Duke Jumps the HSR Gun: Gets Slapped With $600,000 Penalty

On January 18, 2017, the Justice Department’s Antitrust Division (“Antitrust Division”) announced a $600,000 civil settlement against Duke Energy for illegal “gun-jumping” violations of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”).

The HSR Act requires that parties to certain acquisitions notify the antitrust enforcement agencies and observe a waiting period before consummating the transaction or transferring beneficial ownership of a business.  Duke Energy prematurely obtained beneficial ownership over a power plant through a tolling agreement before filing its HSR pre-notification form and observing the HSR waiting period.

Background

On August 25, 2014, Duke reached an agreement to acquire the Osprey Energy Center in Florida from Calpine Corporation for $166 million.  On September 30, 2014, the parties executed a tolling agreement, which took effect the next day.  In 2015, months after the tolling agreement was executed, Duke submitted a filing pursuant to the HSR Act concerning its intent to acquire the Osprey plant.  The tolling agreement allowed Duke to assume immediate control over all competitively significant decisions for the Osprey plant, including fuel purchases and hourly energy output, and it allowed Duke to retain the profit (or loss) of Osprey’s operations. 

According to the complaint, “[t]he combination of Duke’s agreement to purchase Osprey and the contemporaneously negotiated and interdependent tolling agreement transferred beneficial ownership of Osprey’s business to Duke before Duke fulfilled its obligations under the HSR Act.”  As a result, the DOJ alleged that “from the moment the tolling agreement went into effect, Osprey ceased to be an independent competitive presence in the market for generating electricity for Florida consumers.”

The DOJ recognized that it is relatively common for firms in the electric power industry to enter into tolling agreements, however, the DOJ alleged that Duke had no separate rationale to enter the Osprey tolling agreement other than “as a bridge to the acquisition of the plant itself” and to make it easier for the parties to obtain FERC approval for the acquisition.

While the DOJ determined that Duke was in clear violation of the HSR Act from the day the tolling agreement became effective on October 1, 2014 until the HSR waiting period was terminated on February 27, 2015, the DOJ let Duke Energy off lightly.  Violations of the HSR Act are subject to fines of up to $40,000 per day, which could have resulted in a fine much higher than Duke’s negotiated settlement.

Lesson Learned

The Antitrust Division’s enforcement action underscores the antitrust agencies’ considerable concern about the transfer of beneficial ownership and control prior to the expiration of the HSR waiting period. The purpose of the HSR Act and the waiting period, in particular, is to give the government notice so that it has an adequate opportunity to investigate proposed mergers and take action before companies actually combine their operations. Accordingly, the buyer must resist from taking control or influencing the business decisions of the target prior to the expiration of the waiting period.

The HSR waiting period keeps the parties separate, thereby preserving their status as independent economic actors during an antitrust investigation.  Consistent with this purpose, an acquiring person may not, after signing a merger agreement, exercise operational or management control of the to-be-acquired person’s business until the waiting period has expired.

This enforcement action underscores the Antitrust Division’s resolve to vigorously scrutinize the conduct of parties to a transaction prior to consummation of the transaction. The DOJ will take action against pre-merger “gun jumping” even where the antitrust review indicates that the underlying acquisition itself will not harm competition.  The rules are clear.  Parties to transactions can easily avoid “gun jumping” violations with appropriate safeguards, controls, and antitrust advice.  In summary, the Antitrust Division’s action against Duke Energy reinforces the message that merging parties should not act as if the merger has already occurred prior to the expiration of the HSR waiting period.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com