on August 20, 2014, the US Federal Trade Commission fined Berkshire Hathaway heavily for converting convertible notes into voting securities without seeking regulatory review.

Failure to comply with regulatory requirements, even inadvertently, may lead to significant fines and penalties and government lawsuits seeking to block or undo acquisitions. The rules for establishing whether the threshold tests for review and pre-clearance are met are complex and require the advice of competent competition counsel in each individual case.

Antitrust issues in potential acquisitions

US Law

Private equity firms need to consider potential antitrust issues, and consult competition counsel, in performing due diligence concerning potential acquisition targets.

For example, a potential acquisition of a firm with a dominant position in its industry or large market shares must be evaluated in order to determine if the situation may result from either behaviour in violation of section 2 of the Sherman Act, which outlaws monopolisation and attempts to monopolise, or behaviour of standard-setting or self-regulatory industry activities that could be characterised as a conspiracy to monopolise.

This could result in post-acquisition litigation against the target and the private equity firm. Note, for example, the current burdensome series of US class actions in which Goldman Sachs and JP Morgan are currently embroiled, arising from their prior acquisitions of aluminium warehouse facilities. They are accused of conspiring with the London Metals Exchange (LME) to monopolise the aluminium market, restraining supplies and artificially inflating prices. The firms emphatically claim the suits have no merit.

Private equity firms must also consider potential antitrust constraints on marketing strategies they may plan to employ to make acquisition targets perform better. For example, instituting a resale price maintenance (RPM) programme to enhance brand image by maintaining premium resale pricing by customers might appear to be a good option, but it is fraught with antitrust issues in the US. RPM agreements were long considered per se US antitrust violations. For federal antitrust purposes, they are now evaluated under a rule of reason – sometimes illegal, sometimes not. However, states within the US have separate antitrust laws and state antitrust regulators are not bound by federal interpretations. Some state regulators (New York, for example) have taken the position that RPM agreements remain per se illegal under state law.

Private equity firms acquiring interests in companies that compete, in whole or in part, with existing portfolio companies also need to be careful when appointing fund employees as directors or officers of the competitors. Section 8 of the Clayton Act (codified in Title 15 U.S.C., section 19) prohibits a ‘person’ from serving as an officer or director of certain competing companies. A ‘person’ can include different individuals representing the same entity. Accordingly, a private equity firm that puts different representatives on boards of competing portfolio companies can violate section 8. The violation is per se (that is, without regard to whether any anti-competitive effects flow from the interlocking directorates) and even a small amount of competition between two companies can trigger a section 8 violation.

Although penalties for a section 8 violation, standing alone, are not severe, a violation can be a lightning rod for disputes in two ways:

  1. It can be enforced through a private right of action, usually by other competitors or whistleblowers, such a disgruntled ex-employee or by the FTC or the DoJ.

  2. The mere fact of a section 8 violation can be a predicate for further inquiry into whether the interlocking directorate has been used to facilitate price fixing, market allocation or other violations of section 1 of the Sherman Act.

Accordingly, private equity firms that have interests in competing portfolio companies should seek advice from competent competition counsel in connection with appointments of firm employees as directors or officers of those companies.

UK/EU law

Article 102 of the Treaty on the Functioning of the European Union prohibits behaviour that is deemed abusive in a context where the company in question is found to be in a dominant position. This is really only likely to be relevant where an investee company has a strong market position or a share over 40 percent.

A company may be dominant if it has sufficient market power to enable it to behave independently of its competitors, customers or suppliers. Generally speaking, companies with market shares of less than 40 percent are unlikely to be considered dominant. A market share of over 40 percent should always be treated with caution and much higher shares can lead to a presumption of dominance.

It is not illegal for a company to be dominant, but competition rules place a special responsibility on dominant companies vis-à-vis their competitors, customers and suppliers and are essentially designed to stop the dominant company:

  • squeezing or shutting its smaller competitors out of the market; or
  • exploiting suppliers or customers by imposing unfair terms or excessively high prices.

A dominant position can be abused by unilateral decisions of the business. Dominant companies must be particularly careful about how they approach their pricing policies and offer discounts. Common commercial practices such as offering loss leaders or bundling products together may be more difficult for dominant companies.

Where an authority finds there has been an abuse of a dominant position, it has the power to:

  • impose a fine; or
  • require that the business cease and desist from the abusive conduct or impose positive measures to ensure the infringement is brought to an end.

Advice for private equity firms

Pre-acquisition, a private equity house should take two steps to assess the risk of an Article 102 infringement. First, carry out competition due diligence of the target to evaluate contingent liabilities for competition law infringements that can be inherited by a purchaser. Second, ringfence confidential information received during due diligence where a fund is acquiring a company that competes with an existing portfolio company.

A purchaser can inherit the competition law liabilities of a new portfolio company for infringements that took place prior to the date of acquisition, particularly when the target is acquired by way of share acquisition. It is notoriously difficult to identify cartel conduct as it is by its very nature secret. A fund should nevertheless carry out due diligence and seek disclosure of all complaints, investigations (including informal) and litigation. It should also seek to obtain appropriate competition law warranties in all future investments to protect itself from liabilities, which may arise post-acquisition from past and/or continuing cartel conduct of the target.

