Private Equity Firms Probed by US on Overlapping Board Seats (BX, APO, KKR)

The Justice Department is looking into whether private equity firms influence corporate boards in ways that violate antitrust laws.

According to people who asked not to be named discussing a confidential inquiry, federal investigators are looking into the practice of private equity firms putting executives on boards of companies in the same sector.

The board directors with seats on rivals in the same sector could influence those companies to act in ways that maximize gains for all, rather than competing vigorously to provide the best services or lowest prices to consumers.

The antitrust division of the Justice Department has sent civil investigative demands similar to subpoenas to the three companies. Several large and small private equity companies have received letters in the last month, according to the people.

There are antitrust reviews of deals before the agency.

They didn't comment. Civil investigative demands don't mean wrongdoing.

It is common for a dealmaker to sit on the boards of multiple portfolio companies if the person had a hand in the acquisition of the businesses. Many firms try to avoid having the same executives on the boards of their direct rivals in order to avoid being accused of hurting competition.

The Biden administration is trying to rein in corporate consolidation and revive antitrust powers. A 1914 merger law forbids people from sitting on the boards of companies that are directly competing. For a long time, that law has not been strictly enforced.

One of the people said that the antitrust officials have been talking to the research community about this issue. The officials are looking at how the practice affects other companies in the same industry.

During the past ten years of low interest rates, the best-known firms grew quickly. With abundant cash on hand and cheap debt available, many private equity firms extended their reach across the economy.

Firms that encourage dealmakers to carve out a niche in a sector have strict rules that prevent them from pursuing companies in the same business. If the directors also sit on the boards of other companies in the same line of business, they should not vote on important votes.

Many private equity firms tell regulators and investors that they don't micromanage companies and that board directors are just there to check on company governance, not to influence day-to-day business or prices of goods.

The Justice Department launched its initiative to eliminate board overlaps last week after seven executives stepped down from boards.

In announcing the action, the assistant attorney general for antitrust said that executives sharing officers or directors further concentrates power and creates the opportunity to exchange competitively sensitive information.

The Department of Justice made use of 1914 law when directors left five tech firms.

Three directors associated with a Chicago private equity firm resigned from the board of SolarWinds Corp. Dynatrace is a network management platform that has a rival platform.

The person didn't respond to the request for comments. The executives resigned after receiving a letter from the Justice Department, but didn't admit any violations.

The private equity industry has been called out by the Justice Department and the FTC. In public comments last week, the chair of the FTC said the agency would be looking closely at the role of private equity firms in the healthcare industry. Private equity investments in nursing homes have been linked to higher mortality rates.

Companies are required to eliminate the board overlap within a year. Small companies with less than $4 million in sales are excluded.

The law bars a person from serving on a board, but it doesn't say whether that person is an individual or an entity. He said it was unclear how to determine when companies compete against each other.

The courts haven't made a decision on those issues There is a chance that DOJ will press on those.