FTC Issues Record Fine for Merger "Gun Jumping"
The Federal Trade Commission recently announced a $5.6 million settlement with XCL Resource Holdings (XCL), EP Energy (EP), and Verdun Oil (Verdun) for alleged gun jumping behavior. This penalty is a record for the FTC and is close to the $5.67 million levied by the Department of Justice in a settlement with Gemstar-TV Guide International Inc.1
Key points
- Gun jumping occurs when a buyer exercises ownership or control over a notifiable acquisition target before the expiration of the waiting period required by the Hart-Scott-Rodino (HSR) Act.
- According to the FTC’s allegations, the seller (EP) relinquished pre-closing operational and decision-making control of major aspects of its crude oil production business in the purchase agreement. This effectively granted the buyer (XLC) immediate beneficial ownership of the acquired party’s assets in direct violation of the HSR waiting period.
- The types of conduct identified in the complaint are well-recognized examples of gun jumping violations, though the settlement is nonetheless noteworthy due to its size and timing. The underlying deal closed in 2022, which means the FTC has been investigating the resulting allegations for the intervening years.
- The settlement, which follows on the heels of a similar $3.5 million settlement with ASM and Legends in August, appears to signal a renewed agency emphasis on policing merging party behavior during the HSR waiting period.2
What did XCL, EP, and Verdun allegedly do during the mandatory waiting period that raised gun jumping concerns?
During the mandatory waiting period, XCL, EP, and Verdun allegedly engaged in several activities that raised gun jumping concerns and were considered by the agency to constitute the impermissible transfer of control. XCL directed EP to suspend its crude oil development activities, including well-drilling, so that XCL could take over EP’s development plans and designs. XCL also decided which EP contracts to honor and covered the volume shortages of the remaining contracts. Through phone calls and emails, XCL employees allegedly reviewed and approved EP’s well-drilling and site design plans, made changes to these plans, and directed EP employees to execute them. Additionally, the FTC accused XCL and Verdun of requiring approval for EP’s expenditures above $250,000 and often for those below this threshold, effectively controlling EP’s ordinary-course business activities. The purchase agreement also stipulated that XCL and Verdun approve EP’s hiring of field-level employees and contractors for drilling and production operations.
Furthermore, XCL employees allegedly used competitively sensitive information from the due diligence virtual data room to consult EP employees while negotiating new contracts. XCL, EP, and Verdun regularly conferred about EP’s non-public competitively sensitive information, including business operations, plans, sales, site designs, vendor relationships, and more. According to the FTC, EP did not resist requests for this information or employ safeguards, and XCL and Verdun employees involved in sales, marketing, and operations had unrestricted access to it.
XCL, EP, and Verdun settled the allegations against them for unlawful gun jumping conduct violating Section 7A of the Clayton Act, 15 U.S.C. §18A. The parties will pay $5.6 million which is the largest monetary penalty imposed by the FTC for gun jumping and close to the overall record.3
Key takeaways
- The HSR Act requires certain acquiring entities to file notification with the FTC and DOJ and to observe a mandatory waiting period before completing acquisition. Parties to a transaction must abide by the waiting period restriction before participating in certain activities, such as the transfer of assets, voting securities, and control over assets and voting securities.
- Parties to a transaction, subjected to a waiting period, must carefully craft their purchase agreement so as to avoid the impression that execution of the purchase agreement triggers the transfer of actual or beneficial control of the acquired entity’s key assets or the unlawful coordination between competing entities that harms competition in the relevant industry prior to the expiration of the waiting period or closure of the deal.
- Parties should use adequate safeguards to protect their competitively sensitive information, especially non-public information beyond the scope of due diligence of a transaction. Safeguards should include limiting access to employees not involved in sales, marketing, and operations and limiting use for due diligence or other legitimate business purposes. In deals between actual or potential competitors, parties should carefully consider a “Clean Team Agreement” that defines specific protocols for sharing competitively sensitive information.
- Given the long fuse on this agency investigation and settlement, parties should be aware that the ending of the HSR period itself does not mean that pre-closing behavior is suddenly free from gun jumping risks.
- The clear signs of a pre-closing transfer of control and ownership appear to be what drove this investigation and ultimately led to the settlement.
- Parties should not take this as a signal that they need to shut down all sharing of competitively sensitive information during the due diligence phase. Such sharing can be safely managed with proper protocols, such as a “Clean Team Agreement.” The risks start to climb quickly, however, when the buyer is given too much control over the target’s day-to-day strategic decisions during the waiting period.
- Parties need to draft relevant covenants narrowly to ensure the target can operate independently. Include only provisions necessary to protect the deal's value (e.g., preventing extraordinary expenditures).
- Operational decisions relating to output and pricing (e.g., halting drilling activities or altering customer pricing) are particularly sensitive and provisions delegating such authority in the purchase agreement will likely be seen as a transfer of control.
Baker Botts's antitrust team often counsel transacting parties in drafting purchase agreements and provide guidance on permissible conduct prior to closing to ensure compliance and avoid gun jumping violations under relevant antitrust regulations worldwide. Our team is ready to offer our insights and expertise upon request. Please feel free to reach out to any member of our team for any assistance or advice you may need.
1 United States v. Gemstar-TV Guide Int’l, Inc, No. 03-0198-JR, 2003 WL 21799949, at *5 (D.D.C. July 16, 2003).
2 United States v. Legends Hosp. Parent Holdings, LLC, No. 1:24-CV-5927-JPC, at 6 (S.D.N.Y. Dec. 9, 2024) (unpublished).
3 Gemstar-TV Guide, 2003 WL 21799949, at *5.
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