New York-based MidRail claimed in a lawsuit filed in the Supreme Court of New York on Friday that Partners Group was considering investing in or with MidRail, but used confidential and proprietary business information shared by the rail firm to instead compete with it.
According to the lawsuit, Partners Group’s actions caused the company “tens of millions of dollars in lost competitive advantage” and “will certainly cause MidRail further damage in the future”. The company called Partners Group’s expressed intent to invest “a ruse”.
A spokeswoman for the Swiss firm told Private Equity International: “Partners Group considers the lawsuit filed today to be wholly without merit, and will vigorously defend against the asserted claims. We will not comment further on this pending litigation.”
A lawyer for MidRail would not provide further comment, and the company’s chair did not return a phone message and email immediately.
In the complaint, MidRail claims that it began discussions with Partners Group in 2017 about partnering for potential transactions in the rail industry, with MidRail providing the rail “know-how” and the firm putting up the money.
“As one of MidRail’s key strategic advantages lies in its proprietary information, MidRail required PG to enter into a non-disclosure agreement that would protect this information,” the lawsuit reads. That NDA was signed in June 2017, according to MidRail, and was reviewed in January 2019. The company says the details it shared included a deal pipeline as well as intellectual property, financial models and operational plans, which under the NDA could only be used by Partners Group to conduct deals with MidRail.
In 2017, MidRail began investigating a potential acquisition of Patriot Rail, another rail-line operator, before Patriot was on the market, and contacted Partners Group to potentially invest alongside it, according to the lawsuit. That discussion continued through 2018.
In 2019, the two firms worked together on another potential acquisition, this time of Petroleum Service Corporation. That deal fell through and PSC was sold to Aurora Capital Partners for $335 million, the lawsuit claims.
In May last year, Partners Group allegedly informed MidRail that it was planning to put a first round bid on Patriot, telling MidRail it would partner with the firm if the bid made it through to round two. MidRail then provided more confidential information to Partners Group under the NDA. However, when the firm made it to the second round of bidding in mid-June, it told MidRail it was pursuing the acquisition on its own, it is claimed.
While MidRail searched for another financial backer, Partners Group allegedly repeatedly met Patriot’s management and at a dinner shared MidRail’s plans for the acquisition, including a pipeline and strategy, representing them as its own.
Still unaware of Partners Group’s actions, MidRail says it found a new backer and planned its own bid for Patriot that “was just high enough that it would outbid anyone that did not have access to MidRail’s confidential information,” the lawsuit claims. The company’s trade secrets projected “substantially greater growth for Patriot than conventional wisdom in the rail sector allowed,” meaning MidRail’s high bid could still theoretically result in large returns on its planned investment.
But when MidRail discovered Partners Group was allegedly using its proprietary information and strategy in the firm’s own bid, it decided it had to essentially bid against itself. It put up another $100 million for the acquisition and eventually closed the deal.
MidRail also claims that “PG is continuing to use MidRail’s confidential information for purposes barred by the NDA and to MidRail’s detriment, including as part of PG’s ongoing fundraising efforts.”
Matthew Schwartz, a partner at Boies, Schiller and Flexner, which represents MidRail, said about the case: “The ability to confidentially share sensitive business and financial information is essential for an effective, well-functioning private equity market. Companies would never divulge proprietary information to potential investors, partners, or buyers if they could not be sure that information would not later be used against them. Partners Group’s violation of that trust is so egregious that MidRail had no other choice than to take legal action to protect its business.”