What is Gun Jumping?
Gun jumping in its simplest form refers to the act of an acquirer or a target "jumping" the period of uncertainty between signing a deal and closing the deal. It refers to a transaction party’s impermissible conduct between signing and closing that directly influences the underlying transaction’s value – without the prior approval of government bodies. Once a seller and buyer have executed an agreement that must be filed or submitted to an antitrust authority, the parties may not take any action to influence the authorities’ review of a deal without the authorities’ prior permission.
A gun jumping violation may occur before or after a filing has been made , if the action is taken by the parties in contemplation of the deal. Gun jumping may also be committed through oral communications or other behavior besides a filing. Gun jumping is of special concern to the authorities because it alters the way the businesses actually operate. It can result in EPA changing before closing in such a way that it is impossible for the authority to draw conclusions about the proposed transaction. As one example, if a potential buyer starts recruiting key employees of the target, the acquirer may be seen as taking unfair advantage over the target. This leads to concerns that the potential buyer induced the target to favor the acquirer over other bidders. The bottom line in every case will turn on its specific facts.
Gun Jumping Under Laws and Regulations
Gun jumping is governed by legislation, case law, and agency policy. The Hart-Scott-Rodino Antitrust Improvements Act, 15 U.S.C. §§ 18a, et seq. (the "HSR Act"), is the central piece of legislation governing premerger notification and waiting periods. Currently, transactions with a value above $85.4 million must be reported to the appropriate agencies for review. The HSR Act has been interpreted to apply to transactions involving acquisitions of voting securities, or a substantial part of an issuer’s assets or non-corporate interests, above that jurisdictional threshold. If a transaction is not exempt from notification, the HSR Act requires the parties to submit detailed information about their operations and business activities to the Federal Trade Commission and the Department of Justice Antitrust Division, which are the two premerger notification agencies. The information provided by the parties includes the parties’ manpower and sales, where they do business, the capital assets used, and information about competitors and customers. The parties are required to file a notification form 30 days prior to consummation of the transaction (15 days if either or both parties are small entities). During this waiting period, the premerger notification agencies are able to review the proposed transaction and determine whether it poses antitrust concerns.
If the agencies have concerns, they may ask the parties for more information. The agencies also are empowered to unilaterally extend this waiting period by requesting additional information ("second request") from the parties. Once the additional information is produced, the waiting period is extended an additional 30 days. The agencies can seek to block a deal prior to closing, even if the parties satisfy the waiting period requirements of the HSR Act.
Enshrined in the HSR Act and interpreted by the agencies’ guidance documents, gun jumping relates to ending a waiting period or consummating a transaction prior to the end of the waiting period for antitrust review. Gun jumping provisions were enacted to ensure that the companies involved in the deal do not act as a "single firm" prior to the closing date, and to avoid any outflow of confidential information that could reduce competition. If information is leaked prior to the closing, it could give the less publicly disclosing company an unfair advantage over the other in a bidding process, as the more fully-informed party can modify its bidding strategy depending on its knowledge of the less informed party’s corporate strategies. Gun jumping rules also intend to prevent parties from pre-acquisition coordination — and any negative effects on competition — by forcing companies to compete with each other prior to closing. If the waiting period has been exhausted but a deal has not yet closed, parties may not cooperate other than to integrate their operations or conduct de minimis joint activities that will not eliminate competition among the parties.
Gun Jumping Consequences
The consequences of gun jumping can be severe, leading to investigations by antitrust authorities, large fines, and in some cases, complete unwinding of a transaction. The competition authorities may opt to suspend implementation of the merger, which effectively halts or even aborts the transaction in question. As described above, gun jumping can arise from a desire to share information during a transactional period of competition between parties. It also arises when a party gives up independence during a period in which it must retain that independence for competition purposes. Gun jumping creates early co-mingling of assets and introduces unacceptable risks of coordinated competitive conduct.
The authorities are clearly interested in deterrence against gun jumping and will impose stringent penalties to that end. The general penalty for a violation of the HSR Act reporting and waiting period requirements is up to $41,000 per day or transaction. In re: Merck & Co., Inc., HSR App. No. 2116 (FTC Feb. 23, 2006) (Settlement); In re: Westfield Partners, Inc., HSR App. No. 2117 (FTC Mar. 24, 2005) (Order). As an illustration, in 1990, the FTC secured a settlement with Dentsply, a dental supplies manufacturer, for $1.5 million for failing to comply with the premerger notification provisions of the HSR Act prior to its acquisition of a competing company. See In re: DENTSPLY International Inc., 1990-2 Trade Cas. P 68,974 (F.T.C. Oct. 18, 1990).
Moreover, the FTC and DOJ will assert jurisdiction over companies that gun-jump their transactions in order to gain access to sensitive business information prior to the expiration of the waiting period. HSR Rules § 801.30; HSR Rules § 803.30 (providing guidance concerning the applicability of the per se violations of the HSR Act). The FTC will take action against a deal where parties commit gun jumping and take action prior to the earlier of compliance with terms of an order, or the expiration of the applicable waiting period. See In re: NYSE Euronext/Deutsche Börse AG, HSR App. No. 1120177 (Aug. 10, 2012) (FTC complaint). Here, the FTC imposed a $5 million fine for the alleged pre-consummation violations in a transaction to acquire the NYSE Euronext at issue in this case. In re: ZFC Holdings Corp., Docket No. C-4388, 2013 WL 1204917 (F.T.C. Mar. 22, 2013) (FTC decision) (Settlement). Gun jumping is a per se violation of the HSR Act, which has proven to be a dangerous trap for parties to realize that they have violated pre-consummation rules.
