Bidding Consortia (Club Deals)

• Pages: 113-132

113

BIDDING CONSORTIA (CLUB DEALS)

A. Introduction

Private equity firms often pursue investment opportunities on an

individual, or sole sponsor, basis and compete to varying degrees against

other private equity firms, financial investors, or companies. Sometimes

two or more firms, however, will pursue investment opportunities

together in competition with other private equity firms, financial

investors, or companies. This type of joint effort by private equity firms

to pursue investment opportunities collaboratively has been referred to as

a bidding consortium, and the transactions involving such joint efforts

have been referred to as “club deals.”

Since bidding consortia or “club deals” involve otherwise competing

private equity firms pursuing an investment opportunity jointly,

questions have arisen as to the legality of such arrangements under the

antitrust laws. Are these lawful arrangements that increase competition,

unlawful arrangements that decrease competition, or does such a

determination depend on facts and circumstances that must be analyzed

on a case-by-case basis? Are bidding consortia or club deals more

analogous to illegal bid-rigging arrangements or to lawful joint ventures?

The application of joint-bidding principles from antitrust law to

private equity club deals is an evolving area of jurisprudence. Arguably,

a potential analogy to club deals may be drawn from the practice of

“pooling” by antique dealers at public auctions during the 1980s, a type

of joint bidding that courts have addressed clearly.1In United States v.

Pook,2the court explained a conspiracy that resulted in the criminal

conviction of four companies and twelve individuals:

When a dealer pool was in operation at a public auction of

consigned antiques, those dealers who wi shed to participate in the pool

would agree not to bid against the other members of the pool. If a pool

member succeeded in purchasing an item at the public auction, pool

members interested in that item could bid on it by secret ballot at a

1. See Lita Solis-Cohen, Jury Convicts Chesco Antiques Dealer of Antitrust

Violation for “Pooling,” PHILA. INQUIRER, Oct. 27, 1987; Lita Solis-

Cohen & Michael D. Schaffer, 4 Antiques Dealers Accused of Bid Rigs,

PHILA. INQUIRER, Jan. 8, 19 87.

2. 1988 WL 36379 (E.D. Pa. 1988), aff’d, 856 F.2d 185 (3d Cir. 1988).

114 Private Equity Antitrust Handbook

subsequent private auction (“knock out”)[.] The pool member bidding

the highest at the private auction claimed the item by paying each pool

member bidding a share of the difference between the public auction

price and the successful private bid. The amount paid to each pool

member (“pool split”) was calculated according to the amount the pool

member bid in the knock out.3

Although the jury found the defendant’s actions “purposely anti-

competitive,” the court observed that it “could have instructed the jury

that defendant’s conduct was a per se violation of Section One of the

Sherman Antitrust Act.” 4 The pooling scheme amounted to a

“[c]onspiracy to keep auction prices artificially low and non-

competitive,” through which “[c]onsignors and auctioneers were

invariably deprived . . . of their proper share of the ultimate sales

prices.”5 Simply put, “[a]greeing not to bid is bid-rigging; keeping the

prices lower than they would have been if competitive is price-fixing.”6

Crucially for our purposes, however, the court found that in the

context of these antique auctions “[t]here was no credible evidence of

pro-competitive effects of auction pooling.”7 As detailed below, had the

court been presented with credible evidence that the defendants’

practices did increase competition—as is often the case with private

equity club deals—then those practices would not have been a per se

violation of the Sherman Act, and would instead have been subject to a

more comprehensive analysis weighing all of their costs and benefits to

the market. Cases directly challenging private equity club deals have

now begun to emerge and offer guidance for navigating the antitrust

requirements for these transactions.

B. Frameworks for Analyzing Competitive Harm

Section 1 of the Sherman Act (Section 1) prohibits contracts,

conspiracies, and combinations in restraint of trade. 8 Because most

contracts arguably restrain trade to some degree, courts have long

interpreted Section 1 to prohibit only those contracts or combinations

3. Id. at *1.

4. Id. at *4.

5. Id. at *3.

6. Id.

7. Id.

8. 15 U.S.C. §1.