M&A Antitrust Alert: FTC Imposes Important Gun-Leaping Penalty for Illegal Pre-Merger Coordination Amongst Crude Oil Producers

by Reb D. Wheeler, William H. Stallings, Scott P. Perlman, Oral D. Pottinger, Gail F. Levine, Andrew J. Stanger, Joshua W. Eastby, and Brian E. Saleeby

M&A practitioners have lengthy regarded the mixing planning and execution course of as one of many keys to a profitable M&A transaction. Nevertheless, in offers topic to pre-merger antitrust clearance, it’s important to navigate the road between deal provisions and preparations meant to protect the worth of the goal enterprise and permit the events to organize for post-closing integration, versus those who might outcome within the purchaser exerting management over the goal enterprise or accessing competitively delicate data previous to closing in a way that may very well be seen as doubtlessly harming competitors in violation of the US antitrust legal guidelines. This conduct, generally known as “gun-jumping,” can lead to investigations by the Federal Commerce Fee (FTC) and the Justice Division’s Antitrust Division (DOJ) in addition to important civil penalties for violation of the pre-merger notification and ready interval necessities of the Hart-Scott-Rodino Antitrust Enhancements Act of 1976 (the “HSR Act”).

A noteworthy grievance filed by the DOJ on January 7, 2025, on the request of the FTC, serves as a reminder of the dangers to merging events of not correctly navigating these issues throughout the pre-closing interval. DOJ’s grievance alleges that the Defendants, merging crude oil producers XCL Sources Holdings, LLC (“XCL”), Verdun Oil Firm II LLC (“Verdun”), and EP Power LLC (“EP”), engaged in gun leaping in violation of the HSR Act by permitting Verdun and XCL to instantly assume management over sure of EP’s day-to-day enterprise operations and by exchanging private, competitively delicate data (CSI) earlier than the HSR Act’s ready interval had elapsed. The proposed settlement supplies for a $5.6 million civil penalty, which the FTC heralded as “the biggest greenback penalty imposed for a gun-jumping violation in U.S. historical past.”[1]

In July 2021, Verdun agreed to accumulate EP for a purchase order value of roughly $1.4 billion. As a part of the transaction, EP’s drilling operations within the Uinta Basin (Utah) have been to be transferred to XCL, an organization beneath frequent administration with Verdun that additionally had oil drilling operations within the Uinta Basin area.[2]

The grievance alleged that, throughout the necessary HSR ready interval, the Defendants engaged in gun-jumping by allowing XCL and Verdun to train important operational management over EP’s ordinary-course enterprise actions in violation of the HSR Act by:

1. requiring EP to droop its oil well-drilling design and planning actions within the Uinta Basin area in order that XCL might take over the administration of EP’s growth and manufacturing plans, leading to or contributing to produce shortfalls;
2. coordinating with EP on EP’s buyer contracts and crude oil deliveries within the Uinta Basin area by sharing detailed details about manufacturing volumes and provide obligations and, in some cases, participating straight with EP’s prospects and excluding EP from the method completely;
3. requiring EP to obtain approval from XCL and Verdun to conduct bizarre course enterprise actions and make bizarre course expenditures (e.g., buying provides, coming into or extending contracts for drilling rigs) and deliberate capital expenditures above $250,000, which the FTC alleged to be an unreasonably low threshold on this context;
4. coordinating pricing for EP’s prospects within the Eagle Ford, Texas area; and
5. sharing EP’s CSI relating to pricing, manufacturing volumes, website designs, and different matters with XCL and Verdun on a every day or weekly foundation and not using a reliable enterprise function for doing so and with out enough safeguards to restrict entry or forestall misuse.[3]

In response to the grievance, the Defendants’ actions led to a crude oil provide scarcity for EP throughout a interval when the US market typically was going through important provide shortages and multi-year highs in oil costs. [4]

With respect to the $5.6 million civil penalty to be imposed beneath the settlement, the penalty can be break up between the events, with XCL and Verdun collectively and severally paying $2.8 million and EP paying $2.8 million.

Authorized Commonplace – In america, there are two authorized sources of the restrictions on gun-jumping actions: the HSR Act, 15 U.S.C. § 18A, and Sherman Act Part 1, 15 U.S.C. § 1. This case offers primarily with violations to the HSR Act.[5] The HSR Act supplies that events to transactions that meet sure minimal reporting thresholds are required to file pre-merger notification kinds with the FTC and DOJ and observe a ready interval—often 30 days—earlier than the transaction might be consummated. This ready interval beneath the HSR Act ensures that the events to a proposed transaction stay and performance as separate, impartial entities throughout the antitrust evaluation course of earlier than any consolidation of the companies or belongings happens. Throughout the ready interval, the customer can not acquire helpful possession of the goal, together with by making selections about how the goal operates within the bizarre course of enterprise with respect to pricing, advertising, or manufacturing selections. We talk about these restrictions in additional element on this Mayer Brown article.

