Crude oil producers XCL Resources Holdings, LLC (XCL), Verdun Oil Company II LLC (Verdun), and EP Energy LLC (EP) have agreed to pay a $5.6 million civil penalty to settle violations under Section 7A of the Clayton Act, as amended (commonly referred to as the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act)).
On the Federal Trade Commission’s (FTC) recommendation, the Department of Justice (DOJ) alleged “gun jumping,” including illegal premerger coordination prior to the expiration of the waiting period required in transactions meeting certain HSR Act filing thresholds.
Parties to a transaction must remain separate and independent prior to closing in order to preserve competition. For transactions that meet the HSR Act filing thresholds, parties must also remain separate and independent until the applicable HSR Act waiting period has expired. Failure to do so is gun jumping. Liability for gun jumping can occur well before closing, and, as this matter demonstrates, the government can come knocking on your door well after closing too. The current civil fine for HSR Act violations is $51,744 per day.
Recent Gun Jumping Enforcement Actions
Antitrust agencies have brought enforcement actions for gun jumping under Section 7A of the HSR Act; the Sherman Act, as amended (which prohibits unreasonably restraint of trade); and the FTC Act, as amended, which prohibits unfair methods of competition in or affecting commerce.
On January 7, 2025, in U.S. Department of Justice v. XCL Resources Holdings LLC et al., the DOJ filed a complaint and the FTC announced a record-breaking settlement for XCL, Verdun, and EP to pay a $5.6 million civil penalty for gun jumping. The complaint alleges XCL, Verdun, and EP violated the mandatory HSR Act waiting period because, according to the DOJ, Verdun exerted control or ownership over EP immediately upon executing the transaction agreement.
According to the complaint, Verdun, under common management as XCL (the buyers), agreed to acquire EP for $1.4 billion on July 26, 2021. The FTC investigated whether the transaction violated the antitrust laws and in March 2022 filed a settlement with the parties to resolve the competitive concerns. As part of the settlement, the parties agreed to divest EP’s Utah assets and business. The HSR waiting period expired in March 2022, permitting the parties to close. Nearly three years after reaching that settlement, the FTC challenged the acquiring entity’s pre-closing control over the target entity. Under the purchase agreement, prior to closing, the buyers halted EP’s production, required EP to submit all expenditures above $250,000 for approval, maintained approval rights over certain development, and coordinated EP’s contract negotiations.
The HSR waiting period, however, required the buyers to wait at least 30 days after giving notice of the transaction before exerting the type of control over EP that the purchase agreement required. The FTC found that control amounted to gun jumping conduct in violation of the HSR Act. According to the complaint, the violations lasted through October 27, 2021, a period of 94 days, at which point the parties amended the purchase agreement to provide for EP’s independent operations, without the buyers’ control over the day-to-day business.
Although gun jumping cases are generally considered rare, on August 5, 2024, in United States v. Legends Hospitality Parent Holdings LLC, the DOJ brought a gun jumping enforcement action against Legends Hospital Parent Holdings LLC (Legends), alleging violations by Legends of the HSR Act when it exercised control over, and acquired beneficial ownership of, its competitor, ASM Global, Inc., during the HSR Act waiting period. According to the proposed final judgment, the DOJ imposed a $3.5 million civil penalty on Legends for this violation.
Next Steps
To comply with the HSR Act waiting period, prior to a transaction closing, the parties must not acquire beneficial ownership of the other party’s equity or assets, or exercise control over such equity or assets, exchange in impermissible joint conduct, or exchange competitively sensitive information. Although gun jumping enforcement actions are rare in the United States, parties to a transaction should exercise caution and consider the below next steps.
- File on an LOI—Consider an HSR filing upon execution of the letter of intent.
- Review Existing Obligations—Examine existing commercial arrangements between the parties and consider discussing interim operating covenants as early as possible.
- Update Clean Team Protocols—Acquiring ultimate parent entities should revisit their form of clean team agreements to ensure such agreements appropriately limit the exchange of competitive information.
- Route Communication Through Clean Team—Parties should clear integration meetings and contact between counterparts by third-party advisors, such as legal counsel, to avoid accidental coordination of competitive actions (or inactions).
- Consider Antitrust Diligence Earlier—Counsel should determine whether the HSR Act applies to the transaction as early as possible. As soon as practically possible, parties should consider potential anticompetitive implications of existing relationships and exerting effective control over a target.
For more information on the case, or on DOJ and FTC antitrust enforcement in general, contact Robin Crauthers.