WHEN ARE PRIVATE EQUITY FIRMS LIABLE FOR ACTS OF THEIR PORTFOLIO COMPANIES?
Corporate separateness is a linchpin of modern investment, allowing capital to flow without exposing private equity (PE) investors for every decision made by a portfolio company. But a string of recent decisions and settlements involving claims of fraud, anticompetitive conduct and regulatory violations provide clear reminders that the protections offered by the corporate form are not iron clad.
The latest example landed just two months ago, when a federal court allowed claims against Bain Capital to proceed based on a data breach at one of its most recent acquisitions – an educational software provider called PowerSchool servicing 60 million students and 10 million teachers.
Notably, the court refused to dismiss certain claims against Bain based in part on PowerSchool’s acts before Bain’s acquisition was complete. The complaint alleged that Bain conditioned its investment on certain cost reduction measures, like offshoring cyber security functions, which PowerSchool undertook and which contributed to the data breach.
The PowerSchool case raises questions any investor would want to ask before taking a stake in an operating company. What are the common claims brought against PE companies based on acts of a portfolio company? What are the theories of liability that succeed? And what kind of conduct has exposed PE companies to liability in the past?
False Claims Act
Any investor in highly regulated entities – for example, defence contractors or healthcare providers – is aware of the False Claims Act (FCA) risks those entities face. Investors routinely perform due diligence to determine the level of risk a company faces before investing in it.
Jul-Sep 2026 issue
MoloLamken LLP