The Proposed Last Judgment submitted to the Court docket by DOJ supplies helpful steering with respect to the road described above by defining each Clearly Prohibited and Permissible Conduct as follows:

Clearly Prohibited Conduct – The Proposed Last Judgment that the federal government tendered to the Court docket to settle the gun-jumping allegations supplies a snapshot of the federal government’s views as to the sorts of conduct prohibited by the HSR Act versus what’s permissible. Whereas the Proposed Last Judgment doesn’t, by itself, apply to different events, it displays the requirements that the federal government will apply in a lot of these circumstances. The submitting outlined sure prohibited conduct between the events to a transaction throughout the interval between the signing of an settlement or letter of intent, and the sooner of the expiration of the relevant ready interval and the abandonment of the transaction (the “Pre-consummation Interval”):

• Combining, merging, or transferring operational or decision-making management over any side of the goal enterprise which can be a part of the transaction: Right here, antitrust regulators argued that XCL requiring EP to droop bizarre course well-development tasks and actions and coordinating on EP’s buyer contracts, buyer relationship and buyer deliveries granted XCL and Verdun too a lot management over EP’s enterprise throughout the Pre-consummation Interval.
• Requiring the vendor to acquire approval from one other celebration to the transaction for any bizarre course actions or bills, together with deliberate capital expenditures: On this level, greenback thresholds are significantly important and ought to be set at a sufficiently excessive degree so the goal is ready to function within the bizarre course of enterprise throughout the Pre-consummation Interval with out always in search of approval from the customer. On this case, the FTC argued that the $250,000 threshold was too low.
• Delaying or suspending bizarre course gross sales or growth efforts: Sometimes, no covenant ought to prohibit the goal’s capability to set costs or reductions throughout the Pre-consummation Interval. It is strongly recommended that any restrictions on the goal’s capability to enter into new contracts ought to embody a carve-out for contracts entered into with prospects or distributors within the bizarre course of enterprise.
• Sharing CSI with respect to competing merchandise: On this level, the Proposed Last Judgment notes that events to a transaction could disclose (i) data that’s publicly out there on the time of disclosure; or (ii) data that’s essential to conduct affordable and customary due diligence of or integration planning for the transaction pursuant to an NDA or clear staff settlement that (a) limits use of the knowledge to conducting due diligence or integration planning (together with by limiting the people that may entry this data solely to these concerned in or supervising due diligence or integration planning), (b) prohibits disclosure of the knowledge to any worker of the receiving entity who’s straight accountable for the advertising, pricing, or gross sales of a competing product, and (c) requires the recipient to delete or destroy the knowledge if the transaction doesn’t shut.

Clearly Permissible Conduct – The Proposed Last Judgment additionally units forth examples of clearly permissible conduct that events to a transaction could interact in throughout the Pre-consummation Interval:

• Agreeing {that a} celebration to a transaction shall proceed to function within the bizarre course of enterprise throughout the Pre-consummation Interval.
• Agreeing {that a} celebration to a transaction forgo conduct throughout the Pre-consummation Interval that will trigger a fabric adversarial change within the worth of the belongings to be acquired.
• Negotiating, agreeing to, or taking part in joint working, joint growth, farm-in, or farm-out agreements with each other throughout the Pre-consummation Interval, as long as these agreements don’t relate to any belongings which can be topic to the transaction.
• Disclosing private data referring to competing merchandise within the context of litigation or settlement discussions, if the disclosure is topic to a protecting order.

Along with the prohibited and permitted conduct recognized within the Proposed Last Judgment submitted on this case, antitrust enforcers have recognized quite a lot of further actions and restrictions that serve reliable functions within the context of pending M&A transactions, and subsequently don’t represent gun-jumping violations. We mentioned these in a Mayer Brown article.

Grey Areas – The first problem in avoiding gun-jumping violations is that what could run afoul of the of the foundations usually relies on the circumstances. Whereas the guideposts that this case and others have established are useful, there are numerous interim covenants, contractual constraints, and pre-closing necessities that events to a transaction could also be keen to comply with that arguably fall right into a regulatory grey space.

For that reason, events contemplating a transaction that may very well be reportable beneath the HSR Act are properly suggested to seek the advice of antitrust counsel early within the lifecycle of the deal to make sure that interim covenants and different transaction necessities are crafted to serve the events’ reliable enterprise wants whereas avoiding potential gun-jumping considerations. Events to a reportable transaction must also develop a strong compliance and coaching routine surrounding the transaction to make sure that members of the events’ deal groups are conscious of and adjust to their obligations beneath the related covenants and the antitrust legal guidelines. Moreover, the events must also be conscious of the necessity for guaranteeing that the covenants are adopted in follow throughout the Pre-consummation Interval to additional reduce the danger of potential antitrust considerations.[6]

