Friday, March 15, 2013

Club Deal Law Suit Narrowed

Club Deal Law Suit Narrowed

On Wednesday, a Federal District Court Judge in the case of Kirk Dahl et. al. versus Bain Capital et. al. issued a ruling that substantially narrows antitrust claims filed by investors against a host of private equity firms.  In essence, the litigation alleges that private equity firms violated the antitrust laws by forming investment clubs to bid on large public deals, and thereby suppressed the price paid for acquiring those companies.  The defendant private equity firms had filed a motion for summary judgment, and the judge agreed with the defendants to dismiss the broadest aspects of the case.  I’m less interested in the specifics of this case than in the role of investors in pursuing these kinds of legal actions.[1] 
PE Strategy (2008)

The complaint in this case is 221 pages and is replete with suggestive email interchanges between various private equity professionals.    The judge excluded most of these tidbits because they don’t have legal significance.  Rather, the emails are the normal discourse between private executives as they form consortia or jockey to win deals. 

Back in my days as Chief Investment Officer at North Carolina, a major class action law firm asked us to join a case against AOL Time Warner.  They sent us a 100-page complaint, which the State Treasurer shared with the Attorney General.   Without even getting to the merits of the proposed lawsuit, the AG’s lawyers said that they would never permit the State to sign on to a complaint written in such a flamboyant and inflammatory manner.  The cause of action was buried in sensational rhetoric.

Why are these types of complaints drafted in a provocative manner?   The class action lawyers certainly aren’t trying to impress judges.  Rather, the main aim is to inflame the passions of public and union fund trustees, so they’ll pursue the cases.  Moreover, the complaints are drafted like huge press releases so that business reporters will publicize the juiciest parts.  As in the Dahl case, the judge often has to fashion a proper complaint out of the plaintiff’s screed.

In my view, the Dahl lawsuit is less a battle between investors and private equity than an illustration of the profound differences in the interests of large and small institutional investors.    Large institutional investors are largely responsible for creating the huge PE firms.  The big mandates from the likes of CALPERS or New York Employees’ Retirement System turned firms like Blackstone, KKR and Carlyle into PE powerhouses and enabled an elite group of firms to form clubs in bidding on huge public companies.  Small investors, who are plaintiffs in the Dahl case, tend to invest a larger portion of their assets in large public companies than large institutions.  Thus, it’s smaller investors who were drawn to this case.  Meanwhile, large investors probably were hoping that private equity clubs were, indeed, able to acquire large businesses at attractive prices as they were the main investors in the PE funds.

I doubt the Bain case will go to trial.  My guess is that the defendants won’t want to take on the risk and publicity associated with a trial.  In due course, there will be a modest settlement.    This entire saga will be replayed at some point in the future.   The banks will again finance mega-buyouts, and private equity will form clubs to take down huge companies.  Computer servers will fill with suggestive emails that will become fodder for class action lawyers.  Then the lawyers will bring cases using voluminous complaints that will be whittled down by judges, and ultimately settled.  And so it goes.

[1] For those interested in the specifics of the judges opinion they can be found at and the complaint is at  Peter Lattman of The New York Times has an excellent summary of the proceedings at

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