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10 key themes

Financial Investors – In The Regulatory Spotlight

Jenn Mellott


Partner, Washington, D.C.


Paul van den Berg

van den Berg

Partner, Amsterdam/Brussels

Rebecca Ward


Partner, London


Led by the United States, antitrust authorities around the world are increasingly focused on financial investors, one facet in the global trend toward increased antitrust scrutiny. This has several implications for dealmaking by private equity (PE) and other financial investors, including longer review periods and in-depth questioning from authorities on potential overlaps and vertical links, noncontrolling minority stakes, and cross-directorships across the investment portfolio, even in deals that appear to raise minimal antitrust concerns.

Regulatory filings are no longer just a procedural hurdle

While most transactions involving financial investors do not raise antitrust issues and will continue to be cleared following brief reviews under simplified processes, financial investors should no longer assume that merger clearance will be just a procedural hurdle. Investors should anticipate and prepare for more questions both from sellers and agencies, particularly in those deals that feature horizontal overlaps and vertical links, even if market shares are limited. In such cases, the risk of longer review periods needs to be factored in.

Buyout groups are “an extremely important part of our enforcement programme” and fuller assessment of their deals is “top of mind for me, and . . . for the team.

Jonathan Kanter
Assistant Attorney General, US Department of Justice - November 2022

A deep and current understanding of portfolios – including noncontrolling minority stakes and interlocking directorships – is key to gauging merger control risk. Well-prepared financial investors will be at a competitive advantage if potential competition concerns are identified early and any vendor concerns are alleviated. They will be better placed to execute on a successful regulatory strategy and to negotiate appropriate terms and conditions in deal documents.

Financial investors should also continue to heed increasingly unpredictable FDI reviews (see Theme 3) and, for transactions involving European targets, familiarize themselves with the requirements of the upcoming EU Foreign Subsidies Regulation (see Theme 10), which will give them an edge in regulatory risk assessments in the future.

US agencies lead the charge on a more aggressive stance toward financial investors

Antitrust enforcers at the DOJ and FTC increasingly are criticizing financial investors, and PE firms in particular, with the head of the DOJ’s Antitrust Division seeing a business model “designed to hollow out or roll up an industry and essentially cash out” as “very much at odds with the law and very much at odds with the competition we’re trying to protect.” Both the FTC Chair and the head of the DOJ’s Antitrust Division have criticized PE firms for using such transactions involving the combination of smaller players in the same industry to “accrue market power” without the antitrust authorities noticing.

In 2022, the FTC brought an enforcement action against one PE firm requiring divestitures of certain health care clinics that the firm sought to acquire in its most recent series of rollup transactions. The FTC has required this PE firm to divest similar assets in recent years, and the consent agreement requires that the firm both notify and seek prior approval from the FTC for future related transactions, even if those are nonreportable under the Hart-Scott-Rodino Act (HSR Act). This action signals the agencies’ likely approach to comparable deals in the future; there, the FTC alleged the PE firm was “gobbling up competitors in regional markets that are already concentrated.”

Interlocking directorships will remain on authorities’ radar in 2023

Antitrust authorities around the globe are carefully scrutinizing interlocking directorships on a stand-alone basis and in the context of merger reviews. Investors should be mindful of the risk that an authority might perceive interlocking directorships as facilitating unlawful information exchange, coordination or an unfair method of competition.

The most recent sign of enforcers’ focus on PE came with the DOJ making good on its promise to “reinvigorate” rules against interlocking directorates. In mid-2022, the DOJ announced that as a result of identified violations of Section 8 of the Clayton Act, which governs interlocking directorates, seven directors had resigned from the boards of five companies, including several directors affiliated with PE firms. The FTC similarly reaffirmed that it will use its authority under Section 5 of the FTC Act to pursue enforcement actions against interlocking directors and officers of competing firms that are not covered by the literal language of the Clayton Act.

Although most other jurisdictions do not impose a specific prohibition, antitrust laws in the EU, the UK and other jurisdictions are wide enough to address anticompetitive effects arising from interlocking directorates, and authorities have considered this in their reviews, including when it comes to the design of remedies. Even where an interlocking directorate is not technically prohibited, it may still be prudent for investors to proactively manage regulatory risk in this area by implementing firewalls and information-sharing guardrails.

Regulators in the EU, the UK and APAC also share skepticism about broad portfolios with overlapping investments and cross-directorships

The call for more aggressive enforcement against investors by US agencies has been picked up by regulators in other jurisdictions, especially in the EU and the UK. This will make it even more important for financial investors to think about ways to anticipate and mitigate global antitrust risk.

