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Intro: Hello, welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content through this series please contact our speakers. 

Anatoliy: Hi, everyone and welcome back to Dealmaker Insights. I'm Anatoliy Rozental, private equity and M&A partner based in our New York office uh with the explosion of developments in the US Antitrust space. I've teamed up with our antitrust and competition team to chair a three part series where we'll be discussing the practical impact of recent developments and key priorities for our clients. For our first episode, I honored to be joined by my partner Michelle Mantine, who chairs our global antitrust and competition team and who is at the forefront of some of these antitrust models. So, let's dig right in, we are here to talk about recent developments at the intersection of private equity and antitrust law. What is happening that makes this conversation so important? 

Michelle: Well, this month alone, the federal agencies that enforce the antitrust laws signaled an intensified look into the purported financialization of health care markets. Citing concerns regarding health care consolidation and private equities role in the marketplace. Specifically on March 5th, regulators hosted a public workshop, private capital, public Impact an FTC workshop on private equity and health care. And during that workshop, the agencies announced a cross government inquiry into the impact of private equity investment and other forms of what they refer to as corporate greed in the health care sector. Speakers from the agencies touted enforcers recent enhanced scrutinizing of private equity firms and their involvement in health care. The workshop featured remarks from agency officials as well as panels of economists, academics and health care workers. Now across the board, the speakers denounced private equity’s role in health care leaving little room for discussion of the possible benefits, clinical or otherwise of private capital investments in the health care market. Now that very same day, just before that workshop began, the agencies issued a request for information or RFI looking for information regarding consolidation in health care markets. Again, citing concerns that acquisitions in this space may generate profits for private equity firms at the expense of patient care and worker safety. As the Federal Trade Commission's chair, Lina Khan, expressly noted private equity companies should be on notice of these efforts by the antitrust agencies specifically that the agencies are on the lookout for strategies and things that they see that could be problematic under the antitrust laws. They're focused on, in their words, protecting the American public from anti competitive and unlawful tactics. 

Anatoliy: Certainly worrying for some of my um private equity clients in this space, aside from Lina Khan and the FTC, what other agencies are involved and how are they going to work together to, to regulate private equity firms? 

Michelle: Yeah, beyond Lina Khan and the FTC, the antitrust division of the Department of Justice, the DOJ is really uh sort of alongside the FTC spearheading this effort. Now, both of those agencies, the FTC and DOJ are in charge of enforcing the federal antitrust laws, generally. In this particular effort, those agencies were joined by the Department of Health and Human Services, HHS, with support from the Center for Medicare and Medicaid Services, CMS. HHS is charged with protecting the health of American citizens while CMS works within HHS to administer government funded health care through the Medicare and Medicaid programs. Now, the FTC has undoubtedly focused on private equities involvement in health care. As of late, you know, they instituted a civil suit against a private equity investor, Welsh Carson and its portfolio company US Anesthesia Partners challenging its serial acquisitions with which the FTC alleges allowed the firm to monopolize the market at issue in that case. Now, corporate involvement in health care has been a consistent priority for this administration and it will likely continue well beyond this workshop. The DOJ also has plans to investigate for this discussion on March 5th, whether private equity investments in health care entities violate state corporate practice of medicine. CPOM laws. Now, HHS has a slightly different focus. It plans to focus its efforts more on monetary transparency and accountability regarding the use of government funds. Similarly, CMS plans to implement additional oversight into ownership of healthcare entities by exploring stronger standards to oversee the quality and execution of Medicare and Medicaid programs. Now, these agencies have agreed upon information sharing between and among them allowing information gathered by one agency to be used in potential investigations by the other agencies. Beyond these agencies, state regulators have been taking on similar cases under the state antitrust laws, scrutinizing investing and challenging private equity transactions in this space. In addition to proposing their own state legislation that will make it more challenging for private equity companies to engage in transactions purely in health care, but also beyond state antitrust rules are also becoming increasingly common as a method for inquiring against these types of actions. So for example, the Colorado Attorney General just settled lawsuits against the entity I named earlier Us Anesthesia Partners requiring that group which is private equity backed to sever exclusive contracts with five hospitals and dissolve any of its doctors non-compete agreements. Similarly, the Massachusetts Attorney General imposed conditions on a hospital acquisition by a private equity owned firm within the last few years. Multiple states have implemented transaction notification statutes that are often referred to as baby HSR statutes which are requiring transactions within the health care sector or ones involving hospitals or insurers to report transactions to state authorities before closing it. So it's really critical that, you know, the state players are factored into overall legal risk analysis and evaluation and assessment of transactions. 

Anatoliy: Michelle. We're, we're talking a lot about health care. It does this mean that our PE clients that are not investing in the PE space don't have to be concerned about additional antitrust scrutiny from the government? 

