On January 7, 2025, the Federal Trade Commission (FTC) announced a record-setting penalty to settle allegations of gun jumping in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, 15 U.S.C. §18A (HSR Act).  “Gun jumping,” in its traditional application in the merger setting, means that the parties to a transaction did not properly abide by the waiting period under the HSR Act and began to transfer beneficial ownership before clearance has been achieved.  The $5.6 million penalty is the largest fine ever issued in a gun jumping case.

The present gun jumping case stems from the acquisition of EP Energy LLC (EP) by companies under common control, Verdun Oil Company II LLC and XCL Resources Holdings, LLC (Verdun/XCL).  The parties were competitors in the crude oil market in Utah and entered into the acquisition agreement in July 2021 which required a filing with the US government pursuant to the HSR Act.

On the date that the parties announced the acquisition, but prior to the expiration of the HSR-mandated waiting period, Verdun/XCL allegedly began engaging in activities that exerted control over EP.  For example, Verdun/XCL began to manage EP’s customer transactions, began to coordinate pricing with EP, and forced EP to cease planned development activities.

While the parties returned independent business control to EP in October 2021, the FTC found that Verdun/XCL and EP had violated the HSR Act for 94 days.  Due to the egregious violation of the HSR Act, the competitive sensitivities of a merger between competitors, and the alleged consumer harm resulting from unregulated consolidation of the crude oil market, the FTC sought and obtained the record setting civil penalty.  The substantive merger investigation of the matter resulted in the divestiture of certain Utah oil assets.

Background on HSR Act

The HSR Act is the United States’ pre-merger notification statute. It requires parties contemplating certain types of transactions involving the acquisition of assets, non-corporate interests (e.g., limited liability company membership or partnership interests) or voting securities that meet the size thresholds to file a notification form describing the transaction with the FTC and the US Department of Justice (DOJ) and to wait a prescribed waiting period before consummating the transaction.

Violations of the HSR Act can carry substantial penalties – up to a maximum of $51,744 a day in 2024.  This number (and the filing thresholds) are adjusted annually.  Penalties can be applied for violations even where there is no underlying competitive concern with the proposed transaction.

Waiting periods

The HSR Act contemplates an initial waiting period (generally 30 days) to allow the governmental agencies to determine whether one of the agencies wants to investigate the proposed acquisition more thoroughly.  There is a shorter waiting period in the case of a cash tender offer or bankruptcy.

If one of the agencies decides that it does want to investigate, it will issue a so-called “second request” seeking a substantial amount of data, information, and documents from the parties to the transaction. The waiting period does not expire in such a case until 30-days after both parties have substantially complied with the second request.  Of course, it is axiomatic that the transaction cannot be consummated during the waiting period.

It is this waiting period that generates potential “gun-jumping” – the taking of beneficial ownership of the acquired party in some fashion during the HSR Act waiting period.  And while companies and corporate counsel are reasonably well-versed in its prohibitions, there have been a number of relatively recent cases demonstrating that more vigilance may be required.

Prior Gun Jumping Cases

Last year, DOJ settled a gun jumping complaint against Legends Hospitality Parent Holdings, LLC (“Legends”) for actions related to its proposed acquisition of ASM Global, Inc. (“ASM”), a competitor in the venue services market.  Legends announced its acquisition of ASM in November 2023, and the waiting period is alleged to have begun at essentially that same time.  A second request was issued in January 2024, which extended the parties’ waiting period.

In May 2023, months before filing its HSR form, Legends had been awarded a contract to manage a city-owned arena following the expiration of ASM’s management contract in July 2023.  Instead of following the transition plan Legends submitted with its bid for the contract, Legends had ASM continue to manage the arena, essentially leaving ASM in control of the newly-awarded Legends contract.  Legends and ASM drew up a contract in December 2023—during the waiting period—wherein ASM agreed to book and manage third-party events at the arena on behalf of Legends.  The government also alleged that Legends and ASM agreed not to submit competitive bids for other venue management contracts in anticipation of the merger and exchanged competitively sensitive information such that they could submit a joint bid for management of a university arena in 2024.  The matter was settled with the payment by Legends of a $3.5 million civil penalty.

DOJ brought a case for similar gun jumping conduct against Duke Energy Corporation (“Duke”) in 2017.  In August 2014, Duke reached an agreement with Calpine Corporation (“Calpine”) to purchase one of Calpine’s electrical generating plants (“Osprey”) for approximately $166 million.  On October 1, 2014, the same date that Duke submitted an HSR form, the parties began operating under a tolling agreement wherein Duke had authority to make all significant competitive decisions for Osprey.  The tolling agreement was allegedly set up to encourage FERC to grant approval for the acquisition but served no independent purpose.  Under the tolling agreement, Duke became responsible for determining when and how much energy Osprey would generate, began to purchase and deliver all fuel necessary to produce that energy, and was entitled to use all of the energy produced by Osprey.  Duke paid Calpine a fixed fee for operating the Osprey plant under Duke’s instruction, but Calpine was insulated from any market risk as of October 1, 2014.  Accordingly, Duke was allegedly the beneficial owner of Osprey during the entire HSR waiting period.  The HSR Act violation was settled with an agreement by Duke to pay a $600,000 civil penalty.

Conclusion

While the Verdun/XCL civil penalty is a stark reminder of the need for compliance with the HSR Act waiting periods, it is not the only form of “gun jumping” about which companies and counsel must be cognizant.  Section 1 of the Sherman Act prohibits agreements which unreasonably restrain trade.  As long as a transaction has not been consummated – irrespective of whether a filing under the HSR Act has been or will be made – the parties are still independent economic actors, and they remain subject to Section 1 and the other antitrust laws.  Several gun jumping cases prior to those discussed herein involved allegations of violations of Section 1 or other antitrust laws in addition to a violation of the HSR Act.   Hence, care must be taken not to exceed the necessary sharing of information and coordination in order to plan for the future integration of the companies.  Where the parties are competitors, extra vigilance is required.  All of this is quite manageable with proper planning and thoughtful antitrust advice.

This content was originally published on January 8, 2025 via the International Law Office (ILO) newsletter. It can be found here: FTC Secures Record-Setting Civil Penalty for Gun-Jumping in Violation of the HSR Act

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