Recent HSR Enforcement Actions Offer a Harsh Reminder That “The Rules Are the Rules”

In the last days of the Biden Administration, the Antitrust Division (DOJ) took the rare step of bringing two separate enforcement actions relating to violations of the Hart-Scott-Rodino (HSR) Act. The DOJ announced a record $5.6 million civil penalty for “gun jumping” in connection with a 2021 acquisition of a crude oil producer. Days later, the agency sued a private equity fund for violating the HSR rules by failing to make required notifications and omitting or altering required “Item 4” documents.

These actions are a reminder to all companies to faithfully observe and comply with the HSR rules and the need to ensure merger agreements do not inadvertently permit acquiring parties to exercise control over targets prior to the receipt of HSR approval.

Gun Jumping: The complaint filed against crude oil producers Verdun Oil Company II LLC (Verdun), EP Energy LLC (EP), and XCL Resources Holdings LLC (XCL) alleges that the companies violated the HSR Act by “gun-jumping,” or exercising beneficial ownership over the target prior to receiving HSR clearance. In this case, Verdun and EP entered into a $1.4 billion proposed transaction and made the required premerger notification filing. The complaint alleges that prior to the expiration of the HSR waiting period, Verdun and its sister company, XCL, assumed operational and decision-making control over “significant aspects” of EP’s day-to-day business operations, including “key competitive decisions.” This included XCL and Verdun ordering a stoppage of EP’s planned well-drilling development activities, coordinating with EP on EP’s contract negotiations with certain customers, and accessing EP’s competitively sensitive business information. The Complaint highlights broad interim operating covenants that required EP to obtain XCL or Verdun’s express approval for activities alleged to be within the ordinary course of EP’s business, effectively allowing the buyer to control the target before the transaction closed. This is the largest-ever penalty imposed on a party for a gun-jumping violation, and is a warning to companies of the potentially high cost of non-compliance with the HSR rules.

Item 4 Omissions/Failure to File: DOJ also filed a lawsuit against KKR & Co. Inc. and affiliated investment advisors and funds (“KKR”), alleging that the private equity funds violated the HSR Act’s premerger notification requirements on several transactions over the course of two years. Specifically, the DOJ claims that individuals altered documents required to be produced in their HSR filings for eight transactions, failed to make the required HSR filing for two transactions (valued at $6.9 billion and over $376 million, respectively), and omitted certain required competitive and synergy documents (“Item 4” documents”) in HSR filings for at least ten transactions. KKR has replied with a countersuit, alleging that DOJ’s action was unfounded and designed to “to chill merger and acquisition activity and target private equity firms.” Regardless, the DOJ’s allegations serve as a stark reminder to merging parties of the importance of engaging in a robust and comprehensive search for potential Item 4 material.

Companies considering transactions that pass the relevant thresholds should be reminded of the importance of following HSR Act requirements, including filing complete and accurate premerger notifications, observing the mandatory waiting period prior to acting as a merged entity, and ensuring document maintenance systems are in effect to ensure a successful transaction review process. In particular, in light of the new HSR Rules set to go into effect in the coming weeks, now is an excellent time to ensure companies have processes and procedures in place to ensure effective compliance.