United States: FTC imposes first “gun grab” penalty in 25 years

in short

The U.S. Federal Trade Commission (“FTC”) has imposed a $5.6 million civil penalty against crude oil producers XCL Resources Holdings, LLC (“XCL”), Verdun Oil Company II LLC (“Verdun”) and EP Energy LLC (“EP”). fine. A “front-running” violation occurs when a proposed buyer exerts control over the operations of a target business prior to the expiration of the relevant waiting period under the Hart-Scott-Rodino Act (“HSR”). The settlement is the largest penalty ever imposed for a gun-grabbing violation. Specifically, the FTC alleged that XCL and Verdun controlled key business decisions related to EP facilities and pricing prior to the completion of the HSR review process. This case highlights the importance of implementing antitrust agreements to govern pre-closing coordination and integration planning.

• The $5.6 million civil penalty settlement announced by the FTC is the largest fine ever imposed in the United States for a gun-grabbing violation.
• This decision comes less than a year after the U.S. Department of Justice’s Antitrust Division (“DOJ”) fined Legends Hospitality Parent Holdings, LLC $3.5 million for similar violations in connection with its acquisition of ASM Global, Inc. preemptive behavior. .
• These civil penalty settlements demonstrate the focus of the FTC and DOJ on violations of HSR rules and alleged interference with their review of proposed transactions.
• Companies required to notify transactions under the HSR Act should implement safeguards at the outset of the transaction process to ensure HSR compliance. In particular, guidance should establish protocols that limit the exchange of competitively sensitive information (For examplerestricting access to a “clean team”) and preventing the buyer from exerting control over the target’s business operations or strategic decisions prior to closing.

Unlawful pre-merger coordination or front-running occurs when parties to a proposed transaction fail to comply with the mandatory waiting period required by the HSR Act. Specifically, the HSR Act requires the parties to obtain an HSR license before taking any action to integrate their separate commercial operations. In particular, the proposed buyer must not acquire “beneficial ownership” of the target business until the HSR review is completed. In other words, the target business must continue to operate independently of the buyer. Penalties for robbery violations include civil penalties, injunctive relief, and forfeiture of ill-gotten gains.

The FTC voted 4-0 to accept the record settlement with Verdun and refer the matter to the Justice Department for prosecution. The U.S. Department of Justice filed a lawsuit and proposed settlement on behalf of the FTC, alleging that Verdun and XCL “restricted EP’s discretion to conduct normal business activities” during the HSR mandatory waiting period.¹

On July 26, 2021, Verdun, which was co-managed with XCL at the time of the transaction, agreed to acquire EP for $1.4 billion.² The FTC launched an in-depth investigation into the merger and required EP to divest all of its operations and assets in Utah as a condition of allowing the deal to proceed. The U.S. Federal Trade Commission (FTC) questioned the acquisition in March 2022, saying that without a divestiture, “the Salt Lake City refinery could face higher Uinta Basin crude oil prices.” . . And there may be attempts to pass those costs on to consumers. “³

In the latest front-running complaint, the FTC alleged that the parties engaged in activities that allowed “one competitor to control the other party’s normal business activities related to crude oil production prior to the closing of the transaction(.)”⁴ According to the complaint, the parties engaged in a number of prohibited preemptive activities before the transaction was completed, including EP, XCL and Verdun ordering a halt to EP’s planned drilling and development activities; XCL and EP coordinating and managing EP’s customer contracts in the Uinta Basin area of ​​Utah , relationships and delivery; Verdun and EP coordinated pricing for EP customers in the Eagle Ford, Texas area.⁵

Additionally, the complaint includes allegations that the parties exchanged competitively sensitive information during HSR reviews without putting in place adequate safeguards to limit access or prevent misuse.⁶ The exchange of information included much more detailed competitively sensitive information than required to conduct due diligence, including “EP’s customer contracts, customer pricing, production volumes, customer schedules, business plans, site designs, supplier relationships and contracts, licenses and permits.” Details. Investigative information and other competitively sensitive non-public information. “⁷ XCL and Verdun employees simultaneously receive information about EP development plans, contracts, customers and forecasts.⁸

Importantly, the complaint highlights that the parties engaged in this activity at a time when “the U.S. market as a whole is facing severe supply shortages and multi-year high oil prices.”⁹ This could result in record-breaking penalties from the Federal Trade Commission.

While companies negotiating potential M&A transactions may have legitimate business reasons for exchanging competitively sensitive information prior to closing, precautions should be taken and safeguards implemented to neutralize any possible anti-competitive effects arising from the exchange. Additionally, it is important that the buyer allows the target business to continue operating normally during the period between signing and the end of the HSR waiting period. In particular, parties to strategic M&A transactions should involve antitrust counsel and receive guidance early in the transaction process to avoid any potential haste concerns.

1 complaint 9, United States v. XCL Resources Holdings, LLC et al.No. 1:25-cv-00041 (DDC January 7, 2025), See https://www.ftc.gov/system/files/ftc_gov/pdf/complaintforcivilpenaltiesandequitablereliefforviolationsofthehartscottrodinoact.pdf.
2 Federal Reserve. trade newsletter, Oil companies to pay record negligence fine to FTC for antitrust violationsPress Release (January 7, 2025), https://www.ftc.gov/news-events/news/press-releases/2025/01/oil-companies-pay-record-ftc-gun-jumping- fine -violates antitrust laws.
3 ID.
4 10 complaints United States v. XCL Resources Holdings, LLC et al.No. 1:25-cv-00041 (DDC January 7, 2025), See https://www.ftc.gov/system/files/ftc_gov/pdf/complaintforcivilpenaltiesandequitablereliefforviolationsofthehartscottrodinoact.pdf.
5 ID. 10-16pm.
6 ID. 16-17 pm.
7 ID. 17 years old.
8 ID. 18 years old.
9 ID. 10 o’clock.