"Gun jumping" occurs when companies that are planning
a merger coordinate their business activities before the Department
of Justice or Federal Trade Commission has completed its antitrust
review of the transaction under the Hart-Scott-Rodino (HSR) Act.
The U.S. antitrust agencies aggressively enforce the prohibition on
"gun jumping," as reflected in this month's DOJ
challenge to premerger coordination between Duke Energy and the
electricity generating business it proposed to acquire. DOJ settled
the challenge with Duke paying $600,000 in civil penalties.
This case illustrates that interactions between merging parties
involving what otherwise might be considered ordinary course
business transactions may need special scrutiny in the merger
context. It also highlights the importance of carefully drafting
party documents and monitoring party statements before other
regulatory agencies, which may be scrutinized for evidence of
premerger coordination.
Duke's proposed transaction
In August 2014, Duke entered into an agreement with
Calpine Corporation to acquire Calpine's Osprey Energy Center,
a natural gas-fired electricity generating plant in Florida. Duke
generates and sells electric power in retail and wholesale markets
in across the U.S. In September 2014, many months before making its
HSR filing for the Osprey acquisition, Duke entered into a
"tolling agreement" with Calpine that allowed Duke
immediately to exercise control over the Osprey plant.
Pursuant to the tolling agreement, Duke assumed control of
purchasing fuel for the plant, arranging for its delivery, and
scheduling the transmission of the energy generated by the plant.
Duke determined the amount of energy to be produced each day and
relayed detailed instructions to the plant personnel to achieve
that amount. Critically, Duke--not Calpine--retained the profit (or
loss) between the price of energy generated and the cost to
generate that energy.
DOJ challenge
On January 18, 2017, DOJ filed a complaint in federal
district court alleging that Duke had violated the HSR Act by
obtaining beneficial ownership of Osprey's business before the
observing the waiting period required by the HSR Act.
DOJ alleged that the tolling agreement was not a separate, ordinary
course transaction, but that "Duke was only interested in the
tolling agreement as a step in the process of purchasing the
plant." The DOJ complaint cited testimony of a Duke executive
before the Florida Public Service Commission to show that the
tolling agreement was an attempt to obtain approval of the
Transaction by the Federal Energy Regulatory Commission (FERC).
Duke, Osprey, and Calpine hoped that FERC would consider the
tolling agreement to render Osprey already effectively controlled
by Duke, so that the merger would not change Duke's market
share (which might otherwise have been too high for FERC to approve
the acquisition). Duke expressly argued before FERC that Duke
"already controls [Osprey] pursuant to the Tolling
Agreement."
Gun Jumping
Under the HSR Act, an acquiring party to a transaction
meeting certain thresholds cannot assume "beneficial
ownership" or obtain operational control until the expiration
of the mandatory waiting period. This "gun jumping"
prohibition freezes the competitive status quo while the government
investigates the competitive effect of the transaction. Although
the parties may carry out due diligence and plan for integration,
they may not begin to coordinate their current business activities,
present themselves as a single entity, or take any steps to
integrate operations. This limitation is procedural; a violation
does not require there be any effect on competition.
Additionally, until the transaction officially closes, merging
firms remain subject to Sherman Act § 1, which prohibits
competitor agreements that unduly restrain trade. This means that,
until closing even after expiration of the HSR waiting period,
merging parties still can violate Section 1 if they coordinate
pricing and purchasing or allocate customers or geographic
markets.
Given the HSR Act rules against gun jumping and Sherman Act
§ 1, it is important for merging parties strictly to
avoid coordination of their current operations prior to the end of
the HSR Act waiting period and closing the transaction.
Penalties
In its press release accompanying the complaint, DOJ announced
that Duke had agreed to settle the charges by paying a $600,000
civil penalty. The penalty was lower than the maximum penalty of $6
million ($40,000 per day for the 150-day duration of the violation)
in part because Duke was willing to resolve the charges by consent
decree and avoided a prolonged investigation and litigation.
This challenge emphasizes the importance of understanding and
carefully following gun jumping principles. Casual adherence or
outright failure to comply can lead to substantial delays in merger
review and substantial fines. It is therefore important to work
closely with antitrust counsel in transactions that raise
significant information exchange or other gun jumping issues. This
particular case highlights the importance of taking consistent
positions before all authorities reviewing a merger, as testimony
before one may have unintended consequences before another. In HSR
Act investigations, the antitrust agencies certainly may evaluate
the parties' statements to other government bodies.
This is not only a U.S. law issue. Competition law enforcers
throughout the world consider enforcement of filing requirements
and gun jumping rules to be critical to upholding their merger
control programs. In one previous alert, we discussed an action by
MOFCOM, the Chinese merger authority,
imposing a fine for failure to file under China's merger
rules. In another, we discussed the French Competition
Authority's imposition of a record fine for
gun jumping in France.
DOJ's January 18 complaint against Duke is here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
