Antitrust Update

JUSTICE DEPARTMENT CHALLENGES GUN-JUMPING AND EVASION OF HSR RULES

Under the Hart-Scott-Rodino ("HSR") Antitrust Improvements Act of 1976 ("Act"), transactions which are "HSR-reportable" cannot be closed prior to review by the Department of Justice ("DOJ") or the Federal Trade Commission ("FTC"). Two questions often arise in the HSR context:

(1) What are the limits of permissible coordination between the companies prior to closing?

(2) Under what circumstances can the need for HSR review be triggered by transactions that involve stock acquisitions but fall short of a full merger or acquisition?

Last month, the DOJ's Antitrust Division filed two civil actions which provide guidance on these two questions and ó along with other recent enforcement actions1 ó highlight the importance of paying attention to HSR and other antitrust laws in executing corporate transactions.

GEMSTAR-TV GUIDE AGREES TO PAY RECORD $5.67 MILLION CIVIL PENALTY TO SETTLE "GUN JUMPING" ALLEGATIONS

The antitrust laws place limits on the ability of firms to coordinate prior to closing a merger, joint venture, or similar transaction. It is particularly important that parties that are competitors remain competitors until the deal is closed. According to R. Hewitt Pate, Acting Assistant Attorney General in charge of the DOJ's Antitrust Division:

Merging parties must remain separate and independent until the end of the [HSR] statutory waiting period. A plan to merge in the future does not justify price fixing, customer allocation, or otherwise combining their businesses, while the Justice Department is investigating the competitive effects of the transaction.2

Violations of this principle ó so-called "gun jumping" ó are subject to enforcement actions by the DOJ or FTC under the HSR Act as well as Section 1 of the Sherman Act, and can result in substantial penalties.3 The practical problem for firms contemplating transactions is that identifying conduct that crosses the line is not always easy. Essential pre-closing activities that inherently require coordination present especially delicate issues. How can parties evaluate the benefits of a deal without exchanging competitively sensitive information? And how can a firm be assured, without being accused of assuming control of its rival's business, that the firm that it seeks to acquire will not impair its assets prior to a transaction's consummation?

A recent DOJ enforcement action should help firms better to identify the danger areas. On February 6, 2003, DOJ announced a settlement with Gemstar-TV Guide International Inc., requiring the company to pay a record $5.67 million civil penalty and to agree to certain restrictions in connection with certain future transactions.4 Prior to a July 2000 merger, Gemstar and TV Guide competed in offering interactive program guides for digital cable services. The DOJ Complaint alleges that, while negotiating a joint venture during this period, the companies illegally limited competition in numerous ways in violation of both the HSR Act and the Sherman Act, Section 1. Among other things, the parties allegedly allocated customers, fixed prices, and agreed to "slow roll" contracts to major customers. Further, the Complaint alleged, TV Guide submitted for Gemstar's review and approval numerous customer contracts, characterized by DOJ as an illegal premerger assumption of control by Gemstar over TV Guide.

The $5.67 million penalty DOJ extracted ó based on the maximum penalty of $11,000 per day under the HSR statute ó confirms that pre-closing coordination of previously competitive activities presents significant antitrust risk. Indeed, DOJ brought a similar action last year against Computer Associates for assuming control of a competitor's sales practices and accessing its competitively sensitive information after the parties had entered into an acquisition agreement, but before the HSR waiting period had expired.5

While the amount of the penalty imposed on Gemstar-TV Guide was substantial, the consent decree may be of even greater significance to corporate counselors...

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