CLS Blue Sky Blog

Cleary Gottlieb Discusses Change Healthcare Decision’s Implications for PE Sponsors

Biden-appointed antitrust officials have asserted, unfairly in our view, that private equity firms deserve heightened scrutiny when they engage in corporate transactions.  For example, the head of the DOJ’s Antitrust Division said in an interview with The Financial Times earlier this year that the private equity business model “is often very much at odds with the law and very much at odds with the competition we’re trying to protect.”  The Chair of the Federal Trade Commission has similarly stated in a separate Financial Times interview that private equity firms’ acquisitions can have “life and death consequences.”

Agency criticism of private equity has just failed its first courtroom test.  The U.S. Department of Justice and Attorneys General from Minnesota and New York filed a lawsuit challenging the $13 billion acquisition of Change Healthcare Inc. (“Change”) by UnitedHealth Group Incorporated (“United”).  District Court Judge Carl Nichols’ opinion approved the acquisition of assets divested to address a competitive overlap by entities affiliated with TPG Capital (“TPG”).  The Court held that “the evidence at trial established – and the Court finds – that TPG’s incentives are geared toward preserving, and even improving, [the business’s] competitive edge,” rejecting DOJ’s arguments to the contrary.  Opinion at 24-25.

This is welcome news for private equity firms competing to be divestiture buyers.  We do not, however, expect that the agencies will abandon their current aggressive enforcement policies, including those that disfavor private equity buyers. Given that the antitrust agencies (and particularly the DOJ) have adopted anti-settlement policies generally, merger parties proposing remedies to address competitive concerns raised by antitrust agencies will likely need to plan to litigate with the agencies.  The United/Change case provides a path for merger parties and private equity divestiture buyers to prevail in litigation with antitrust agencies challenging the adequacy of divestitures to private equity.

Below is a brief description of the relevant holding in the United/Change case and what we see as implications going forward.  Cleary Gottlieb represented Change Healthcare at trial in this case.  The merger closed on October 3, 2022.

The Divestiture

The competitive overlap that gave rise to the divestiture in this case was in an area known as “first-pass claims editing,” a software product that health insurance companies use to analyze reimbursement claims.  Both United and Change offered claims editing products for sale, sometimes in competition with each other, before the merger.  The parties offered to divest Change’s market-leading product, ClaimsXten.  Opinion at 27.  Following an auction process, the parties agreed to sell ClaimsXten and related assets to TPG for $2.2 billion.

The Court’s Analysis of TPG and the Divestiture Remedy

Following an 11-day bench trial, the Court found that the proposed divestiture to TPG would adequately preserve competition in first-pass claims editing.  The Court analyzed the divestiture using a five-part test proposed by the plaintiffs:

At trial, the plaintiffs suggested that TPG’s debt financing plans raised concerns, but the Court did not find this to be significant.

Key Takeaways for Divestitures to Sponsors

This post comes to us from Cleary Gottlieb Steen & Hamilton LLP. It is based on the firm’s memorandum, “The Change Healthcare Decision and Implications for Private Equity Sponsors,” dated October 11, 2022, and available here. David Leinwand, Matt Salerno, and John Kupiec also contributed to the memorandum.

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