On two consecutive days in January 2010, the U.S. Department of Justice (DOJ) announced two antitrust actions that should be of interest to those involved in M&A transactions. One case involved allegations of Hart-Scott-Rodino (HSR) Act “gun jumping,” and the other involved a post-closing challenge to a transaction that was not reportable under the HSR Act.
Smithfield Foods – Gun Jumping
On January 21, 2010, the DOJ Antitrust Division announced a "gun jumping" case involving Smithfield’s acquisition of Premium Standard Farms in 2007. United States v. Smithfield Foods, Inc., No. 1:10-cv-00120; see press release. The case was settled by a consent order, requiring Smithfield to pay a $900,000 civil penalty for violation of the HSR Act. HSR “gun jumping” involves situations where, in the government's view, the buyer in an HSR-reportable transaction is deemed to acquire beneficial ownership of the assets or entity to be acquired prior to the expiration of the HSR Act waiting period. This is the most recent in a number of “gun jumping” cases, and highlights the importance of crafting interim course of conduct provisions in M&A deals in a way that does not give the acquiring firm control over the acquired business prior to the expiration of the statutory HSR Act waiting period. The HSR Act prevents parties from completing a reportable transaction until 30 days after HSR filings are made, unless the period is terminated early or extended by a second request.
The DOJ’s case asserts that the acquiring firm (Smithfield) was consulted and asked to consent to three different contracts that the acquired firm (Premium Standard) entered for the purchase of hogs during the pendency of the acquisition. According to the DOJ, the hog purchases were ordinary course of business transactions for Premium Standard, and so the buyer, Smithfield, should not have had the right to review or approve those transactions. The DOJ's position was that Smithfield obtained beneficial ownership over Premium Standard through that consent process prior to the expiration of the HSR Act waiting period, and therefore violated the HSR Act.
This case highlights how parties must be careful in drafting “ordinary course of business” covenants in merger or acquisition agreements. The DOJ and Federal Trade Commission (FTC) can take an aggressive view that a buyer's review or consent over seller ordinary course of business activities effects a transfer of beneficial ownership of the seller’s business (or part of it), in violation of the HSR Act. In general, while the agencies understand that interim course of conduct provisions are appropriate to ensure that the acquired business operates in the ordinary course of business, consistent with past practices, they may inquire as to whether the buyer's contractual right to review or approve actions by the target limit the target's ability to operate in the ordinary course of business, and bring a challenge when they believe the seller has obtained control over those ordinary course transactions.
Dean Foods – Post-Closing Challenge to a Non-Reportable Transaction
On January 22, 2010, the DOJ filed a complaint, along with the states of Wisconsin, Illinois and Michigan, challenging Dean Foods' April 2009 acquisition of dairies from Foremost Farms. United States v. Dean Foods Co., No. 10-c-0059; see press release. The DOJ alleges in its complaint that the transaction resulted in a substantial lessening of competition in milk processing and sales of school milk in several areas. The DOJ seeks divestiture of the acquired assets, as well as a requirement for Dean to provide prior notice of future acquisitions. The transaction was not large enough to trigger mandatory reporting under the HSR Act.
Another interesting aspect of the Dean Foods complaint is that it quotes extensively from internal company documents that the DOJ asserts demonstrate the rationale for eliminating from the marketplace an "irrational competitor" offering aggressive pricing. This highlights how contemporaneous business planning documents can be important in the merger review process.
This is the most recent among a number of post-closing challenges by the DOJ and FTC. For example, just two days before its Dean Foods complaint, the DOJ reached a settlement with the Daily Gazette, resolving the DOJ’s 2007 challenge to the newspaper’s 2004 acquisition of the Charleston Daily Mail. See the January 20, 2010, press release. The settlement requires the Daily Gazette to restructure the business to enable the Charleston Daily Mail to compete independently. In another recent example, in July 2009 the FTC challenged Carilion Clinic’s 2008 acquisition of two outpatient clinics in Roanoke, Virginia. In the Matter of Carilion Clinic, No. 9338. The FTC and Carilion reached a settlement in 2009 requiring Carilion to divest an imaging center and an outpatient surgical center in Roanoke. These challenges, and others, demonstrate that transactions that are not large enough to trigger HSR Act review may nonetheless be subject to post-closing review, and potentially challenge, by the antitrust agencies.
Although they involve different issues, these cases show that the Obama administration DOJ and FTC are actively enforcing merger laws, both in terms of pre-merger notification requirements and substantive competition issues.