Some of the biggest private equity firms in the world can breathe a sigh of relief…sort of.
US district judge Edward Harrington in Boston said this week emails and other forms of communication from industry luminaries such as The Blackstone Group’s Tony James and Kohlberg Kravis Roberts co-founder George Roberts was not evidence of an overarching collusion conspiracy made during the mega buyout period between 2003 and 2007. However, he allowed a much narrower case to move forward.
Plaintiffs – which include a Detroit police and fire pension fund and shareholders of chip maker Freescale Semiconductor prior to its buyout in 2006 – are recalibrating their court strategy after the judge’s ruling.
“Many of the Defendants’ executives also knew each other personally and corresponded informally… [having] appeared at the same events, communicated directly with one another, and referred to each other by nicknames,” Harrington wrote on Wednesday.
The evidence shows a kaleidoscope of interactions among an ever-rotating, overlapping cast of defendants as they reacted to the spontaneous events of the market
“Even where the evidence suggests misconduct related to a single transaction, there is largely no indication that all the transactions were, in turn, connected to a market-wide agreement. Rather, the evidence shows a kaleidoscope of interactions among an ever-rotating, overlapping cast of defendants as they reacted to the spontaneous events of the market”, the judge ruled.
When pressed at the second day of oral argument for evidence supporting a “larger picture” of an overarching conspiracy, the plaintiffs largely abandoned that argument to focus instead on a lack of action taken by 10 of the world’s largest buyout shops.
Defendants are a who’s who list of private equity firms, including: Apollo Global Management, Bain Capital Partners, The Blackstone Group, The Carlyle Group, Goldman Sachs’ private equity group, Kohlberg Kravis Roberts, Providence Equity Partners, TPG Capital, Thomas H. Lee Partners and Silver Lake as well as 11th defendant, JP Morgan Chase, which provided financing and advice for some of the transactions at issue.
Plaintiffs are now resting their case on defendants agreeing not to “jump” each other’s deals, meaning a superior bid would not be submitted after a target company announced a signed agreement with one of the firms.
According to court papers, the plaintiffs’ attorney argued: “[y]ou have other activity that is illegal like bid rigging and other things like that but that's not the agreement. The agreement is not to jump a signed deal or a deal that hit a certain level in an auction …”
The plaintiffs’ theory rests primarily on a contemporaneous email written by a TPG executive during the Freescale transaction made at the height of the LBO boom in 2006 for $17.6 billion, which states “KKR has agreed not to jump our deal since no one in private equity ever jumps an announced deal”.
Defendants counter that “jumping” an announced deal was simply bad business. A competing bid may result in the target suffering break-up fees, and any rival bid can be matched by a current bidder. In similar vein, GPs said they would be hesitant to jump a deal for fear of retaliation from other GPs on future deals, court papers showed.
Acknowledging the ambiguities in private equity dealmaking, Harrington wrote that: “Plaintiffs persistent hesitance to narrow their claim to something cognizable and supported by the evidence has made this matter unnecessarily complex and nearly warranted its dismissal.”
“Nevertheless, the court shall allow the plaintiffs to proceed solely on this more narrowly defined overarching conspiracy because the plaintiffs included allegations that defendants did not ‘jump’ each other’s proprietary deals.”
The judge also allowed plaintiffs to pursue a claim alleging some of the defendants had “stepped down” from making superior bids after Bain, KKR and others entered into an agreement to acquire hospital chain HCA for $21.3 billion in 2006. Off the hook on this specific claim is Bain Capital and Kohlberg Kravis Roberts, the ultimate acquirers of HCA.