In the first Hart-Scott-Rodino (HSR) gun-jumping enforcement action in five years, the Antitrust Division of the U.S. Department of Justice (DOJ) recently announced a settlement with Flakeboard America Limited and SierraPine resolving allegations of illegal premerger coordination. The DOJ alleged that the parties' conduct prior to the expiration of the HSR waiting period (i.e., working together to shut down one of SierraPine's mills and move its customers to Flakeboard) constituted a premature transfer of "beneficial ownership" in violation of HSR rules and a per se unlawful agreement between competitors in violation of Section 1 of the Sherman Act. The transaction was never consummated due to antitrust concerns, but SierraPine's mill was nevertheless shut down pursuant to the terms of the acquisition agreement. The settlement required each party to pay $1.9 million in civil penalties, and Flakeboard was required to disgorge $1.15 million in profits.
Pre-Closing Coordination under the Antitrust Laws
The antitrust laws apply to pre-closing conduct in two ways. First, the HSR Act required parties to a covered transaction to notify the transaction to the antitrust authorities and observe a mandatory waiting period. Until the waiting period expires or is terminated, the buyer cannot obtain beneficial ownership of the assets or voting securities that are the subject of the transaction. Over the years, the DOJ and Federal Trade Commission have brought enforcement actions claiming that pre-closing coordination between the buyer and the seller has risen to the level of a premature transfer of beneficial ownership. It is important to note that the filing and waiting period requirements of the HSR Act apply to all covered transactions, even when there is no competition between the parties. The HSR Act subjects violators to a maximum civil penalty of $16,000 per day for the duration of the violation.
Second, pre-closing coordination can give rise to substantive antitrust issues under Section 1 of the Sherman Act, for example, when competitors merge. Section 1 applies to coordination between independent entities. Thus, as a technical matter, Section 1 applies until the transaction is consummated (i.e., when the seller loses its independent status), and it applies even if the transaction is not subject to the filing requirements of the HSR Act. Pre-merger coordination is usually evaluated under the "rule of reason," which condemns concerted action only if there is actual harm to competition. If a merger, once consummated, would not lessen competition, pre-consummation coordination carried out pursuant to an acquisition agreement would likewise not lessen competition in violation of Section 1. However, agreements that qualify for per se treatment (that is agreements that are unlawful regardless of their actual impact—or lack of impact—on competition), such as agreements to fix prices, reduce output, or allocate customers, would violate Section 1, even in the context of post-signing, pre-closing coordination, until the transaction is closed. And, pre-closing coordination in respect of markets where the merger could lessen competition could likewise give rise to a Section 1 violation.
The Alleged Antitrust Violations
Flakeboard and SierraPine each manufacture and sell particleboard and medium density fiberboard (MDF). On January 13, 2014, the parties entered into an asset purchase agreement (APA) pursuant to which Flakeboard would acquire certain of SierraPine's particleboard and MDF assets, including some but not all of SierraPine's mills. In particular, Flakeboard did not want SierraPine's particleboard mill in Springfield, California. As part of the acquisition agreement, SierraPine agreed to shut down the mill five days prior to closing, but after the expiration of the HSR waiting period. SierraPine initially did not announce the closure of the mill because it intended to continue to operate the mill as if there were no transaction—conduct consistent with the antitrust laws. However, a labor issue arose that likely would have required SierraPine to publicly announce the shutdown earlier than anticipated. When the labor dispute arose, the parties discussed the timing and ramifications of the closure announcement. Flakeboard refused to waive the provision in the agreement regarding the closure of the mill. At the end of January, Flakeboard and SierraPine agreed on the content and timing of the closure announcement and planned for permanent closure of the mill, without regard to the expiration of the HSR waiting period.
During this period, SierraPine allegedly provided Flakeboard with competitively sensitive information, including the types and volume of products purchased by each Springfield customer, which Flakeboard distributed to its sales force. SierraPine also agreed to Flakeboard's request to push back the closure announcement to allow Flakeboard's sales personnel to better position themselves to contact SierraPine's customers. In addition, at Flakeboard's request, SierraPine instructed its own sales employees to inform customers of the Springfield mill that Flakeboard wanted their business and would match SierraPine's prices, and assured its key sales employees of future employment with Flakeboard to encourage them to direct customers to Flakeboard. SierraPine issued a press release announcing the mill's closure on February 4, 2014, and ceased operation of the mill on March 13, 2014, months before the HSR waiting period was due to expire.
Meanwhile, the DOJ had serious substantive concerns about the transaction arising out of its HSR investigation. On September 30, 2014, the parties abandoned the deal in response to the DOJ's concerns that the transaction would likely harm competition in the sale of MDF on the West Coast, but the Springfield mill was not reopened.
The DOJ alleged that the coordinated closure of the Springfield mill and efforts to steer customer to Flakeboard before the expiration of the HSR waiting period amounted to a premature transfer of beneficial ownership to Flakeboard and a per se violation of Section 1.
Terms of the Settlement
In the settlement, the parties agreed to pay a civil penalty of $1.9 million for the HSR violation. Two things are noteworthy about the HSR settlement. First, both the buyer and the seller agreed to pay a penalty. In most cases, only the buyer is subject to the penalty. Second, the settlement amount for the HSR violation is nearly half of the maximum penalty that could have been imposed on the parties for the violation—i.e., $3.568 million for each party. In explaining the acceptance of this lower amount, the DOJ cited the parties' cooperation with the investigation. In addition to the HSR civil penalty, Flakeboard agreed to disgorge $1.15 million in illegal profits earned as a result of its alleged Section 1 violation—i.e., the approximate amount of profits Flakeboard obtained by coordinating with SierraPine to shut down the Springfield mill and direct the mill's customers to Flakeboard. The parties also agreed to implement an antitrust compliance program to ensure compliance with the settlement agreement.
A Cautionary Tale
Gun-jumping cases that result in enforcement actions are rare. The agencies recognize that not all pre-closing coordination violates the antitrust laws, and where pre-closing arrangements are carefully tailored to protect a legitimate interest, they are permissible. In this action, the DOJ did not allege that the APA term requiring SierraPine to close the mill before the consummation of the transaction, on its own, constituted a gun-jumping violation. However, the DOJ highlighted Flakeboard's practical and close involvement and direction in the closure of SierraPine's mill and the movement of customers and Flakeboards' pricing guarantees. Moreover, the mill closure could not easily be undone when the transaction fell through. In this case, Flakeboard was in effect buying all of SierraPine's customers, but only some of its mills. The practical consequence of the parties' conduct was to give Flakeboard what it was acquiring before the HSR waiting period expired in a manner that could not easily be undone when the deal was abandoned. Absent the transaction, SierraPine would have kept the mill and its customers, thus this practical consequence was considered an impermissible loss of independence.
Counseling for premerger coordination is heavily fact-dependent. In this and prior gun-jumping cases, the agencies point to conduct that, taken in isolation, is common pre-closing coordination practice, but that is condemned in the larger context of what the parties were doing. What is often common, legitimate pre-closing conduct can be cited in other contexts as impermissible coordination. Thus, parties must often walk a fine line between coordination that is designed to make the post-consummation transition successful and coordination that gives the buyer de facto ownership prior to the expiration of the HSR period. This enforcement action does serve as a reminder that parties to mergers should consult antitrust counsel early and work with counsel throughout the process to ensure compliance with the antitrust laws, especially for transactions in industries where the DOJ may have heightened competitive concerns.