Antitrust regulators focus on private equity
On Monday, June 13, 2022, the US Federal Trade Commission (FTC) announced a consent order regarding private equity investor JAB Consumer Partners’ acquisition of specialty and emergency veterinary clinic operators. The consent order is notable because it imposes a ten-year pre-transaction approval and notification requirement on JAB and on the required divestiture purchaser.
According to a complaint filed by the FTC on June 3, 2022, JAB sought FTC clearance for its $1.1 billion acquisition of competitor, SAGE Veterinary Partners, LLC. On June 13, 2022, the FTC unanimously adopted a consent order resolving the FTC’s investigation. The consent order required JAB to divest certain specialty clinics in Texas and California and imposed extensive approval and notice requirements on JAB.
Specifically, JAB agreed to (1) divest six clinics to purchaser United Veterinary Care, LLC; (2) seek prior approval from the FTC for any future acquisition of a specialty or emergency veterinary clinic within a 25-mile radius of a JAB-owned specialty or emergency clinic in California and Texas; (3) provide the FTC with 30 days’ prior notice of JAB’s intent to acquire a specialty or veterinary clinic within 25 miles of a JAB-owned specialty or emergency clinic anywhere in the US; and (4) satisfy the foregoing pre-approval and pre-notice requirements for a period of 10 years.
Also of note, the consent order obligates United Veterinary Care to obtain the FTC’s pre-approval before selling any of the divested clinics for a period of ten years. These pre-approval and pre-notification requirements, some of which are first of their kind, impose requirements that far exceed what is ordinarily required under the Hart-Scott-Rodino Act.
The FTC’s announcement of the consent order was accompanied by a joint statement from the Commission’s three Democratic members singling out private equity transactions as an area of potential antitrust concern and enhanced scrutiny. These members heralded the consent order’s pre-notice and approval provisions as measures that would “allow the FTC to better address stealth roll-ups by private equity firms”.
In their statement, the Commissioners specifically noted that, “[w]hile private equity firms can support capacity expansion and upgrades, firms that seek to strip and flip assets over a relatively short period of time are focused on increasing margins over the short-term, which can incentivize unfair or deceptive prices and the hollowing out of productive capacity.” The statement continues: “serial acquisitions or ‘buy-and-buy’ tactics can be used by private equity firms and other corporations to roll up sectors, enabling them to accrue market power and reduce incentives to compete, potentially leading to increased prices and degraded quality.”
These statements are consistent with recent public comments made by the leadership of the Department of Justice’s Antitrust Division. Speaking at the American Bar Association’s Antitrust in Healthcare Conference on June 3, 2022, Deputy Assistant Attorney General Andrew Forman indicated that the DOJ is “thinking a lot about enhancing antitrust enforcement around a variety of issues surrounding private equity.” DAAG Forman went on to describe three areas of focus for the Antitrust Division: (1) the risk of private equity “roll-ups,” where, in the Division’s view, smaller transactions cumulatively or otherwise lead to a lessening of competition or a creation of monopolies; (2) whether private equity investments “blunt the incentive of the target company to act as a maverick or disruptive . . . or otherwise cause the target company to focus solely on short-term financial gains and not on advancing innovation or quality”; and (3) whether private equity transactions in competing companies lead to board interlocks in violation of Section 8 of the Clayton Act.
The recent action and comments by antitrust regulators are important reminders to private equity funds doing business in the US to be thoughtful about the antitrust implications of their transactions. Although requirements like those imposed in the JAB consent order do not arise without an underlying transaction, private equity funds should be wary that a transaction does not have to be reportable to the FTC or DOJ to be the subject of an enforcement action.
Indeed, where there are substantive antitrust issues, such as transactions leading to excessive market concentration, price increases or customer complaints, enforcement actions can and do arise from deals not subject to Hart-Scott-Rodino Act reporting. Accordingly, prudent private equity funds will take the FTC’s and DOJ’s recent warnings seriously as regulators seem to be matching their rhetoric with aggressive enforcement actions.
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