Tolling agreements are a common feature of the energy industry. Through these agreements, a buyer will supply fuel to an electric generator and, in return, the generator will provide power back to the buyer. Although commonly used, the U.S. recently found that such a tolling agreement, when entered into between companies that intended to merge, violated the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, 15 U.S.C. §18a (HSR Act), leading to the imposition of significant financial penalties against the buyer.
In August 2014, Duke Energy Corporation (Duke) and Calpine Corporation (Calpine), a competing seller of wholesale electricity in Florida, reached an agreement for Duke’s purchase of Osprey Energy Center (Osprey) a combined-cycle natural-gas fired electric generating plant in Florida, from Calpine. The structure of the proposed transaction included a tolling agreement, which gave Duke responsibility for determining the amount of power to be produced at Osprey and for purchasing the fuel necessary to generate that power. Essentially, the tolling agreement enabled Duke to assume operational control over the Osprey plant and limited Calpine’s role to “mechanical operation of the Osprey facility consistent with Duke’s instructions.”
On 18 January 2017 the Antitrust Division of the Department of Justice (DOJ), acting at the request of the Federal Trade Commission (FTC), filed a complaint and proposed final judgment in the United States District Court for the District of Columbia, alleging that Duke violated premerger reporting requirements by obtaining and exercising beneficial control of Osprey from Calpine before observing the requirements of the HSR Act. Specifically, the complaint alleged that Duke began exercising operational control of Osprey prior to filing required notifications with the FTC and DOJ and observing the mandatory 30-day waiting period for antitrust review.
Although such tolling agreements, including provisions giving buyers control over output, are increasingly common in the energy indupurchase Osprey and had no rationale independent of the transaction. Indeed, the tolling agreement was intended to hasten FERC approval for the transaction by enabling Duke to demonstrate that it “already controls” Osprey such that “no new harm could come from permitting Duke to acquire Osprey outright.”
According to the DOJ, agreements that transfer beneficial ownership and are executed before HSR notification and expiration of the waiting period may amount to gun-jumping under the HSR Act if entered into while a buyer intends to acquire the target. These types of agreements enable a buyer to assume control of a target and bring about effects of the combination before regulators have completed their antitrust review. DOJ thus argued that, taken together, the term sheet and tolling agreement had the effect of removing Calpine as an independent competitive presence in the market and allowing Duke to make all competitively significant decisions for the Osprey plant from the moment the tolling agreement went into effect and well before HSR notification had been filed.
Significantly, the DOJ imposed civil penalties in the amount of $600,000 against Duke even though this appears to be its first violation of HSR notification and reporting requirements. The agencies often do not impose penalties on parties who inadvertently violate the HSR Act so long as, among other things, it is their first violation of the HSR Act and they self-report their failure upon discovery and file corrective HSR forms soon thereafter. In this case, because Duke’s violation amounted to gun-jumping, as opposed to an inadvertent missed (and subsequently corrected) filing, the agencies took a harsher approach.
This case highlights the importance of consulting experienced HSR counsel in advance of acquiring voting shares, non-corporate interests, or assets through any means. Although tolling agreements of the type at issue here are increasingly common in the energy industry, parties that have or may have an interest in acquiring the other party to the agreement must be careful to avoid assuming beneficial ownership of the target before complying with the HSR Act’s reporting requirements if HSR notification would be required. Failure to do so may result in the tolling agreement being construed as evidence of gun-jumping and the acquiring person being subject to significant penalties of up to $40,654 per day for noncompliance.