In this episode of Deal-by-Deal, host Greg Hawver talks to fellow McGuireWoods partner Holden Brooks about antitrust considerations for private equity investors in the middle market (and, interestingly, the lower middle market).

They begin by discussing the Hart-Scott-Rodino Act, which requires pre-close filings for deals valued above $111.4 million that also meet certain other criteria — and note that some add-on strategies and other deals below this threshold may be subject to investigation by the Federal Trade Commission or Department of Justice if there are antitrust concerns.

Hawver and Brooks also discuss FTC v. U.S. Anesthesia Partners and Welsh Carson a lawsuit that highlights the importance of assessing one's own acquisition conduct, being precise and accurate in communications and documents, and involving antitrust counsel in the pipeline stage of deals.

Meet Your Guest 

Name: Holden Brooks

Title: Partner, McGuireWoods

Speciality:  Holden is a partner in the firm’s Antitrust, Trade and Commercial Litigation Department, where her practice focuses on mergers, complex litigation, civil and criminal enforcement, and counseling across several industries with significant experience in the area of healthcare.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

You are listening to Deal by Deal, a McGuireWoods Independent Sponsor podcast. Deal by Deal invites you to conversations with experienced independent sponsors and other private equity professionals. Join McGuireWoods partners, Greg Hawver, and Jeff Brooker as they explore middle market private equity M&A to provide you with timely insights and relevant takeaways.

Hello and welcome to Deal by Deal, a podcast for independent sponsors and other private equity investors. My name's Greg Hawver, M&A partner at McGuireWoods in the Chicago office, and happy to be hosting this episode together with my partner Holden Brooks, who is an antitrust partner at McGuireWoods. And now, with this episode, she'll be a recurring guest on Deal by Deal. So Holden, welcome. Good to have you.

Great to be here. Really great to be here. And I think we're going to be covering some ground that I've been talking a lot about recently, so looking forward to talking about it with you.

Good. Good, good, good. Holden, do you want to give a really brief overview of what you do here at McGuireWoods?

Sure. So I am a partner in the Antitrust group at McGuireWoods in our Chicago office. I do criminal antitrust. I do civil litigation antitrust. I do compliance counseling in the antitrust area. I do merger work and Hart-Scott-Rodino filings, et cetera. I'm a true generalist when it comes to antitrust. But I would say about 75 to 90% of what I've done over the last decade or so has been in the healthcare space. So that's my niche. But really looking forward to talking about the transactional space today with you.

Great. Great. Good deal. Thanks, Holden. We appreciate your time. You are definitely one of the leaders nationwide on antitrust matters affecting the middle market private equity investments in the healthcare space and otherwise. So it's really great to have your insights here on this one. So I think the title of this episode, broadly speaking, can be Antitrust Considerations for Private Equity Investors, and we will call this the fall 2023 edition of that.

So we're just going to try to touch on a couple timely themes the investors should be thinking about out there in the middle market and, I think, interestingly in the lower middle market. But before we jump into that. Last time you were on, Holden, we talked quite a bit about the FTC and some of their statements and positions on non-compete agreements as they relate to employees and otherwise. Those are an important tool for makers, obviously. Any update on that front?

I have to say, not much of an update right now. As you might recall, Greg, we spent a lot of time talking to clients last year who were very... or earlier this year who were very concerned about the impact on the FTCs proposed rule to ban the majority of non-compete agreements in the employment context. Since then, the FTC has indicated that the proposed rule probably won't be finalized or and certainly won't be in effect until sometime in probably Q1, Q2 of 2024.

So that, at the federal level, the non-compete action has kind of been very low level. But my understanding is that there are many states now that have sort of picked up that baton and run with it and that folks really do need to be consulting with employment council to understand what states have their own non-compete bans and laws, et cetera in place, which may frankly have the same effect in a lot of ways as that proposed federal rule.

Got it. Got it. That's helpful. That's a helpful update that there hasn't been any major developments on the federal front. So our prior podcast might be good listening still if people are interested in the topic of non-competes, but also, Holden, good point to always check with your attorney as far as whether there's state restrictions on non-competes and probably even more so given the environment. Great. Well, so one of the main reasons, Holden, we thought it'd be a good idea to chat here in late October is the recent case that came out, the FTC verse U.S. Anesthesia Partners and Welsh Carson. I believe it's just the complaint that's come out there.

That's a case that focuses in the healthcare industry specifically. And I think it's, again, kind of made waves among our private equity group because we have a heavy focus in healthcare. But I think it's interesting for investors who even aren't doing healthcare deals, who are doing kind of a buy-and-build strategy in specific markets, et cetera. So I'm looking forward to getting your views on that complaint. But before we dive in there, maybe it's helpful to take a step way back and just get the overall framework of there's deals that exceed 111 million or so, right, that require a filing with the FTC to get antitrust clearance, and there's various other... that's very much shorthand.

