On January 21, 2010, the U.S. Department of Justice, Antitrust Division ("DOJ") announced that it had settled an action against Smithfield Foods, Inc. ("Smithfield") and Premium Standard Farms, LLC ("Premium Standard") for an alleged violation of the premerger waiting period requirements of the Hart-Scott-Rodino Act ("HSR Act"). The DOJ claimed that Smithfield's exercise of its rights in a merger agreement with Premium Standard to review and consent to what the DOJ considered to be ordinary course contracts to be entered into by Premium Standard was illegal premerger coordination in violation of the HSR Act. The parties agreed, jointly and severally, to pay a $900,000 fine.
The HSR Act requires that parties to a proposed merger that meet certain thresholds file premerger notification with the DOJ and the U.S. Federal Trade Commission, and observe a waiting period, prior to consummating the transaction. Merging parties can violate the HSR Act when the acquiring party "jumps the gun" by taking steps which have the effect of transferring beneficial ownership of the target business prior to the expiration (or early termination) of the waiting period.
The DOJ's Allegations
According to the DOJ complaint, Smithfield, "the largest pork packer and processor and the largest hog producer in the United States," agreed in September 2006 to acquire Premium Standard, "the sixth-largest pork packer and processor . . . and the second-largest hog producer in the United States," for a total purchase price of approximately $810 million. Premerger notification was originally filed in October 2006, followed by a "second request" from the DOJ for further information. The DOJ's investigation of the transaction focused on the procurement of hogs from independent hog suppliers. The HSR waiting period expired on March 7, 2007.
The complaint alleged that, beginning on September 20, 2006, Premium Standard submitted to Smithfield, for its review and consent, each of the three multi-year purchase contracts for hog purchases from an independent hog producer which arose during the waiting period. One of the contracts accounted for less than one percent of Premium Standard's slaughter capacity.
Together, the three contracts obligated Premium Standard to purchase, on an annual basis, between 400,000 and 475,000 hogs at a total cost ranging from approximately $57 million to $67 million.
The complaint alleged that these contracts were "necessary to Premium Standard's ongoing business and entered into in the ordinary course." As a result of exercising consent rights to those contracts, the DOJ asserted, Smithfield obtained operational control, and thus beneficial ownership, of that portion of Premium Standard's business, prior to expiration of the HSR waiting period.
The DOJ did not find issue with "customary interim conduct of business" provisions which "protect[ed] Smithfield's legitimate interests in maintaining Premium Standard's value without impairing [its] independence." These included provisions regarding "rights to assume new debt or financing, issue new voting securities and sell assets, as well as requirements that Premium Standard carry on its business in the ordinary course consistent with past practice."
This case is important for several reasons:
- Many transactions include interim operating covenants that limit a target's ability to enter into "material" contracts without the consent of the acquirer. Though the three contracts at issue were considered "ordinary course" by the DOJ, they were all long-term commitments extending substantially beyond the anticipated closing date. Parties should exercise care in defining "material" when considering whether and how to seek consent rights over material contracts.
- The parties were direct competitors throughout the United States, but nothing in the complaint suggested that the conduct at issue violates antitrust law only when the parties to the transaction are competitors. Parties should be careful to avoid restricting the ability of the target business to operate in the ordinary course during the HSR waiting period, regardless of whether they are competitors.
- The complaint in this action was filed almost three years after the applicable HSR waiting period expired. Parties should be aware that substantive merger review of a transaction does not preclude a later complaint for an HSR Act "gunjumping" violation, even when the antitrust regulators close an investigation and allow the transaction to proceed.
The DOJ alleged that the parties were in continuous violation of the HSR Act from September 20, 2006, the date on which Premium Standard first submitted its contracts to Smithfield for review and consent, through March 7, 2007, the expiration date of the applicable HSR waiting period. The maximum fine for the alleged violation, under the HSR Act, would have been approximately $1.8 million, twice the settlement amount.
The DOJ's press release can be found here and links to the papers filed in the action can be found here.