On January 7, 2025, the U.S. Department of Justice (DOJ) filed suit against three Texas-based crude oil companies—XCL Resources Holdings, LLC (XCL), Verdun Oil Company II, LLC (Verdun), and EP Energy LLC (EP)—alleging unlawful pre-merger coordination in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act), conduct also known as "gun jumping." The alleged conduct occurred in connection with XCL and Verdun's proposed acquisition of EP that triggered notice and waiting requirements under the HSR Act. Concurrent with the complaint, DOJ filed a proposed settlement that includes, among other provisions, a $5.6 million penalty and a ten-year antitrust compliance commitment. This settlement represents the largest dollar penalty ever imposed for a gun jumping violation and serves as a stark reminder to merging parties that they must remain separate and independent before closing.
Under the HSR Act, if a proposed transaction meets certain statutorily defined thresholds and no exemptions apply, the parties must file notifications with the Federal Trade Commission (FTC) and DOJ and wait to close until the prescribed waiting period expires. This process is intended to provide the antitrust agencies with time to assess the competitive effects of the proposed transaction. During the waiting period, the HSR Act generally prohibits each party from prematurely exerting operational control over the other party's assets or otherwise obtaining beneficial ownership. Violations of the HSR Act are currently subject to a statutory penalty of up to $51,744 per day of noncompliance. For more details regarding the HSR thresholds and notification requirements, see here.
According to DOJ's complaint, XCL and Verdun agreed to purchase EP for approximately $1.4 billion on July 26, 2021, and filed their HSR notifications shortly thereafter. After reviewing the HSR filings, FTC opened an investigation into the competitive effects of the proposed transaction. On March 25, 2022, FTC and the parties entered into a consent agreement that allowed the transaction to move forward and terminated the HSR Act waiting period. Prior to that, however, XCL and Verdun allegedly assumed beneficial ownership of EP based on a variety of conduct that DOJ characterized as "a straightforward example of unlawful gun jumping." In particular, DOJ claimed that:
- The purchase agreement contained contractual provisions that allowed XCL and Verdun to control EP's ordinary-course business activities before the transaction closed: The so-called conduct of business covenants in the purchase agreement restricted EP's discretion to conduct its ordinary-course business activities. For example, EP committed not to propose, agree to, or commence any individual operation anticipated to cost more than $250,000—an amount DOJ described as "a relatively low threshold" in the crude oil production business—without prior approval from XCL or Verdun, and without any exception for ordinary course transactions. Additionally, EP was also required to secure approval from XCL or Verdun for other basic activities, such as hiring field-level employees and contractors for its drilling and production operations. According to DOJ, the purchase agreement effectively gave XCL and Verdun "control to stop or delay EP from moving forward with its production plans in the normal course of its business."
- XCL required EP to suspend certain crude oil production activities: According to DOJ, after signing the purchase agreement, XCL immediately halted EP's new well-drilling activities so that "it—not EP—could take over the management of EP's development plans and designs moving forward."
- XCL coordinated with EP on EP's customer contracts, customer relationships, and customer deliveries: After the halting of EP's well-drilling activities, XCL began conferring and coordinating with EP about EP's production volumes, customer contracts, and supply obligations, which involved exchanging information about EP's actual and projected production volumes, delivery capabilities, and details on customer supply obligations. XCL also coordinated with EP to manage and direct EP's customer contractual obligations and engaged directly with EP's customers about EP's supply and delivery obligations.
- XCL and Verdun required EP to make changes to its operations: XCL and Verdun required EP to change its business plans and day-to-day operations, including its well-drilling and site design plans, leasing and renewal activities, selection of vendors, and development opportunities.
- Verdun and EP coordinated regarding prices for EP customers: Verdun and EP coordinated prices in the Eagle Ford region of Texas, where EP shared customer pricing and supply volume information with Verdun and sought Verdun's approval of the prices it negotiated with its customers.
As part of the proposed settlement, the parties agreed to:
- Pay $5.6 million in civil penalties
- Antitrust compliance requirements, including (i) implementing an antitrust compliance program to ensure compliance with the final judgment and the antitrust laws; (ii) appointing an antitrust compliance officer to supervise the program; and (iii) providing annual antitrust training to employees and obtaining corresponding certifications from them each year. The compliance terms will last for ten years, beginning on the date the proposed settlement is entered by the court.
- In connection with any future transaction reportable under the HSR Act, an express prohibition on conduct similar to that alleged in the instant case
- Grant DOJ access to records, documents, and personnel as necessary to facilitate DOJ's monitoring of the companies' compliance with the final judgment
DOJ's allegations against the crude oil companies and the accompanying settlement highlight several key takeaways for merging parties concerning pre-merger activities and to avoid gun jumping:
- "Conduct of business" covenants in purchase agreements must be carefully crafted to ensure that they do not encroach on the target's ability to operate independently pre-closing. Covenants in purchase agreements that potentially give the buyer control over any aspect of the target's operations pre-closing can create potential antitrust risk, particularly if such covenants encroach on the target's ordinary-course business activities or day-to-day operations. While merging parties can and generally do negotiate contractual provisions to ensure that there is no material adverse change in the value of the target in the period between signing a purchase agreement and closing, the parties should seek antitrust counsel's review of any such covenants to reduce their potential antitrust risk and avoid potential delays in regulatory approval.
- Merging parties must remain independent before closing and ensure that any pre-merger activity is reasonably related to and narrowly tailored to due diligence or integration planning. It is essential that merging parties continue to operate independently until the merger closes. The most serious gun jumping violations have typically occurred where merging parties prematurely combined significant aspects of their day-to-day operations and/or managed themselves as one entity. That said, pre-merger activities are unlikely to violate antitrust laws if they are reasonably necessary and narrowly tailored to due diligence or integration planning efforts. If you are unsure of whether certain pre-closing conduct might constitute gun jumping, contact antitrust counsel immediately.
- Implement effective safeguards to mitigate antitrust risk. Merging parties should also ensure that there are effective safeguards and protocols in place to mitigate gun jumping risks. Appropriately tailored parameters established early in the negotiation process can help parties avoid both actual violations and the appearance of violations. For instance, parties can implement non-disclosure agreements and clean team agreements when they are assessing the feasibility of a transaction and/or conducting due diligence. Parties can also provide employee training on gun jumping compliance and establish firewalls between employees involved in different aspects of the acquisition (e.g., due diligence, negotiations, and/or integration) and those involved in operating the ongoing business to further mitigate risk.
- Consult antitrust counsel as early as possible to ensure best practices. Antitrust counsel can assist in recommending, implementing, and monitoring safeguards and protocols, particularly with respect to pre-merger activities and diligence requests. Involving antitrust counsel from the start of merger discussions—even among non-competitors—can limit the risk of avoidable antitrust problems down the road.
