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Tips to Avoid Gun-jumping in a Merger
Practical Law Legal Update 8-589-3425 (Approx. 5 pages)
Tips to Avoid Gun-jumping in a Merger
by Practical Law Antitrust
| Law stated as of 09 Dec 2014 • USA (National/Federal) |
This Update provides tips on counseling clients to avoid gun-jumping. Gun-jumping occurs when parties to a transaction that is reportable under the Hart-Scott-Rodino (HSR) Act either prematurely transfer beneficial ownership or illegally coordinate before closing. For more resources on gun-jumping, see Gun-Jumping and Premerger Information Exchanges Toolkit.
Parties to a merger or acquisition that is reportable under the Hart-Scott-Rodino (HSR) Act cannot close the transaction until they have obtained clearance from the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ). The HSR Act mandates a waiting period (generally 30 days) during which the transacting parties must remain separate and independent while the antitrust agencies review the transaction's competitive significance and decide whether to investigate further. Parties to a reportable transaction can violate the HSR Act and other antitrust laws if they engage in gun-jumping, that is:
- Conduct before closing that amounts to the transfer of beneficial ownership of the assets or equity to be acquired.
- Other illegal pre-closing coordination, such as jointly deciding to shut down one of the parties' facilities before closing.
Gun-jumping violations can lead to enforcement actions by the FTC and DOJ and result in injunctive relief, civil penalties and disgorgement (see Practice Note, Gun-Jumping Antitrust Enforcement). For example, the DOJ recently brought a gun-jumping action against a particleboard manufacturer, Flakeboard America Limited, and its competitor and target, SierraPine, which resulted in disgorgement. The DOJ charged the parties with violating the HSR Act by prematurely transferring ownership of the target business during the HSR waiting period and violating Section 1 of the Sherman Act by prematurely coordinating with each other before obtaining HSR clearance.
Conduct Causing Gun-Jumping Violations
The following types of conduct between transacting parties can constitute gun-jumping:
- Sharing competitively sensitive information, such as current and future pricing or cost information.
- Prematurely transferring beneficial ownership or closing the transaction.
- Prematurely integrating or consolidating operations.
- The buyer exercising control over the target's assets or its routine business, management, or operations.
- Engaging in impermissible joint conduct, such as fixing prices, terms, and conditions.
For more information on the alleged gun-jumping violations in agency enforcement actions, see Practice Note, Gun-Jumping Antitrust Enforcement: Box: Civil Enforcement Actions: HSR Act and Box: Civil Enforcement Actions: Section 5 of the FTC Act.
For example, in the Flakeboard matter, the DOJ alleged that the parties engaged in gun-jumping where they coordinated to, among other things:
- Permanently shut down one of SierraPine's mills during the HSR Act waiting period.
- Direct the closed mill's customers to a competing Flakeboard mill, which would honor SierraPine's prices.
- Share competitively sensitive information about customers of the SierraPine mill, including customer names, contact information, and types and volumes of purchases.
Tips for Avoiding Gun-Jumping
Counsel should provide advice to transacting parties on how to avoid gun-jumping as early as possible in the negotiation process and before engaging in due diligence. Counsel should advise parties:
- Not to begin integrating their businesses until after HSR clearance is obtained, even if the transaction is unlikely to raise an antitrust concern.
- To avoid exchanging competitively sensitive information, particularly current or future information on:
- customers;
- prices;
- costs;
- product innovation;
- marketing plans; and
- strategic plans.
- To avoid managing one another's business affairs. In particular, the buyer should not attempt to influence the target company's:
- ordinary course of business decisions;
- price setting, output determination or new product launches;
- advertising and marketing programs; and
- customer relationships.
Counsel should also review the parties' merger agreement to identify any provisions that might be viewed as transferring beneficial ownership before closing, such as a provision:
- Allowing the buyer to:
- take control of the seller's inventory at signing; or
- operate the target's business.
- Requiring the buyer to approve the target's ordinary course of business decisions.
The parties' merger agreement is submitted to the antitrust agencies in a reportable transaction and the reviewing agency will evaluate whether any provisions constitute gun-jumping.
For a checklist of warnings and instructions counsel can provide to transacting parties to avoid gun-jumping violations, see Avoiding Gun-Jumping in Corporate Transactions Checklist.
Penalties in Gun-Jumping Cases
Where parties are found guilty of gun-jumping, the antitrust agencies have required:
- Civil penalties of up to $16,000 per day (see HSR Act Violations: Civil Penalties Chart: Gun-Jumping Violations).
- Injunctive relief, including:
- preventing the future occurrence of the specific gun-jumping violation;
- requiring the party to implement and maintain an antitrust compliance program; and
- requiring a government employee to monitor compliance with the consent order.
- Disgorgement of any illegally obtained profits stemming from the violation.
For example, in the DOJ's recent enforcement action against Flakeboard and SierraPine, the parties agreed to pay $1.9 million each, or about $8,600 for each day of the gun-jumping violation. The DOJ also required Flakeboard to disgorge an additional $1.15 million in illegal profits for violating Section 1 of the Sherman Act, an unusual remedy in gun-jumping actions. This type of remedy is rare because it is unusual for transacting parties to actually profit from a gun-jumping violation.