Private Equity Antitrust Inquiry

Richard M. Steuer Questions

• How real is the risk? • How do you continue doing deals? • What’s next? • What do you need to know?

1 Initial Reports

• October 10 press reports: • New York field office, Justice Department • Antitrust Division letters to: • • Carlyle Group • Clayton, Dubilier & Rice • Silver Lake Partners • Subsequent letter to: • Merrill Lynch 2 • Seeking general information on voluntary basis, regarding business practices and deals since 2003

3 Private Class Action

• November 15 – Private antitrust class action (S.D.N.Y.) on behalf of former shareholders of companies sold to funds at “below market rates”

4 Companies Listed

• • Open Solutions •HCA • Toshiba Ceramics • Harrah’s • P&I Personal & Informatik • Linens ’n Things • Breed Technologies • Jacuzzi, Metals USA • Masonite International • Sourcecorp • Yankee Candle • Stores • Kerzner International • OSI Restaurant Systems • Education Management Corp. • Warner Chilcott • Serena Software • Burlington Coat Factory • Pacific Edge Software • Sungard Data Systems • Neiman-Marcus Group • • International • CarrAmerica Realty •Petco • La Quinta • Intergraph • Wyndham • Lenovo Group • • • Meristar Hospitality •West Corp. • HealthMarkets, Inc. • Somera Communications •Boca Resorts • Sintex Industries •Prime Hospitality • Vaibhav Gems • Kinder Morgan 5 Defendants

• Clayton, Dubilier & Rice • Madison Dearborn Partners • Silver Lake Partners • Apollo Management • Blackstone Group • Partners • • Merrill Lynch • Thomas H. Lee Partners • • Pacific Group

6 Plaintiffs’ Counsel

• Wolf Haldenstein Adler Freeman & Herz

7 Justice Department Inquiry

• Suspected conduct resembles bidders for art, antiques and used machinery prosecuted years ago • To understand where government “coming from,” helpful to understand those prosecutions

8 Auction Cases

• Bidders formed auction pools • One bid; others sat out or made dummy bids • Afterwards, private auction among themselves • Difference in price divided among pool members

9 Auction Cases

• Distinguishing feature: Secrecy • Otherwise, seller could consent or not, but not misled

10 Bidding Pools

• Not all bidding pools unlawful • Legitimate reasons to form pools: • Need for funds • Need for expertise • Need to spread risk

11 Bidding Pools

• Justice Department endorsed formation of joint venture pools years ago • Pools formed for legitimate reasons and not secret are not anticompetitive

12 Justice Department Inquiry

• Reportedly, government interested in whether, after funds form pools (or “clubs”), other funds forebear from forming competing pools on understanding that they will enjoy similar treatment when forming pools of their own in future deals • Also, government may be interested in whether funds not originally included in pool are invited to participate after pool succeeds in buying company

13 Private Class Action

• Private suit alleges that in “going private transactions” 1) Once a firm or group signed a definitive agreement others could not submit competing bids 2) Funds formed “clubs” to submit only a single bid 3) “Losers” were given “a piece of the deal” after company taken private; and 4) Funds shared information to limit bids and depress prices

14 Antitrust Applicability

• Threshold issue: • Whether antitrust laws apply or the SEC has exclusive jurisdiction.

15 Credit Suisse v. Billing

• Last June, Supreme Count asked views of Solicitor General in case involving claimed antitrust liability for IPO underwriters • Second Circuit had ruled antitrust liability possible • Solicitor General filed brief November 9th, urging Supreme Court to examine scope of antitrust immunity

16 Exposure?

• Felony: • Fines of up to $100 million or more • For individuals, fines of up to $1 million plus up to ten years in jail • Private class actions: • Automatic treble damages plus attorneys fees • Joint and several liability • No right of contribution

17 Real Trouble?

• Consortiums not secret • Capital and expertise needed to make these bids • Value of spreading risks • Existence of many sources of capital • = difficult to show pools unreasonably anticompetitive

18 Plus …

• Without evidence of actual agreements, difficult to prove collusion • Potential bidders not obligated to bid or form competing groups • Parallel decisions by similarly-situated businesses facing same economic circumstances do not prove conspiracy

19 What’s Next?

• So far, government inquiry on least formal basis: • Voluntary request letters, not civil investigative demands or subpoenas • Private action brand new: • How much activity likely before government makes next move?

20 Impact on Health of Private Equity Funds?

• Government inquiry: • Prophylactic effect • Attention • Sensitizing • Private action: • Expensive to litigate • “Settlement value” even if no merit?

21 How to Protect Yourself?

• Business as usual? • Consortiums? • Post-acquisition arrangements? • Quid pro quo? • Communication?

22 • Remember: Competition, competition, competition

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