HSR: Listen to the statute and…wait!

As we have explained in the past, parties to a merger or acquisition must report the transaction to federal antitrust authorities – the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) – provided the parties and the transaction exceed certain thresholds. The statute that governs that reporting obligation, Section 7A of the Clayton Act – otherwise known as the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (HSR Act) – also mandates that parties may not close on the transaction until after a prescribed time, usually 30 days. Relatedly, Section 1 of the Sherman Act prohibits “restraints of trade,” which, among other activities, prohibits various forms of competitor collaborations that diminish competition between them. Thus, competitors who are contemplating a merger must wait until the transaction is consummated before beginning to work together as one company. Failing to do so could result in a violation of the HSR Act and, potentially, the Sherman Act, as parties to one transaction recently discovered.

On November 11th, the DOJ announced a nearly $5 million settlement with Flakeboard America Ltd. (Flakeboard), its parent companies, and SierraPine for violations of Section 1 of the Sherman Act and the HSR Act. On January 13, 2014, Flakeboard and SierraPine, both producers of particleboard and medium-density fiberboard, entered into an asset purchase agreement by which Flakeboard would acquire three of SierraPine’s mills, two in Oregon and one in California. The total value of the proposed transaction was approximately $107 million. The transaction exceeded the thresholds established by the HSR Act; therefore, the parties were required to file a premerger notification with the FTC and DOJ, which they did on January 22, 2014, triggering the beginning of the waiting period. Before the termination of the waiting period though, SierraPine and Flakeboard took certain steps that evidenced they were working together as one entity.

Two of SierraPine’s mills competed directly for business with one of Flakeboard’s mills. Due to certain labor concerns, SierraPine had to close one of those mills prior to the expiration of the waiting period, and it worked in concert with Flakeboard to do so. The two entities coordinated on both the timing and the process of closing the mill, including sharing customer lists, order histories and price lists, and promising Flakeboard jobs to key SierraPine employees. Their efforts enabled Flakeboard to secure a significant number of SierraPine’s customers. According to the complaint filed by the DOJ, such conduct constituted a violation of Section 1 of the Sherman Act, and also transferred operational control, and therefore beneficial ownership, of SierraPine’s business to Flakeboard before the termination of the waiting period in violation of the HSR Act. As a result of the Sherman Act violation, Flakeboard has agreed to disgorge $1.15 million in profits. In addition, both parties have agreed to pay $1.9 million each in civil penalties for “gun jumping” (i.e., effectively acting as one company before the expiration of the waiting period) in violation of the HSR Act.

While not all collaborative activities or exchanges of information among competitors in contemplation of a merger or acquisition will violate Section 1 of the Sherman Act or the HSR Act, there are certain activities in which parties should not engage and certain data that companies should exercise extreme caution before disclosing. Additionally, when involved in a transaction that is subject to the premerger notification requirement of the HSR Act, one of the most obvious ways to prevent unnecessary scrutiny from the FTC and DOJ is to take the waiting period at face value and wait. Until the waiting period is terminated, the parties to the transaction are still competitors, and they should conduct themselves accordingly. The price tag for jumping the gun? Civil penalties of up to $16,000 per day. Patience is truly a virtue worth embracing.