Thursday, May 6, 2010

Legal Obligations for PE and its Implications

Merger and Acquisition activities are bread and butter to Private Equity, and M&A activities are directly affected by Antitrust Regulations in the US. Hence, PE firms need to be aware about them. This is what I learned about the main Antitrust regulations in USA:

The Sherman Antitrust Act of 1890 prevents companies from horizontal/vertical price fixing, boycotts, bid rigging or forming cartels/market allocation. This focussed on limiting monopolies. It, however, did not outlaw any attempts to reduce competition. This was addressed by Clayton Antitrust Act of 1914 that further prevents interlocking directorates, price discrimination, acquisitions with the view to reduce competition and tie-in sales agreements (unless needed to maintain selling company's goodwill). The Federal Trade Commission Act (FTC) of 1914 further prohibits using market share to strong-arm the suppliers and using misleading/false advertisements. Robinson-Patman Act of 1936 was brought in to "save" small retailers from chain stores by prohibiting price-discrimination that is not cost justified or that is not done in response to a competitor's price- an odd-man (according to me) that stands out for its populist undertone. An anti-merger loophole in the Clayton Antitrust Act was closed by the Celler-Kefauver Act of 1950, which prevented acquisition/merger by buying of assets (earlier act outlawed acquisition by buying of stocks only). Hart-Scot-Rodino Antitrust Improvement Act of 1976 further tightened the regulation by making it mandatory for companies to go through at least a 30-days waiting notice period for a merger or acquisition. In principal, this allows the authorities to investigate the case thoroughly, ask for more information and decide if it violates the anti-trust laws.

Overall, the Antitrust laws in US seem robust and well developed. These laws are further supplemented by a long and inclusive list of more than 40 laws to protect consumer rights, indicating a well developed consumer protection system as well. PE firms need to take them into account, depending on the industry vertical they are operating in. In addition to Antitrust laws, PE firms are also affected by laws governing the Capital Markets. This includes 8 different acts, including the recent Sarbanes-Oxley Act of 2002. It seems the PE firms rely on the exceptions stated in the laws governing the Capital Markets to prevent or reduce the overhead associated with it: offering the securities to a limited number of accredited investors (499) with a pre-existing relationship with the firm. All the same, the bottom line that I gather is that private equity functions can get impossibly out of hand in the law-maze without the presence of an able lawyer in the team. After reading "World's Newest Profession" by Dr. McKenna, I also gather that Management Consultants may to be involved to keep clear of legal issues. I am not sure about this as PE firms have their elaborate processes to impose internal control and check fraud, which if sufficiently developed or recognized may obviate such a need. No matter which way it turns, it makes my head reel to think of the amount of bureaucracy and paper-pushing inherent to businesses at larger scale.

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