FTC Reminds Merging Parties: Don’t Jump the Gun During the HSR Waiting Period!

FTC Reminds Merging Parties: Don’t Jump the Gun During the HSR Waiting Period!

Client Alert

Authors

Three crude oil producers have agreed to pay civil penalties totaling $5.7 million to settle allegations that they engaged in “gun jumping,” namely, allowing the acquirer to exercise control over the target’s business conduct before expiration of the waiting period of the Hart-Scott-Rodino (HSR) Act.1 The penalties are the largest ever imposed for a gun-jumping violation in the United States. This action reflects that the antitrust authorities are vigilant about enforcing the HSR Act’s prohibition on an acquirer’s obtaining control over a target before obtaining antitrust clearance and will aggressively pursue substantial penalties for gun jumping.2

Background

Verdun Oil Company II, LLC, agreed to purchase EP Energy, LLC, for $1.4 billion on July 26, 2021, triggering an HSR filing and obligation to suspend closing pending antitrust review. The waiting period ended eight months later, on March 25, 2022, when the parties entered a consent agreement with the Federal Trade Commission (FTC) addressing concerns that the transaction would harm competition in crude oil markets in Utah.

The FTC alleged that the parties’ purchase agreement transferred control over key aspects of EP’s business to Verdun and its sister company, XCL Resource Holdings, LLC, immediately on signing and that the acquirers engaged in several types of operational and decision-making control over EP’s day-to-day business operations during the antitrust review. As alleged, this conduct included the following:

  • Verdun and XCL halted EP’s new well-drilling activities, leading to crude oil supply shortages.
  • EP employees reported to XCL and provided their XCL counterparts with competitively sensitive information about customer contracts, supply volumes and pricing terms.
  • XCL employees directly dealt with EP customers to resolve supply and delivery issues.
  • EP submitted all expenditures above $250,000 to XCL or Verdun for review and approval, and many of those expenditures were for ordinary course activities.
  • XCL directed EP to alter ordinary course business operations, including well-drilling designs and leasing and renewal activities, receiving competitively sensitive EP business information in the process.
  • Verdun coordinated with EP on contract negotiations with customers.

The parties amended the purchase agreement on October 27, 2021, to remove Verdun’s and XCL’s influence over EP’s day-to-day operations. The FTC alleged that the parties’ gun jumping violated the HSR Act for 94 days, from signing until the amendment. 

On January 7, 2025, XCL, EP and Verdun agreed to pay civil penalties totaling $5.7 million to settle the action.

Implications

First, transacting parties must be mindful of the distinction between requiring acquirer approval for non-ordinary and ordinary course business activities. Although acquirers may exercise control over non-ordinary course target activities that could affect the value of the acquired assets, they may not interfere with ordinary course conduct until the HSR waiting period has expired. Merging parties should carefully assess interim operating covenants to ensure that they restrict only non-ordinary course activities and take compliance measures to keep acquiring firm employees from interfering with the target’s ordinary course activities during the HSR waiting period.

Second, when purchase agreements provide target expenditure (or indebtedness) thresholds to determine whether the acquirer must approve target business activity between signing and closing, it is important to calibrate these thresholds to the size of the target business. Here, the complaint alleged that a $250,000 threshold for acquirer approval was too low to exclude interference with ordinary course activities.

Third, elements of this case may have brought extra scrutiny and made for a particularly compelling enforcement action—the parties were competitors (indeed a remedy was required), and the complaint alleged that gun jumping contributed to real-world negative effects for consumers in high-profile circumstances. But regardless of whether parties are competitors or gun jumping harms consumers, agencies will aggressively enforce against gun-jumping violations if they discover them.

Authors

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