The antitrust world is changing. US agencies’ eyes are turning to finance, with the newest enforcement target being private equity (“PE”). Repeated public statements and speeches of US antitrust officials under the Biden administration clearly signal this policy shift. This is no surprise for Europe. The European Commission, confirmed by the Courts, has also recently targeted PE investors on antitrust grounds in high-profile cases. Most interestingly, being a minority investor is no longer a bulletproof line of defense. But how come, and what is the cause of concern? My latest article unravels this plot.
In my paper, I expose why these recent PE developments are of great significance and why they indicate a seismic shift in the antitrust edifice, both theoretically and practically. I set off by asking a simple question: where does competition, antitrust, and private equity intersect? I then structure my analysis along three main dimensions: i) discussing market trends and economic theory and exploring the new economic learning regarding evolving business practices and strategies of industrial firms and financial investors, ii) continuing with antitrust law enforcement, and comparing doctrinal developments in the US and the EU vis-à-vis private equity firms in their capacity as minority shareholders, and iii) rounding off with some notes on politics and policy considerations, which may imply a constraint on antitrust’s outer limits as a discipline and its potential overreach into finance.
In a sense, private equity is the victim of its success. Mergers and acquisitions (“M&A”) and the PE industry have reached record heights in recent years. It is no wonder then that they may be under closer antitrust scrutiny. But the surprise comes from the fact that antitrust enforcers resort to novel theories of harm relating to their investment strategies to attack PE. On the one hand, PE investors increasingly engage in serial acquisitions within a specific industry (“rollup acquisitions”). As a result, they often have parallel investments in rival firms in their portfolios, although those are usually minority shareholding positions (“common ownership”). In addition, unlike large asset managers like BlackRock, PE investors are typically “active” as they seek to influence the management of the firms they invest in.
Antitrust law and policy’s repositioning in reaction to economic reality indicates a more aggressive attitude and a wider philosophical change. For instance, US antitrust officials now express concern about (i) the substantive impact of “competitive overlaps at the investor level,” and note (ii) their preference for strategic over financial buyers of divested business during the remedy stage of likely harmful mergers that may be cleared subject to conditions. Moreover, they underscore (iii) the aggregate competition effects of PE buyouts even if each transaction of a group of potentially interrelated acquisitions may seem unproblematic, and are attentive to upholding (iv) the continued effectiveness of merger reporting rules, which according to a proposed reform shall require aggregation of holdings of all “associates” of the acquiring “person,” whose definition has been expanded to include all entities under “common investment management” (e.g., within the same family of separate PE funds). In addition, the US Horizontal Merger Guidelines are currently in the process of potential revision, and private equity and common ownership prominently feature among the special topics raised for comments.
Has economics something to say about these enforcement and policy trends? Most definitely. Some things come as new learning and may, to some extent, justify antitrust agencies’ concerns. Others are old theories to be applied in new settings, perhaps with some counterintuitive results. Yet, overall, it is hard to draw general conclusions: the economic analysis of PE involves theoretical tradeoffs in terms of likely harms and benefits, whereas the empirical evidence on PE’s impact on competition is mixed depending on context-specific parameters. So, where is the catch? The catch is that the tradeoffs at play are different and partially novel. To begin, antitrust has traditionally kept from regulating the market for corporate control (and for good reasons) unless necessary, such as when deciding among alternative divestiture buyers in merger control. But what is this market, and who is competing in it? This is not industry-level competition. Rather, financial and strategic bidders compete to acquire control of companies, producing two beneficial effects. First, shareholders benefit from competition in this market as it disciplines and induces managers to run companies efficiently, thus minimizing agency costs. It is understandable, then, why corporate and securities laws that deal with the internal affairs of firms and the efficiency of capital markets are primarily responsible for safeguarding competition in the market for corporate control. Antitrust’s main mission is to focus on the external effects of firm behavior on product markets. Strategic buyers usually increase product market concentration and may negatively impact competition in terms of prices, quantities, innovation etc. For this reason, non-strategic acquirers such as PE have been favored when selecting likely divestiture buyers.
