FTC Announces Record $5.6 Million Gun-Jumping Fine and Reminds Parties of Perils of Prematurely Transferring Beneficial Ownership During HSR Waiting Period

At a Glance

• Under the HSR Act, parties to a proposed transaction that meet certain jurisdictional and monetary thresholds must provide notice to the FTC and the Department of Justice Antitrust Division (DOJ) and observe the statutory waiting period (usually 30 days) prior to consummating their deal. During the waiting period, parties are not permitted to transfer beneficial ownership of the target business, and the parties must continue to act as separate, independent entities. In particular, parties that compete in the marketplace must continue to do so.
• According to the FTC’s complaint, the unlawful coordination between the competing crude oil producers occurred over at least 94 days from the moment the parties executed their purchase agreement on July 26, 2021, until they executed an amendment on October 27, 2021, that returned operational control to EP midway through the FTC’s investigation.
• The FTC’s complaint is a textbook application of traditional antitrust principles for parties’ pre-consummation conduct. Given the affirmative votes of both Republican and Democratic FTC commissioners, we do not expect the agency’s approach on gun-jumping issues to change in the new administration. The enforcers will continue to expect merging parties to compete vigorously during the Hart-Scott-Rodino investigation and pre-consummation period, and failing to do so may attract attention not only about the parties’ deficient compliance practices, but also about competition issues for the underlying transaction.

On January 7, 2025, the Federal Trade Commission (FTC) announced a proposed settlement for crude oil producers XCL Resource Holdings, LLC; Verdun Oil Company; and EP Energy LLC to pay a record-breaking $5.6 million civil penalty to settle allegations they engaged in unlawful pre-merger coordination — also known as “gun jumping” — in violation of the Hart-Scott-Rodino Act (HSR Act). The settlement provides for the largest civil penalty ever to be paid for gun-jumping activities in the United States.

Notably, the proposed settlement received approval from four FTC commissioners, including the Trump administration’s incoming FTC Chair Andrew Ferguson (the only other commissioner, Melissa Hoyoak, recused herself). While the amount of the fine is staggering, nothing about the FTC’s complaint breaks new ground with respect to parties’ antitrust obligations during the HSR waiting period. This development therefore serves as a reminder to companies and their counsel that the parties’ antitrust obligations do not end after execution of the purchase agreement, and that the agencies may still scrutinize the parties’ conduct in the interim HSR waiting period before consummation.

Parties’ Obligations Under the HSR Act

Under the HSR Act, parties to a proposed transaction that meet certain jurisdictional and monetary thresholds must provide notice to the FTC and the Department of Justice Antitrust Division (DOJ) and observe the statutory waiting period (usually 30 days) prior to consummating their deal. The agencies use the waiting period to review the transaction and determine whether it is likely to have anticompetitive effects on the relevant markets. The waiting period is often extended if one of the agencies identifies the transaction as one requiring more extensive scrutiny. During the waiting period, parties are not permitted to transfer beneficial ownership of the target business, and the parties must continue to act as separate, independent entities. In particular, parties that compete in the marketplace must continue to do so.

The maximum daily fine for violating the HSR Act is adjusted annually and currently is set at $51,744 per day. Among other events of noncompliance is failing to file reportable transactions. Additionally, competing companies that violate the Sherman Act by fixing prices, allocating markets, controlling supply or engaging in other forms of anticompetitive conduct during the HSR waiting period are subject to criminal fines up to $100 million or twice the gain or loss attributable to the conduct. Private plaintiffs harmed by violations of the Sherman Act also may recover three times the amount of actual damages they can prove, plus attorneys’ fees and costs, which can be substantial.

The Transaction

On July 26, 2021, crude oil production company Verdun entered into a purchase agreement to acquire its competitor, EP, a company engaged in crude oil production in the Uinta Basin area in Utah and in the Eagle Ford area of Texas, for $1.445 billion. Verdun and its sister company, XCL, also operated in the Uinta Basin and Eagle Ford areas, respectively. The agreement triggered the HSR Act’s reporting and waiting period requirements, and the FTC ultimately obtained a consent agreement on March 25, 2022, that required Verdun to divest all of EP’s Utah operations to a qualified third-party operator as a remedy for mitigating the potential loss of competition in the local crude oil market. While the 2022 consent decree resolved the FTC’s concerns regarding prospective competition, it did not deal with concerns that arose during the investigation regarding the parties’ pre-consummation dealings.

According to the FTC’s complaint, the parties’ purchase agreement explicitly provided for the immediate transfer of control, prior to consummation, over key aspects of EP’s business to Verdun and XCL. Examples of Verdun’s and XCL’s control and influence over EP’s business included:

