The antitrust agencies remain vigilant in prohibiting “gun jumping” — the unlawful coordination of parties to a transaction during the pre-HSR clearance and pre-closing time periods. On 7 November 2014, the U.S. Department of Justice (DOJ) announced a settlement under which parties to an abandoned transaction agreed to pay a total of nearly US$5 million in fines — US$3.8 million in civil penalties to settle claims of unlawful gun-jumping under the HSR Act and an additional US$1.15 million from the purchaser in disgorgement of illegally obtained profits in violation of Section One of the Sherman Act. The parties also agreed to implement antitrust compliance programs and not to share certain information or reach certain agreements during pre-closing periods with other parties to acquisition agreements in which they may become involved.
According to the DOJ’s complaint, on 13 January 2014, Flakeboard America Limited (Flakeboard) and SierraPine executed an agreement under which Flakeboard agreed to acquire from SierraPine two particleboard mills in Oregon and California and a medium-density fiberboard (MDF) mill in Oregon in exchange for approximately US$107 million. Flakeboard already owned particleboard and MDF mills in the U.S., including a particleboard mill in Albany, Oregon that competed against SierraPine’s particleboard mill in Springfield, Oregon.
Following signing, the parties filed the required HSR forms and subsequently received a Second Request from the DOJ. The HSR waiting period expired on 27 August 2014, 30 days after the parties declared substantial compliance with the Second Request. The parties abandoned the transaction on 30 September 2014, in the face of DOJ concerns about the transaction’s likely anticompetitive effects in the production of MDF.
On 13 March 2014, during the pendency of the HSR waiting period, SierraPine closed its Springfield mill. The DOJ complaint alleges that prior to executing the asset purchase agreement (APA), SierraPine had no plans to close the mill; however, the APA required SierraPine to close the mill five days prior to Fiberboard’s acquisition of the assets. Upon announcement of the transaction, SierraPine did not publicly disclose the plan to close the Springfield mill for fear that the announcement would result in lost customers and employees. Days after announcing the transaction, however, a labor issue arose causing SierraPine to conclude that it would need to announce the closure of the mill sooner than it had originally planned. At that time, SierraPine asked Flakeboard to waive the APA provision so that SierraPine could keep the mill open during the pendency of the HSR waiting period. Flakeboard refused to waive the provision. Both parties understood that Flakeboard’s refusal to waive the APA provision would have the effect of causing SierraPine to close the mill during the pendency of the HSR waiting period and regardless of whether the transaction ultimately closed. The parties worked together concerning the content and timing of the press release announcing the mill’s closure. They also worked together (including through the sharing of competitively sensitive customer information) to transition the mill’s customers to Flakeboard’s competing mill, again during the pendency of the HSR waiting period.
The DOJ’s complaint charges the parties with violations of the Sherman Act and the HSR Act. Section One of the Sherman Act prohibits agreements in restraint of trade. According to the DOJ, the parties’ agreement to close SierraPine’s Oregon mill and transition SierraPine’s customers to Flakeboard’s nearby mill “constituted an agreement between competitors to reduce output and allocate customers,” a per se violation of Section One. Flakeboard agreed to disgorge the profits that it earned as a result and during the six months leading up to the settlement agreement — specifically US$1.15 million. The DOJ explained that disgorgement was necessary because it would be impractical to order the closed mill to be re-opened to restore competition.
Further, the DOJ charged that the parties’ coordination of the closing of SierraPine’s Oregon mill and joint actions to transition its customers to Flakeboard’s nearby mill during the pendency of the HSR waiting period amounted to a violation of the HSR Act, subjecting each party to possible penalties of up to US$16,000 a day for each day of the violation. The DOJ said that the parties were in violation of the HSR Act for 233 days — from 17 January 2014, when they began to coordinate the closure of SierraPine’s mill, to 27 August 2014, when their HSR waiting period expired. Maximum penalties under the HSR Act would have amounted to US$3.568 million for each party separately. However, the DOJ agreed to accept civil penalties of US$1.9 from each party because the parties cooperated with the DOJ by producing voluntarily evidence of their premerger coordination and by entering into a timing agreement permitting the orderly production of documents related to the transaction.
In addition, each party (and Flakeboard’s foreign ultimate parent entity) agreed not to reach agreements with parties to acquisition contracts in which they may become involved that would take effect prior to the closing of the acquisition and that could affect price or output for competing products in the U.S. They also agreed, among other things, not to exchange, while negotiating an acquisition agreement or prior to the closing of such an agreement, non-public “information about customers, prices, or output for” competing products in the U.S except to the extent that such information is exchanged as part of “reasonable and customary due diligence” and is “reasonably related to a party’s understanding of future earnings and prospects.” Even in such cases, the parties agreed that the disclosure would only occur pursuant to the terms of a non-disclosure agreement limiting the use of such information to due diligence and prohibiting disclosure of such information “to any employee of the [p]erson receiving the information who is directly responsible for the marketing, pricing, or sales of” competing products. See Proposed Final Judgment.
There are many lessons to be gleaned from the complaint and settlement agreement.
- First, they serve as reminders that parties may not coordinate their activities and engage in certain information exchanges during the pendency of the HSR waiting period and pre-closing.
- Second, they underscore the need for parties to consult with antitrust counsel not only to confirm that certain pre-closing activities or information exchanges are lawful, but also in the context of negotiating the pre-closing covenants of the agreement. In the present case, just days after executing the asset purchase agreement, SierraPine found itself in the unfortunate position of seeking a waiver from the purchaser with respect to a specific pre-closing covenant it had agreed to abide by and, barring receipt of such waiver, having to decide whether to take actions that could possibly violate the HSR and Sherman Acts or that could jeopardize the closing of its transaction.
- Third, it is noteworthy that the DOJ did not require the maximum civil penalties available under the HSR Act due to the parties’ cooperation with the DOJ in its investigation of the pre-closing conduct and also in its investigation of the underlying acquisition.