But if you're in that range or above, you need to be speaking with a lawyer like yourself to make sure that you're navigating that filing process. But my understanding is that this new case involves transactions that are smaller in size than that threshold. And so, is that the case? And then how should people be thinking about deals that maybe, frankly, an M&A and a lawyer might look at a deal and see it's, "Okay, this is a $40 million deal. I don't really need to call my antitrust partner." Is that still the case, or how do people think about these deals under those bright-line thresholds?

So great question, and I have a lot to say about it. As you said, the Hart-Scott-Rodino Act imposes a requirement of a pre-close filing for deals that are valued above 111.4 million and meet a bunch of other criteria as well. So just because you're at or above that valuation threshold doesn't mean you necessarily have to file. But it is important to have a conversation with a qualified antitrust attorney to figure out whether that filing obligation exists. And one thing I want to say about that HSR process is that there were new HSR rules that were proposed over the summer.

So the Federal Trade Commission took a look at the HSR form and the rules and what do you have to give to the Federal Trade Commission when you're filing an HSR, et cetera. And they decided that they needed to be changed and that the amount of information and the kind of information that you need to submit with an HSR filing should be changed. And one of the areas, again, in this proposed rule, which is not finalized yet, that should be of interest to people who do smaller deals is that there's an obligation to disclose deals that you have undertaken both on the sell side and on the buy side over the past few years in a particular segment.

So let's say that you're buying a widget manufacturer, and it happens to be over $111.4 million but you've spent the past five years amassing all the other widget manufacturers for amounts below $111.4 million. They want to know about that. What's essentially a roll-up strategy or serial acquisition strategy. So that is one way that, I think, it's very likely that this kind of roll-up activity is going to come to the attention of the antitrust regulators in the context of a single HSR filing. The other thing I think people need to pay attention to who generally do smaller deals is that even if you are not doing an HSR reportable deal, your deal is still subject to investigation.

There's nothing that prevents the Federal Trade Commissioner or the Department of Justice from investigating your deal, pre-close or post-close if they get a tip or some kind of information that leads them to believe that they need to investigate. And one thing that both the Federal Trade Commission and DOJ have both said is that their eyes are on private equity firms, in particular, who are engaging in roll-up strategies. So I don't think it's beyond the pale to think that we will see... if FTC and DOJ are to be believed, that we'll see more and more of these investigations pre-close and post-close of serial small deals in the same sector, potentially in the same geographic market if there are antitrust concerns that those deals present.

Just stopping there. I mean, that's really interesting. I don't know that you've seen something like that. But I mean, how would that actually look if the FTC or the DOJ would get a tip about a roll-up strategy? I mean, would that be just kind of, you'd get some letters from the DOJ? You think... [inaudible 00:09:58] you're saying it could be pre-closing or post-closing?

Yeah, so what would happen there is that you would get something called a civil investigative demand, probably. Maybe they would start off with approaching you for some voluntary disclosure of relevant information, but they do have the power to issue these civil investigative demands that are like subpoenas, and they are compulsory process. You need to put in place a document hold. You have obligations to turnover, data documents, et cetera, depending on what the specifications call for. And also subject maybe some employees to sort of deposition like interviews, et cetera. And usually, at the same time, they're also asking other stakeholders in the market, like your competitors, your customers, your suppliers, et cetera, to also weigh in and disclose information that would be pertinent to investigating a deal.

So it definitely happens. It's one of the reasons why one of the pieces of advice we give to clients is even if you're not going to have to file HSR, even if your deal closes, you're going to want to maintain a level of antitrust awareness in your documents and with respect to your business strategies to not immediately raise prices or take other actions that harm competition because other people in the market know how to dial up the Federal Trade Commission or DOJ drop a dime suggest that they investigate. And again, they always have that power, but that's how it would unfold. You would probably get a civil investigative demand and then be off to the races for that investigation.

Got it. Okay. A couple follow-up questions here. So what is the DOJ looking for? And I guess I don't want to scare people away from doing add-on deals, right. I mean, I don't think we're expecting a tsunami of these type of investigations, right. It's probably just something to be... to increase your awareness on.

But I assume that if your widget company is in a fragmented market in a geography and you have 5% of the market, and you're acquiring an additional 3% of the market, that's not going to be something that's going to raise alarm bells. But what is the DOJ looking for? I assume it's consolidation of competitors in a certain geography that harms consumers. Are those the couple of bullet points of add-on strategies that are higher risk than others?

