(Bloomberg) -- KKR & Co. and the Justice Department are sparring over a push to hold the firm’s top executives more accountable for disclosures related to takeovers, as US authorities deepen their scrutiny of the private equity industry.
The high-stakes fight stems from a federal investigation into whether KKR withheld information in its filings to government agencies about the competitive impact of mergers and acquisitions. To settle the probe, antitrust enforcers want the famed buyout firm to agree that their co-chief executive officers could be held personally liable for future lapses, according to people familiar with the matter.
KKR has rebuffed that demand and the two sides also remain at loggerheads over any possible fines and whether a settlement would involve an admission that information was intentionally withheld, said the people, who asked not to be identified discussing the private talks. The requests — and KKR’s pushback — underscore how the Biden administration’s aggressive antitrust enforcement agenda is ricocheting through Wall Street.
A settlement with New York-headquartered KKR, which helped popularize the leveraged buyout in the 1980s, could set a template for future Justice Department actions against private equity firms accused of failing to comply with merger disclosure requirements outlined in the Hart-Scott-Rodino Act. Those so-called HSR filings are signed by company officials pledging their accuracy.
In a statement, KKR said that it takes “incredibly seriously” its obligations to all of its regulators. “KKR has been cooperating in good faith and engaging in discussions with the Antitrust Division of the Department of Justice relating to the accuracy and completeness of some of our Hart-Scott-Rodino filings from 2021 and 2022.”
A spokesperson for the Justice Department declined to comment.
The Justice Department has two parallel investigations into KKR’s disclosures, one civil and one criminal, which the firm has previously disclosed. The company has said it received a grand jury subpoena over the accuracy of its filings. The criminal inquiry focuses on whether individuals who signed the forms were aware of any omissions.
To settle the civil probe, the Justice Department officials are seeking a stiff monetary penalty and a requirement that KKR’s most senior executives sign off on future filings for merger reviews, said the people familiar with the matter.
Potential Liability
The Justice Department rejected an earlier KKR offer to pay around $100 million, the people said. Perhaps more contentious than any settlement price, however, is the requirement floated by antitrust enforcers that Co-Chief Executive Officers Scott Nuttall and Joe Bae be held personally liable if more lapses occur within the next five years.
Potential personal liability for the top executives would be a significant condition for KKR, which has been involved in more than 200 acquisitions and investments announced since the beginning of October 2020, according to data compiled by Bloomberg. It would also represent one of the most severe remediations the government has ever sought over alleged merger notification failures.
The Justice Department has said it’s making a broader effort to ensure private equity firms comply with the HSR Act. In addition to notifying officials about mergers, the law requires firms to submit a variety of other documents, such as studies, analyses and reports prepared by corporate leaders while weighing deals.
Both the Justice Department and the Federal Trade Commission police the HSR Act and can fine companies more than $50,000 per day for failing to report a deal or closing one before a review is final. In 2006, for example, Qualcomm Inc. paid $1.8 million for not notifying antitrust enforcers about its acquisition of Flarion Technologies Ltd. The largest fine to date involved $11 million that hedge fund ValueAct Capital Management LP paid in 2016 for failure to notify investments made in Halliburton Co. and Baker Hughes Co.
Antitrust officials are most concerned about failures to turn over all required documents, rather than accidental situations where a company forgets one or two things. FTC Chair Lina Khan has set her sights on so-called roll-ups, especially in the health care sector.
Private equity firms are major players in corporate takeovers. With multibillion-dollar war chests of cash raised from institutions and wealthy investors, they buy into companies and, typically, overhaul their management. Sometimes they combine them with complementary businesses. After several years, the private equity firms generally sell the reshaped company or take it public.
Overlapping Board Seats
Beyond HSR filings, US antitrust officials also increased scrutiny of the private equity sector with a sweeping probe into overlapping board seats in 2022. That enforcement push relied on a rarely invoked antitrust prohibition against so-called interlocking directorates, where the same individuals or entities have board seats at competing businesses.
The initiative has led to resignations at more than a dozen companies including individuals associated with private equity firm Thoma Bravo LLC. KKR is also among the firms that faces the DOJ inquiry into board overlaps.
Meanwhile, the Justice Department and the FTC are preparing to announce a revamp of the HSR filing process that would require companies involved in proposed deals to turn over more details, including about any related acquisitions during the previous five years. Business groups and those representing the private equity industry oppose the changes, saying the agencies are seeking unnecessary information that would impose significant costs on merging parties.
The revamped form could add an even greater compliance burden on companies, including private equity firms. The current form requires 37 hours to complete, according to the agencies, but the new version would add more than 100 hours to the time it takes to prepare a filing.
--With assistance from Michael Hytha.
©2024 Bloomberg L.P.