The Department of Justice Antitrust Division recently brought a civil antitrust lawsuit against Duke Energy Corporation, alleging that the electric power generator engaged in illegal “gun jumping” by obtaining beneficial ownership over a power plant through a tolling agreement before making a required Hart-Scott-Rodino Act filing and observing the applicable statutory waiting period. The DOJ announced that it had simultaneously reached a $600,000 settlement with Duke. The HSR Act requires that parties to certain acquisitions notify the antitrust enforcement agencies and observe a waiting period before consummating the transaction or transferring beneficial ownership of the business at issue. This case serves as a reminder that the antitrust agencies remain highly focused on compliance with all aspects of the HSR Act, regardless of whether the underlying transaction poses harm to competition.
On August 25, 2014, Duke reached an agreement to acquire the Osprey Energy Center in Florida from Calpine Corporation for $166 million. On September 30, 2014, the parties executed a tolling agreement, which took effect the next day. In 2015, months after the tolling agreement was executed, Duke submitted a filing pursuant to the HSR Act concerning its intent to acquire the Osprey plant. The tolling agreement allowed Duke to assume immediate control over all competitively significant decisions for the Osprey plant, including fuel purchases and hourly energy output, and it allowed Duke to retain the profit (or loss) of Osprey’s operations. According to the DOJ complaint, “[t]he combination of Duke’s agreement to purchase Osprey and the contemporaneously negotiated and interdependent tolling agreement transferred beneficial ownership of Osprey’s business to Duke before Duke fulfilled its obligations under the HSR Act.” As a result, the DOJ alleged that “from the moment the tolling agreement went into effect, Osprey ceased to be an independent competitive presence in the market for generating electricity for Florida consumers.”
Clearly it is not unusual for firms in the electric power industry to enter into tolling agreements, and the DOJ recognized that such agreements are relatively common. In this case, however, the DOJ alleged that Duke had no separate rationale to enter the Osprey tolling agreement other than “as a bridge to the acquisition of the plant itself” and to make it easier for the parties to obtain FERC approval for the acquisition.
The DOJ determined that Duke was in violation of the HSR Act from the day the tolling agreement became effective on October 1, 2014 until the HSR waiting period was terminated on February 27, 2015. Violations of the HSR Act are subject to fines of up to $40,000 per day, which could have resulted in a fine much higher than Duke’s negotiated settlement.
This case demonstrates that the antitrust agencies will carefully investigate and challenge pre-merger “gun jumping” even where the agencies’ antitrust review indicates that the underlying acquisition itself will not harm competition. The case also serves as a reminder that prior to receiving HSR clearance, agreements and coordination between parties to a transaction may be perceived as prematurely transferring beneficial ownership. The HSR rules are highly technical in nature, but parties to transactions can avoid inadvertent “gun jumping” violations with appropriate safeguards and controls