In cases where a private equity house acquires a portfolio company, which is not in competition with any of its other portfolio companies, information can be exchanged freely. However, in cases where the target company competes with a current portfolio company, the parties should be mindful of the information that is exchanged so as not to exchange confidential information pre-completion. Where the target is a competitor, a fund may engage in transition planning and limited exchanges of information with the target to the extent that this is necessary for:

  • Due diligence.
  • Notification of the merger to any relevant competition authorities.
  • Preparing for completion of the merger and integration planning.

Where the target competes with a fund's current portfolio company, the fund should only exchange publicly available information and other non-contentious data, including historical sales information (prices, sales figures in volume and revenue relating to activities/items more than six months ago). Legal counsel should be able to assist in defining the precise ambit of information that can be exchanged in such events.

A major concern for fund managers arises from the fact that any fine levied by a competition authority in relation to anti-competitive conduct at portfolio-company level may end up being sought from the fund that owns it or the private equity house itself. This potential liability arises even if there has been no fault or involvement by any director of the portfolio company appointed on behalf of the fund. In recent years, the European Commission has made increasing use of its ability to fine parent companies for the behaviour of their subsidiaries (known as parental liability) and private equity funds should be fully aware of this. The fact that a subsidiary or portfolio company has been sold prior to the discovery of the anti-competitive conduct does not release the parent or fund from liability.

In order to increase the deterrent effect, parental liability enables the European Commission to significantly increase the level of fine imposed as the fine can be based on the worldwide turnover of the whole group rather than that of the individual company. For private equity houses, this could potentially include the turnover of all portfolio companies.

Goldman Sachs / Prysmian case

Example of antitrust issues in relation acquisition targets

In 2011, the European Commission began its pursuit of a Goldman Sachs buyout fund in connection with its investigation of a former portfolio company for its alleged participation in a cartel.

GS Capital Partners bought Prysmian, one of the world’s largest cable manufacturers, from Pirelli Cavi in 2005 and claimed that it was not aware of any cartel activity at the company prior to or during its period of ownership.

Prysmian held an initial public offering in 2007, at which point GS Capital Partners reduced its stake before selling its remaining shares in 2009. However, the bank was fined €37.3 million by the regulator for its connection with the companies found to have operated the cartel allocating markets and customers in the underwater power cables market in Europe from 1998 to 2008.

Effective strategies for mitigating competition risk

The most effective strategy for risk mitigation, and therefore reducing the risk of competition-related disputes arising, is prevention.

A private equity house should ensure that it, and each of its portfolio companies, has a suitable compliance programme in place to counter anti-competitive behaviour, as well as suitable procedures to implement and monitor such programmes.

There is no single effective policy when it comes to compliance. The most appropriate measures to put in place will be those that are tailored to each company and to each sector. At the heart of any effective programme should be a commitment from all directors and managers that they agree to comply with competition law and the importance of the programme should be clearly communicated to the rest of the business.

Funds should consider appointing a senior executive with a good understanding of competition law to ensure that compliance procedures are in place and effective. Regular staff training alone is unlikely to be sufficient. Instead, appropriate procedures should be implemented whereby management oversees sensitive and high risk areas of the business.

For fund manager executives sitting on portfolio company boards, there is a special responsibility to identify potential risks. If areas of risk are identified, specific risk mitigation procedures should be adopted. For example, the portfolio company could implement a system whereby employees report contacts with competitors so that these can be monitored. Other measures could include the pre-approval of membership of any industry or sector organisations, provision of specific compliance training for staff and incorporating competition compliance provisions into employment contracts.

In relation to prospective portfolio companies, fund managers should consider whether their due diligence procedures are effective enough to detect possible competition law infringements and ensure that appropriate indemnities and warranties are in place to manage the liability after purchase. If an infringement is detected or the fund becomes aware of any current or previous portfolio company that is being investigated by the competition authorities, the fund should seek legal advice immediately. Approaching the competition authorities under a leniency programme may allow the fund and/or portfolio company to benefit from immunity or reduced fines and make use of settlement procedures.


While it may never be possible completely to eliminate the risk of competition law breaches, there are procedures and steps that can be put into place to mitigate these risks and avoid potential disputes in this area. The issues raised in this chapter are by no means exhaustive, but the chapter does serve as a high-level overview of key areas of potential concern. No two business scenarios are the same and as such, the competition law assessment differs between scenarios. If a fund is at all concerned in relation to conduct either at management or portfolio company level, it should seek legal advice as a matter of urgency in order to assess (with a view to mitigating) the true extent of the risk and possible exposure to disputes or regulatory investigation.


L. Donald Prutzman - Tannenbaum Helpern

Andre R. Jaglom - Tannenbaum Helpern

Michael G. Tannenbaum - Tannenbaum Helpern

Tom Usher - King & Wood Mallesons SJ Berwin

Adele Behles - King & Wood Mallesons SJ Berwin

[1] Dahl v. Bain Capital, 07-12388 (WGY) (D. Mass.).

For more information on the topic discussed, contact:

01.21.2015  |  PUBLICATION: Other Publications  |  TOPICS: Antitrust, Investment Management

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