On August 5, 2024, the United States Department of Justice (“DOJ”) filed a rare[1] gun jumping[2] civil lawsuit and proposed settlement in the United States District Court for the Southern District of New York against Legends Hospitality Parent Holdings, LLC (“Legends”)—a global sports and entertainment venue services company partially owned by the New York Yankees and the Dallas Cowboys—in connection with Legends’ consummated USD2.325 billion acquisition of ASM Global, Inc. (“ASM”)—a venue services company focused on venue management. According to the complaint, Legends violated the premerger notification and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”) by exercising operational control over aspects of ASM during the HSR Act waiting period. This is the first such gun jumping action brought by the U.S. antitrust agencies since 2017[3]and is a reminder that the antitrust agencies are on the lookout for, and do bring, standalone HSR Act enforcement actions even when the agencies do not raise antitrust concerns with the underlying merits of the transaction.
HSR Act and “gun jumping” legal framework
The HSR Act requires companies to notify the Antitrust Division of the DOJ and Federal Trade Commission (“FTC”) of acquisitions of assets or voting securities that meet certain size thresholds where no exemption applies.[4] When a transaction requires reporting under the HSR Act, the parties must observe a statutory waiting period (normally 30 calendar days)[5] before closing.[6] This allows the DOJ and FTC to analyze the potential competitive effects and determine whether further investigation is warranted before the parties close. During the waiting period, neither party can exercise “beneficial ownership”[7] (e.g., operational or financial control or bearing the risk of loss or benefit of gain) of the other’s equity or assets.
Failure to abide by the HSR Act waiting period requirements is one example of a “gun jumping” violation.[8] Relatedly, anticompetitive conduct (e.g., improper information exchanges or coordination between competitors) among merging parties can also be prosecuted under Section 1 of the Sherman Act[9]as an unreasonable restraint of trade or Section 5 of the FTC Act[10] as an unfair method of competition until closing—unlike violations of the HSR Act, which end with the expiration or termination of the waiting period. However, gun jumping violations are most often brought under the HSR Act.[11]
Gun jumping enforcement actions can lead to both injunctive relief and civil penalties against both the acquirer and target, with the civil penalties reaching up to USD51,744 per day (currently).[12] Injunctive relief may seek to prevent the specific or similar conduct causing the violation in the future, require the parties to maintain an antitrust compliance program, and/or agree to an antitrust agency-approved compliance officer. Disgorgement of illegally obtained profits stemming from the violation may also be required.[13]
Parties should also remember that many ex-U.S. jurisdictions have similar gun jumping frameworks, including at the European Union level.[14]
Conduct by Legends
On November 3, 2023, Legends agreed to acquire ASM for USD2.325bn and filed its required HSR Act form on November 6, 2023. Accordingly, Legends was subject to the premerger notification requirements of the HSR Act, including the obligation to continue to operate as a separate and independent entity from ASM during the applicable waiting period, which expired May 29, 2024, following an extension by the issuance of a Second Request[15]by the DOJ on January 8, 2024.
According to the DOJ’s Complaint,[16]Legends allegedly engaged in illegal gun jumping by obtaining beneficial ownership of ASM’s business before the HSR waiting period had expired or been terminated.[17] Specifically, the Complaint alleges:
- In May 2023, Legends won the right to manage an arena in California when ASM’s management lease expired, having competed with ASM for the business. However, during the HSR waiting period, Legends determined that ASM would continue to service the contract, which included (i) signing an agreement in December 2023 requiring ASM to book third-party events at the arena and (ii) requiring ASM to provide venue management services for the arena beginning in April 2024, thereby making key decisions on behalf of ASM before the waiting period had expired.
- Legends sought to discuss competitive bidding strategies with ASM. In August 2023 (while Legends and ASM were in discussions around the transaction, but before the HSR filing), Legends sought to prevent both it and ASM from making competing bids for the same management contract relating to an entertainment complex in North Carolina. Similarly, in May 2023, after transaction discussions began, Legends and ASM sought to coordinate and jointly bid for a contract related to a new university arena that they had previously planned to bid for separately. This happened again in 2024 regarding a different university arena contract.
- The parties exchanged competitively sensitive information to construct the joint bids described above.[18]
Proposed settlement
Although some of the conduct described in the Complaint occurred pre-signing, interestingly, the DOJ’s proposed settlement limited the alleged HSR Act violation period to post-signing conduct, specifically, from December 7, 2023 (when Legends signed the agreement requiring ASM to book third-party events at the arena) to May 29, 2024 (when the HSR waiting period was terminated) – 175 days in total.[19] To settle this alleged violation, Legends agreed to a USD3.5 million civil penalty, which amounted to approximately USD20,000 per day or just under 40% of the maximum statutory penalty. The settlement will also require Legends to, among other things, refrain from certain conduct, appoint an Antitrust Compliance Officer, implement an antitrust training and compliance program, and submit regular compliance reports to DOJ. If the court adopts the proposed settlement (as is expected), it will resolve the lawsuit.
