A Harsh Reminder About The Danger Of Pre-Closing Activities In M&A Transactions

On November 7, 2014, the Department of Justice (DOJ) required particleboard competitors Flakeboard America Limited (Flakeboard) and SierraPine to pay $5 million in penalties and to institute a ten-year antitrust compliance program because of inappropriate pre-closing conduct.1 DOJ's allegations centered on three things: (1) the parties' discussions and conduct relating to the planned closure of SierraPine's mill in Springfield, Oregon; (2) the movement of customers from the Springfield mill to Flakeboard; and (3) the sharing of SierraPine's customer and pricing information.

The Alleged "Gun Jumping"

The Hart-Scott-Rodino Act of 1976 (HSR Act),2 if applicable, requires that transacting parties obey a mandatory pre-closing waiting period. This waiting period seeks to preserve competition between the parties while the antitrust enforcement agencies review the proposed transaction. If the merging parties prematurely transfer "operational control" of the target, they are subject to a fine of $16,000 for each day they are in violation of the HSR Act. In addition, the Sherman Act prohibits pre-closing coordination between competitors regarding price, output, or other restraints of trade.3 Pre-closing violations of the HSR Act and Sherman Act are known as "gun jumping."

On January 13, 2014, Flakeboard and SierraPine signed an asset purchase agreement (APA) for the acquisition of three SierraPine mills. The APA included a provision that required SierraPine to close its Springfield mill shortly before closing the deal, but after receiving HSR approval. However, an unexpected labor issue at the Springfield mill that arose days after announcing the proposed transaction caused SierraPine to discuss with Flakeboard the implications of the labor issue on the mill's closure. Following that discussion, SierraPine announced the closure of the mill on February 2, eleven days into the HSR waiting period.

Because the mill was closing, the parties decided to refer SierraPine's Springfield mill customers to Flakeboard. To do so, SierraPine shared its customer list, including products and volume purchased by customer, with Flakeboard's sales team and directed its sales employees to notify the Springfield mill's customers that Flakeboard wanted their business and would match SierraPine's prices. Flakeboard requested that SierraPine delay the mill closure announcement until Flakeboard could better position its sales team to contact SierraPine's Springfield mill...