Yeah. And I think that's a really important point to make, which is that if you are aggregating small market shares in a way that is not giving you some kind of outsized power, right. The power to raise prices without being concerned about losing market share, right. The power to lower wages. If this is an area where competition among employers has an impact on your business, they are looking at that labor side of thing too. If there's so much competition on the sell side and on the employer side that you're not going to be able to incur or impose the kinds of competitive harms that DOJ is worried about, you're not going to end up on their radar screen.

This is not a situation where any aggregation of market share is going to result in harm. I think the U.S. Anesthesia Partners case is a great sort of illustration of what types of strategies and what types of conduct are going to make it more likely that you'll end up on a regulator's radar screen. Again, if you believe the complaint because, as you noted, it's really just the complaint that's been filed in that case. There was a tremendous amount of market share based on the allegations that, over time, gave U.S. Anesthesia Partners the leverage to raise prices significantly above what DOJ considered to be a competitive level.

And there was a chorus of people who were ready to complain about that as well. The payers and other people in the market all could make out a pretty good case for how they were harmed, and as you say, consumers and patients were harmed. So I think that that U.S. Anesthesia Partners case really is a useful benchmark to look at. It is the type of conduct that is going to land you on a radar when it is at that level when there is a very clear effect on competition and a very clear negative effect on price, efficiency, quality, all the other things that we like to think competition improves.

Great. Maybe we do just walk through that case. I assume it's public record, so we can go through a little bit of the facts just to illustrate the market power and some of the smoking guns or the bad acts that people really need to watch out for out there. Because again, I think it's interesting to think about what are the market share dynamics that puts you on the radar in the first place.

What are some of the industries that maybe the DOJ is looking at more closely than others? It sounds like healthcare is one of them. And then what are the actual kind of bad acts and emails and messages and things that can get you into hot water? Once the DOJ is kind of zeroed in on your market share and your industry and is looking at your platform, what are kind of some of the bad acts there? So maybe we can just kind of talk through some of those topics as it relates to this case if that works.

Sure. And let me just also point out another couple of sort of what I'll just call extraordinary points about the U.S. Anesthesia Partners case as well. Number one, I think that people have become aware of this litigation and have assumed that the Federal Trade Commission got a whiff of this roll-up strategy and marched into federal court and filed a complaint. In fact, the story is much longer than that. FTC has been investigating this company and this conduct for quite a while. The company itself disclosed that publicly, I think, two years ago, one, two years ago at this point in time.

But by the time the FTC files its complaint in September, it really is able to come at U.S. Anesthesia Partners with what we call sort of a kitchen sink approach with respect to these antitrust claims.

So this is a civil enforcement action in federal court in Texas, and the allegations are made that this is a monopolization problem. This is a violation of Section 2 of the Federal Sherman Act. It is a violation of Section 7 of the Clayton Act and Section 5 of the FTC Act based on the sort of acquisition conduct. And there was sort of a general anti-competitive course of conduct to obtain price increases as a result of having made these acquisitions. So building up enough market power again to, as I said before, to be able to raise prices without worrying about losing too much market share.

So this platform was a group of anesthesiologists, and they would go into hospitals and perform anesthesiology. And then, by combining together, they were able to increase their rates well beyond what others were charging. Kind of what... Just it would be interesting to hear kind of what was the pricing issue, right.

Yeah. So what it is that they, again, according to the complaint, right... And that we would just need to be able to say that this is... these are allegations. The facts are maybe cherry-picked as they are in any complaint. But according to the complaint, U.S. Anesthesia Partners got to the point where it controlled nearly 60% of hospital anesthesia costs in Texas, the state... looking at the state as a whole, and was managing-

Wow.

... 43% of the cases, right. So as I was saying before, this is a pretty sort of extreme level, right. It was six times larger... When you just look at their case volume, it was six times larger than the next group in Dallas, for instance, right.

Mm-hmm.

And they were... Through their managed care strategy, because of how their contracts were phrased and constructed, et cetera, they were able to basically fold in every new group that they acquired and put them onto contracts which were in place that had higher rates. So if you were a payer who was getting hospital anesthesia services from group A at, I'm just going to say, like 102% of Medicare. All of a sudden, they become part of USAP, and your cost for those same services could go up by several multiples. So it was...

Mm-hmm.

And in addition to that, the other thing I think is instructive about this complaint is that this strategy was pretty much laid out in normal course documents that not only at the U.S. Anesthesia Partners level but also at the private equity sponsor level as well. They were very... The complaint uses very dramatic language, talks about from their lofty perch on Park Avenue in New York. This private equity saw an opportunity to extract more money out of the anesthesia patients in Texas, et cetera, et cetera.

Mm-hmm.

