FTC Imposes Record Fine on Texas Energy Companies for HSR "Gun Jumping"

"Gun jumping" is an enforcement priority for the Department of Justice and Federal Trade Commission. A recent enforcement action against three Texas oil producers challenged several types of alleged gun jumping that the government emphasizes companies should avoid between signing and closing a merger or acquisition.

The federal merger notification statute, the HSR Act, requires parties to large M&A transactions to make "HSR" filings and delay closing to allow the government an opportunity to review their transaction under substantive antitrust law. The HSR waiting period lasts 30-60 days, unless the government extends its investigation by issuing a "second request" for additional information. Until that waiting period expires, an acquiror cannot take "beneficial ownership," including by allowing the acquiring company to begin to exercise control over the target's operations—"gun jumping"—whether or not that will have an anticompetitive effect.

The XCL transaction. Sister companies XCL Resources and Verdun Oil agreed to pay $1.4 billion to acquire target EP Energy, a crude producer in the Texas Eagle Ford and Utah's Uinta Basin. The parties signed their acquisition agreement in July 2021. They then made HSR filings and delayed closing to allow the HSR waiting period to expire.

• However, according to the government's complaint, their agreement required that the target immediately halt its crude development activities so the acquirors could control plans to use its drilling assets moving forward. This led to shortages, so the acquirors began working with the target's customers for alternate supply. This allegedly gave the acquirors access to the target's customers and customer contracts.
• The government also alleged the acquirors used nonpublic information obtained in due diligence to influence the target's operations. For example, a Verdun employee allegedly used customer pricing and contract terms obtained from the data room to suggest changes to the target's pricing to customers.
• The agreement also required the target to obtain acquiror approval for all expenditures above $250,000, which the government alleged effectively transferred control of day-to-day operations to the acquirors.

In October 2021, FTC issued a "second request," extending its investigation and the HSR waiting period. At that point the parties amended the purchase agreement, removing the acquirors' early control rights.

After investigating, the FTC alleged the transaction would lessen competition in Uinta Basin waxy crude sold to Salt Lake City refiners. In a 2022 settlement of the FTC's antitrust challenge to the transaction, the acquirors agreed to divest the target's Utah business to a third party. The government's gun-jumping investigation continued until 2025.

Enforcement action. In XCL, the government challenged the following alleged pre-closing conduct by the acquirors:

1. Control of the target business. The acquirors allegedly secured the right to control—and then controlled—much of the target's ordinary-course business decisions, daily operations, and customer interactions. This included pausing the target's well-development activities, changing its site design plans and vendor selections, and taking control over some operations.
2. Exchanging competitively sensitive information. The acquirors' pre-closing involvement led to the target allegedly providing acquiror personnel with nonpublic information on the target business, including customer contracts and pricing, production reports, business plans, and other nonpublic information, which the acquirers then disseminated and used within its own business.
3. Control over expenditures. The acquisition agreement's pre-closing covenants required that the target submit for approval by acquirors all expenditures above $250,000. The government alleged that this dollar amount covered many of the target's ordinary-course expenditures and itself effectively transferred control over much of the target's daily operations.

The companies agreed to settle the enforcement action and pay a $5.6 million fine, a gun-jumping record. (HSR Act violations are subject to a ~$52,000 daily penalty.)

Lessons learned. This action highlights the importance of understanding gun-jumping principles. Much of the XCL conduct reflects routine concerns in M&A transactions. For example, many merger agreements require acquiror approval for significant pre-closing expenditures. The government's complaint acknowledges this practice, but asserts the $250,000 threshold was too low for an oil producer, such that (in the government's view) the acquirors obtained control of the target's day-to-day business. Likewise, the complaint asserted the target made little effort to control use of competitive information in its data room.

Whether or not the parties are competitors, failure to comply with gun-jumping rules can lead to delays in merger review and substantial fines. It is therefore important to work closely with inside and antitrust counsel in advance of signing a transaction agreement, especially where it may raise information-exchange or other gun-jumping issues.