How to Avoid Gun Jumping
Best practices to avoid gun jumping in a mergers and acquisitions (M&A) transaction can be summarized as follows:
Pre-Merger Phase
Once the parties have signed a non-binding letter of intent or term sheet or have entered into a definitive agreement contemplating a potential M&A transaction, parties should bear in mind the following guidelines to avoid prematurely consummating a transaction and to remain compliant with antitrust laws:
During the Process
During the M&A process, parties should not communicate too much . They must keep parties outside the reasonable field of antitrust risk apprised of what they are doing, but not so much that the relationship evolves into something more. The parties also should formulate their defense plan and stay in close touch with local counsel with antitrust expertise to ensure that their plans comply with the local antitrust laws.
Gun Jumping Case Studies
Gun jumping is a hotly contested issue in the merger control landscape. There are no shortage of recent cases in this area, both across the world and across the various competition authorities.
In the U.S., gun jumping has increasingly been the focus of antitrust authorities. The Federal Trade Commission (FTC) has reached antitrust settlements for failure to conform to the requisite waiting period in 14 transactions since the beginning of 2019. The FTC has recently targeted gun jumping in certain vertically-related transactions. In mid-2019, the FTC’s complaint against Fresenius Kabi AG for its proposed acquisition of Akorn Inc. involved allegations that Fresenius Kabi Inc. had exercised "control" over Akorn before the deal was consummated. The FTC recently challenged such conduct in its complaint with respect to United Technologies Corporation’s proposed merger with Raytheon Company. The investigation found that certain personnel at UTC who were responsible for managing the merger with Raytheon were also serving in other roles at UTC that may have influenced the merger.
Bringing these cases in the U.S. to a head was the Office of the Attorney General in the District of Columbia’s 2019 settlement with Thomas Jefferson University and Einstein Healthcare Network over that transaction. The D.C. AG filed suit in June 2019, alleging that the two entities’ joint venture violated the covenant not to close a transaction until after the expiration of the waiting period under the HSR Act. The D.C. AG also alleged that the combined entity had disclosed information to its parent organizations prior to the expiration of the waiting period. The D.C. AG required the parties to pay $200,000 in civil penalties and agree to comply with all antitrust laws to resolve the action.
EU policymakers have also expressed interest in gun jumping, with the EC releasing a white paper on gun jumping in early 2018. The EC proposed sanctions including fines of up to one percent of a company’s total turnover for closing a transaction without notification or before the expiration of the applicable waiting period. Such fines would be in addition to applicable EU fines for closing a transaction past the expiry of the waiting period and fines resulting from subsequent anti-competitive effects of a premature closing. One case the EC cited in the white paper was that of Hungarian pharmaceutical manufacturer Richter, who closed its acquisition of the German company Gedeon Richter in disregard of EU gun jumping prohibition. The EC required the parties to pay fines amounting to more than €30 million as a result of the gun jumping.
Since that time, neither the EC nor any other EU member state has formally initiated gun jumping proceedings. However, in a recent hearing before the U.K.’s Competition and Markets Authority, Ms. Warnock of the EC stated that the EC is comparing notes with other competition authorities on the benefits of setting out clear guidance on gun jumping and suggested increased enforcement for gun jumping in the future.
Gun Jumping and the Future
Notwithstanding the current political rhetoric over globalization, global antitrust has advanced such that international antitrust considerations very much play a role in practically all significant volumes of business in the United States. The future of gun jumping will be a greater harmonization of what constitutes gun jumping around the world, and governments and antitrust agencies cooperating and coordinating more closely on their actions with respect to gun jumping. This is historically not unlike the continuing emergence of principles of antitrust law among different jurisdictions — while not yet complete, antitrust law today bears a close resemblance irrespective of differences in legislative enactment or "tradition." A similar evolution is underway with respect to the interaction of individual countries’ competition laws and policies, and gun jumping rules are just another manifestation of how that process continues to unfold. It is recognized, for example, that both the Antitrust Division and FTC efforts to ensure that the HSR notification process provides the information necessary to make timely antitrust enforcement decisions has been a long, ongoing process, but one that is being advanced at a much more accelerated pace at this time. It is not that the gun jumping rules were ignored , but rather that the HSR review process was not sufficiently thought out at their inception such that necessary changes have been needed to update the procedures to close loopholes, expand the explanatory guidance, and to allow the agencies to address happenstance post-closing behavior that might end up being gun jumping issues. We can expect that such changes will continue to be made, where warranted, to ensure that the rules are consistent with what is being done on a global basis, and that there are no perceived loopholes (for example, allocating assets and customers among withdrawn or refiled transactions) that have not been addressed by the rules. Ultimately, the future of gun jumping regulations will include more active adherence to the timing, process and behavior requirements of both the HSR notification process and the provisions of the Merger Guidelines that address pre-closing conduct. Mistrust of gun jumping has grown so much over the past several years such that there are now real concerns about entrenchment and pre-closing behavior. The end of the so-called "game of chicken" over pre-closing waiting period compliance is likely in the future. There are going to be tougher rules, with more meaningful enforcement, so that the pre-closing and post-closing processes are not hindered by an initial unwillingness to conform to the rules by separating the parties (or establishing a "fire wall") in appropriate contexts.