A publicly filed Report and Recommendation on Feb 12 from Magistrate Judge James Orenstein is recommending to Judge Gleeson that the Court deny MasterCard’s motion to dismiss the Class Plaintiffs Supplemental Complaint that challenges MasterCard’s reorganization and IPO.
[Click here to view the Report and Recommendation].
In our opinion, as Class Plaintiff, this is a significant victory as it undermines MasterCard’s legal and business strategy of attempting to avoid antitrust liability by transforming itself into a “single entity” immune from Section I of the Sherman Act.
We have written in depth on this topic ever since MasterCard launched its plan to transfer liabilities through a questionable public offering. While there are other remedies beyond overturning the MasterCard IPO, the situation is similar to those now faced by Visa Inc and its nearly identical planned IPO, which we now think could be modified to address these issues and even be deferred or rescheduled. [See Risk Factors]. We expect that yesterday’s Report and Recommendation could minimally have a materially negative impact on Visa’s IPO pricing.
Selected highlights from the Report and Recommendation
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Background: In their First Consolidated Amended Class Action Complaint, filed on April 24, 2006, the merchants and trade associations that comprise the Class Plaintiffs alleged sixteen antitrust claims against a variety of networks and banks arising from those defendants’ use of fees and rules that enable the merchants to accept credit and debit cards as forms of payments for the goods and services their customers purchase.
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[T]he plaintiffs allege that the IPO fundamentally altered MasterCard’s structure and operations, as well as the relationships between and among itself and the Banks, in ways that offend federal antitrust laws as well as New York State’s prohibition against fraudulent conveyances.
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Before the IPO, the banks that made up the membership of the MasterCard consortium completely controlled the network: they owned all of its shares and populated its Board of Directors and other governance committees.
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The plaintiffs assert that it [the IPO] was to avoid such liability that MasterCard’s banks determined to transform the consortium into a public company that would qualify as a single entity; however, in doing so, the plaintiffs contend that the banks sought only to divest themselves of enough participation in MasterCard to avoid antitrust liability, without losing their ability to engage in anti-competitive conduct. Id. 74-75. In making that allegation, they note that MasterCard publicly described one expected advantage of the IPO as being insulated against “legal and regulatory challenges involving our ownership and governance.”
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The Class Plaintiffs contend that the net effect of these changes is to create the appearance but not the reality of a single entity, and thereby improperly to insulate MasterCard from Section 1 liability for what amounts to a continuation of its member banks’ continued unreasonable horizontal restraints of commerce.
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I conclude that the IPO resulted in both MasterCard and the Banks making an acquisition that is properly subject to scrutiny under Section 7. First, the Banks Acquired stock in the new MasterCard entity, and that acquisition is not shielded from liability simply because it was paid for with arguably more valuable shares of the old entity. Second, MasterCard acquired assets from the Banks – namely, their shares of the old MasterCard entity and certain associated rights – and that acquisition is not shielded from liability simply because the assets can also accurately be described as MasterCard’s own stock rather than “the stock … of another person
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… [T]he plaintiffs assert that the rules governing transfers and ownership of the new classes of MasterCard shares will concentrate effective control of the new entity in the defendants’ hands. Those rules ensure that the banks that were members of the old MasterCard consortium will retain a substantial economic interest – 41 percent ownership – in the new entity. Combined with ten percent ownership share guaranteed to the new MasterCard Foundation, it is impossible for outsiders to obtain a majority stake in the company. In addition, the restrictions on governance rights – including the ownership qualifications and veto powers associated with Class M shares and the limitations on voting rights available to public investors – further ensure that no outsider can gain enough power to operate MasterCard in a way that might be more competitive but less profitable for the banks.
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… Given the plaintiffs’ plausible allegations about the characteristics of the relevant market and the effects of the acquisitions at issue, I conclude that the Complaint sufficiently pleads that the agreements leading to the IPO will probably result in a substantial lessening of competition. Combined with my earlier conclusion about the form of the acquisition, I further conclude that – with respect to both MasterCard’s alleged acquisition of assets from its member banks and the Banks’ acquisition of stock in MasterCard – the plaintiffs have identified, if not yet sufficiently pleaded, a viable claim under Section 7 of the Clayton Act.
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