Second, the presence of PE provides lifeblood in this market for corporate control and induces (even dominant) industrial firms to think strategically and be ready to act as “wanna-be” acquirers in order to pre-empt unfavorable market developments in an otherwise “merger-stable industry.” In other words, PE introduces competition between different organizational forms with potential organizational and dynamic efficiency benefits. In this light, it brings added value and has a potential benign efficiency justification that needs to be weighed against any market power motives that antitrust enforcers may associate with. At the same time, the fact that PE investors are common owners considerably complicates the substantive competitive analysis of mergers and the assessment of remedies. On the one hand, an efficient rationale (synergies) for the acquiring firm pursuing M&A under common ownership cannot be presumed. This suggests there may be no reason to favor strategic acquirers in such a setting. On the other hand, common minority ownership under certain circumstances (for instance, absent blockholders) may operate as a “partial merger” substitute with the comparative advantage that Williamson’s “selective intervention” is possible. Oliver Williamson, a Nobel laureate in economics, was a pioneer on analyzing the structure of organizations. Thus, common ownership by PE may have an additional organization efficiency rationale that could justify the more friendly treatment of financial over strategic acquirers.
How does the law play in? In the EU and the US, there is heightened scrutiny of PE, even when in the form of minority investments. At a high level, the same minimum formula for antitrust enforcement applies. That is, agencies need to find at least de facto control exercised by the PE investor over its portfolio firms in connection to the minority ownership interests it holds in them. Counterintuitively perhaps, control still matters, although it may be found in different forms today compared to the past – the ownership and investment landscape has changed. The logic for allowing increased enforcement against PE is also similar: with more power, more antitrust scrutiny is incumbent. However, when looking closer at antitrust doctrine, the mechanics and legal tools used in the US and the EU to pursue likely harmful PE cases are different; specifically in relation to minority PE investments giving rise to de facto control, US antitrust employs merger control law, whereas EU competition law uses the parental liability doctrine as a basis for enforcement.
Why such difference? In short, the differential enforcement routes chosen to tackle minority shareholdings that do not entail outright “legal control” can be explained by the distinct structural limitations in the law of each jurisdiction. In the EU, merger control scrutiny is limited by the formalistic jurisdictional criterion of “decisive influence,” which cannot capture all potentially harmful instances of (jointly) de facto controlling acquisitions. In the US, unlike the EU, there is a presumption against parental liability for antitrust violations committed by subsidiaries or affiliate companies based on the corporate law principle of separate “legal personhood.” This is so although, as a matter of theory, antitrust uniformly counts “economic units” – i.e., it applies to entities that may form part of the same business group regardless of their organizational structure, which it counts as a “single economic unit.” In practice, however, the interpretation of this fundamental antitrust principle has developed in divergent ways in the EU and the US for reasons of path dependence.
Is this the end of the story? Not quite. Looking at previous historical and contemporary developments in both jurisdictions, one may be surprised by latent patterns of theoretical commonality and practical convergence. For instance, before we had a pan-European Merger Regulation at the EU level, Articles 101 and 102 TFEU were used as a de facto merger control regime to scrutinize problematic controlling and non-controlling shareholding acquisitions. Remedies imposed during the application of these rules to approve minority shareholding transactions included forward-looking behavioural commitments and limits on further shareholding acquisitions. These resemble the “prior notice” and “prior approval” requirements that US antitrust agencies have imposed for the first time in 2022 on PE firms’ attempted acquisitions reviewed under merger control rules. In a similar vein, there are signs that US courts may interpret and implement in a less formalistic way whether PE firms may have acted beyond their financial investor status and are subject to parental liability for their portfolio firms’ antitrust violations depending on the facts of the case.
So how is this story to end? Turning to the politics of private equity when thinking about corporate control and antitrust’s evolution, I provide three scenarios that may rationalize how we reached this moment in antitrust’s history and some recommendations for the future. For one, “pragmatic” or “populistic” rationales may justify recent aggressive antitrust enforcement against PE. For yet another, while antitrust’s extension to the realm of finance may be valid, it may also bear risks if subject to “anarchist” tendencies. Without limiting principles, antitrust’s intervention in the “market for corporate law” can have unintended consequences. Antitrust could also end up being “protectionist” of corporate managers against potentially controlling shareholders with counterproductive effects for its actual protected class, consumers. For this reason, my article concludes that we need increased dialogue between antitrust and corporate or financial law regulators and targeted antitrust policies that aim to safeguard competitive markets without endangering competitive companies—substance over form, but balance above all.
Anna Tzanaki is a Senior Lecturer at Lund University’s Faculty of Law.
This post is adapted from her paper, “Antitrust’s Increasingly Long Arm: (Minority) Private Equity Investors Beware,” available on SSRN and published in Competition Policy International’s October 2022 Antitrust Chronicle on Private Equity.