The Federal Trade Commission and the Department of Justice (DOJ) are ever vigilant to ensure that parties involved in a merger or acquisition do not “jump the gun,” or combine their businesses until after the expiration of the Waiting Period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the Act). In the latest case, the DOJ found that parties had jumped the gun when, prior to the expiration of the Waiting Period, the target sought the consent of the acquirer with respect to contracts made in the ordinary course of business. This is a classic problem that parties to an acquisition face between the time of signing and closing. The case underscores the importance of the parties remaining independent prior to the expiration of the Waiting Period.
This particular action stems from the 2007 merger between Smithfield Foods, Inc. and Premium Standard Farms, LLC. The parties announced the proposed merger in September 2006 and made their respective filings under the Act in October 2006. In November 2006, the DOJ issued a Second Request for Information to the parties. This extended the Waiting Period until the parties complied with the Second Request. The Waiting Period finally expired on March 7, 2007, and the parties closed the transaction thereafter.
According to the DOJ’s Complaint, during the Waiting Period, Premium Standard stopped exercising independent business judgment in the purchase of hogs, which it routinely made in the ordinary course of business. Instead, Premium Standard sought Smithfield’s approval on three different multi-year hog purchase contracts. The DOJ’s Complaint asserts that these contracts “were necessary to Premium Standard’s on-going business and were entered into in the ordinary course.” Because Smithfield granted consent to these “ordinary course” contracts, it exercised operational control over Premium Standard and thus acquired beneficial ownership of Smithfield prior to the expiration of the Waiting Period in violation of the Act. The DOJ and the parties settled the case, and the parties agreed to pay $900,000 in civil fines for this gun-jumping conduct.