• Control of EP’s Supply. XCL required EP to suspend its well-completion activities pending consummation, even where such activities were necessary to meet ongoing contractual obligations. In addition, XCL assumed the contractual and reputational risks associated with EP’s anticipated production shortfalls. The FTC’s complaint stresses these actions occurred during a time when consumers already were paying high energy prices as COVID-19 restrictions eased.
• Control of EP’s Customer Relationships. In response to supply shortages, XCL engaged directly with EP’s existing customers and coordinated supply and delivery of EP’s contractual obligations to the customers. Customers looked to XCL to fulfill EP’s commitments.
• Control of EP’s Customer Pricing. Verdun used information obtained during due diligence to suggest changes to EP’s customer pricing structure. EP sought and obtained approval from Verdun for new customer contracts.
• Control of EP’s Well Design. XCL employees actively supervised EP’s well-design and planning activities, “including by requiring changes to EP’s site design plans and vendor selection process.”
• Control of EP’s Expenditures. Verdun and XCL required EP to seek preapproval for all expenditures above $250,000, which the FTC described as a “relatively low threshold in the crude development and production business.” As a result, EP sought the purchasers’ approval before making a wide-range of “ordinary-course” business transactions, including many purchases under the $250,000 threshold.
• Control of EP’s Hiring. EP was required to seek preapproval from Verdun and XCL for all field-level employees and contractors.
• Exchange of Competitively Sensitive Information. Even after the parties executed the purchase agreement, Verdun and XCL requested and received competitively sensitive information about EP’s business operations and customers, including “details on EP’s customer contracts, customer pricing, production volumes, customer dispatches, business plans, site designs, vendor relationship and contracts, [and] permitting and surveying information.” The complaint alleges that the parties took no precautions to limit who at Verdun and XCL could access the information, or how the information could be used.

According to the FTC’s complaint, the unlawful coordination between the competing parties occurred over at least 94 days from the moment the parties executed their purchase agreement on July 26, 2021, until they executed an amendment on October 27, 2021, that returned operational control to EP midway through the FTC’s investigation.

Lessons for Companies and Their Counsel

As noted above, the FTC’s recent complaint represents a textbook application of traditional antitrust principles to parties’ pre-consummation conduct. Given the affirmative votes of both Republican and Democratic FTC commissioners, as well as the DOJ’s recent $3.5 million gun-jumping penalty announced last year against a venue services company, we do not expect the antitrust agencies’ approach on gun-jumping issues to change in the new Trump administration. The enforcers will continue to expect merging parties to compete vigorously during the HSR investigation and pre-consummation period, and failing to do so may attract attention not only about the parties’ deficient compliance practices, but also about competition issues for the underlying transaction.

The proposed settlement should encourage companies and their deal counsel to give careful consideration to the parties’ pre-consummation antitrust compliance obligations.

Antitrust Compliance Obligations Do Not End With Due Diligence

Competing parties rightfully undertake significant efforts during the negotiation period to protect one or both parties’ competitively sensitive information and ensure relevant decision makers from the competing business do not use the information in a way that could put the disclosing party at a competitive disadvantage if the deal falls through. But after execution of the purchase agreement, the agencies have been known to take the position that all required due diligence has been completed and no additional information exchanges are required (except to the limited extent they are required to coordinate the parties’ HSR filings). While such a position is arguably unduly restrictive, parties should exercise caution to ensure that any exchanges or agreements remain focused on how the merged entities will engage with the market in the post-consummation period.

Parties’ Conduct Must Not Have the Legal or Practical Effect of Transferring Beneficial Ownership During the HSR Waiting Period

The FTC’s complaint explains that “[w]hile the existence of beneficial ownership will depend on the facts in the particular case, practical indicia include controlling ordinary-course business decisions, assuming or rejecting contractual obligations, obtaining competitively sensitive information, and partaking in financial gains and losses.” The parties should avoid any agreements or understanding regarding how the parties will conduct themselves before closing. Examples of risky pre-consummation agreements include, as examples: (1) the prices each party will charge; (2) the geographic areas each party will solicit; (3) the types of products each party will offer; (4) the output or capacity of each party; and (5) the suppliers each party will deal with.

Limited Information Exchanges May Be Defensible

Certain information exchanges to monitor a party’s compliance with the provisions of the purchase agreement, effectuate provisions of the purchase agreement, conduct confirmatory due diligence, or plan for post-consummation activities are likely low-risk. These include, as examples: (1) requesting confirmation that the target has not taken any actions that threaten the valuation of the business; (2) sending observers who don’t make competitively sensitive decisions for the competing business to participate in the target’s board meetings; (3) reviewing sensitive financial data for purposes of adjusting the purchase price; and (4) deciding the customers the combined entity will serve post-consummation and the conditions on those relationships. Depending on the sensitivity of the topics discussed or information exchanged, the acquiring party may need to employ a clean team similar to that used during due diligence to ensure the target’s most sensitive information is not available to the acquirer’s key decision makers during the pre-consummation period.

Limited Transition Planning May Be Low-Risk

Moreover, defensible transition planning likely includes discussion of, as examples: (1) products the combined entity will offer; (2) customers the combined entity will target; (3) personnel to be retained and terminated; (4) sales methods to be employed; and (5) evaluation of and planning for coordination of the parties’ existing facilities. The key is that such planning must focus on the future combined entity, and the parties must avoid agreements and understandings regarding how they will individually compete in the pre-consummation period. Clean teams often are necessary to avoid antitrust risk in this area.

Non-Competitively Sensitive Subjects Are Still Appropriate for Pre-Consummation Collaboration

As to matters unrelated to actual or potential competitive concerns, the parties have wider latitude both to plan and to implement cooperative efforts before consummation. These areas could include collaboration to obtain cost-savings in support service areas such as human resources, accounting, payroll administration, benefits administration, legal services, actuarial services, tax planning, investment decisions, third-party administrative services, information systems, regulatory compliance and auditing services.

For More Information

The antitrust laws are nuanced and complex and their application to particular circumstances requires a careful review and understanding of the underlying facts. Companies should consult antitrust and/or HSR counsel regarding their obligations during the pre-consummation period.