The Federal Trade Commission (FTC) secured a record consent penalty of $5.6 million against two merging parties on January 7, 2025 for improper pre-merger coordination, marking the agency’s first gun-jumping action in over a quarter century.  Verdun Oil Company and XCL Resources Holdings had agreed to acquire EP Energy LLC in a transaction requiring prior notification to the FTC and the U.S. Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”).  In the substantive antitrust investigation that followed the parties’ HSR Act notifications, the FTC secured a commitment for Verdun and XCL to divest assets as a condition of FTC approval for the transaction.  The FTC also discovered that the parties had violated the HSR Act.

The HSR Act prohibits the parties to a reportable transaction from combining their operations before the Act’s waiting period expires.  This prohibition extends to the acquiring party directing the operations and decisions of the acquired party and, in many cases, to the parties’ premature sharing of competitively sensitive information.  Failure to adhere to these restrictions is colloquially known as “gun-jumping.” 

According to the FTC’s Complaint, the parties “disregarded their obligations under the HSR Act and transferred significant operational control over EP’s ordinary-course business to XCL and Verdun.”[1]  Specifically, the alleged gun-jumping conduct included the following actions:

• The Purchase Agreement provided for the immediate transfer of control to XCL and Verdun over key aspects of EP’s business, including granting XCL and Verdun approval rights over EP’s oil development and production activities and over many ordinary-course expenditures.  XCL and Verdun exercised these approval rights by immediately halting EP’s new well-drilling activities so that XCL could control production and production plans moving forward.[2]
• When EP suffered supply shortages as a result, the defendants coordinated their competitive activities by arranging for XCL and EP—direct competitors in the market—to work in concert to supply EP’s customers and satisfy EP’s supply commitments.  EP employees “effectively reported to their XCL counterparts and provided XCL employees with details on customer contracts, supply volumes, and pricing terms.”[3]
• The Purchase Agreement required EP to submit all expenditures above $250,000 for XCL’s or Verdun’s review and approval, a level that applied to many of EP’s ordinary-course expenditures and effectively transferred control over EP’s day-to-day operations to XCL and Verdun; moreover, XCL and Verdun received and approved expenditure requests falling well below the threshold.[4]
• XCL required changes to EP’s well-drilling designs and its leasing and renewal activities, and EP gave XCL unfettered access to EP’s competitively sensitive business information, including design plans, customer contract and pricing information, and daily supply and production reports, in the months after the signing of the Purchase Agreement.[5]   
• Verdun coordinated with EP on EP’s contract negotiations with its customers, directing EP to raise its prices in the next contracting period, which EP did.[6]

Merging parties can and should draw a great deal of guidance from the FTC’s Complaint in this matter.  Parties to a merger agreement are often under tremendous pressures from the other side and their own principals to realize the benefits of the bargain as quickly as possible, to get a good start on integration planning, and to prevent the acquired party from squandering its assets or allowing them to deteriorate pending closing.  The temptation to push the envelope of what’s permitted can be intense, but it’s critically important for both sides to be aware of—and adhere to—the boundaries of the HSR Act during the pendency of the waiting period.  The Verdun case illustrates the importance of putting into place protections to prevent gun-jumping:

1. Set and observe strict limits on cooperation during the waiting period.  The most important principle of the HSR Act is that the parties must remain separate and independent during the waiting period.  Any joint activities present the potential for a gun-jumping violation and should be reviewed in advance by antitrust counsel.  Verdun, XCL and EP were alleged to have improperly coordinated EP’s development and production activities, which, according to the FTC, “led to a crude oil supply shortage for EP when the U.S. market was facing significant supply shortages and multi-year highs in oil prices, resulting in Americans paying skyrocketing prices at the pump.”
2. Examine pre-closing conduct covenants closely for gun-jumping potential. There exists some degree of tension between the requirements of the HSR Act and the right of the acquirer to receive the benefit of its bargain in the form of an undeteriorated business.  The acquired party to a merger agreement may lawfully agree not to take certain actions that may deteriorate the business to be acquired, such as making extraordinary purchases above certain specified amounts.  Counsel and parties must, however, accurately gauge the level at which an expenditure crosses the line from “ordinary course” to “extraordinary”—EP’s $250,000 limit missed the mark in that regard, according to FTC.  Other pre-closing conduct covenants, such as those governing hiring, salary and bonuses, carry the potential for gun-jumping violations as well.  Review all commitments carefully and with the assumption that they will be scrutinized closely by the antitrust agencies.
3. Define the limits, then stick to them in a well-supervised integration planning process.  Even though the Verdun parties had set their negative covenant limits, they violated them, as XCL and Verdun approved expenditure requests falling well under that threshold.  Parties and counsel on both sides must work together to outline thresholds in their agreement that are then followed religiously.
4. Have a well-thought out plan for all pre-merger coordination, and adhere to it.  Gun-jumping violations are most often avoided when parties set up a robust process for coordinating integration planning activities during the HSR Act’s waiting period.  This includes the use of clean teams and the close involvement of antitrust counsel for integration planning activities that touch on competitively sensitive areas like sales and marketing or production planning—two areas that tripped up Verdun, XCL and EP as they coordinated on important development activities, pricing plans, and contract negotiations with EP’s customers.

The Verdun case illustrates the critical importance of defining and adhering to a strict integration plan that has undergone careful scrutiny by antitrust counsel.  The case also demonstrates the importance of including antitrust counsel not only in the formation and execution of the integration plan, but in the negotiation of the transaction agreement that initiates the process.

[1] Compl. ¶ 6.

[2] Id. ¶ 7.

[3] Id. ¶ 8.

[4] Id. ¶ 9.

[5] Id. ¶ 10.

[6] Id. ¶ 11.