M&A Antitrust Alert: FTC Imposes Significant Gun-Jumping Penalty for Unlawful Pre-Merger Coordination Among Crude Oil Producers
M&A practitioners have long regarded the integration planning and execution process as one of the keys to a successful M&A transaction. However, in deals subject to pre-merger antitrust clearance, it is critical to navigate the line between deal provisions and arrangements intended to preserve the value of the target business and allow the parties to prepare for post-closing integration, versus those that could result in the buyer exerting control over the target business or accessing competitively sensitive information prior to closing in a manner that could be seen as potentially harming competition in violation of the US antitrust laws. This conduct, commonly referred to as “gun-jumping,” can result in investigations by the Federal Trade Commission (FTC) and the Justice Department’s Antitrust Division (DOJ) as well as significant civil penalties for violation of the pre-merger notification and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”).
A noteworthy complaint filed by the DOJ on January 7, 2025, at the request of the FTC, serves as a reminder of the risks to merging parties of not properly navigating these considerations during the pre-closing period. DOJ’s complaint alleges that the Defendants, merging crude oil producers XCL Resources Holdings, LLC (“XCL”), Verdun Oil Company II LLC (“Verdun”), and EP Energy LLC (“EP”), engaged in gun jumping in violation of the HSR Act by allowing Verdun and XCL to immediately assume control over certain of EP’s day-to-day business operations and by exchanging non-public, competitively sensitive information (CSI) before the HSR Act’s waiting period had elapsed. The proposed settlement provides for a $5.6 million civil penalty, which the FTC heralded as “the largest dollar penalty imposed for a gun-jumping violation in U.S. history.”1
Background
In July 2021, Verdun agreed to acquire EP for a purchase price of approximately $1.4 billion. As part of the transaction, EP’s drilling operations in the Uinta Basin (Utah) were to be transferred to XCL, a company under common management with Verdun that also had oil drilling operations in the Uinta Basin region.2
The complaint alleged that, during the mandatory HSR waiting period, the Defendants engaged in gun-jumping by permitting XCL and Verdun to exercise significant operational control over EP’s ordinary-course business activities in violation of the HSR Act by:
(1) requiring EP to suspend its oil well-drilling design and planning activities in the Uinta Basin region so that XCL could take over the management of EP’s development and production plans, resulting in or contributing to supply shortfalls;
(2) coordinating with EP on EP’s customer contracts and crude oil deliveries in the Uinta Basin region by sharing detailed information about production volumes and supply obligations and, in some instances, engaging directly with EP’s customers and excluding EP from the process entirely;
(3) requiring EP to receive approval from XCL and Verdun to conduct ordinary course business activities and make ordinary course expenditures (e.g., purchasing supplies, entering or extending contracts for drilling rigs) and planned capital expenditures above $250,000, which the FTC alleged to be an unreasonably low threshold in this context;
(4) coordinating pricing for EP’s customers in the Eagle Ford, Texas region; and
(5) sharing EP’s CSI regarding pricing, production volumes, site designs, and other topics with XCL and Verdun on a daily or weekly basis without a legitimate business purpose for doing so and without adequate safeguards to limit access or prevent misuse.3
According to the complaint, the Defendants’ actions led to a crude oil supply shortage for EP during a period when the US market generally was facing significant supply shortages and multi-year highs in oil prices.4
With respect to the $5.6 million civil penalty to be imposed under the settlement, the penalty will be split between the parties, with XCL and Verdun jointly and severally paying $2.8 million and EP paying $2.8 million.
Analysis
Legal Standard – In the United States, there are two legal sources of the restrictions on gun-jumping activities: the HSR Act, 15 U.S.C. § 18A, and Sherman Act Section 1, 15 U.S.C. § 1. This case deals primarily with violations to the HSR Act.5 The HSR Act provides that parties to transactions that meet certain minimum reporting thresholds are required to file pre-merger notification forms with the FTC and DOJ and observe a waiting period—usually 30 days—before the transaction can be consummated. This waiting period under the HSR Act ensures that the parties to a proposed transaction remain and function as separate, independent entities during the antitrust review process before any consolidation of the businesses or assets occurs. During the waiting period, the buyer cannot obtain beneficial ownership of the target, including by making decisions about how the target operates in the ordinary course of business with respect to pricing, marketing, or production decisions. We discuss these restrictions in more detail in this Mayer Brown article.