In 2020, the EC initiated a study on the effects of common shareholdings by institutional investors and asset managers on European markets. While no major enforcement action has been taken since the report, the EC continues to monitor overlaps created by minority shareholdings. Indeed, the proposed new EU merger notification form would mandate disclosure of all material (including noncontrolling) shareholdings and directorships in competing companies or companies active in vertically related markets for each notifiable transaction. In addition, it is increasingly common in merger control proceedings to receive questions on influence rights and information flows across the purchaser’s groupwide investment portfolio. Finally, the revised referral policy under Article 22 of the EUMR allows the EC to potentially intervene in rollup acquisitions that may previously have escaped scrutiny at the member state level because of low target revenue.

A draft law is being discussed in Germany that would grant the German FCO broad powers to address perceived “disruptions” of competition. Those powers are likely to include oversight of cross-ownerships and interlocking directorates. Similarly, in the UK, while the CMA has recognized that highly leveraged PE acquisitions are unlikely in themselves to impact competition, it has also demonstrated a willingness to follow the EC in pursuing financial sponsors for potential antitrust violations by their portfolio companies, as demonstrated most recently by its case against two PE firms which previously owned a business engaged in excessive pricing for thyroid drugs.

In APAC, the ACCC has been on record stating that “common fund management and ownership that allow a degree of control or influence by minority interests have the potential to detrimentally effect competition.” This position led to an investment in a regional cargo port being abandoned – the investment would have resulted in common ownership interests across competing port infrastructure. The ACCC’s statement is a warning for investors in critical infrastructure and may spur other agencies in Asia to closely scrutinize such (minority) investments for potential anticompetitive effects.

Mandated divestitures can still be an opportunity for well-prepared financial investors

Antitrust officials are increasingly skeptical of PE firms as potential buyers of divestiture assets to remedy transactions that otherwise raise antitrust concerns.

The head of the DOJ’s Antitrust Division has argued that PE firms “are incapable [of] or uninterested in using [divested assets] to their full potential” and therefore are not able to restore and preserve competition that may be lost as a result of a transaction. However, earlier this year, a district court denied the DOJ’s attempt to block UnitedHealth Group’s $7.8b acquisition of Change Healthcare, finding that the proposed divestiture to a PE buyer would resolve any competitive concerns. The DOJ is appealing this decision.

Equally, both the EC and the UK’s CMA have expressed skepticism at financial investors being suitable divestment remedy purchasers and are raising more questions during merger reviews as to whether a financial investor would have the incentive and industry know-how to vigorously compete through ownership of the remedy business.

In this context, financial investors need to think carefully about how they present their acquisition case, and ideally would do so through portfolio companies that can demonstrate sector knowledge and expertise – as well as evincing an intention to invest in the competitiveness of the divestment business for the future. A bid supported by an ambitious and credible procompetitive narrative will therefore be at an advantage.

Anticipating regulatory scrutiny up front

In an era of more aggressive, less predictable merger enforcement (see Theme 2), financial investors remain a highly attractive proposition for sellers looking to maximize deal certainty when compared with strategic buyers. However, even for financial investors, the world is more complex than it used to be. Identifying likely risk areas early when considering transactions will allow investors to reassure sellers about their ability to manage potential regulatory intervention. For this, knowledge of one’s own portfolio (across funds if applicable) is paramount, as is the choice of coinvestors. Opportunities resulting from antitrust divestiture processes will still be possible, though they will require a robust engagement plan with agencies. Overall, it will be even more important to seek antitrust advice early in the process and provide for the necessary contractual protection to develop an effective regulatory strategy, involving sellers and target management as required. The regulatory obstacles will by no means be insurmountable, but financial investors should be prepared for additional scrutiny of a greater portion of their deals going forward.

Looking ahead in 2023

  • The political stance of the US antitrust agencies is unlikely to change in 2023, and recent election results may even embolden them. Investors should expect more test cases and challenges, increased scrutiny of PE divestiture buyers in consent decrees, and longer merger review timelines, which allow for potential litigation if the risk profile of a transaction is higher.

  • In the EU, the revised notification form will require increased disclosure and more scrutiny of minority shareholdings and cross-directorates in horizontally or vertically related markets. This further increases the need for portfolio management and knowledge, even across different fund structures. Multiple investments in a single sector even from funds under common management but different ownership will inevitably lead to protracted reviews, even if no competition issues are ultimately identified.

  • Merger control is but one piece of the regulatory puzzle. Coordination of review timelines will gain in importance as the geopolitical climate forces a further proliferation of national security and FDI screenings, and the EU’s novel Foreign Subsidy Regulation will add another layer of scrutiny on state-owned or -linked investors. Transaction documents should leave sufficient leeway to address regulators’ questions and potential concerns, and regulatory risk allocation clauses should anticipate novel theories of harm.

  • Expect regulatory risk to feature more as a parameter in auction dynamics. Anticipating difficulties of competing bidders or consortia across merger control, foreign investment and subsidies will be a clear advantage. At the same time, avoiding own goals through anticompetitive or suspect narratives in internal documents remains essential, as agencies can be expected to demand disclosure, including of information memoranda and other deal documents.

With thanks to Laurent Bougard, Kara Reid and Vanessa van Weelden for their contributions to this theme.

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