In Dahl v. Bain Capital Partners, LLC., former shareholders of companies purchased through leveraged buyouts alleged a per se violation on the part of Carlyle Group, Goldman Sachs, Blackstone and others by conspiring to fix the prices paid in leveraged buyouts. The defendants were accused of conspiring to suppress takeover prices by establishing “club rules” which kept the firms from outbidding each other once buyouts were made public. 937 F. Supp. 2d 119, 124 (D. Mass. 2013)(“Plaintiffs contend that defendants understood that, by working together, they could suppress competition and avoid another price escalation.”). The Carlyle Group was the last defendant to settle this class action–for a reported $115 million. In August, Blackstone Group LP, KKR & Co LP and TPG Capital LP disclosed in a court filing they agreed to pay $325 million to settle the lawsuit. Prior to that, Silver Lake Partners LP settled with the plaintiffs for $29.5 million. Goldman Sachs and Bain Capital Partners LLC settled for $67 million and $54 million, respectively (here). The firms faced up to $36 billion in liabilities if potential damages were trebled under the Sherman Act.
The case helps re-learn some lessons about cooperation among buyers: it can be a per se violation; legitimate joint ventures can easily slide into buyer collusion, experienced antitrust counseling pays, and private plaintiffs negotiate much like the DOJ.
1) Collusion among Buyers to Suppress Bids is a Per Se Violation
The earliest Supreme Court cases dealing with the Sherman Act involved buyer collusion. In United States v. Swift & Co., 122 F. 529 (N.D. Ill. 1903), modified, 196 U.S. 375 (1905), the defendants violated the Sherman Act by directing their purchasing agents at the stockyards “to refrain from bidding against each other when making such purchases” and by these means to obtain livestock …at prices much less than it would bring in the regular way.” The first Supreme Court case to directly hold that a buyer cartel was conspiracy a violation of the Sherman Act was Mandeville Island Farms, Inc. v. American Crystal Sugar, 334 U.S. 219 (1948).
Buyer collusion can lead to criminal charges and jail sentences. In the last several decades the Antitrust Division has brought dozens of criminal cases charging buyer cartels (known as auction “rings”) in a wide variety of industries. The latest string of criminal buyer collusion cases brought by the Division, real estate auction foreclosure sales, are still ongoing.
2) Legitimate Joint Ventures Can Quickly Slide Into Per Se Territory
It is not illegal simply for firms to work together to submit a single bid. Joint ventures can be procompetitive and serve legitimate functions. For example, in the context of a leveraged buyout firms can band together to raise the capital necessary to submit a bid, to share the risk, benefit from complementary expertise or enjoy other efficiencies. But, where firms have been working together in legitimate joint ventures the lines of communication are open and the tempting allure of “not leaving money on the table” in a bidding war can lead to agreements outside the joint venture context to simply not compete against one another. It is OK to make a unilateral decision not to compete against a company, but if you communicate that intention to the other company, you are headed for trouble. And, if you get a quid pro quo in return, you are in deep trouble. When, as alleged in the leveraged buyout case, there is an agreement involving many different potential bidders and “club rules” which are designed simply to suppress prices, it is clear that you have left joint venture land and are deep in per se territory.
3) Antitrust Counseling Pays
Companies dealing in joint ventures are already in a potentially troublesome area of antitrust. There is already unquestionably an agreement between competitors. While most joint ventures are procompetitive, someone else (a plaintiff?) might have a different view. And as mentioned, it is an area where the jump from a legitimate joint venture to a per se violation may not be great. Having experienced antitrust counsel can help prevent the creation of emails such as these in the leveraged buy-out case:
According to the lawsuit, Blackstone’s Mr. James told KKR co-founder George Roberts in an email: “We would much rather work with you guys than against you. Together we can be unstoppable but in opposition we can cost each other a lot of money.”
- According to the lawsuit, Blackstone’s Mr. James told KKR co-founder George Roberts in an email: “We would much rather work with you guys than against you. Together we can be unstoppable but in opposition we can cost each other a lot of money.”
- David Rubenstein, co-founder of Carlyle, rejected competing with KKR, saying: “I don’t want to be in a pissing battle with KKR at the same time we are teaming on other deals.
- Blackstone President Hamilton “Tony” James said in an email that KKR called him with congratulations and to inform him that KKR was “standing down” from competing for the deal “because he had told me before they would not jump a signed deal of ours.”
It is likely that the plaintiffs had additional incriminating emails that helped lead to settlements.
4) Plaintiffs’ Lawyers Negotiate Much Like the DOJ
The Antitrust Division’s leniency program and its policy of giving generous discounts to early cooperators is mirrored in civil litigation. Plaintiffs’ lawyers also give discounts to early settlers to tempt someone to come forward. This provides cooperation, helps fund the lawsuit, and ratchets up pressure on the holdouts. I’ve heard stories about how famed antitrust class action lawyer, the late Harold Kohn, could strike fear in the hearts of defendants as he laid out his negotiating strategy. It appears that in this case, Carlyle Group, as the last settling defendant, paid a proportionately higher figure than those who settled early. And of course, the prospect of going to trial and be left holding the bag for a potential $36 billion in liability is a strong incentive to settle, while not admitting any wronging as the defendants did in this case.
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