Three key takeaways
Closely review the potential antitrust implications of interim operating covenants and ensure that integration planning does not result in implementation before the expiration of the applicable waiting period or closing. Although gun jumping enforcement actions are rare, this case underscores the importance of adhering to premerger notification and waiting period requirements under the HSR Act, regardless of whether the underlying transaction may raise other antitrust concerns. While there are legitimate business reasons for parties to engage in certain forms of pre-closing coordination (e.g., such as pre- and post-signing due diligence and transition planning, as well as developing a clearance strategy), implementation before the expiration of the applicable waiting period or closing should not occur. Setting appropriate parameters, thresholds, and qualifications in interim operating covenants and managing integration planning with the assistance of counsel, for example, help mitigate gun jumping risks by ensuring that a target can operate in the ordinary course of business between signing and closing.
Both acquirers and sellers can be liable for civil penalties under the HSR Act. Even though the DOJ sought reduced civil penalties (as well as other injunctive relief) only from the acquirer, Legends,[20] the antitrust agencies can and have sought civil penalties against both parties in prior gun jumping violation matters, including one matter where the parties ultimately abandoned the transaction.[21] As this case itself is an example of, HSR Act enforcement actions can and do occur where agencies have not taken issue with the underlying transaction.
Have a plan for managing competitively sensitive information. Similarly, despite the fact that the DOJ only alleged an HSR Act violation, the alleged conduct, especially conduct involving the sharing of competitively sensitive information that influenced bidding strategies, could have potentially resulted in allegations of a Sherman Act Section 1 violation. If the FTC rather than the DOJ had investigated the matter, it is also theoretically possible that the conduct described in the complaint could have raised FTC Act Section 5 violations. Parties should have a plan for managing the exchange of competitively sensitive information pre-closing, such as using clean team agreements.
Footnotes
[1] Eleven gun jumping cases have been brought since 1991: United States v. Atl. Richfield Co., No. 91-0205, 1991 WL 290711 (D.D.C. Jan. 31, 1991), United States v. Atl. Richfield Co. and U.F. Genetics, Inc., No. 91-3267, 1991 WL 11670716 (D.D.C. Jan. 27, 1992), United States v. Titan Wheel Int'l, Inc., No. 96-1040, 1996 WL 351143 (D.D.C. May 10, 1996), United States v. Input/Output, Inc., No. 99-0912, 1999 WL 1425404 (D.D.C. May 13, 1999), United States v. Computer Assocs. Int'l, Inc., No. 01-02062, 2002 WL 31961456 (D.D.C. Nov. 20, 2002), United States v. Gemstar-TV Guide Int'l, Inc., No. 03-0198-JR, 2003 WL 21799949 (D.D.C. July 11, 2003), United States v. QUALCOMM Inc., No. 1:06-cv-00672-PLF, 2006 WL 1316934 (D.D.C. Apr. 19, 2006), United States v. Flakeboard America Ltd., et al., No. 3:14-cv-04949-VC, 2015 WL 12656838 (N.D. Cal. Feb. 2, 2015), United States v. Duke Energy Corporation, No. 17-116-BAH, 2017 WL 2819875 (D.D.C. Apr. 7, 2017) and United States v. Legends Hospitality Parent Holdings, LLC, No. 1:24-cv-5927 (S.D.N.Y. Aug. 5, 2024).
[2] “Gun jumping” relates to the unlawful transfer of beneficial ownership of the target’s assets or equity prior to the expiration or termination of the HSR Act waiting period (or in other jurisdictions, prior to the relevant antitrust authority approval or waiting period expiration or termination). Gun jumping is sometimes categorized into two types of violation – procedural and substantive. Procedural gun jumping can occur when parties fail to submit an HSR Act filing in connection with a reportable transaction (e.g., an acquirer was unaware of its HSR Act filing obligations), and substantive gun jumping can occurs when an acquirer is aware of the HSR Act filing obligation but nevertheless takes actions to acquire beneficial ownership of the target’s business (e.g., coordinating on competitive activities, directing the target’s ordinary course business, etc.). In this client alert, references to gun jumping solely refer to substantive gun jumping.
[3] United States v. Duke Energy Corporation, No. 17-116-BAH, 2017 WL 2819875 (D.D.C. Apr. 7, 2017). As noted in footnote 2, for purposes of this client alert, alleged violations of procedural failures to file HSR Act notifications are excluded as gun jumping precedents.
[4] See our previous client alert: 2024 Increases to HSR Thresholds, Filing Fees, HSR Penalties and Interlocking Directorate Thresholds (Update with March 6, 2024 Effective Date for HSR Thresholds), A&O Shearman (Feb. 5, 2024), https://www.aoshearman.com/en/insights/2024-increases-to-hsr-thresholds-filing-fees-hsr-penalties-and-interlocking-directorate-thresholds. Section 7A of the Clayton Act specifies that certain acquisitions must be reported to the DOJ and the FTC in advance of their consummation.
