On November 7, 2014, the Antitrust Division of the U.S. Department of Justice (DOJ) announced a Complaint and proposed Consent Settlement of significant claims of illegal premerger coordination with buyer and seller in a failed transaction. United States v. Flakeboard America, Ltd., et al., Case No. 3:14-cv-4949 (N.D. Ca. Nov. 7, 2014) (The DOJ press release is available here;1 complete DOJ case papers, as well as the Competitive Impact Statement (“CIS”) filed pursuant to the Tunney Act, are available here.2)
The DOJ settlement is a fresh reminder, with a novel fact pattern, of the dangers of gun jumping in HSR-fileable transactions. The Consent Settlement, now subject to Tunney Act review in the Northern District of California, requires Flakeboard (putative Buyer) to disgorge $1.15 million in “ill-gotten gains, the approximate amount of profits that Flakeboard illegally obtained by coordinating with SierraPine” (putative Seller), and each of Seller and Buyer are fined $1.9 million for violating the waiting period requirements of the HSR Act. Competitive Impact Statement (“CIS”) at p. 3.3
United States v. Flakeboard America, Ltd., et al.: The Facts
On January 13, 2014, Flakeboard agreed to acquire three particleboard or fiberboard mills in the United States from seller SierraPine. Flakeboard and SierraPine competed to sell particleboard, an unfinished wood product that is widely used in countertops, shelving, and other finished products. One novel feature of their asset purchase agreement required SierraPine to shut down all “business operations” at one of the facilities Flakeboard was acquiring, after the HSR waiting period had expired or been terminated, but before the transaction closed. Prior to negotiating the transaction with Flakeboard, SierraPine had no plans to shut down operations at this mill. Complaint ¶¶ 16-17. SierraPine did not want to even announce the shutdown of the mill because, if the transaction was not consummated, SierraPine intended to continue operating the mill, and feared employee and customer disruption if the shutdown was prematurely announced. CIS at p. 5. The parties announced their transaction on January 14 (but did not announce the planned shutdown of the SierraPine mill) and filed their HSR Forms on January 22, 2014, triggering the 30-day initial HSR waiting period.
What Went Wrong?
As luck would have it, within two days of announcing the transaction, an unspecified “labor issue” arose and, as a result, SierraPine believed that it would have to announce the planned shut down much earlier than was planned. Flakeboard and SierraPine consulted about this unfortunate development. The parties considered having Flakeboard waive the provision in the agreement regarding the post-HSR, pre-consummation shut-down. SierraPine believed that a waiver would avert the need to announce the shutdown prematurely. Complaint ¶ 20.
Flakeboard did not agree to waive the provision, and the next steps taken by the parties were fateful. The Complaint alleges that Buyer and Seller, in consultation with each other and by agreement:
- Agreed on the content and timing of a press release announcing the shut-down of the SierraPine facility. This enabled Flakeboard to better position its sales force to reach out to affected SierraPine customers.
- Per its agreement with Flakeboard, SierraPine shut down the facility in mid-March 2014, contrary to its pre-transaction intention and months before the HSR waiting period expired.
- SierraPine gave Flakeboard competitively sensitive information about customers that were served from the shut-down mill, including contact information and the types and volumes of products they purchased. That information went straight to Flakeboard’s sales force.
- At Flakeboard’s request, SierraPine instructed its own sales force to tell customers that Flakeboard wanted their business and would match all prices from SierraPine.
- Also at Flakeboard’s request, SierraPine relayed assurances of future employment with Flakeboard to certain of its key employees so that they would be incentivized to shift those customers to Flakeboard. “Once that [Springfield closure] announcement is made the 74 [million square feet of particleboard] from Springfield becomes fair game. I . . . want to make sure that SierraPine sales group will be trying to direct the business to their new employer . . .,” wrote a top Flakeboard sales manager. In fact, SierraPine did not compete for most of the customers from its shut down Springfield mill, telling at least one customer “We will try to transition all business to [Flakeboard’s] Albany [mill].”
Complaint ¶¶ 21-24.
Flakeboard and SierraPine abandoned the transaction on September 30, 2014, in the face of DOJ concerns about the impact of the combination in medium-duty fiberboard, one of the products produced by SierraPine.
The Flakeboard case is just the latest in a string of DOJ prosecutions for illegal premerger coordination, or gun jumping.4 Entire books have been written on the subject,5 and as with much of U.S. merger control practice, foreign jurisdictions, including in particular the European Union and member states, are also targeting the practice.6 While any pre-consummation integration is unlawful under Section 1 of the Sherman Act, as a practical matter, parties that are subject to HSR filing requirements and the enforced waiting periods are particularly liable to close scrutiny of their post-execution, pre-consummation information exchange and coordination activities, because the HSR process exposes so much of the parties’ activities to potential agency scrutiny.
It is almost impossible to counsel in the abstract in this area. Each situation presents its own unique challenges, and the right answer is almost always fact-dependent. Nevertheless, we offer some bright-lines that were clearly crossed by the Flakeboard and SierraPine parties:
- Planning for post-closing activity or integration is OK; unilateral implementation is OK; coordinated implementation is not.
- A clear indicator of something amiss occurs when Seller takes steps it would not otherwise take, or which are not in Seller’s independent unilateral interest, but which benefit Buyer.
- Sharing competitively-sensitive information between the parties that will affect how one or the other competes is clearly problematic.
- Extending employment assurances to Seller employees on the condition that they conduct themselves in ways injurious to their current (Seller) employer to the advantage of their potential future (Buyer) employer is wrong.
- Limiting customer choice, reducing competition that would otherwise occur for customer business, likely affecting what customers pay or from whom they can purchase, is clearly wrong.
Buyer and Seller are well-advised to have good antitrust advice while their business teams proceed with the entirely legitimate business of pre-integration planning. There is much that can be done, lawfully and without incident, pre-consummation, to allow the parties to make post-closing Day One smooth and seamless to all stakeholders, and allow the Buyer to immediately begin to recognize efficiencies and achieve synergies. We have tremendous experience managing these processes in a wide variety of industries and for transactions of all sizes and would welcome the opportunity to consult with you about your particular situation.