Corporate & Securities Law

Massachusetts District Court Finds That Billing Implied Immunity Does Not Apply To Private Equity Leveraged Buyouts

By Sheppard Mullin Richter Hampton, LLP

The U.S. District Court for the District of Massachusetts denied a Rule 12(b)(6) motion brought by defendant private equity firms (“PE Firms”) challenging a putative class action complaint brought by a trust, a public retirement trust fund and five individuals.  The plaintiffs asserted that the PE Firms entered into a bid rigging and bid allocation agreement when purchasing the “Target Companies.”  Nine specific transactions, involving billions of dollars, were alleged.  The PE Firms assertedly carried out their conspiracy by submitting false bids; agreeing not to submit bids; “granting management certain incentives;” and including “losing” bidders in the final transactions.  Plaintiffs, as shareholders in the Target Companies, claimed that defendants had deprived plaintiffs of the fair value of their shares.
 

Defendants sought dismissal on the grounds that plaintiff’s claims were impliedly preempted by Credit Suisse Securities (USA) LLC v. Billing, ___ U.S. ___, 127 U.S. 2383 (2007), as incompatible with the securities laws; and on the grounds that plaintiffs had failed to meet the test set forth in Bell Atlantic Corp. v. Twombly, ___U.S. ___, 127 S.Ct. 1955 (2007), for pleading the existence of a conspiracy.  The district court rejected both grounds.

The court stated that implied immunity from the antitrust laws “should be used minimally in order to allow simultaneous operation of the securities and antitrust laws as much as possible.”  Dahl, slip op. at 4, citing Silver v. New York Stock Exchange, 373 U.S. 341, 357 (1963).  For implied immunity, Billing required “clear incompatibility” between the securities and antitrust laws, which is determined through consideration of four factors:  (1)  whether the challenged practices lie squarely within the area of financial market activity that the securities laws seek to regulate; (2) the existence of regulatory authority under the securities laws to supervise the activities in question; (3) evidence that the responsible regulatory entities exercise that authority; and (4) a resulting risk that the antitrust and securities laws, if both applied, would produce conflicting guidance, requirements, duties, privileges or standards of conduct.  Dahl, slip op. at 2, citing Billing, 127 S.Ct. at 2392.

Dahl also described considerations under the fourth factor:  (1) the need for securities-related expertise; (2) the fine lines between what is permissible versus impermissible in the eyes of the SEC; (3) the different inferences that could be drawn from evaluating the same facts under the securities laws and the antitrust laws; and (4) the inconsistent judgments that could result.  Dahl, slip op. at 5, citing Billing, 127 S.Ct. at 2395.

The court found that none of the Billing factors weighed in favor of implied immunity:
 

(1) The securities laws did not govern the conduct at issue.  “Private equity LBOs do not lie within the area of the financial market that the securities laws seek to regulate because they are private . . . .”  Dahl, slip op. at 6 (court’s emphasis);

(2) “[N]o regulatory authority exists to oversee these private equity transactions . . .”  Id.;

(3) The “SEC has no regulatory authority here . . .”  Id. at 7; and

(4) “There can be no conflict here because the securities laws . . . are absent vis-à-vis private equity LBOs.”  Dahl, slip op. at 7.
 

The court rejected the argument that the SEC filings made by the Target Companies in connection with the transactions constituted regulation within the meaning of Billing:

The PE Firms assert that the many filings that a Target Company must make in conjunction with an LBO represents regulation by the SEC.  This argument is unconvincing.  The SEC does not substantively regulate the PE Firms, it merely requires certain disclosures be filed as part of an LBO transaction. . . .  [The SEC] did not substantively regulate the behavior in question . . . .
 

Dahl, slip op. at 6-7.

The court also rejected defendants’ assertion that plaintiffs had failed to plead the existence of a conspiracy adequately as required by Twombly.   The court ruled that the complaint had “allegations plausibly suggesting agreement.”  Dahl, slip op. at 8, citing Twombly, 127 S.Ct. at 1966.  The court based its conclusion on nine specifically pled transactions:  “The presence of the same PE Firms in multiple transactions ties the PE Firms together in a way that the Twombly defendants were not.”  Dahl, slip op. at 10.

Authored by:

Thomas D. Nevins

(415) 774-3284

tnevins@sheppardmullin.com

Full post as published by Antitrust Blog Review on February 10, 2009 (boomark / email).