The Antitrust Division of the U.S. Department of Justice (DOJ)
obtained a record $5.6 million settlement for gun-jumping from
defendants XCL Resources Holdings, LLC (XCL),Verdun Oil Company II,
LLC (Verdun), and EP Energy LLC (EP). XCL and Verdun (which are
under common management) agreed to acquire certain of EP's
operations for $1.4 billion. Each of XCL and Verdun made
Hart-Scott-Rodino Act (HSR Act) filings for the acquisition as did
EP as the acquired person. All three companies are engaged in crude
oil production. The U.S. Federal Trade Commission (FTC)
investigated the transaction and obtained a consent decree
requiring divestitures.
The transaction agreement that gave rise to the alleged violations
of the Hart-Scott-Rodino Act contained several provisions that the
Antitrust Division found problematic:
- EP agreed "not to propose, agree to, or commence any individual operation on the Assets anticipated to cost in excess of Two Hundred Fifty Thousand ($250,000)," unless XCL or Verdun first expressly approved the activity.1 The provision had no ordinary-course exception, and thus required the buyer's consent even for ordinary-course activities and expenditures. The complaint described this as "a relatively low threshold in the crude development and production business."2 EP often sought and received approval for smaller expenditures as well.
- EP agreed to "not conduct any operation in connection with" the crude wells it was planning to drill "unless such operations are expressly permitted pursuant to" the Purchase Agreement "or are otherwise approved by Purchaser."3
- XCL and Verdun agreed to take on the financial risk for meeting EP's customer commitments in light of the fact that XCL and Verdun were determining the extent of EP's drilling activities. XCL and Verdun were responsible for any penalties associated with not meeting those commitments.
The complaint alleges that the effect of these provisions was
immediate: EP ceased its drilling efforts at the request of XCL as
reflected in a series of emails. XCL and Verdun then determined
which drilling activities should occur.
In order to make these decisions, the complaint alleges that XCL
requested and received detailed information about EP's actual
and projected production volumes, delivery capabilities, and
customer supply obligations — including details about the
customers' contracted volumes and pricing terms. This was done
without a legitimate business justification and without appropriate
antitrust safeguards. (The complaint also notes that information
provided in the data room was shared without appropriate safeguards
on access and use as well.)
XCL then stepped into EP's shoes in interacting with customers
directly (sometimes without EP), again as evidenced by numerous
emails. As part of this effort, the parties allegedly coordinated
regarding prices for some of EP's customers. Verdun directed EP
to raise prices in its next contract with certain customers and it
did so.
The complaint alleges that the drilling stoppages caused by
XCL's denial of consent lasted several weeks until the parties
realized the FTC was going to investigate their transaction. At
that point, the parties allowed EP to resume its drilling
activities. However, EP was still required to seek XCL's
approval for plans and related expenditures. Nevertheless, the
complaint alleges that the duration of the violation was from the
date of the agreement until the date they amended the agreement to
allow EP to regain operational control — a period of 94
days.
The complaint alleges that this conduct violated the HSR Act,
which requires parties to file notice of their transaction and
observe a waiting period before closing their transaction. The
complaint alleges that: "This was no mere technical violation;
the Defendants' conduct effectively allowed one competitor to
acquire beneficial ownership, including control over key
competitive decisions of the other, before the transaction closed,
which is precisely what the HSR Act
prohibits."4
In addition to requiring all the parties to pay a fee for the
violation (even though the HSR Act arguably covers only the
acquiring person's actions), the consent decree contains a
broad prohibition on defendants "engaging in any other
agreement, combination, or conspiracy that has the same effect as
the alleged violation."5
While the consent decree contains a prohibition on the parties
disclosing or seeking "current or future prices or contract
offers" and "Non-Public Information relating to
customers, current or future drilling and completions, production,
sales, or shipments to customers," it contains an exception
for information "that is necessary to conduct reasonable and
customary due diligence of or integration planning for the proposed
transaction, provided such activity by Defendants are supervised by
antitrust counsel and occurs pursuant to a non-disclosure agreement
that (a) limits use of the information to conducting due diligence
or integration planning (including limiting dissemination of the
information to individuals involved in or supervising due diligence
or integration planning), (b) prohibits disclosure of the
information to any employee of the receiving entity who is directly
responsible for the marketing, pricing, or sales of a Competing
Product, and (c) requires the recipient to delete or destroy the
information if the Reportable Transaction does not
close."6
Prior Gun-Jumping Cases
This action is consistent with prior gun-jumping settlements where the agencies alleged that the acquiror directed the business of the acquired company. These include the following types of activities:
- Requiring the target to shut down a plant7
- Providing the acquiror with information and consent rights over ordinary course contracts with third parties8
- Merging decision-making processes, including agreeing to "slow roll" pending negotiations, agreeing to prices and material terms, and acting jointly on numerous business decisions9
- Providing officers of the acquirors with positions, offices, and business cards; having target employees travel overseas to resolve a commercial dispute between the acquiror and third party10
- Obtaining control of assets including inventory, machinery, equipment, and customer and supplier lists11
- Coordinating bidding12
Takeaways
- The agencies remain concerned about information shared between merging parties who are competitors. Always conduct diligence with appropriate safeguards, such as clean team agreements or providing only aggregated information. This applies both to the period before signing and the period between signing and closing.
- Focus carefully on the condition to closing covenants. Be sure that any restrictions on the acquiror spending be at a sufficiently high level to allow them to operate and/or have ordinary course exceptions to any requirement that the acquiror must approve spending.
- Ordinary course covenants, even if standard, may be problematic in practice. Antitrust counsel for both sides should be involved in determining whether the acquired entity may do things that appear prohibited under the covenants. And care should be taken to ensure the covenants do not have a chilling effect on the competitive activities of the acquiror.
- Finally, merging parties must not take actions that allow the acquiror to take control of the business or obtain beneficial ownership in any fashion, including through the conduct set forth above in the current or prior gun-jumping actions.
Footnotes
1. Complaint, United States v. XCL Resources Holdings LLC et al., No. 1:25-cv-0041 (D.D.C. Jan. 7, 2025), at 9.
2. Id. at 15, ¶53.
3. Id. at 9, ¶29.
4. Id. at 2, ¶2.
5. Id. at 20.
6. Proposed Final Judgment, United States v. XCL Resources Holdings LLC et al., No. 1:25-cv-0041 (D.D.C. Jan. 7, 2025), at 6.
7. United States v. Flakeboard America Limited, et al., No. 14-cv-04949-VC (N.D. Cal. Feb. 2, 2015).
8. See, e.g., United States v. Smithfield Foods, No. 10-00120, 2010 U.S. Dist. LEXIS 1457 (D. D.C. Jan. 25, 2010); Complaint, United States v. Qualcomm Inc. and Flarion Techs., No. 1:06CV00672 (PLF) (D.D.C. Apr. 13, 2006).
9. United States v. Gemstar-TV Guide Int'l, No. 03-0198, 2003 WL 22019510 (D.D.C. Feb. 6, 2003).
10. United States v. Input/Output, Inc., No. 990912, 1999 WL 1425404 (D.D.C. May 13, 1999).
11. United States v. Titan Wheel International, Inc., No. 96-01040, 1996 WL 351143 (D.D.C. May 10, 1996).
12. United States v. Legends Parent Hospitality Holdings, LLC, No. 1:24-cv-5927 (S.D.N.Y. Aug. 5, 2024).
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