Don’t Shoot Your Merger in the Foot: What You Need to Know about Gun Jumping under the Hart-Scott-Rodino Act

7 min

Before pulling the trigger on a merger, companies should know that the factors contributing to a successful transaction from a business perspective – advanced planning and integration – may raise the danger of illegal premerger coordination, or “gun jumping,” under the federal antitrust laws. In addition, in negotiating a transaction, the parties often need to share competitively sensitive business information, discuss the allocation of business and legal risk, and negotiate a merger agreement that protects the value of the proposed transaction. Unless structured properly, these activities also may give rise to antitrust liability.

What Is Gun Jumping?

Gun jumping generally refers to exchanges of competitively sensitive information or coordinated business conduct prior to expiration of the mandatory Hart-Scott-Rodino (HSR) Act waiting periods imposed on merging parties. The HSR Act requires parties, prior to merging, to notify the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) for transactions that meet certain statutory thresholds. This HSR filing triggers certain waiting periods during which the agencies review the transaction.

During the HSR waiting periods, the parties may not close the transaction and must remain as independent companies. Thus, a buyer is prohibited from exerting control of a target’s business prior to the expiration of the waiting periods.

Companies may be subject to a maximum civil penalty of $16,000 per day for each day in violation of the HSR Act. In addition, Section 1 of the Sherman Act requires the parties to remain independent and refrain from coordinating their competitive activities. Failure to do so could result in a separate Sherman Act violation.

The DOJ Targets Gun Jumping

In January 2010, pork producers Smithfield Foods and Premium Standard Farms agreed to pay $900,000 to settle claims that Smithfield exercised operational control over Premium Standard in violation of the HSR Act. United States v. Smithfield Foods, Inc. et al., No. 1:10-cv-00120 (D.D.C. Jan. 21, 2010). According to the DOJ, Premium Standard stopped exercising independent business judgment after executing the merger agreement when it sought Smithfield’s consent to engage in ordinary course purchases of hogs from independent hog producers. “Each time Premium Standard sought consent, it provided Smithfield with the proposed contract terms, including the price to be paid, quantity to be purchased, and length of contract.”

The DOJ did not, however, challenge the agreement’s standard business covenants, which prohibited Premium Standard from assuming new debt, issuing new securities or selling assets; required Premium Standard to carry on its business in the ordinary course; and conditioned closing on the absence of any material adverse effect. These covenants protected the value of Premium Standard to Smithfield without harming its independence.

Looking Down a Loaded Barrel: Premerger Coordination

The Smithfield settlement highlights the importance of understanding interim covenants in the transaction agreement and coordinated activities during the HSR waiting periods that raise antitrust concerns. As Assistant Attorney General Christine Varney explained regarding the Smithfield settlement, “[m]erging companies must remain independent in their ordinary business operations, including purchasing decisions, until the end of the premerger waiting period.” As such, until the transaction closes, the parties cannot:

  • Allocate customers or agree that one party will not bid on a job or contract;
  • Require the acquirer’s consent to engage in ordinary business transactions, such as the pricing of goods or selection of customers;
  • Prohibit expansion, construction, capital expenditures, or IP licensing; or
  • Transfer personnel from one party to the other.

Information Exchanges

The Smithfield settlement also underscores that certain types of information should not be exchanged between the parties, either during negotiations of the transaction or during the HSR waiting periods. The antitrust agencies recognize that parties to a potential transaction have a legitimate need to engage in due diligence to determine their respective contributions, identify potential liabilities, and explore the potential benefits of the proposed deal. The agencies will not challenge the exchange of typical due diligence materials, such as information relating to the target’s finances, products, plants, facilities, environmental exposure and litigation risk.

On the other hand, the agencies may challenge the exchange of competitively sensitive information, such as the sharing of Premium Standard’s proposed third-party contracts with Smithfield. Parties to a transaction should avoid exchanging any of the following types of information, which could diminish competition during the course of negotiations or during the HSR waiting periods:

  • Do not share customer-specific data, pricing, or discounting. Providing aggregate customer information usually is permissible.
  • Do not share forward-looking cost or price projections or future market plans or strategies. Past performance and historic information generally are not problematic.
  • Do not share information on present or future bids.
  • Do not discuss altering the competitive landscape, such as discussions about renegotiating contracts with customers to “ease the transition” for the new entity.
  • Limit discussions of valuation to executives who are integral to the negotiations, and who are not responsible for the day-to-day decision-making process.

