Clifford Chance

BC

Welcome to the Clifford Chance Podcast where we discuss pressing issues and trends facing the business world today.
I'm Brian Concklin, I'm a partner in the firm's global antitrust practice, and I'm based here in Washington, DC.

CS

And I'm Caroline Scholke. I'm a counsel in the Dusseldorf office of Clifford Chance.
So Brian, can you tell us a little bit about your practice in the finance and private equity sector?

BC

Yeah, thanks, Caroline. Me personally, I advise numerous financial investors and private equity firms in all aspects of antitrust guidance and advice.
Oftentimes, a majority of that work is compliance with the Hart Scott Rodino pre-merger notification filing process, but it's also compliance work. I think despite some of the rhetoric about the economy and the aggressive nature of the US Antitrust enforcers today, here in the US, we are seeing a lot of uptick in PE deals in the past few months. What about you on the EU side?

CS

Well, it's been quiet on deals involving financial investors and PE houses in Germany and in the EU in the recent past. But what we are currently seeing is that the trend is moving upwards again and financial investors, private equity houses, they are increasing their investments in Europe again, not only, but in particular in the healthcare sector.
So Brian, we've been at the ABA last week. What are your biggest takeaways that you'd want your clients to know in the finance and private equity sector?

BC

There were two very high-level topics I think our private equity and financial investor clients should keep in mind or have as takeaways. The first was really a focus on the HSR form, and the second was a focus on private equity investments in the healthcare sector. On the HSR side, breaking that into two pieces, most clients, particularly in the private equity sector, but I would say any client, should be aware that the new HSR form should be coming out within weeks. That's at least what the panelists indicated. The DOJ indicated that the new HSR form should be less burdensome than what was proposed earlier this year, which is a fantastic sign for our clients. But we still expect there to be large changes and there to be much more information required in the new form.
The second piece on the HSR angle is that the FTC official signaled during one of the panels that the US agencies are concerned that parties, particularly private equity firms, are not fully compliant with the HSR Act. They in fact mentioned that they think some filings are quote "skinny," particularly when it comes to item 4 documents. So they are more closely scrutinizing filings, particularly private equity filings, and signal that they may in fact, if they find an issue, go back to previous HSR filings to see if there were omissions in those as well.
Although the panelists noted that the FTC evaluates all deals on their own, and it's kind of back pedaled a little bit, clearly the agencies are more focused on private equity deals than they have been before. Caroline, how does that sound to a non-US lawyer, and how do you think our non US clients are going to take that?

CS

It sounds surprising, I must admit. Surprising that private equity investors are in the scope of the US agencies because any private equity is no corporate structure, which is in the focus of competition agencies in the EU and generally all corporate structures are treated equally from an EU side perspective.
And well, it's true that there's increasing number of cases where PE houses receive clearances, only subject to commitments. But this is not due to the fact that the acquirer is a PE investor, but rather because there are overlaps in the case.
Maybe another observation we did from an EU perspective on EU filings, I mean there were also movements in the EU in the merger control world, but actually they go into the opposite direction. The EC published last year its simplification package which reduces the burden, at least for straightforward filings with no overlaps.
Well, some of the amendments do not seem to be simplifying the filing procedure, at least not from the party's perspective, but rather from the agency's perspective.
So Brian, you also mentioned that PE investments in healthcare are also in the focus.
Can you say more on that?

BC

Absolutely yes, Caroline, thanks for the question. So the ABA wasn't a coming out party in terms of this issue. Partitioners and clients, etc., have known for a while that the US agencies have been focused on private equity investments in the healthcare space. Going back to September of last year, the FTC suit, Welsh, Carson and US Anesthesia partners regarding alleged efforts to consolidate and monopolize the market for anesthesiologists in parts of Texas. The FTC's complaint at the time alleged that part of that conduct was roll up acquisitions in the space. And then in March of this year, the DOJ, FTC, and Department of Health and Human Services together issued a joint RFI seeking public comments on information regarding the effects of transactions in the healthcare space by private equity firms. I think what came out during the ABA was the FTC Bureau of Competition Director said that the FTC is hyper focused on PE acquisitions in the healthcare space. So really, if anything, it was just another red flag that this is something that the agencies are very much focused on. In particular, the agencies are focused on concerns around private equity firms acquiring, through a series of smaller acquisitions of dispersed competitors or competitors in dispersed spaces, consolidating the market and thereafter being able to potentially raise prices or reduce the quality of care, and that's really what private equity clients should be aware of, especially as they're thinking about making acquisitions in the healthcare space, is that this is something that the agencies are focused on and it is something that they very much are concerned about at this time.

