Client Alert: Fall 2023 Antitrust M&A Developments
For the First Time FTC Sues a Private Equity Firm Over “Roll-up Strategy”; DOJ Separately Launches “Safe Harbor” Self-Reporting Policy For Closed M&A Deals
Date: October 6, 2023
FTC Sues Private Equity Firm Over its Portfolio Company “Roll-up” Strategy
In the FTC’s first court challenge ever to “roll-ups” by private equity firms, on September 21, 2023, the FTC sued PE firm Welsh, Carson, Anderson & Stowe (“Welsh Carson”), certain of its affiliated entities, and a Welsh Carson anchor portfolio company, for pursuing a “roll-up strategy” to consolidate anesthesia practices in key markets in Texas, including Dallas and Houston, alleging significant and on-going violations of federal antitrust laws. Specifically, the FTC brought to bear multiple antitrust law enforcement tools available to it by asserting separate claims under Section 7 of the Clayton Act (which generally prohibits acquisitions that “may . . . substantially . . . lessen competition, or ... tend to create a monopoly”); Section 1 of the Sherman Act (which generally prohibits agreements “in restraint of trade”); Section 2 of the Sherman Act (which prohibits any attempt to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce”); and Section 5 of the FTC Act (which generally prohibits “unfair or deceptive acts or practices in or affecting commerce”). In its complaint the FTC seeks both “structural relief” (i.e., potential forced divestitures of prior closed deals) as well as injunctive relief to enjoin Welsh Carson from pursuing “similar and related conduct in the future.”
According to the FTC’s complaint, in 2012, Welsh Carson formed a platform portfolio company, U.S. Anesthesiology Partners, Inc. (“USAP”), to pursue the consolidation of anesthesiology practices in key Texas markets, including Dallas (where USAP has a 68% market share) and Houston (where USAP has a 70% market share). Specifically, the FTC alleges that USAP conspired to monopolize “hospital-only anesthesia” markets in each market. The complaint also alleges that a subsequent series of large and small “tuck-in” acquisitions in Dallas and Houston violated Section 7 of the Clayton Act. The FTC asserts that the acquisitions were illegal “whether considered individually or as a series.” Notably, the FTC named the PE sponsor, Welsh Carson, as an additional defendant and alleged that it “controlled, directed, dictated or encouraged USAP’s conduct.”
The FTC also challenged USAP’s acquisition of one anesthesiology practice in each of San Antonio, Tyler and Amarillo under Section 5 of the FTC Act. Specifically, noting that these acquisitions “did not increase market concentration,” the FTC did not allege a violation under Section 7 of the Clayton Act, but instead alleged that these acquisitions constituted “unfair methods of competition” under Section 5 of the FTC Act because USAP raised the rates of each acquired practice post-closing.
Finally, the FTC alleged that USAP and Welsh Carson violated Section 1 of the Sherman Act through “collaboration agreements” with competing anesthesiology practices that effectively constituted price-fixing conspiracies, although most agreements were entered into by USAP’s predecessor companies. The FTC complaint also asserts a separate violation of Section 1 of the Sherman Act arising out of an alleged market allocation agreement between USAP and “an actual or potential competitor.”
The acquisitions involved presumably did not meet the filing thresholds requiring pre-consummation notice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) at the time of closing, and are being challenged years later. The FTC action serves as a reminder that an acquisition will not escape antitrust scrutiny because either an HSR Act filing is not required or, even if a filing is required and made, a transaction receives HSR Act clearance. Specifically, even small non-reportable transactions with an acquisition value well below the HSR Act filing thresholds have increasingly been challenged, sometimes years after the fact. With specific reference to acquisitions by PE firms, Lina Khan, FTC Chair, wrote that “one reason why enforcers may not have scrutinized the impact of roll-ups previously is the relatively small size of each acquisition.” In fact, over the past two years, the FTC and DOJ have increasingly issued “warning letters” notifying merger parties that, despite the expiration of the HSR Act’s waiting period, the agencies specifically retain the power to challenge both proposed and consummated transactions. Companies and others should remain mindful that HSR Act filing obligations are often triggered by a wide variety of non-M&A or “merger” transactions, including asset acquisitions, initial and follow-on investment transactions, bankruptcy sales, joint ventures and other “strategic alliances,” patent or other IP licensing activities, NewCo formations, and the exercise, exchange or conversion of options or other convertible securities.