Sharing CSI/Clear groups – The current case additionally highlights the necessity for events to a transaction to be centered on correct safeguards for the trade of CSI. Right here, DOJ alleged that EP shared a spread of CSI with XCL and Verdun on a every day or weekly foundation throughout the Pre-consummation Interval with none reliable enterprise function for doing so and with out implementing correct safeguards to restrict the entry to and use of this CSI by XCL and Verdun’s workers.[7] DOJ alleged that Verdun’s operations and gross sales workers used EP’s CSI, together with CSI shared within the due diligence part of the transaction, to tell Verdun’s aggressive selections and to debate EP’s pricing with EP workers throughout the Pre-consummation Interval, though Verdun and EP have been nonetheless rivals at the moment.[8]

Typically, exchanges of CSI might be made in the midst of an M&A transaction, together with throughout the interval between when a definitive settlement is signed and when the transaction finally closes, in furtherance of reliable enterprise functions comparable to performing due diligence for the transaction and planning for post-closing integration of the events. Nevertheless, when such CSI is exchanged between events to a transaction, antitrust regulators count on the events to make important efforts to restrict the entry to and use of that CSI solely to facilitate these reliable enterprise functions and to implement enough safeguards to make sure that CSI just isn’t utilized for different functions that would end in hurt to competitors, both throughout the Pre-consummation Interval or within the occasion the transaction doesn’t shut.

Antitrust practitioners and M&A dealmakers often flip to a standard resolution of exchanging CSI solely amongst a restricted group of recipients by way of a clear staff course of. Sometimes, this includes the events coming into right into a separate clear staff settlement that outlines the protections to be afforded to data shared by way of the clear staff course of and limits membership on the clear staff to people who aren’t concerned in making pricing and advertising selections with respect to any services or products on which the events to the transaction compete. Learn extra in regards to the clear staff course of on this Mayer Brown article.

The Proposed Last Judgment makes clear that antitrust regulators count on events to a transaction to take lively steps in sustaining the integrity of the clear staff course of and implement and cling to strong safeguards on the stream of CSI between the events throughout the Pre-consummation Interval.

• The current case is a reminder that each consumers and sellers might be penalized for gun-jumping violations. Events to a transaction shouldn’t view gun-jumping as a buyer-specific danger. For the vendor in an M&A transaction, guaranteeing that the method is designed to keep away from attainable gun-jumping violations is particularly necessary as a result of the vendor might face each potential antitrust penalties for gun-jumping and, within the occasion that the transaction just isn’t finally consummated, there exists the danger that the CSI a vendor discloses to its competitor, to the detriment of the vendor’s aggressive standing within the market.
• Antitrust counsel ought to be concerned in transactions from an early stage, and persistently evaluation interim working covenants to make sure each events are afforded enough protections.
• Particularly, financial thresholds in interim covenants must thought of within the context of the events’ enterprise to make sure operational independence is maintained throughout the Pre-consummation Interval.
• Coaching and compliance processes ought to be carried out for the members of the transaction staff and for different enterprise personnel accountable for integration planning to make sure that any interim covenants are adopted in follow and that reliable enterprise functions, comparable to planning for a transaction’s consummation, don’t inadvertently increase additional gun-jumping considerations.
• A sturdy and effectively managed clear staff course of can successfully enable the events to finish the due diligence course of whereas minimizing the danger of potential regulatory scrutiny or lawsuits from personal plaintiffs alleging violations of antitrust, securities, or different legal guidelines stemming from missteps in reference to an M&A transaction.

[1] We be aware that in July 2016, ValueAct, an activist funding agency, was fined $11M by the DOJ for investing in Halliburton and Baker Hughes with out submitting for HSR evaluation.

[2] Grievance, paragraph 3.

[3] Grievance, paragraphs 7-11, 35-68.

[4] Grievance, paragraph 32.

[5] Certainly, the FTC didn’t tackle someway whether or not it thought of the alleged conduct to violate the Sherman Act’s prohibition on anticompetitive agreements between rivals.

[6] For instance, whereas the DOJ grievance alleges that the requirement that EP obtain approval from XCL or Verdun with a purpose to make expenditures higher than $250,000 was itself a low threshold for a crude oil growth enterprise, the grievance additional alleges that EP carried out this requirement in follow by in search of approval for expenditures falling properly beneath the $250,000 threshold. Grievance, paragraphs 9, 53-54.

[7] Grievance, paragraphs 59-67.

[8] Grievance, paragraphs 65-67.

Reb D. Wheeler, William H. Stallings, Scott P. Perlman, Oral D. Pottinger and Gail F. Levine are Companions, Andrew J. Stanger is a Data Counsel, and Joshua W. Eastby and Brian E. Saleeby are Associates at Mayer Brown. This submit first appeared as a shopper alert for the agency.

The views, opinions and positions expressed inside all posts are these of the creator(s) alone and don’t characterize these of the Program on Company Compliance and Enforcement (PCCE) or of the New York College College of Regulation. PCCE makes no representations as to the accuracy, completeness and validity or any statements made on this website and won’t be liable any errors, omissions or representations. The copyright of this content material belongs to the creator(s) and any legal responsibility almost about infringement of mental property rights stays with the creator(s).