The Proposed Final Judgment submitted to the Court by DOJ provides useful guidance with respect to the line described above by defining both Clearly Prohibited and Permissible Conduct as follows:
Clearly Prohibited Conduct – The Proposed Final Judgment that the government tendered to the Court to settle the gun-jumping allegations provides a snapshot of the government’s views as to the types of conduct prohibited by the HSR Act versus what is permissible. While the Proposed Final Judgment does not, on its own, apply to other parties, it reflects the standards that the government will apply in these types of cases. The filing outlined certain prohibited conduct between the parties to a transaction during the period between the signing of an agreement or letter of intent, and the earlier of the expiration of the applicable waiting period and the abandonment of the transaction (the “Pre-consummation Period”):
- Combining, merging, or transferring operational or decision-making control over any aspect of the target business that are part of the transaction: Here, antitrust regulators argued that XCL requiring EP to suspend ordinary course well-development projects and activities and coordinating on EP’s customer contracts, customer relationship and customer deliveries granted XCL and Verdun too much control over EP’s business during the Pre-consummation Period.
- Requiring the seller to obtain approval from another party to the transaction for any ordinary course activities or expenses, including planned capital expenditures: On this point, dollar thresholds are particularly essential and should be set at a sufficiently high level so the target is able to operate in the ordinary course of business during the Pre-consummation Period without constantly seeking approval from the buyer. In this case, the FTC argued that the $250,000 threshold was too low.
- Delaying or suspending ordinary course sales or development efforts: Typically, no covenant should restrict the target’s ability to set prices or discounts during the Pre-consummation Period. It is recommended that any restrictions on the target’s ability to enter into new contracts should include a carve-out for contracts entered into with customers or vendors in the ordinary course of business.
- Sharing CSI with respect to competing products: On this point, the Proposed Final Judgment notes that parties to a transaction may disclose (i) information that is publicly available at the time of disclosure; or (ii) information that is necessary to conduct reasonable and customary due diligence of or integration planning for the transaction pursuant to an NDA or clean team agreement that (a) limits use of the information to conducting due diligence or integration planning (including by limiting the individuals that can access this information only to those involved in or supervising due diligence or integration planning), (b) prohibits disclosure of the information to any employee of the receiving entity who is directly responsible for the marketing, pricing, or sales of a competing product, and (c) requires the recipient to delete or destroy the information if the transaction does not close.
Clearly Permissible Conduct – The Proposed Final Judgment also sets forth examples of clearly permissible conduct that parties to a transaction may engage in during the Pre-consummation Period:
- Agreeing that a party to a transaction shall continue to operate in the ordinary course of business during the Pre-consummation Period.
- Agreeing that a party to a transaction forgo conduct during the Pre-consummation Period that would cause a material adverse change in the value of the assets to be acquired.
- Negotiating, agreeing to, or participating in joint operating, joint development, farm-in, or farm-out agreements with one another during the Pre-consummation Period, so long as those agreements do not relate to any assets that are subject to the transaction.
- Disclosing non-public information relating to competing products in the context of litigation or settlement discussions, if the disclosure is subject to a protective order.
In addition to the prohibited and permitted conduct identified in the Proposed Final Judgment submitted in this case, antitrust enforcers have identified a variety of additional actions and restrictions that serve legitimate purposes in the context of pending M&A transactions, and therefore do not constitute gun-jumping violations. We discussed these in a Mayer Brown article.