Michelle: It's a great question and I told you the short answer is no. While the examples you are seeing right now are focused on health care, it goes beyond that and the agencies have taken the opportunity to say that in the March 5th discussion and otherwise in their commentary. So just for a few examples, if you look back in August of 2022 the FTC challenged a private equities firms acquisition in the veterinary services space albeit health care adjacent, right? That challenge was settled. But though the parties are subject to numerous limitations on future acquisitions including prior approval and notice requirements on any purchase of their specialty or emergency veterinarian clinics within certain geographic areas. Similarly, alongside of these sort of changes and discussions on private equity and antitrust in June of 2023 the FTC announced upcoming changes to the information that will be required for merger control notifications under the Hart-Scott Rodindo Act. These proposed changes include requiring significantly more information regarding minority investors, officer director, relationships, board advisors, as well as a broader scope of internal documents to be submitted with the HSR filings. Private equity buyers will be particularly impacted by these requests for more information assuming that these proposed rules become final, particularly the information request seeking information about disclosure prior acquisitions that occurred within the past 10 years. That's quite a long time. Now, alongside those proposed HSR changes in July of 2023. The FTC and DOJ had released draft merger guidelines which were finalized in December of 2023. And those guidelines call for heightened scrutiny of private equity activity across all industries not just limited to health care. The guidelines expressly note that the agencies will investigate broad strategies of serial acquisitions even if no single acquisition on its own would substantially lessen competition or tend to create a monopoly. In addition, the guidelines note that the agencies will consider how minority interests may impact competitive decision making suggesting that that might even expand as far as non voting minority interests. Now last but not least in November of 2022, the FTC issued a policy statement describing the types of conduct that it considers to be an unfair method of competition even if that conduct does not violate the traditional antitrust laws such as the Sherman Act and the Clayton Act. The policy statement defines roll up transactions specifically as a series of transactions that tend to bring about harms that the antitrust laws were designed to prevent but individually may not have violated the antitrust laws. Now, since that time, the release of that statement in November of 2022 the FTC has increased its activity issuing civil investigative demands to PE firms under requests per section five of the FTC Act. Last but not least, both the DOJ and FTC have continued to enforce section eight of the Clayton Act which prohibits interlocking directorates between companies that cross certain thresholds, particularly in the case of private equity in August of last year. For example, the FTC announced an action to prevent an interlocking directorate arrangement, marking the first time that the FTC applied section eight enforcement to a non corporate entity. So far because of the DOJ’s recent efforts, 15 interlocking directors have resigned from 11 different corporate boards across various industries. That might not sound a lot, but that's a lot, a lot more than what was prevented in the past. And the antitrust agencies have stated that they are continually looking for interlocking directorates imposed by private equity venture capital and corporate venture capital firms among others. 

Anatoliy: Certainly seems like there's a a new regime here. So, so what can private equity firms do to mitigate their antitrust risk as they do transactions? 

Michelle: Yes, they, this is the time really to take stock of your operations entities in this area should exercise caution and work with their antitrust lawyers to evaluate the effects, both procompetitive and anti competitive of their strategic business decisions. So regular audits compliance efforts, ongoing counseling discussions with Council can really help navigate the impact of new policies and regulations. I think the big thing here is to really make sure that as a, as a private equity firm or corporate client that you're in the know, right? And part of that is appreciating a, we expect that there will be continued scrutiny in this area. Antitrust agencies are focused on private equity and financial sponsors. So we need to just know going into the deal that we may get more questions than we have in the past and be prepared to answer them. And we need to think about that even in the context of minority interests because they're starting to garner much more attention that they had in the past. I mean, the FTC is expected to assess even the minority interest from PE firms and financial advisors in looking at these transactions much more than they did before. Even just looking at how a board member or advisor position might influence the strategic and commercial decision making of an entity. Clients should also anticipate potential enforcement outside of the merger clearance process. Whether it be through a civil investigative demand or other subpoena like document, they should expect that agencies will take a critical view towards series of acquisitions concentrated within any single sector or related sectors over a more expansive multiyear time frame. And last but certainly not least being mindful of the documents you create in your retention policies. You know, there's a tendency by companies to hold on to documents and information longer than they should now is the time to look at those retention policies and to see how long you really need to hold tight on those materials. Similarly, what kind of documents are you creating? And do you need them? Not only do you need them, what do they say and how might they be interpreted by a regulator or completely out of context? Five years later, working with your lawyers to make sure that your language is very careful and strategic to the points you're trying to make is all the more critical really now, more than ever. 

Anatoliy: Michelle. That's all the time we have today. Thank you so much for your time and thank you to everybody for tuning in. For part two I'll be joined by my partner Chris Brennan and we'll be discussing the impact of the new merger guidelines. We hope you can all join us. 

Outro: Dealmaker Insights is a Reed Smith production. Our producer is Ali McCardell. For more information about Reed Smith's corporate and financial industry practices, please email dealmakerinsights@reedsmith.com. You can find our podcast on Spotify, Apple, Google Stitcher, reedsmith.com and on our social media accounts at Reed Smith LLP on LinkedIn, Facebook and Twitter. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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