Antitrust and Trade Regulation Alert
January 26, 2010
Authors:
Brian K. McCalmon
brian.mccalmon@klgates.com
DOJ Obtains Gun-Jumping Settlement Based
on Prior Approval of Contracts
+1.202.661.6230
Scott T. Baker
scott.baker@klgates.com
+1.202.778.9051
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Bringing its first gun-jumping case in four years, the Department of Justice’s
Antitrust Division (“DOJ”) last week sent a clear message that the Obama
Administration’s antitrust team will be watching closely any effort by merging
parties to coordinate their businesses prior to closing. The DOJ’s case is a sharp
reminder that, prior to closing, firms must continue to operate as independent
competitors in the marketplace, even if the merger itself is not competitively
problematic.
The federal antitrust authorities have long pursued penalties under the Hart-ScottRodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), when the
acquiring party exercises influence over the acquired party’s ordinary course
business decisions prior to the expiration of the HSR Act’s waiting period. The HSR
Act prohibits such “gun-jumping” conduct, including restrictive agreements or
information sharing, when it results in operational control and de facto acquisition
before Federal Trade Commission (“FTC”) approval.1 This case involved the merger
between pork processors Smithfield Foods and Premium Standard Farms, competing
hog producers and pork processors. The parties reported the deal to the federal
government under the HSR Act. DOJ opened an investigation into the merger and
eventually issued a Second Request, with which the parties complied; the merger
was consummated 60 days later.
After signing the merger agreement and while pre-merger review was still pending,
Premium Standard Farms, the acquired party, began submitting for Smithfield
Food’s consent the contract terms, price, quantity and duration of three hog
procurement contracts that arose pending consummation. The merger agreement did
not require Premium Standard Farms to do this, and DOJ challenged this conduct as
improper pre-merger coordination under the HSR Act and filed a complaint.
Smithfield Foods agreed to pay $900,000 in civil penalties.
The Smithfield Foods case signals that the agencies will closely scrutinize agreement
provisions and any pre-clearance actions that are designed ostensibly to preserve the
value of the deal for the acquirer. DOJ made clear that merger parties can agree with
each other on certain specific types of asset maintenance provisions:
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The FTC investigates possible HSR Act violations and recommends enforcement actions, which
DOJ files in federal court.
Antitrust and Trade Regulation Alert
[t]he Merger Agreement contained certain
customary interim “conduct of business”
provisions limiting Premium Standard’s
operations during the Section 7A waiting
period to protect Smithfield’s legitimate
interests in maintaining Premium
Standard’s value without impairing
Premium Standard’s independence. These
included provisions regarding Premium
Standard’s rights to assume new debt or
financing, issue new voting securities and
sell assets, as well as requirements that
Premium Standard “carry on its business in
the ordinary course consistent with past
practice.” The Merger Agreement also
conditioned the closing of the transaction on
the absence of any material adverse effect,
as such agreements customarily do.2
By submitting its hog procurement contracts to
Smithfield Foods for advance review and approval,
however, the Complaint alleged that Premium
Standard Farms allowed Smithfield Foods to acquire
beneficial control over a substantial portion of
Premium Standard Food’s business. Although the
parties maintained that the review and approval were
necessary for Smithfield Foods to protect the value
of the assets it was to acquire, DOJ nevertheless
sought penalties, drawing a line in the sand for
parties considering limitations on the seller’s
purchasing decisions pending HSR approval.
million then in effect, implying that the agencies did
not consider the parties’ actions to confer upon
Smithfield Foods beneficial control of Premium
Standard Farm’s entire business.5 And, it blessed as
customary the inclusion of provisions conditioning
closing on the absence of any material adverse
effects.
Merging parties who can demonstrate that the
seller’s execution of specific purchasing, bidding or
sales contracts would result in a material adverse
effect may ultimately find a receptive audience at
the reviewing agency if the buyer seeks to prevent
the seller from executing them. If the value of those
contracts falls beneath the HSR Act’s transaction
size threshold, the parties may be able to claim that
no reportable transfer of assets has occurred
(although parties who are competitors would still be
subject to the anti-conspiracy provisions of the
Sherman Act regardless of the size of the
contracts).6 But as merger partners structure their
post-signing relationship, they must understand that
they will have the burden of showing that
restrictions on such conduct prevent only
extraordinary and harmful commitments by the
seller, not ordinary course transactions.
Does the Smithfield Foods action leave room for
merging parties to impose restrictions on a seller’s
ability to buy and sell pending HSR clearance?
Probably, but merging parties should exercise
extreme caution. DOJ emphasized that the hog
purchasing contracts submitted for Smithfield
Food’s review were necessary for Premium Standard
Farms to “carry on its business in the ordinary
course consistent with its past practice.”3 It noted
that at least one of the contracts accounted for a very
small portion (less than one percent) of Premium
Standard Farm’s annual slaughter capacity.4 It noted
that the value of these procurement contracts
together exceeded the HSR Act threshold of $56.7
5
2
Compl. ¶ 16.
3
Compl. ¶ 18.
4
Compl. ¶ 19.
Compl. ¶ 20.
Acquiring parties may acquire assets or voting interests
short of the notified HSR filing threshold during the
pendency of the HSR review process.
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January 26, 2010
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Antitrust and Trade Regulation Alert
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January 26, 2010
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