The consequences of “gun jumping” in mergers and acquisitions
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) requires that parties to certain qualifying mergers and acquisitions must make a detailed filing with the United States Department of Justice (DOJ) and the Federal Trade Commission (FTC) notifying those agencies of the proposed transaction. The HSR Act also mandates that the parties to those transactions not complete the transaction until the 30-day waiting period expires or early termination is granted. This window of time provides the antitrust enforcement agencies with an opportunity to evaluate the proposed transaction before it is consummated and determine whether the transaction might adversely affect competition. Importantly, not only are the parties precluded from formally closing the transaction during this period of time, they are also prohibited from proceeding with integration of operations and from the acquiring party obtaining operational control. Violations of the waiting period are often referred to as “gun jumping.” Parties to health care mergers need to be sensitive to this requirement.
The DOJ recently announced a settlement that resolved “gun jumping” allegations. The settlement required Duke Energy (Duke) to pay $600,000 in civil penalties after the DOJ alleged that Duke took operational control of Osprey Energy Center (Osprey) before filing the notifications required by the HSR Act and waiting for the expiration of the mandatory waiting period. The DOJ’s announcement noted that parties are precluded from obtaining beneficial ownership of a business too early and that beneficial ownership can be transferred by, “among other things, assuming the risk or potential benefit of changes in the value of the business or exercising control over day-to-day business decisions.” In this case, the DOJ alleged that Duke and Osprey entered into a “tolling agreement” that immediately gave Duke control over Osprey’s output and gave Duke the right to receive Osprey’s day-to-day profits. Effectively, as soon as this tolling agreement went into effect, the DOJ alleged that Osprey ceased to be a competitor of Duke in violation of the requirements of the HSR Act.
It is important to note that “gun jumping” is a distinct violation of the HSR Act and is unrelated to whether the underlying transaction might violate the antitrust laws. In other words, a transaction might not adversely affect competition in any way, but the parties can nonetheless violate the HSR Act by “gun jumping.” The fact that a transaction is not ultimately challenged by the DOJ or FTC will not bar a claim of “gun jumping.” Parties to any transaction must consider and comply with all aspects of the HSR Act before any transaction can be consummated.
Another important note regarding the concept of “gun jumping” is that it can be applied to mergers and acquisitions of two competitors even when no HSR filing is required. Under the antitrust laws, a change in operational control that occurs prior to the closing of a transaction could be viewed as an agreement by two competitors not to compete, which could result in a violation of the antitrust laws. In other words, until a merger or acquisition is finalized, the parties to such proposed transaction should continue to operate as competitors.Download PDF