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Oil pipe
13 January 20256 minute read

FTC assesses record fine for gun-jumping antitrust violation

The Federal Trade Commission (FTC) announced, on January 7, 2025, that crude oil producers agreed to pay a record $5.6 million fine as settlement for violating the Hart-Scott-Rodino Act (HSR Act) through illegal pre-merger coordination, known as “gun jumping.” According to the FTC, the violation occurred because the purchase agreement gave the buyer approval rights over certain ordinary-course operations of the target, enabling the buyer to take control over key aspects of a competitor’s business prior to the expiration of the waiting period. The case reinforces the importance of calibrating negative interim covenants and preclosing conduct in compliance with antitrust laws.

Elements of the FTC’s complaint

According to the FTC’s complaint, unlawful conduct in this case included the following elements, among others:

  • The purchase agreement gave the buyer approval rights over the target’s ongoing and planned crude oil development and production activities, and the buyer did, in fact, put an immediate stop to the target’s new well-drilling projects for a period of time, until the parties realized that the FTC would investigate the transaction.

  • The purchase agreement required the target to submit all expenditures above $250,000 to the buyer for approval in advance, and the target actually sought pre-approval even for smaller expenditures, effectively giving the buyer control over many of the target’s ordinary-course expenditures.

  • When the target experienced supply shortages as a result of halting new drilling, the parties coordinated with each other to supply the target’s customers from the buyer’s supply or from the spot market.

  • During the same period, the target’s employees reported to the buyer and provided the buyer with details of customer contracts, supply volumes, and pricing terms.

  • As a result of the above, the target’s customers began dealing with the buyer directly during the pendency of the waiting period.

  • The buyer also required the target, during the waiting period, to change its well-drilling designs and its leasing and renewal activities, obtained access to the target’s competitively sensitive information, and participated in the target’s contract negotiations to obtain higher prices from customers.

HSR Act violations

The HSR Act prohibits parties from closing a transaction without first providing detailed information to the FTC and Department of Justice (DOJ) and observing a statutory waiting period. Notably, the HSR Act also prohibits parties from transferring “beneficial ownership” of the acquired firm before the waiting period expires. According to the FTC, the conduct summarized above amounted to the premature transfer to the buyer of beneficial ownership over the target.

The HSR Act does not define “beneficial ownership,” which is, instead, generally determined by several factors in a case-by-case analysis. According to the Statements of Basis and Purpose (SBP), the following factors may indicate beneficial ownership in an acquisition of voting securities:

  • The right to any increase in value, or dividends

  • Assuming the risk of loss

  • The right to vote or determine who may vote, and

  • Investment discretion, including the power to dispose of stock.

To determine beneficial ownership of goods or real property, relevant factors include:

  • Who maintains insurance

  • Who benefits from any increase in value

  • Who bears the risk of loss, and

  • Who has the right to dispose of the goods or property.

The FTC has also taken the position that a management agreement may transfer beneficial ownership if it is executed in conjunction with a purchase agreement prior to the expiration of the HSR waiting period.

Summary of the case

In this case, Verdun Oil Company II LLC (Verdun) and its sister company, XCL Resource Holdings, LLC (XCL), agreed to acquire EP Energy LLC (EP) in a $1.4 billion transaction that was subject to the HSR Act’s notification and waiting period requirements. The FTC alleged that the companies failed to satisfy waiting period obligations and engaged in gun jumping by allowing Verdun and XCL to assume beneficial ownership over EP’s operations prior to the transaction closing and during the pendency of the HSR waiting period.

Specifically, the purchase agreement granted Verdun and XCL approval rights over EP’s ordinary-course expenditures and crude oil production activities. EP was required to submit any expenses above $250,000 for prior approval by XCL or Verdun. According to the FTC, the approval requirements effectively transferred control over a significant portion of EP’s day-to-day operations. XCL also halted EP’s planned oil drilling and development activities and required other changes to EP’s ordinary-course business operations. Under the purchase agreement, XCL and Verdun assumed the risk of all costs associated with EP’s supply shortages from halting production. According to the complaint, these activities resulted in crude oil supply shortages and higher prices.

The FTC also alleged that EP gave XCL and Verdun almost unfettered access to its competitively sensitive business information after signing the purchase agreement without customary protections, such as a “clean team.” The shared information included EP’s site design plans, customer contract and pricing information, and daily supply and production reports. XCL and Verdun then used the competitively sensitive information to steer their own business strategy prior to closing. XCL, Verdun, and EP also coordinated to manage EP’s customer contracts, relationships, deliveries, and prices before the waiting period expired.

Key takeaways for merging parties

The key takeaways from this development apply to all merging parties, regardless of industry. These include:

  1. Significance of beneficial ownership and purchase agreement: Gun jumping may be alleged if there are any signs of transfer of beneficial ownership before expiration of the HSR waiting period. When determining whether beneficial ownership exists, parties may consider whether the acquirer has the power to influence the ordinary-course management decisions of the acquired firm. Negative covenants in the purchase agreement can be critical in this respect. Similarly, a buyer assuming potential benefits or risk of loss of a target’s assets or conduct can be a key indicator of the transfer of beneficial ownership.

  2. Importance of clean teams: To avoid allegations of unlawful information exchange or conspiracy, parties may consider using clean team agreements and controlling information flow appropriately during the due diligence and pre-closing periods. Clean team agreements protect the parties by limiting access to competitively sensitive information to employees or agents of the buyer who do not have responsibility for pricing, sales and marketing, customer negotiations, procurement, employee compensation or hiring, or other competitively sensitive functions.

  3. The seriousness of gun jumping: In general, enforcers are actively investigating gun jumping and taking violations seriously. Failure to comply with waiting period requirements could subject parties to substantial civil penalties of up to nearly $52,000 per day (adjusted annually for inflation).

If you have any questions about these matters, please reach out to any of the authors.