On January 21, 2010, the Department of Justice (DOJ) settled a “gun jumping” action against Smithfield Foods (Smithfield) and Premium Standard Farms (Premium Standard) arising out of actions the parties took prior to the expiration of the Hart Scott Rodino (HSR) waiting period and the consummation of their 2007 merger. Pursuant to the settlement, the parties are required to pay $900,000.
The HSR Act requires parties to transactions that meet certain threshold levels to make a premerger notification filing with the DOJ and the Federal Trade Commission (FTC). There is a waiting period associated with the HSR Act that allows the government an opportunity to investigate the proposed transaction for anticompetitive effects and to stop anticompetitive transactions before they are consummated. During this waiting period, the parties must remain independent companies (and if competitors, must continue to compete against each other), so that if the transaction is blocked, the parties and competition will be intact.
Even after the merger agreement is signed, the parties must not consummate their transaction, or transfer control (directly or beneficially) from seller to buyer, until the expiration of the HSR waiting period. A transfer of “beneficial” control includes the power of the buyer to make business decisions for the seller, whether under an express provision in the merger agreement or through cooperation between the parties. Transferring control or beneficial ownership of the seller to the buyer prior to the end of the HSR waiting period is known as “gun jumping.” The penalty for violating the HSR Act is currently $16,000 for each day of the violation, and it may be applied to both the buyer and seller.
The Smithfield/Premium Standard Action
The Smithfield/Premium Standard merger agreement included customary interim “conduct of business” provisions limiting Premium Standard’s operations during the period between execution of the merger agreement and the closing. Such provisions are often seen in merger agreements to protect a buyer’s legitimate interests in maintaining the seller’s value. The Smithfield/Premium Standard agreement included provisions regarding Premium Standard’s rights to:
- assume new debt or financing;
- issue new voting securities and sell assets; and
- carry on its business in the ordinary course consistent with past practice.
According to the DOJ’s Complaint, the foregoing provisions were not problematic, as they protected Smithfield’s interest in maintaining Premium Standard’s value without impairing Premium Standard’s independence. The violation in Smithfield/Premium Standard concerned the actions taken by the parties pre-closing.
Prior to their merger, Smithfield and Premium Standard both processed and sold pork in competition with each other. To continue its hog processing business in its ordinary course, Premium Standard continued to purchase hogs from independent hog producers. However, after executing the merger agreement, Premium Standard began seeking Smithfield’s consent on various ordinary course hog purchasing contracts during the HSR waiting period, including one contract accounting for less than one percent of Premium Standard’s annual slaughter capacity. Whereas each of the contracts in question were not large contracts, together, they accounted for a purchase price of hogs ranging from approximately $57 million to $67 million — an amount in excess of the minimum HSR transaction threshold in effect at that time. Given the foregoing, the DOJ determined that Smithfield had exercised operational control over — and, consequently, acquired beneficial ownership of — a significant portion of Premium Standard’s business prior to the expiration of the HSR waiting period, violating the HSR Act.
The Smithfield/Premium Standard settlement should not be viewed as a statement by the DOJ and FTC that customary interim provisions to maintain the seller’s value during the pre-closing period are unlawful under the HSR Act. Indeed, in the Complaint, the DOJ noted that the interim provisions in the agreement did not impair Premium Standard’s independence. However, the action represents a continued refinement of the gun-jumping standard that the agencies will apply when parties to a transaction go beyond the scope of the valid interim provisions, as the parties in Smithfield/Premium Standard did.
While all transactions subject to the HSR Act must adhere to the Act’s gun-jumping provisions, in transactions where the buyer and seller are competitors, the parties should expect that their written agreements and preclosing conduct will be examined more closely by the government.
As illustrated by the Smithfield/Premium Standard action, the gun-jumping standard is evolving and extremely fact-specific. During the merger process, parties must carefully balance the legitimate interests to ensure that the seller’s business maintains its value and viability prior to closing, as well as to prepare for the quick and effective integration of the acquired business post-closing, with the HSR Act’s prohibition of premature transfer of control from seller to buyer. The balancing process is complex and risky, as it is fact-intensive and deals with the totality of the deal circumstances. Gun-jumping investigations create additional hurdles for the merging parties and can create delays to the HSR process. Further, the federal antitrust agencies will not hesitate (and will likely increase) their enforcement vigilance in this area as a part of the more aggressive antitrust enforcement under the Obama administration, and as the transactional market recalibrates following the 2009 credit break. Thus, parties to a transaction and deal lawyers should pay close attention to coordination and integration issues prior to and during the HSR review period, and should involve antitrust counsel in the early stages of the transaction.