The importance of acquiring companies refraining from the exercise of control over target companies before the government has completed its mandatory review pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) was reinforced recently by a Department of Justice’s Antitrust Division complaint filed against Smithfield Foods, Inc.
On January 21, 2010, the Antitrust Division alleged that Smithfield violated the HSR waiting period requirements during its 2007 merger with Premium Standard Farms, LLC. United States v. Smithfield Foods, Inc., No. 1:10-cv-00120 (D.D.C. Jan. 21, 2010). Smithfield entered into a consent decree, which was filed simultaneously with the complaint, and agreed to pay a fine of $900,000 to settle the case.
The HSR Act requires parties to transactions that meet certain monetary thresholds to notify both the Antitrust Division and the Federal Trade Commission of the transaction and to observe a waiting period — usually 30 days — before closing the transaction. The 30-day waiting period provides the antitrust agencies time to evaluate the competitive effects of a transaction before the parties combine their operations and potentially change the competitive dynamics of the marketplace. The HSR Act not only prohibits the parties from combining their operations during the waiting period, but also prohibits the parties from exercising control over each other. Violations of the HSR waiting period are known as “gun jumping” and can result in fines of up to $11,000 per day.
According to the complaint, Smithfield, the country’s largest pork packer, entered into an agreement on September 17, 2006, to acquire Premium Standard, a competing pork packer. The parties filed HSR Notification and Report Forms on October 6, 2006, with the Antitrust Division and FTC. The Antitrust Division undertook an extensive investigation of the merger and extended the waiting period by issuing a request for additional information (a “Second Request”) on November 6, 2006. The Antitrust Division eventually closed its investigation without taking any action. The HSR waiting period expired on March 7, 2007, and the parties completed the transaction on May 7, 2007.
As is typical in a transaction of this kind, the Smithfield-Premium Standard merger agreement contained a customary “conduct of business” clause. This clause limited Premium Standard’s ability, among other things, to assume new debt, issue voting securities and sell assets, and also required Premium Standard to conduct its business “consistent with past practices.” In its complaint, the Antitrust Division did not object to these provisions: referring to “Smithfield’s legitimate interest in maintaining Premium Standard’s value without impairing Premium Standard’s independence.”
The Antitrust Division did object, however, to the way in which Premium Standard prematurely ceded control of its hog procuring operations to Smithfield. The Antitrust Division alleged that as early as September 20, 2006, Premium Standard began submitting for Smithfield’s consent contracts for the purchase of hogs from independent hog producers. In all, there were three contracts that arose prior to the expiration of the HSR waiting period. These multi-year contracts were for the purchase of up to 475,000 hogs per year at a cost of between $57 million and $67 million. In each instance, Premium Standard provided Smithfield with the terms of the contracts, including the “price to be paid, quantity to be purchased, and length of the contract.”
Smithfield, the complaint stated, “exercised operational control over a significant segment of Premium Standard’s business prior to the expiration” of the HSR waiting period. It had, in effect, acquired “beneficial ownership” of that part of Premium Standard’s business, and “thus acquired and held those assets” in violation of the HSR Act. Hog procurement was a sensitive area of the business because the Antitrust Division was investigating the effect the transaction would have on competition for the purchase of hogs.
There are several important points to be learned from this case concerning how parties to a merger or acquisition conduct their businesses during an HSR review:
The complaint and proposed final judgment can be found at
For more information about the matters raised in this Client Alert, please contact at +1 202 263 3201 or at +1 212 506 2530.
Learn more about Mayer Brown’s Antitrust & Competition practice.
You have no pages selected. Please select pages to email then resubmit.