Last week, the Antitrust Division of the Department of Justice (“DOJ”) announced the latest in a series of “gun-jumping” enforcement actions over the past several years. DOJ’s settlement with two particleboard manufacturers, arising from alleged improper pre-merger coordination, includes $3.8 million in civil penalties, as well as disgorgement of $1.2 million in profits. The settlement highlights the government’s continued scrutiny of parties’ pre-closing conduct, and emphasizes the risks companies face if they prematurely combine operations/assets, share competitively sensitive information and/or improperly coordinate business conduct before closing. The case is a potent reminder that firms involved in mergers and acquisitions must remain separate and independent entities until their deal closes.
On November 7, 2014, DOJ announced that Flakeboard America Limited (along with its parent companies) and SierraPine agreed to settle allegations that the companies failed to observe the waiting period required by the Hart-Scott-Rodino Improvements Act of 1976 (“HSR Act”) and conspired to restrain trade in violation of Section 1 of the Sherman Act. Under the settlement, each company agreed to pay $1.9 million in civil penalties. Flakeboard also agreed to disgorge an additional $1.2 million in profits resulting from the illegal conduct. The settlement starkly illustrates the risks parties in mergers and acquisitions face if they fail to comply with two separate, but related, statutory prohibitions: (1) Section 7A of the HSR Act, under which the parties involved in transactions of a certain size must make pre-merger notifications to the federal antitrust authorities and observe a mandatory waiting period before closing; and (2) Sherman Act Section 1, which prohibits competitors from unlawfully coordinating their conduct in a way that adversely impacts competition, irrespective of the size of the transaction.
In January 2014, Flakeboard and SierraPine, direct competitors in particleboard manufacturing, entered into an asset purchase agreement (“APA”) under which Flakeboard would acquire SierraPine’s particleboard mills for approximately $107 million. The transaction was reportable under the HSR Act.
During deal negotiations, Flakeboard made clear that it did not intend to maintain operations of a SierraPine mill located in Springfield, Oregon. The APA stipulated that SierraPine would close the mill five days before closing but after the expiration of the HSR waiting period – a provision that, on its terms, appeared designed to comply with the HSR waiting period. DOJ’s complaint alleged, however, that the parties’ post-signing conduct veered dramatically from the written terms of the APA. The complaint alleged that, following a labor dispute, SierraPine closed the mill at Flakeboard’s direction – several months before the expiration of the HSR waiting period.
The complaint further alleged that Flakeboard improperly coordinated with SierraPine in several key ways to ensure that the closure would be as profitable as possible to Flakeboard:
- Flakeboard obtained competitively sensitive information about the mill, including detailed client lists and pricing information from SierraPine.
- Flakeboard caused SierraPine to delay the closure announcement to give Flakeboard an advantage over other competitors seeking to contact and service SierraPine customers.
- Flakeboard caused SierraPine to direct its customers to Flakeboard by informing customers that Flakeboard would match current SierraPine prices.
- Finally, SierraPine made no effort to compete for business from customers of the closed mill or to supply these customers from its other mills.
In early October 2014, DOJ announced that Flakeboard and SierraPine abandoned their transaction, which would have consolidated 58 percent of the relevant market in Flakeboard’s control, after DOJ expressed concerns about the transaction’s likely anticompetitive effects in the market for the production of medium-density fiberboard. In the wake of abandoning the transaction, however, SierraPine’s Springfield mill remained closed and DOJ’s complaint alleged that there were no plans to re-open it. One month later, DOJ announced this settlement, under which the parties agreed to pay approximately $5 million in response to allegations that their conduct violated the HSR Act and Section 1 of the Sherman Act.
The Flakeboard settlement illustrates the importance of strict adherence to antitrust guidelines throughout deal negotiations and in the period between signing and closing. In particular, the settlement highlights two of the riskiest areas: (1) impermissible pre-merger information sharing and coordination; and (2) buyer oversight of seller’s operations.
Proper integration planning can be essential to a merger or acquisition’s success. The antitrust agencies recognize that quick and efficient integration between merging firms is often procompetitive. But firms must be vigilant not to cross the line where transition planning ends and collusion begins. Likewise, although the agencies recognize that acquiring firms have a legitimate need to protect the value of the transaction in the period between signing and closing, an acquiring firm must not impose restrictions on the seller’s ordinary course activities in a way that cedes operational control from seller to buyer during the statutory waiting period.
Notably, DOJ’s complaint did not include objections to the provisions in the APA providing for closure of the mill once the HSR waiting period expired and the transaction was imminently set to close. The problem arose when the parties’ conduct veered from the terms of their written agreement. DOJ alleged that the decision to close the mill during the waiting period and coordinated effort to move the mill’s customers to Flakeboard constituted an unlawful agreement between competitors and a premature transfer of operational control from SierraPine to Flakeboard. Flakeboard demonstrates that, even if the transaction is properly documented and the written operating covenants are facially acceptable, antitrust risks can arise if the parties engage in improper conduct during the period between signing and closing.
Like Flakeboard, past enforcement actions in this area typically involve clearly egregious conduct. The federal antitrust agencies have provided little guidance, however, on conduct that is less blatantly problematic but still falls in the gray area between permissible due diligence and transition planning, and impermissible collusion and transfer of beneficial ownership. There are few bright-line rules that apply, and it is therefore important for merging companies to retain antitrust counsel to help them navigate the potential pre-merger pitfalls. In particular, antitrust counsel can advise on how to minimize the risks associated with pre-signing due diligence; development and implementation of the interim operating covenants; and pre-closing integration planning.