What does the FTC Complaint mean?
Roll-up acquisitions have gained increasing attention from both the FTC and the DOJ, including being specifically addressed in the recently released draft Merger Guidelines, which states that the agencies will evaluate not only a specific transaction but also “a pattern or strategy of growth through acquisition by examining both the firm’s history and current or future strategic incentives.” Additionally, recently proposed widespread changes to the HSR Act portend much deeper reporting required under the Act, including a listing of all acquisitions consummated at any time in the 10-year period prior to filing.
Although Welsh Carson held a majority equity ownership position in USAP at the time of its 2012 founding, its ownership stake over time was reduced to 23%. Despite owning less than a quarter of the company, the FTC is alleging that Welsh Carson should still be held legally responsible for USAP’s acquisition strategy and conduct in light of Welsh Carson’s Board seats, voting rights, and the strategic, operational, and financial support it provided to USAP.
While the specific facts, market dynamics and behavior alleged in the FTC’s complaint paint a compelling picture of an acquisition strategy resulting in real anticompetitive harm, the FTC complaint does not mean that all roll-up strategies are anti-competitive or will be subject to agency challenge. That said, PE sponsors and investors will want to pay close attention to future PE/roll-up enforcement initiatives in light of the statement by FTC Chair Khan that “the antitrust laws may apply to parent companies and investors if they directly participate or conspire to participate in anti-competitive conduct.”
DOJ Announces “Safe Harbor” Self-Reporting Policy For Previously Consummated M&A Deals
Separately, on October 4, 2023, the DOJ issued a new policy statement that it will not prosecute acquirers of companies which self-report potential past antitrust misconduct and violations occurring within the target company’s business, if such reporting occurs within six months of the acquisition’s closing.
U.S. Deputy Attorney General Lisa Monaco said the DOJ will provide a “safe harbor” to acquiring companies which disclose the past misconduct within this six-month period, and give the acquirer one year after the closing to fully remedy the issues. The six-month threshold applies whether the misconduct was discovered pre- or post-acquisition, Monaco said.
“Going forward, acquiring companies that promptly and voluntarily disclose criminal misconduct within the safe harbor period, and that cooperate with the ensuing investigation, and engage in requisite, timely and appropriate remediation, restitution, and disgorgement -- they will receive the presumption of a declination,” Monaco said. A declination refers to a case that is not criminally prosecuted due to the company’s voluntary disclosure, cooperation, remediation and, potentially, payment of certain fines.
Regarding the six-month and one-year self-reporting time frames, Monaco noted that the deadlines could be extended “depending on the specific facts, circumstances, and complexity of a particular transaction.”
What does the new DOJ policy mean?
Presumably, in keeping with the DOJ’s stated desire to reform its handling of corporate criminal prosecutions, the goal of this new policy is to reward acquirers for honesty generally and to specifically incentivize the reporting of antitrust misconduct uncovered by diligence or otherwise in the course of an acquisition. In any event, the new policy underscores the importance of conducing meaningful regulatory diligence, as Monaco also stated “[i]f your company does not perform effective due diligence or self-disclose misconduct at an acquired entity, it will be subject to full successor liability for that misconduct under the law.”
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This Alert has been prepared for general informational purposes and a service to our clients and friends. It has been prepared in a summary manner only and is not intended as legal advice. Readers are urged to consult their legal counsel concerning any particular situation and specific legal questions.
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