When does pre-closing integration planning cross the line to become gun jumping that can create antitrust liability? I’ve been thinking about that question today and it’s a fundamental topic that I’ve not yet tackled on the blog, so I thought I’d put up a quick summary. (Yes, I’m trying to write leads that work better for aggregation, and yes, I know things haven’t improved much.)
What Do You Mean Integration Planning?
Any combination of two businesses raises questions about how they will operate once they combine. For larger transactions in particular, there may be many questions that need to be answered to avoid significant confusion, disruption and discontent. Parties to transactions often understandably wish to get a head start on planning integration to ensure a smooth transition, especially where they expect efficiencies that will flow from running the companies as a combined unit.
The least controversial forms of integration planning involve things like establishing new lines of reporting and integrating computer systems. These things simply have to be done.
But other aspects of integration may be less obviously imperative, and in the right circumstances run afoul of U.S. antitrust law (and foreign antitrust law maybe too). When things go past planning and become actual integration before closing, there’s the potential for “gun jumping.”
What Are These “Laws” You Speak Of?
There are two separate antitrust laws that gun jumping can violate: the HSR Act and Section 1 of the Sherman Act.
As you all know by now, the HSR Act requires transactions that meet certain thresholds to observe a waiting period before closing that allows the government the opportunity to investigate whether the transaction will substantially lessen competition. Failing to wait is colloquially called “gun jumping.” You can make up your own bad track and field pun.
Exercising beneficial ownership or control over a target in a reportable transaction without observing the waiting period or before the waiting period expires violates the HSR Act and is subject to fines of up to $16,000 per day per violation. Gun jumping under the HSR Act is only an issue until the applicable waiting period expires or is terminated early.
Separately, the Sherman Act prohibits the restriction of competition through, for example, price fixing, market allocation and bid rigging. Until closing, the parties to a transaction remain separate entities capable of conspiring in violation of the Sherman Act. Penalties for Sherman Act violations include potential jail sentences for individuals involved, criminal fines for the companies, and treble damages liability to customers or others who were harmed by the loss of competition. The Sherman Act remains applicable to the parties until closing, but only applies to companies that are otherwise competitors.
In summary, the HSR Act prohibits exercising control over the target until the waiting period expires. The Sherman Act prohibits coordinating competitive conduct.
Do People Really Get In Trouble For This Stuff?
Well, yes and no. Fines under the HSR Act for gun jumping are relatively rare (and concerns have been tempered some since a former FTC General Counsel walked back some of the agency’s earlier rhetoric a few years ago). Prosecutions under the Sherman Act for activities that happened in the pre-closing stages of a merger may even be more rare (although the risk was always greatest for deals that never close, especially where the merger gave the parties an opportunity to open a dialog that could lead to price fixing). In truth, it’s the egregious cases get pursued.
But for most deals, the real cost of gun jumping is the distraction that it can create during an investigation. Causing the agency staff to be busy investigating whether your pre-closing conduct is problematic instead of the substance of your transaction can only cause delay and distraction. It unnecessarily uses up agency resources, makes agency staff suspicious of your motivations and veracity and requires even more attention from your legal advisers and business people who should otherwise be engaged in productive business.
So even if you’re not likely to ever end up liable, it’s best to steer clear of activities that could be considered gun jumping.
Okay, So What Am I Not Supposed To Do?
Didn’t I tell you already? Don’t take control of the target’s business until the waiting period expires and don’t coordinate your competitive conduct until closing. How hard is that?
Oh, it’s kind of hard? Okay then, I’ll try to give you a few examples of problematic conduct.
Under the HSR Act:
- Controlling the target’s day-to-day business decisions
- Directing the target’s customers to do business with the buyer
- Holding out the companies as a single combined company
- Assigning management from the buyer to run the target business
- Negotiating or directing changes to the target’s business that might undermine its ability to compete if the transaction does not close
Under the Sherman Act:
- Coordinating prices with the target, or dictating the prices at which it sells
- Allocating customers to one company or the other
- Submitting combined bids or coordinating bidding activity
- Sharing competitively sensitive information (i.e., customer-specific prices) that could be used to coordinate (not necessarily itself a violation of the Sherman Act but increases the risk of coordination)
What If I Want To Do Something That Isn’t On Your List?
A helpful rule of thumb is that planning for things that will happen after closing is highly unlikely to be gun jumping. If there will be an issue, it will be with making changes that will be implemented before closing. Planning for post-closing integration is fine, but integrating early is where the trouble lies.
Things to consider when evaluating a proposed pre-closing integration step:
- What are we asking them to do? Things that are low cost, easily reversible or something the target would otherwise do present less risk.
- How will the change affect the target’s business? Changes that will harm the target’s ability to compete if the transaction does not close are more likely to be problematic.
- Can it wait until closing? If there is any doubt, it can be mitigated by waiting.