Illegal Pre-Merger Coordination Results in $4.95 Million Antitrust Fine for Gun-Jumping

November 12, 2014

 

On November 7, 2014, the Antitrust Division of the U.S. Department of Justice (“DOJ”) announced a proposed $4.95 million settlement with Flakeboard America Limited, its parent companies Celulosa Arauco y Constitución S.A. and Inversiones Angelini y Compañía Limitada (collectively, “Flakeboard”), and SierraPine Limited (“SierraPine”) for alleged “gun-jumping” while the parties’ proposed transaction was under antitrust review.

In January 2014, Flakeboard announced a proposed acquisition of three SierraPine mills. In its complaint, the DOJ alleged that while the transaction was under review, the parties closed one of the SierraPine mills, began to transfer all of that mill’s customers to Flakeboard, and exchanged competitively sensitive information about those customers. The mill manufactured particleboard, an unfinished wood product that is widely used in countertops, shelving, low-end furniture, and other finished products. Flakeboard and SierraPine abandoned the proposed acquisition on September 30, 2014, after the DOJ expressed concerns about the transaction’s likely anticompetitive effects in the production of medium-density fiberboard, a manufactured wood product widely used in furniture, kitchen cabinets, and decorative moldings.

The proposed settlement requires the companies to pay a combined $3.8 million in civil penalties for gun-jumping violations of the Hart-Scott-Rodino Act (“HSR Act”). Gun-jumping is a violation of the HSR Act, which requires that combining entities observe a statutory waiting period before consummating transactions that meet the Act’s thresholds. The purpose of the HSR Act is to provide the federal antitrust agencies the opportunity to consider whether the transaction will “substantially. . .lessen competition.” While the waiting period is pending, the parties must remain separate companies and, generally speaking, may not “jump the gun” and coordinate business activities.

The DOJ also found that Flakeboard and SierraPine violated Section 1 of the Sherman Act by agreeing to restrict competition between the companies. For violating Section 1, Flakeboard must disgorge $1.15 million in illegally obtained profits, and both Flakeboard and SierraPine must establish antitrust compliance programs. The Section 1 violation is particularly noteworthy because it may support follow-on actions for treble damages by injured purchasers.

The case is the third gun-jumping action the DOJ has brought in the last eight years, and it should remind firms and their counsel that the antitrust agencies and the antitrust laws require merging parties to operate as independent firms during the period between the signing of a merger agreement and the closing of the transaction, notwithstanding the acquiring firm’s interest in protecting its investment. In addition to the possibility of substantial civil penalties, an antitrust agency investigation into gun-jumping conduct can delay clearance of the underlying merger transaction; and, if the conduct runs afoul of the Sherman Act, as it did here, it may support a Sherman Act Section 1 complaint by an antitrust agency or follow-on damages actions by injured indirect and direct purchasers.

Not all (or even most) pre-closing conduct is prohibited. Counsel-supervised integration planning, and the use of “clean teams” to view nonpublic, competitively sensitive information, for example, are permissible. Merging parties can protect against gun-jumping violations through fairly simple and straightforward procedures and close coordination between in-house and antitrust counsel and the merging parties’ business teams.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Ted Hassi, an O'Melveny partner licensed to practice law in the New York, Courtney Dyer, an O'Melveny counsel licensed to practice law in the District of Columbia and New York, Julia Schiller, an O'Melveny counsel licensed to practice law in the District of Columbia, New Jersey, and New York, and Courtney Byrd, an O'Melveny associate licensed to practice law in the District of Columbia and Maryland, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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