Companies and shareholders contemplating mergers or acquisitions must consider all potential anticompetitive implications of a deal, including the competitive effects of minority shareholder interests. The Federal Trade Commission (FTC) made this clear late last month when it announced approval of the $1.4 billion acquisition of Bankrate, Inc. (Bankrate) by Red Ventures Holdco, LP (Red Ventures)– competing marketing firms offering internet content and customer referrals. The FTC’s approval was contingent upon divestment of one of Bankrate’s subsidiaries that competed with an unaffiliated company wholly owned by two of Red Venture’s minority shareholders. Although those shareholders had only minority interests, they exercised significant power over the Red Venture board, and they could have used that power to stifle competition between their wholly owned company and the Bankrate subsidiary. The merger remedy imposed by the FTC is a reminder that even minority shareholder interests can invite scrutiny from the federal antitrust agencies.
Partial Ownership Risks Generally
Partial ownership can create the potential for antitrust violations under both Section 1 and Section 2 of the Sherman Act. Section 1 prohibits anticompetitive collaboration among competing companies – including price-fixing, bid rigging, market allocation, or group boycotts, to name a few examples. Section 2 prohibits anticompetitive exercise of market power, also known as monopolization or attempted monopolization.
Section 1 Risks
Competitors that engage in collusion or other anticompetitive activity cannot avoid a Section 1 violation merely because one of them has a minority interest in the other, or their relative market shares are small. Only “single entities” are deemed incapable of collaborating with themselves to violate the antitrust laws. In Copperweld Corporation v. Independence Tube Corporporation, 467 U.S. 752, 771 (1984), the Supreme Court held that a parent corporation and its wholly-owned subsidiary are incapable of conspiring with one another for purposes of Section 1 of the Sherman Act because they are considered a “single entity.” Since Copperweld was decided, numerous courts have extended its rationale and held that a parent and its majority owned subsidiary are also incapable of conspiring for purposes of Section 1.
But if the parent corporation owns and controls less than 51 percent of the subsidiary, courts uniformly have held that the parent and subsidiary are still capable of conspiring under Section 1 and do not qualify for protection under Copperweld. And in a minority of jurisdictions, courts have held that corporations with an ownership interest exceeding 51 percent still may not qualify for single entity protection if they lack total control or unity of purpose. Generally speaking, if the entities involved are “separate economic actors pursuing separate economic interests,” then they are not considered a “single entity” under Copperweld. E.g., In re Sulfuric Acid Antitrust Litigation, 743 F. Supp. 2d 827, 884 (N.D. Ill. 2010) (holding that parent and its 50 percent to 46 percent owned subsidiaries were capable of conspiring with one another and did not qualify for Copperweld protection).
Thus a corporation and its minority owned subsidiaries are considered separate economic actors who are capable of conspiring under Section 1. This same rationale extends to competition among subsidiaries and affiliates that all share a common owner. If the common owner has only a minority stake in the subsidiaries, or a majority stake in one but not another, then those minority owned subsidiaries are still separate economic actors capable of engaging in anticompetitive activity with the parent and the other subsidiaries.
Section 2 Risks
Although companies that are considered “single entities” under Copperweld may be incapable of anticompetitive collaboration, they may nonetheless engage in unilateral anticompetitive conduct by abusing their market power. The FTC and the Department of Justice (DOJ) Antitrust Division have explained that acquisitions of even minority interests in competing companies can trigger market power concerns. Summarizing section 13 of the DOJ and FTC’s Horizontal Merger Guidelines, the FTC stated in an online web posting back in 2016 “even if a partial-interest acquisition does not result in effective control, it may nonetheless change a competitor’s incentives post-acquisition in a way that substantially lessens competition.” Section 13 of the Guidelines continues, “The Agencies therefore also review acquisitions of minority positions involving competing firms, even if such minority positions do not necessarily or completely eliminate competition between the parties to the transaction.”
The FTC cited some examples in its 2016 web posting, including the following:
- In 2016, the FTC challenged the $2 billion acquisition of a drug company, Roxane Laboratories, by a competitor, Hikma Pharmaceuticals. Hikma also owned a 23 percent interest in another competitor, Unimark Remedies Ltd. That 23 percent interest, along with Hikma’s rights to market a drug that only it and Unimark could bring to market in the near term, created the strong potential for reduced competition for that new drug. The FTC required divestment of Hikma’s interest in Unimark.
- In 2007, the FTC challenged the $22 billion acquisition by an energy company, Magellan Midstream Holdings, of a 22.6 percent interest in a rival, Kinder Morgan, Inc. (KMI). The concern was that the 50 percent owners of Magellan – two private equity and investment managers – had the right to board representation at both Magellan and KMI, including the rights to exercise veto power over Magellan’s actions and access competitively sensitive information from or about KMI or Magellan. As a condition of the acquisition, the FTC required the private equity and investment managers to take a passive interest in Magellan.
Red Ventures Acquisition of Bankrate
The FTC reinforced its concerns about the anticompetitive effects of partial ownership when it announced the approval of the $1.4 billion acquisition of Bankrate by Red Ventures on April 28, 2018. Red Ventures and Bankrate were two marketing firms offering internet content and customer referrals. They closed the deal in early July 2017, but the FTC challenged the deal in November 2017 because of the 34 percent minority interest collectively held by two of Red Ventures shareholders, General Atlantic, LLC (General Atlantic) and Silver Lake Partners, LP (Silver Lake) – both private equity firms. This interest gave General Atlantic and Silver Lake two seats on the Red Ventures board, approval rights for two other board positions and approval rights for significant capital expenditures of Red Ventures.
The FTC was concerned about this 34 percent interest because General Atlantic and Silver Lake also owned 100 percent of a third-party paid referral service for senior living facilities, called A Place for Mom (APFM). Bankrate (the company that merged with Red Ventures) owned 100 percent of APFM’s chief competitor, Caring.com. The FTC believed, based on General Atlantic and Silver Lake’s control of Red Ventures, that General Atlantic and Silver Lake would effectively control both APFM and Caring.com, thereby creating significant market power in the market for third-party paid referral service for senior living facilities. As a condition of the acquisition, the FTC required that Red Ventures divest Caring.com.
This deal reportedly was the subject of remarks by acting director of the FTC’s competition bureau, Bruce Hoffman, on May 2, 2018, at a conference hosted by Fordham University Law School. Hoffman reportedly emphasized that companies directly engaged in M&A activity must be aware of overlaps at the investor and shareholder level.
Parties engaged in or contemplating M&A activity must consider the potential anticompetitive effects that their combination may have for their subsidiaries and their shareholders. The antitrust implications of these overlapping ownership interests should be considered both before and during the due diligence process. After the deal closes, companies should be aware that merely having a minority interest in a competitor does not eliminate the possibility that they remain capable of colluding with that company going forward. Finally, companies frequently should revisit the membership of their boards to ensure that their corporation does not become the vehicle through which a few minority shareholders attempt to exercise market power over a competitor.
Companies interested in merging with, acquiring or being acquired by a competitor – regardless of the percentage of interest at stake – should consult with legal counsel to fully appreciate their antitrust risk.