This blog post is a part of Lane & Waterman’s M & A Blog Series.
I remember watching the 100m finals at 2011 IAFF World Championships, which took place in Daegu, South Korea. As the finalists took their places in the blocks, most of the attention was on the favorite, Usain Bolt, a triple world and Olympic champion. As the runners were set, Bolt launched out of the blocks well before the starter’s gun reported, which signals the beginning of the race. A shocked crowd watched in disbelief as Bolt removed his shirt in frustration knowing that he would be disqualified from the race for “jumping the gun.” IAFF Competition Rule 162.7 states, “An athlete, after assuming a full and final set position, shall not commence his start until after receiving the report of the gun. If, in the judgement of the starter or recallers, he does so any earlier, it shall be deemed a false start. Except in combined events, any athlete responsible for a false start shall be disqualified.”
Like runners in a race, attorneys and their clients are also subject to false start rules when it comes to participating in certain M&A transactions. Coincidentally, the term used to refer to a “false start” in an M&A transaction is “gun-jumping.” Generally, gun-jumping refers to unlawful pre-merger coordination or activity between parties to an M&A transaction. U.S. antitrust laws such as the Hart-Scott-Rodino Antitrust Improvements Act, the Sherman Act and the Federal Trade Commission Act require that transacting parties remain separate and independent prior to closing a transaction. Parties to M&A transactions that meet certain thresholds are subject to notice requirements to both the Federal Trade Commission and the U.S. Department of Justice and a waiting period before proceeding with the transaction. Like IAFF Competition Rule 162.7, the notice and waiting period ensure that authorities can review the M&A transaction prior to closing to prevent transactions that could potentially harm competition.
Gun-jumping can arise under variety of pre-closing activities including the sharing of confidential and competitive information, transferring a beneficial ownership of equity or assets, integrating or consolidating operations, exercising control over a party’s assets or business management and operations or engaging in joint conduct like price fixing.
A transfer of beneficial ownership can occur where a party takes possession of the other’s assets including inventory, machinery, equipment or customer and supplier lists, or operates the other party’s facilities before approval or expiration of the waiting period. A transfer can also occur where parties prematurely integrate or consolidate business operations or hold themselves out as having merged prior to closing. Integration and consolidation can occur where parties relocate or integrate physical facilities and plants, sharing employees and management and providing access to the other’s operating systems. Parties to an M&A transaction may conduct some pre-merger activities that would otherwise be prohibited if the activities are provided in the ordinary course of business and pursuant to an arms-length agreement.
Joint conduct can arise where the parties participate in pre-closing integration meetings or share confidential information such as pricing, pricing plans and discounts, customer lists, costs and expenses, product development, internal policies regarding competition, marketing and strategic plans. However, parties may plan for integration provided they do not take any steps to implement the planning. Parties may also freely share publicly available information or competitively sensitive information without gun-jumping as part of due-diligence, if such information is reasonably related to the transaction and is provided pursuant to a non-disclosure agreement that limits the use of such information to the current transaction and prohibits disclosure. It is also advisable to use a third-party intermediary, such as an accounting firm or investment bank, to conduct due-diligence and provide another layer of protection for competitively sensitive information.
Parties that engage in unlawful pre-merger activity are subject to enforcement actions by the Department of Justice and Federal Trade Commission. Enforcement actions can include civil and criminal penalties, monetary fines, injunctive relief, disgorgement of pre-merger profits and even “disqualification” where antitrust authorities may unwind closed transactions. Given the risk associated with an M&A false start, parties to applicable transactions should consult with experienced counsel at the formation stage to asses these risks and determine appropriate action to avoid violations.
Complying with the notice and waiting period requirements and refraining from gun-jumping activities may make parties a little slower out of the blocks, but, starting a race is less important than how you finish it. And no head start is worth the risk of disqualification, particularly when someone else is pulling the trigger.
This article is designed and intended for general information purposes and should not be construed or relied upon as legal advice. Your individual situation will determine what is right for you and you should consult an attorney if specific legal information or advice is desired.
Brett Marshall joined Lane & Waterman in 2012 focusing on corporate and business law. His practice covers the full spectrum of corporate transactions and counseling. Brett routinely provides legal advice and assistance to in-house counsel, boards of directors, committees and executive officers and other management on a wide variety of routine and complex corporate matters, including business formation, reorganization, regulatory compliance, financing and mergers and acquisitions.