Antitrust

Antitrust agencies are prioritising the enforcement and deterrence of anti-competitive conduct, especially in consumer-facing markets where consumers most keenly feel the effects of the ongoing cost of living crisis.

In this context, and following the conclusion of some long-running, high-profile cases in the UK especially, private equity investors should be aware of their potential exposure to parental liability for antitrust breaches committed by their portfolio companies (both current and divested), and consider ways to protect themselves.

Parental liability: General EU/UK principles

It is well established under EU and UK law that a parent company (including a PE investor) can be held jointly and severally liable for the anti-competitive conduct of its subsidiary where it exercises “decisive influence” over that subsidiary at the time of the conduct in question. If so, the parent company is treated as having participated in the infringement on the same basis as its subsidiary – regardless of whether it was actually involved in the breach or even aware of it. In practice, this approach has resulted in huge fines against parent companies up to a cap of 10% of global group turnover – all designed to deter antitrust breaches via effective compliance. 

The exercise of decisive influence is presumed when the parent owns 100% of the shares and/or voting rights. It is very difficult in practice to rebut this presumption – and so far has never happened at EU level. Moreover, lesser interests – and even minority interests plus “economic, organisational and legal links” such as board representation or the receipt of information on strategic and commercial plans/performance – can also be sufficient to evidence decisive influence depending on the circumstances.

A bitter pill: UK embrace of the strict EU position 

Two recent high-profile Competition Appeal Tribunal judgments (Liothyronine and Hydrocortisone) have put parental liability firmly in the spotlight in the UK. Both relate to appeals of significant fines imposed by the UK Competition and Markets Authority for abusive pricing of pharmaceutical drugs. They also both involve PE investors being held responsible for their subsidiaries’ conduct during their period of ownership.

The judgments shed light on the steep evidential burden required to defeat a finding of decisive influence:  

• In Liothyronine, the CMA went to great lengths in its final decision to demonstrate that the PE firms involved were not pure financial investors, but rather equivalent to majority shareholders with roles of “active and engaged ownership”. The CMA pointed to significant volumes of internal documentary evidence including investment committee memoranda, third-party advisor documents, management presentations to lenders and rating agencies, and even the PE firms’ annual reports. According to the CAT’s ruling, the CMA had done enough to establish that they had exercised decisive control over the portfolio company.
• In Hydrocortisone, the CAT confirmed one possibility for successfully rebutting the presumption of decisive influence based on a majority shareholding. The CAT held that several parents provided sufficient evidence to show that they did not exercise decisive influence over the infringing subsidiary during the period that it was subject to a legal hold separate regime, because the appointed third party hold separate manager was “afforded a very considerable ministerial discretion (and so control)”. This shows that a hold separate defense is possible to rebut the presumption of decisive influence – and could also be successful at EU level for the same reasons. However, in reality it applied only to a couple of the parents in very specific circumstances. It did not apply to any of the PE houses.     

Although turning heavily on their facts, these cases show that the evidential threshold for investors to prove that they do not exercise decisive influence is technically not insurmountable, although in reality only possible in extremely limited circumstances. They also show how the CMA uses internal documents to evidence decisive influence.

These cases also highlight the particular challenges in acquiring a target company that is subject to an ongoing investigation, particularly for alleged excessive pricing.  In Hydrocortisone, the CMA fined a parent that acquired the target company during the course of the investigation, whereas in Liothyronine the CMA did not fine a PE investor that acquired the target company shortly before the CMA reached its decision. 

Ultimately, the CAT’s approval of the CMA’s approach in respect of decisive influence in both cases sends a clear message that the CMA is ready and able to use its powers to pursue financial sponsors (as well as any other parent company) in the same way as the European Commission – notwithstanding that post-Brexit the UK could move to a less strict approach if it so wished.

Roll up, roll up: Heightened US scrutiny

The US agencies have also increased scrutiny of PE firms in recent enforcement actions. In September, the Federal Trade Commission filed a lawsuit against Welsh Carson Anderson & Stowe, a PE firm that co-founded and funded U.S. Anesthesia Partners in 2012. The FTC alleges that Welsh Carson eliminated competition and raised prices for anaesthesiology services in Texas through USAP, in particular through its “roll-up” strategy. The FTC alleges that USAP became dominant through its strategy of acquiring most of the large anaesthesia practices in Texas. The roll-up strategy was supported by alleged price-fixing and market-sharing arrangements.

The FTC goes into great lengths in its complaint to explain the structure of the various Welsh Carson funds involved. Even though Welsh Carson has only a minority ownership of USAP, the FTC alleges that Welsh Carson “controls” USAP as it has actively directed USAP’s corporate strategy and decision-making, particularly with respect to M&A activities in relation to anaesthesia practices in Texas. Welsh Carson and USAP have sought to have the FTC’s claims dismissed. While this plays out, just like in the UK, the message to PE firms is clear that the antitrust agencies will be aggressive in bringing cases.

Similarly, PE roll-up strategies are also of growing concern in the UK under merger control rules, especially in consumer-facing markets, with a flurry of recent veterinary cases. Meanwhile, recently published proposals to amend the UK de minimis framework require consideration of whether a merger is one of a potentially large number of mergers in the same market, meaning that smaller mergers will not necessarily escape scrutiny.

Practical steps to mitigate the increasing risks

In light of these recent judgments and enforcement actions, PE investors should:

1. Conduct thorough due diligence and market analysis before investing in businesses, in particular regarding their corporate governance policies and processes and the extent of senior management oversight. This will be particularly important for targets that could be seen to be dominant in one or more markets or which frequently enter into agreements with actual or potential competitors.
2. Be aware that internal documents (including deal team documents and presentations) may be scrutinised by authorities, even when created prior to the planned acquisition of the business.
3. Adopt and implement effective group-wide antitrust compliance programmes to avoid antitrust breaches. 
4. Expect greater scrutiny of perceived roll-up strategies – especially in consumer-facing industries – and build this into deal strategy and timing for standalone transactions.