backOil companies ordered to pay $5.6 million for exerting beneficial control before the expiration of the mandatory HSR waiting period.
On January 7, 2025, the Federal Trade Commission (“FTC”) filed and resolved a merger “gun jumping” action, imposing a penalty of $5.6 million on Verdun Oil Company II LLC (“Verdun”), XCL Resources Holdings, LLC (“XCL”), and EP Energy LLC (“EP”) with the buyers (XCL and Verdun) and seller (EP) each agreeing to pay half. According to the complaint, Verdun and XCL exercised beneficial control over EP before the mandatory waiting period under the Hart-Scott-Rodino Act (“HSR Act”) expired and its purchase of the company closed. This action marks the highest penalty ever imposed in a gun jumping action and follows an August 2024 gun-jumping settlement by the Antitrust Division of the U.S. Department of Justice (“DOJ”).
ENFORCEMENT ACTION
On July 26, 2021, Verdun and EP executed a Membership Interest Purchase Agreement, through which Verdun agreed to acquire EP for $1.4 billion. Verdun is under common management with XCL, and as part of the transaction, EP’s operations in Utah’s Uinta Basin were to be transferred to XCL. The proposed transaction required clearance under the HSR Act, requiring them to observe a 30-day waiting period before transferring any ownership or control of the target business to the acquirer.
After receiving the HSR filings, the FTC issued a “Second Request,” investigated the transaction and obtained a consent order on March 25, 2022, requiring the divestiture of all of EP’s Utah operations to Crescent Energy. The HSR waiting period started the day the Purchase Agreement was signed, July 26, 2021, and continued until the FTC accepted the consent agreement and terminated its investigation on March 25, 2022.
According to the complaint, while no transfer of ownership or control was permitted under the HSR Act prior to the termination of the waiting period on March 25, 2022, the Purchase Agreement provided for the immediate transfer of control over key aspects of EP’s business, including approval rights over EP’s ongoing and planned crude oil development, as well as many of EP’s ordinary course expenditures.
The FTC also alleges that the parties engaged in various actions that demonstrated that an unlawful transfer of control from EP to XCL and Verdun took place during the HSR waiting period. For example, the FTC alleges that XCL required EP to suspend its well-completion services, coordinate regarding customer relationships, contracts, and deliveries, seek approval for ordinary-course business activities and expenditures, and make changes to its operations. Most significantly, the complaint alleges that the parties coordinated on prices and exchanged competitively sensitive information during the HSR waiting period then sought Verdun’s approval of the prices EP negotiated with the customers.
The complaint alleges that after the parties learned that the FTC was conducting a full investigation into the transaction, they amended the Purchase Agreement on October 27, 2021 to allow EP to resume well-development activities without seeking consent from XCL or Verdun and allowed EP to operate independently again. However, by this point, according to the FTC, harm already had occurred. The FTC alleges that the parties were in violation of the HSR Act from the time the Purchase Agreement was signed on July 26, 2021 until the Purchase Agreement was amended on October 27, 2021, a period of 94 days. The FTC also alleged that the violation contributed to “skyrocketing” fuel prices by limiting crude oil supply during a time “when the U.S. market was facing significant supply shortages and multi-year highs in oil prices.”
The $5.6 million penalty is the highest penalty ever imposed for gun-jumping in the United States. In addition to the fine, the Agencies seek to implement a compliance program whereby the parties are required to brief certain officers, directors, employees, and agents on the Final Judgment and the antitrust laws. In addition, the proposed Judgment would grant the FTC access to the parties’ records to ensure compliance.
KEY TAKEAWAYS
This action underscores that the antitrust agencies are serious about ensuring that parties observe the suspensory waiting period required by the HSR Act. For any transaction requiring an HSR filing, the parties should take care to avoid any suggestion that the acquiring party has gained, or is exercising, beneficial control or management of the target prior to the termination of the HSR waiting period. In particular, parties should structure their transaction purchase agreements to avoid any suggestion that the parties are combining their management or operations prior to HSR clearance. Moreover, it is important to note that gun jumping violations can occur and be the subject of an enforcement action even if, unlike in the Verdun Oil case, there is no competitive concern raised by the underlying transaction.
Parties that are eager to close transactions should be diligent to ensure a prompt HSR filing, where required. We anticipate that under the new HSR rules, which go into effect on February 10 barring an administrative freeze, parties will need a minimum of three to five weeks to prepare HSR filings. To expedite the process, parties should work with antitrust counsel early, and consider starting to gather responsive documents and information in anticipation of deal signing, rather than waiting until after signing.
The new rules will also coincide with the FTC lifting its three-year long suspension on early termination of filings. While the waiting period typically runs for thirty days from the date that both parties have submitted their premerger filings, early termination gives the Agencies discretion to end the HSR waiting period early where they determine there are no substantive issues. Early termination grants are published in the Federal Register, so if one or both of the parties wants a transaction to remain non-public, then early termination should not be requested.
Regardless of the timing of the HSR waiting period, the principal takeaway from the instant action is that merging companies must remain, and operate as, independent entities until such time as the applicable waiting period lapses and while integration planning is permissible during this period, the parties must take care to ensure that the buyer does not control the seller’s ordinary course business decisions prior to the period’s expiration. The instant action also does not prohibit the use of interim operating covenants in transaction agreements. However, parties should take care to ensure that such covenants are necessary and set at the appropriate material thresholds to preserve the value of the business being acquired rather than to dictate the ordinary course business decisions of the seller.
