Private equity firms probed by US on overlapping board seats

BLACKSTONE, Apollo Global Management and KKR & Co are among private equity firms that are facing a Justice Department investigation into whether they influence boards across corporate America in ways that violate antitrust laws, according to people familiar with the matter.

Federal investigators are examining whether private equity firms’ practice of placing executives on boards of companies in the same sector harms competition, said the people, who asked not to be named discussing a confidential inquiry.

Antitrust enforcers are concerned that board directors with seats on rivals in the same sector could influence those companies to act in ways that maximise gains for all – instead of competing vigorously to provide the best services or lowest prices to consumers. 

The Justice Department’s antitrust division has sent so-called civil investigative demands, which are similar to subpoenas, to Blackstone, Apollo and KKR on this matter, the people said. The firms are among a swath of large and small private equity companies that have been sent the letters in the past month, said the people. 

The new inquiry is separate from routine antitrust reviews of deals that are before the agency.

Blackstone, KKR, Apollo and the Justice Department declined to comment. Receiving a civil investigative demand doesn’t imply wrongdoing.

It’s common for a dealmaker to sit on boards of multiple portfolio companies, especially if the person had a hand acquiring those businesses or has experience working in a sector. But many firms take pains to avoid having the same executives on boards of direct rivals, to avoid allegations that they could hurt competition and consumers.

The probe is part of an aggressive push by the Biden administration to rein in corporate consolidation and reinvigorate dormant antitrust powers. A 1914 merger law, the Clayton Act, forbids so-called interlocking directorates, where individuals or entities sit on the boards of companies that directly compete. But for decades, that law has been sporadically enforced.

The antitrust officials have been conferring with the research community on this issue over the past year, according to one of the people. The officials are especially scrutinising how the practice affects rival healthcare companies, the person said, although the inquiry looks broadly across many industries.

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The best-known buyout firms grew quickly during the past decade of low interest rates as investors pursued higher yields. With abundant cash on hand and cheap debt available, many private equity firms extended their reach across the economy, investing in everything from healthcare companies to biotech firms to consumer brands. 

Many firms, while encouraging dealmakers to carve out a niche in a sector, have strict rules preventing them from pursuing companies in the same business. The directors usually are advised to refuse themselves from key votes if they also sit on boards of other companies in the same line of business. 

Many buyout firms tell regulators and investors that they don’t micromanage companies and that board directors are simply there to be a check on company governance, not to influence day-to-day business or prices of goods.

The Justice Department launched its initiative aimed at eliminating board overlaps last week when it announced seven executives had stepped down from boards after the agency raised antitrust concerns.  

“Competitors sharing officers or directors further concentrates power and creates the opportunity to exchange competitively sensitive information and facilitate coordination – all to the detriment of the economy and the American public,” said assistant attorney general for antitrust Jonathan Kanter in announcing the action. 

The enforcement push prompted three directors associated with Chicago private equity firm Thoma Bravo LLC to resign from the board of SolarWinds, a network management software company. Thoma Bravo also has an investment in and sits on the board of Dynatrace, which has a rival network management platform.

Thoma Bravo declined to respond to a request for comment. SolarWinds said in a securities filing that the executives chose to resign after receiving a letter from the Justice Department, rather than contesting the allegations, but didn’t admit any violations.

Both the Justice Department and the Federal Trade Commission, which also enforces antitrust laws, have called out the private equity industry for closer scrutiny. In public comments last week, FTC chair Lina Khan said the agency would be “looking closely” at the role of private equity firms in the healthcare industry, where firms have assembled portfolios of providers. Khan cited research that private equity investments in nursing homes have led to higher mortality rates.

The law against interlocking directorates requires companies to eliminate the board overlap within one year. It also contains exceptions for small companies, those with less than US$4 million in sales. 

The law bars a “person” from serving on competing boards, but doesn’t clarify whether that refers to an individual or an entity, said Thomas Mueller of the law firm Wilmer Cutler Pickering Hale and Dorr LLP. It’s also vague on how to determine when companies compete against each other, he said.

“The courts haven’t decided those issues,” said Mueller. “There’s a good chance DOJ would press on those.” 

A study published last week by Stanford University researchers found half of the more than 2,200 public biotech and pharmaceutical companies had overlapping board members with competitors sometime in the last 20 years. At any given time, roughly 10 to 20 per cent of the companies researching new drugs and treatments had overlapping directors, said Ishan Kumar, a PhD candidate in stem cell biology and one of the study’s authors.

The overlaps were most common among companies researching treatments related to cancer, vaccines, diseases that affect the nervous system like Alzheimer’s and Parkinson’s, and blood or kidney disorders, the study found.

“My guess is this is just the tip of the iceberg,” said Mark Lemley, another co-author and professor of antitrust and intellectual property at Stanford Law School. “We don’t have any reason to think it’s limited to life sciences companies.” BLOOMBERG