CS

Yeah, we actually see similar developments in the EU.
So there's an increasing number of PE investments in the healthcare sector, being it regarding pharmaceutical companies or rather clinics, and also including the roll ups you mentioned, and many of them actually fall under the radar of the agencies, given the partly minor turnover in one of the targets. And there what we do have in, for example Germany and Austria, the transaction value threshold comes into application. So the healthcare sector is actually a very, very relevant sector for these filing thresholds. And also we always have to keep in mind potential Article 22 referrals to the European Commission, which need to be considered in very much detail.

BC

You know, Caroline, sorry, it's interesting you say that because you know, I would just note that that's also one of the key focuses of the US antitrust enforcers is non-reportable transactions. PE firms should absolutely keep in mind that just because the deal does not get reported under the HSR Act, it does not mean it could not be later scrutinized, and in fact not only would that deal that specific deal be scrutinized, but there's also the possibility that the agencies could look at that deal in combination with a number of other deals that also may not have been reportable or may have been reportable and find a pattern of what the agencies are referring to as serial acquisitions in a given space.

CS

Yeah, thanks very much for sharing this insight, Brian.
And besides this merger control aspect, what I've also heard is that the FTC noted that they are focused on three issues: common ownership amongst competing providers, extractive practices and roll ups, as you just mentioned in the last part.
So could you maybe explain more about the FTC's focus regarding common ownership?

BC

Yes Caroline, it actually is broader than just the FTC. This has been a focus of the DOJ as well, and it all stems back to Section 8 of the Clayton Act. For those not familiar, Section 8 of the Clayton Act generally prohibits interlocking directorates. Although this is something that affects corporates, it also is a big concern amongst the agencies for private equity clients and for private equity investors as they have many, oftentimes many minority positions across an industry. And the concern that the agencies have is where a private equity firm may have various funds with small positions that provide them with board seats on the competitors. And so PE firms really need to ensure that they're monitoring their investments across their portfolio and monitoring where they may have a board seat on one competitor through one fund and a board seat on another competitor, either through that same fund or a different fund. And it also is not a get out a jail free card, even if (and this is not a criminal offense, let me make that clear, I was saying that colloquially) it is not a free pass to have a different individual sit on the boards of two competitors. It could be two separate individuals, and the US agencies are taking the position that still could be a violation of Section 8. And in fact the DOJ has been very aggressive as of late in enforcing Section 8, both in the merger context and also going out and seeking out potential Section 8 violations via public information, SEC filings, disclosures and through other means.
Caroline, what was not covered during the spring meeting that you think should get more attention during the next conference or in the next year?

CS

So this is definitely Article 22 referrals, which was, of course, briefly discussed, but also other EU-specific updates and changes such as the implications of the FSR.

BC

OK. And you had also mentioned Article 22 earlier on, what do you expect to happen with Article 22 or what should our PE clients particularly know about the current status of Article 22?

CS

Yeah, maybe as a recap, in 21, the European Commission issued guidance, reversing the past practice as regards to Article 22. They announced that they will encourage and accept referrals initiated by member states authorities, even if the relevant transactions are not notifiable to the respective agencies. So the first time this new policy was applied was the Illumina Grail case and the General Court confirmed also the approach taken by the European Commission in that case. An appeal is currently pending before the European Court of Justice and currently the hope is that this new policy will be overturned by the ECJ. And given the recently published opinion of the Advocate General, I'm quite optimistic here. But, during the ABA, Margaret Vestaria already indicated that the Commission will find other ways to review not notifiable transaction if the ECJ overturns this new policy, for example by reviewing acquisitions by dominant entities under the prohibition on abuse of dominance, as in the tower cast judgment. So this shows the EC and also the national competition authorities, they can be quite creative here and this is definitely something to watch out for.

BC

Great, so it sounds like our private equity clients have to be worried not only just what the new HSR form may look like, but also whether their deals will be subject to EC review even if they're not notifiable. Great, thank you for providing your thoughtful insight, Caroline. As I just mentioned and as we discussed, there's going to be a lot coming out in the near future about Article 22, I imagine, also the new HSR form, so everyone should please be on the lookout for Clifford Chance's publications on both of those, as there are new developments and of course if any clients have any questions, Caroline, myself and the larger antitrust team here at Clifford Chance are happy to answer those.
More importantly, thanks to everyone for listening. For any additional insights from the spring meeting, please check out our other podcasts, which will be coming out on the health & life sciences sector and the energy sector.
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