So that's the other thing that put this on the radar screen for the FTC I think and made an attractive case is that there seems to be a lot of documents that were available to them that they could cite in order to make their case. So we'll see what else comes out in discovery. But at least for purposes of composing their complaint, there were a lot of attractive bad documents at the PE sponsor level and at the practice level.

Got it. Got it. And that probably rolls into what are the takeaways, and as you noted, I mean, this is just a complaint. The language is very colorful, and the complaint from the FTC and we'll need to see where all of this shakes out, right and what the facts really were. But takeaways from the case for PE investors engaged in roll-up strategies, it sounds like documents that talk specifically about raising prices and using market power in nefarious and FTCs views ways. What kind of advice are we giving to clients coming out of this case?

Well, I mean, I think the first piece of advice that we're giving to clients is be realistic about assessing your own conduct, right. I think a lot of clients are very concerned that they have been pursuing strategies which are now going to put them in the cross-hairs of an antitrust regulator. And again, I think the U.S. Anesthesia Partners case is a pretty extreme case if the complaint is to be believed. So put your own conduct in context.

I don't think that this is going to be the start of a tsunami of these cases against people who are pursuing good faith business strategies to build scale and pursue other tried and true strategies to create viable, successful businesses. But I do think that sort of the time has come to really weave antitrust in to your business practices in a way that is not obtrusive but is just smart, right. I always say there's tremendous return on investment for taking small steps to weave antitrust awareness and compliance into how you do business.

So I think at the front end, I think it's really good to have an awareness when you're looking at pipeline. If you have an opportunity to take your capital and put it into a place, a new platform or a business related to an existing platform, but maybe in a geography where you don't already have market share, being able to figure out whether there's a strategy to move forward with deals in a way that has... can minimize antitrust risk instead of sort of running headlong into an antitrust buzzsaw.

Mm-hmm.

So at the pipeline stage, I think it's very smart to have that awareness. I think that there's almost no higher return on investment than when you are composing management decks, communications, other core documents that relate to your acquisition strategy to just be precise and accurate, right. It's not about like, "Don't use this word, don't use that word, hide the ball, et cetera." It's not about hiding the ball.

It's about not using sloppy inflammatory language that is going to land in a very negative way if it is ever reviewed by a State Attorney General, the Federal Trade Commission or DOJ. So being able to get your point across in a way that does not create undue antitrust risk is also a very prudent thing to do at this point in time. And it doesn't take much. It takes a little bit of education for your... of your BD teams and your leadership, et cetera, to understand how to have a productive discussion about opportunities and potential deals without creating undue risk.

That's a great point. Just to highlight kind of the specific documents that might be good candidates for that type of review for deals that I work on, it would be for funds, anything that goes in front of the investment committee are usually pretty formal materials for independent sponsors, due diligence summaries or investor decks describing the transaction. Those things Holden and her team can take a very quick look at and spot those inflammatory type of statements pretty quickly, and that could be very helpful.

Well, I just want to add one other kind of document to your list there, and that is third-party consultant documents. These are sort of notorious.

Mm-hmm.

If they end up on the desk of a regulator, you can be stuck having to answer for language that a third-party consultant that you hired used, even if, frankly, it doesn't even reflect your company's perspective of the market or competitive dynamics, et cetera.

And so that's the other high ROI antitrust investment to make at the beginning of a process, which is make sure that your consultants are on board with your goals in terms of avoiding inflammatory language, imprecise language, sloppy language that describes competition, et cetera. So again, can be handled very easily. 15, 20 minute call with a consultant before they go off and do whatever market study they're going to do goes a long way.

Great. Great. Well, Holden, the time really flew by on this one. It was really interesting chatting with you as always. Really appreciate it. If listeners have more questions, definitely reach out to Holden or to me. And again, we're not trying to scare anyone out of doing add-on strategies whatsoever.

Those are viable, and we work on those all the time. And I think it is really the edge in kind of extreme cases that if any of these bullet points we talked about on this podcast are applicable to something you're doing, I mean, just keep it on your radar that it is a more heightened scrutiny environment. Holden, any final parting shots for the listeners?

I just want to just reiterate what you just said. This should not be a super scary time for people who are, again, pursuing legitimate strategies for building great businesses. But it is a good maybe moment to pause and figure out whether there are steps you can take to minimize the antitrust risk that you may face in the future, and we're happy to help with that.

Awesome. Thanks again so much for your time, Holden. Always great to talk with you.

You too, Greg. Take care.

Thank you for joining us on this episode of Deal by Deal, a McGuireWoods Independent Sponsor podcast. To learn more about today's discussion and our commitment to the independent sponsor community, please visit our website at mcguirewoods.com. We look forward to hearing from you. This podcast was recorded and is being made available by McGuireWoods for informational purposes only.

By accessing this podcast, you acknowledge that McGuireWoods makes no warranty guarantee or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.