DOJ Continues HSR Enforcement with $600,000 for Gun-Jumping Violation
On January 18, 2017, Duke Energy Corporation (Duke) agreed to pay $600,000 in civil penalties to resolve allegations by the United States Department of Justice (DOJ) that Duke violated the Hart-Scott-Rodino Act (HSR Act). DOJ alleged that Duke acquired beneficial ownership and exercised control (commonly referred to as "gun-jumping") over the Osprey Energy Center (Osprey) prior to expiration or termination of the statutory waiting period for its acquisition of Osprey from Calpine.1
In addition to the statutory penalties, enforcement actions of this type can have reputational effects, and even slow HSR approval. As a result, parties must consider carefully not only how the transaction is structured, but also the obligations of the parties and their conduct during the interim period between signing and closing to ensure compliance with the HSR Act.
Under the HSR Act, companies and individuals entering into transactions that meet certain jurisdictional thresholds must provide notification to the antitrust authorities and observe a statutory waiting period for the antitrust authorities to review the transaction.2 During the waiting period, the buyer may not "gun-jump" (i.e., acquire "beneficial ownership" or otherwise exercise control of the target). While the antitrust authorities will examine the particular facts of each case, examples of conduct during the waiting period likely to be considered gun-jumping include the buyer directing the closure of the target's facility or the buyer assuming the financial risk of loss or benefit of gain of the target.
Duke Energy's Acquisition of Osprey
In August 2014, Duke entered into an agreement with Calpine Corporation to purchase Osprey, a power plant in Florida. As part of the purchase, the parties agreed to a "tolling agreement" which went into effect immediately upon signing. DOJ's Complaint alleged that the tolling agreement conferred beneficial ownership to Duke because Duke: (1) controlled the output of electricity Osprey produced; (2) purchased fuel to supply Osprey; (3) arranged for transmission of energy Osprey generated; and (4) retained Osprey's profits and losses.
While tolling agreements are relatively common in the energy industry, DOJ alleged that the tolling agreement between Duke and Calpine served no economic purpose other than to facilitate the ultimate purchase of Osprey by Duke. Moreover, the Complaint stated that Duke was unwilling to enter the tolling agreement without the acquisition agreement and desired the tolling agreement to help obtain approval for the acquisition from the Federal Energy Regulatory Commission.
Parties to a transaction must wait until the statutory waiting period has expired before the buyer may exert beneficial ownership or exercise control of the target. And Duke's settlement is a reminder of the seriousness with which DOJ views such violations. Moreover, DOJ stated that the penalty imposed on Duke was meant to deter future "gun-jumping" despite the fact that the imposed penalty was adjusted downward "in part because the Defendant was willing to resolve the matter by consent decree and avoid prolonged investigation and litigation."3
Therefore, it is important to remember the following:
- Even transactions that do not raise substantive antitrust issues are subject to the statutory waiting period such that parties must still abide by the HSR Act and not "gun-jump."
- When a written agreement provides for certain actions to occur during the pendency of the HSR waiting period, companies or individuals must be especially careful to ensure that those actions do not amount to beneficial ownership or otherwise create the appearance of exercising control of the target entity.
- As a result, it is important during transaction negotiations for antitrust counsel to review the terms of the agreement as well as the interim operating covenants to ensure that the written obligations do not violate the antitrust laws.
- Similarly, it is important to confer with antitrust counsel prior to exercising rights under the interim operating covenants as the application of such rights could trigger gun-jumping issues based on the particular facts.
- While integration planning during the statutory waiting period to hit the ground running on Day 1 is permitted, the line between permitted integration planning and beneficial ownership or the exercise of control may be difficult to discern. Companies or individuals should seek experienced legal counsel to ensure compliance with the HSR Act when integration planning.
- The penalties for a violation of the HSR Act can be severe, even where DOJ seeks less than the maximum penalty in return for resolving the matter by consent decree. The maximum penalty for an HSR Act violation was recently increased to $40,000 per day.4
Federal Trade Commission, Inflation increases for maximum civil penalty amounts, June 29, 2016, available here; 15 U.S.C. § 18a(g)(1).