[5] The HSR waiting period is typically 30 calendar days after both parties have filed their respective notifications unless earlier terminated or otherwise extended by the issuance of a request for additional information or documentary material (a “Second Request”). If the waiting period would expire on a Saturday, Sunday, or legal public holiday (as defined in 5 U.S.C. 6103(a)), the waiting period is extended to 11:59 pm Eastern Time of the next regular business day. In the case of an all-cash tender offer or a bankruptcy transaction subject to 11 U.S.C. 363(b), the waiting period is 15 calendar days unless earlier terminated or otherwise extended.
[6] 15 U.S.C. § 18a (a) and (b).
[7] 16 C.F.R. §801.1(c).
[8] As mentioned above, gun jumping can also include procedural violations such as failures to file HSR for reportable transactions.
[9] Penalties for such violations can carry both civil and criminal (of up to USD100m for a corporation and USD1m for an individual, along with up to 10 years in prison). The maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over USD100m.
[10] Section 5 authorizes the FTC to issue cease-and-desist orders to enjoin unfair methods of competition. The FTC may issue an order after finding liability at the conclusion of an administrative hearing or as a consent order settling the charges. Section 13(b) of the FTC Act also authorizes the FTC to seek preliminary or permanent injunctive relief for violations of the FTC Act in federal district court (15 U.S.C. § 53(b)). The FTC can obtain monetary relief or civil penalties in limited circumstances, such as for violations of cease and desist orders.
[11] Only three of the 11 cases brought since 1991 have involved an alleged violation of Section 1 of the Sherman Act. United States v. Gemstar-TV Guide Int'l, Inc., No. 03-0198-JR, 2003 WL 21799949 (D.D.C. July 11, 2003), United States v. Computer Assocs. Int'l, Inc., No. 01-02062, 2002 WL 31961456 (D.D.C. Nov. 20, 2002) and United States v. Flakeboard America Ltd., et al., No. 3:14-cv-04949-VC, 2015 WL 12656838 (N.D. Cal. Feb. 2, 2015), which settled the Section 1 claims by the acquirer agreeing to disgorge USD1.15m in profits, among other things. There were no separate Section 1 penalties in either Gemstar or Computer Associates.
[12] 15 U.S.C. § 18a(g)(1), Bipartisan Budget Act of 2015, Pub. L. No. 114-74, 129 Stat. 584 § 701 (further amending the Federal Civil Penalties Inflation Adjustment Act of 1990), and FTC Rule 1.98, 16 C.F.R. § 1.98, 89 Fed. Reg. 1445 (Jan. 10, 2024).
[13] We are only aware of only one instance since 2010 where disgorgement was required; in United States v. Flakeboard America Ltd., et al., No. 3:14-cv-04949-VC, 2015 WL 12656838 (N.D. Cal. Feb. 2, 2015). The DOJ pursued a gun jumping complaint and settlement despite parties abandoning the transaction.
[14] See Article 7(1) of the EU Merger Regulation. For example, see our previous client alert: Record EU gun-jumping penalty contributes to surge in merger control fines, A&O Shearman (Feb. 28, 2024), https://www.aoshearman.com/en/insights/global-trends-in-merger-control-enforcement/record-eu-gun-jumping-penalty-contributes-to-surge-in-merger-control-fines.
[15] A Second Request tolls the agency’s statutory time limit to complete its review of a transaction reported under the HSR Act until 30 days after each party (or 10 days after the acquirer has in the case of an all cash tender offer or both the acquirer and acquired persons in an 11 USC § 363 bankruptcy) has certified that it has substantially complied with the Second Request. 15 U.S.C. §18a(e) and 16 C.F.R. § 803.20.
[16] See DOJ Complaint, United States, v. Legends Hospitality Parent Holdings, LLC, No. 1:24-cv-5927 (S.D.N.Y. Aug. 5, 2024), https://files.lbr.cloud/public/2024-08/127135930935.pdf?VersionId=i_MOEQ02wQidiBlxJdh6jrEzfO6CPmo1.
[17] Id. at [22].
[18] For example, “[w]hile constructing their joint bid, Legends and ASM exchanged competitively sensitive information surrounding the arena development project.” Id. at [18]. DOJ defined “competitively sensitive information” as “any non-public information of Defendant or any Competitor, including information relating to negotiating positions, tactics, or strategy; pricing or pricing strategies; Bids or Bidding strategies; intentions to Bid or not to Bid; decisions to Bid; whether a Bid was or was not submitted; and costs, revenues, profits, or margins.” See DOJ United States’ [Proposed] Final Judgment at [F].
[19] Id. at [23].
[20] Based on the alleged violation period of 175 days, the maximum civil penalties the DOJ could have sought were USD9,055,200 from each of the parties.
[21] United States v. Flakeboard America Ltd., et al., No. 3:14-cv-4949-VC, 2015 WL 12656838 (N.D. Cal. Feb. 2, 2015) where the acquirer paid USD1.15m in illegal profits obtained from illegal premerger coordination in addition to injunctive relief and a civil penalty for the Section 1 violation. The DOJ pursued a complaint and settlement despite parties abandoning the transaction.