Gray Areas – The primary challenge in avoiding gun-jumping violations is that what may run afoul of the of the rules often depends on the circumstances. While the guideposts that this case and others have established are helpful, there are countless interim covenants, contractual constraints, and pre-closing requirements that parties to a transaction may be willing to agree to that arguably fall into a regulatory gray area. For this reason, parties considering a transaction that could be reportable under the HSR Act are well advised to consult antitrust counsel early in the lifecycle of the deal to ensure that interim covenants and other transaction requirements are crafted to serve the parties’ legitimate business needs while avoiding potential gun-jumping concerns. Parties to a reportable transaction should also develop a robust compliance and training regimen surrounding the transaction to ensure that members of the parties’ deal teams are aware of and comply with their obligations under the relevant covenants and the antitrust laws. Additionally, the parties should also be mindful of the need for ensuring that the covenants are followed in practice during the Pre-consummation Period to further minimize the risk of potential antitrust concerns.6
Sharing CSI/Clean teams – The present case also highlights the need for parties to a transaction to be focused on proper safeguards for the exchange of CSI. Here, DOJ alleged that EP shared a range of CSI with XCL and Verdun on a daily or weekly basis during the Pre-consummation Period without any legitimate business purpose for doing so and without implementing proper safeguards to limit the access to and use of this CSI by XCL and Verdun’s employees.7 DOJ alleged that Verdun’s operations and sales employees used EP’s CSI, including CSI shared in the due diligence phase of the transaction, to inform Verdun’s competitive decisions and to discuss EP’s pricing with EP employees during the Pre-consummation Period, even though Verdun and EP were still competitors at that time.8
In general, exchanges of CSI can be made in the course of an M&A transaction, including during the period between when a definitive agreement is signed and when the transaction ultimately closes, in furtherance of legitimate business purposes such as performing due diligence for the transaction and planning for post-closing integration of the parties. However, when such CSI is exchanged between parties to a transaction, antitrust regulators expect the parties to make significant efforts to limit the access to and use of that CSI only to facilitate those legitimate business purposes and to implement sufficient safeguards to ensure that CSI is not utilized for other purposes that could result in harm to competition, either during the Pre-consummation Period or in the event the transaction does not close.
Antitrust practitioners and M&A dealmakers frequently turn to a common solution of exchanging CSI only among a limited group of recipients through a clean team process. Typically, this involves the parties entering into a separate clean team agreement that outlines the protections to be afforded to information shared through the clean team process and limits membership on the clean team to individuals who are not involved in making pricing and marketing decisions with respect to any products or services on which the parties to the transaction compete. Read more about the clean team process in this Mayer Brown article.
The Proposed Final Judgment makes clear that antitrust regulators expect parties to a transaction to take active steps in maintaining the integrity of the clean team process and implement and adhere to robust safeguards on the flow of CSI between the parties during the Pre-consummation Period.
Key Takeaways
- The present case is a reminder that both buyers and sellers can be penalized for gun-jumping violations. Parties to a transaction should not view gun-jumping as a buyer-specific risk. For the seller in an M&A transaction, ensuring that the process is designed to avoid possible gun-jumping violations is especially important because the seller could face both potential antitrust penalties for gun-jumping and, in the event that the transaction is not ultimately consummated, there exists the risk that the CSI a seller discloses to its competitor, to the detriment of the seller’s competitive standing in the marketplace.
- Antitrust counsel should be involved in transactions from an early stage, and consistently review interim operating covenants to ensure both parties are afforded adequate protections.
- In particular, monetary thresholds in interim covenants need to considered in the context of the parties’ business to ensure operational independence is maintained during the Pre-consummation Period.
- Training and compliance processes should be implemented for the members of the transaction team and for other business personnel responsible for integration planning to ensure that any interim covenants are followed in practice and that legitimate business purposes, such as planning for a transaction’s consummation, do not inadvertently raise further gun-jumping concerns.
- A robust and efficiently managed clean team process can effectively allow the parties to complete the due diligence process while minimizing the risk of potential regulatory scrutiny or lawsuits from private plaintiffs alleging violations of antitrust, securities, or other laws stemming from missteps in connection with an M&A transaction.
1 We note that in July 2016, ValueAct, an activist investment firm, was fined $11M by the DOJ for investing in Halliburton and Baker Hughes without filing for HSR review.
3 Complaint, paragraphs 7-11, 35-68.
5 Indeed, the FTC did not address one way or the other whether it considered the alleged conduct to violate the Sherman Act’s prohibition on anticompetitive agreements between competitors.
6 For example, while the DOJ complaint alleges that the requirement that EP receive approval from XCL or Verdun in order to make expenditures greater than $250,000 was itself a low threshold for a crude oil development business, the complaint further alleges that EP implemented this requirement in practice by seeking approval for expenditures falling well below the $250,000 threshold. Complaint, paragraphs 9, 53-54.
