Soon after someone settles “gun jumping” charges, client alerts with informative titles like “DOJ Settlement Resolves ‘Gun Jumping’ Charges” start flying around. These “alerts” usually recite facts alleged in the complaint, say ordinary course of business provisions are typically fine, but consult an antitrust lawyer to make sure yours are okay. But few (if any) actually say what should be considered when setting a threshold in an ordinary course of business provision to minimize risk of a “gun jumping” investigation.
First, what is “gun jumping”? Put simply, for transactions that require a merger filing, a seller cannot give the keys to the business to the buyer before the designated waiting period expires and the deal closes. The idea is to maintain the seller as an independent business in case the transaction is blocked by the antitrust enforcement agency reviewing the transaction, so that competition does not suffer. Jumping the gun, so to speak, can delay closing and lead to an investigation and fines. (As an aside, for transactions that do not require a merger filing, turning over the keys to the business before closing poses most of the same risks.)
What is clear is that the seller needs to be free to operate its business independently and in the ordinary course while the buyer needs assurances that the seller’s conduct between signing the purchase agreement and closing does not diminish the value of what is being bought. This is why transaction agreements frequently contain provisions specifying that the seller must operate “its business in the ordinary course consistent with past practice prior to” closing the deal. Such agreements also frequently list things the seller cannot do—to preserve the value of the deal for the buyer—by saying, to quote an actual example, that the seller cannot “directly or indirectly acquire. . . assets, rights or properties except. . . purchases of inventory, raw materials or supplies, and other assets up to $2,000,000 in the aggregate, in the ordinary course of business consistent with past practice.” These types of provisions usually go on to direct the seller to seek the buyer’s consent (not to be withheld or delayed, of course) before doing what is prohibited.
The language quoted above is straight out of a merger agreement signed in connection with an $800 million plus deal that closed, but saw the parties investigated for “gun jumping” and ultimately paying a nearly $1 million fine. In that case, the seller routinely purchased needed inventory in amounts of much more than the $2 million threshold noted above. While the deal’s competitive significance was being investigated by the Department of Justice, the seller shipped a number of multi-year contracts to the buyer for approval. Those contracts obligated the seller to purchase, on an annual basis, inventory at a total cost ranging from approximately $57 million to $67 million. The Department of Justice said these types of inventory purchases were necessary for the operation of the seller’s ongoing business in the ordinary course.
So, what does this all mean for you? What you should not do is rely on whatever has been done in past agreements as a justification for what to put in your agreement. Just because someone agreed to a threshold of $250,000, $500,000, or more does not mean it is right for you. Whatever threshold you arrive at, it should be above what is done in the ordinary course and at a level that would be considered a material change in the business. One possible way to make this determination is to examine the seller’s purchasing or contracting history and ask what is in the pipeline. Although not necessarily determinative, company policies on purchasing and contracting authority may be helpful too in terms of providing an upward boundary. Considering these factors and others instead of blindly following past practice can help minimize risk of a “gun jumping” investigation.