Additional Guidance from DOJ Enforcement Actions

Other DOJ enforcement actions involving gun jumping illustrate the types of conduct that are problematic and underscore that until the parties to a proposed transaction are lawfully permitted to close the transaction, the two companies must remain as independent competitors.

  • U.S. v. Qualcomm, No. 1:06CV00672 (D.D.C. Apr. 13, 2006). The parties agreed to pay $1.8 million in civil penalties to settle DOJ’s allegations that Qualcomm and Flarion Technologies had violated the HSR Act. The DOJ alleged that Qualcomm required Flarion to seek approval before undertaking business activities such as making new proposals to customers during the HSR waiting period. In addition, Flarion sought and followed QUALCOMM’s guidance before undertaking other routine activities such as hiring consultants and employees. Note: The amount of the penalty was reduced from the maximum because the companies voluntarily reported the existence of the gun jumping problems and took some measures to change their contract and conduct.
  • U.S. v. Gemstar-TV Guide Int’l, Inc., No. 1:03CV00198 (D.D.C., Feb. 6, 2003). The parties agreed to pay $5.67 million in civil penalties to settle DOJ allegations that Gemstar and TV Guide fixed prices and terms, agreed to stop competing, and jointly managed their interactive program guide prior to the close of the HSR waiting period. In addition to the fine, the consent decree prohibited Gemstar-TV Guide from engaging in similar conduct in the future and allowed customers that signed contracts with Gemstar or TV Guide during the pre-merger period an opportunity to rescind those contracts.
  • U.S. v. Computer Associates International, Inc., No. 1:01CV02062 (D.D.C., Apr. 23, 2002). Computer Associates and Platinum Technology agreed to pay $638,000 to settle DOJ allegations that they violated the HSR Act and Section 1 of the Sherman Act when Computer Associates imposed conduct of business provisions on Platinum that prevented it from undertaking certain competitive activities during the HSR waiting period without Computer Associates’ approval, including (1) requiring Platinum to obtain approval before entering into customer contracts; (2) limiting Platinum’s right to discount its products by more than 20 percent or enter into fixed-price contracts and offer certain services without approval; (3) installing a Computer Associates Vice President at Platinum’s headquarters to review customer contracts and other competitively sensitive information about Platinum’s business strategy; and (4) conducting other management-related functions at Platinum.

Preserving the Value of the Transaction for the Buyer

Despite the many restrictions on premerger coordination, the agencies recognize that the parties have a legitimate interest in prohibiting a seller from engaging in extraordinary activities that threaten the value of the proposed merger. In Smithfield, for example, the DOJ did not challenge the standard covenants that prohibited the target from engaging in extraordinary activities. Similarly, in Omnicare v. UnitedHealth Group, No. 06-C-6235 (N.D. Ill. Jan. 16, 2009), the court rejected a private plaintiff’s challenge to a merger agreement that prohibited the target company from entering into contracts outside of the ordinary course of business or valued in excess of $3 million without the acquirer’s consent.

Parties contemplating a transaction should consult with legal counsel to strike the appropriate balance between covenants that promote the parties’ legitimate business interests and those that might restrict the target’s ability to compete in the ordinary course. Standard covenants that pose little antitrust risk include prohibitions on the transformation of corporate structure, changes in accounting methods, the paying of special dividends or compensation, or covenants that prohibit the target from unilaterally committing the buyer to extraordinary investments or expenditures that could materially affect the value of the transaction.


The Smithfield settlement demonstrates that the agencies will not hesitate to challenge gun jumping under the HSR Act. To reduce the risk of a violation, the parties to a transaction should consult with antitrust counsel to develop a strategy that ensures compliance with the antitrust laws while also protecting the parties’ legitimate business interests.

For more information about this case or antitrust issues in general, please contact Lisa Jose Fales at 202-344-4349 ( or Andrew Bigart at 202-344-4323 (