The Federal Trade Commission (FTC) has imposed a record-breaking $5.6 million fine on XCL Resource Holdings, LLC (XCL), Verdun Oil Company II LLC (Verdun), and EP Energy LLC (EP) to settle allegations that they engaged in unlawful gun-jumping in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). The enforcement action, which was filed in federal court by the U.S. Department of Justice (DOJ) on January 7, 2025, is a strong reminder that merging parties must continue to operate as independent companies until the HSR waiting period has expired.

Pursuant to a Membership Interest Purchase Agreement (Purchase Agreement) dated July 26, 2021, Verdun, which is under common management with XCL, agreed to acquire EP, a company engaged in crude oil production, for approximately $1.4 billion. After the parties submitted their HSR filings, the FTC commenced an investigation into whether the transaction would lessen competition for the development, production, and sale of crude oil in Uinta Basin, Utah. After a months-long investigation, the FTC ultimately accepted a consent decree requiring the parties to divest EP’s Utah operations and terminated the HSR waiting period on March 25, 2022.

Alleged HSR Violations

The complaint alleges that, during the pendency of the FTC’s investigation and prior to the FTC terminating the HSR waiting period, the parties violated the HSR Act by engaging in conduct pursuant to the Purchase Agreement that effectively transferred beneficial ownership of EP to Verdun. Although the parties had not officially closed the transaction, the complaint asserts that Verdun’s and XCL’s control over key aspects of EP’s business before the expiration of the HSR waiting period meant that Verdun and XCL acquired and held EP’s assets within the meaning of Section 7A of the Clayton Act. Taken at face value, the allegations do not break new ground or expand the category of conduct understood to constitute gun-jumping. For example, the complaint states that during the period before the HSR waiting period expired:

• As required by the Purchase Agreement, EP sought approval from XCL or Verdun prior to making expenditures above $250,000, an amount which the complaint states is a relatively low threshold given the capital-intensive nature of crude development and production operations, without an exception for ordinary course transactions. The complaint alleges that, in practice, EP also sought approval for expenditures below the $250,000 threshold.
• As contemplated by the Purchase Agreement, which prohibited EP from conducting operations relating to crude oil wells under development without approval from Verdun or XCL, XCL required EP to stop its ordinary course well-completion activities in Utah, contributing to a shortage in EP’s ability to meet its supply commitments.
• The parties agreed to complete certain of EP’s well projects as a combined team, with XCL employees actively supervising EP employees.
• XCL directed EP on the fulfillment of EP’s supply commitments to customers and XCL covered volume shortages under EP’s customer agreements that resulted from EP halting its well-completion activities in Utah. Further, XCL and Verdun agreed to cover all financial risk and liabilities associated with these shortages.
• XCL engaged directly with EP’s customers such that EP’s customers contacted XCL directly about EP’s volume projections and delivery schedules.
• EP obtained XCL’s approval before engaging in other ordinary course activities, such as hiring field-level employees, changing EP’s well-drilling and site design plans and the selection of vendors.
• EP and Verdun coordinated on pricing and contract terms for EP’s customers.
• XCL and Verdun obtained competitively sensitive information from EP without a legitimate business purpose, including obtaining daily and weekly reporting on EP’s operations, as well as ad hoc updates about customers, contracts, projections, and development plans.
• The parties did not have adequate safeguards surrounding the exchange of competitively sensitive information during due diligence.

Key Takeaways

The enforcement action presents important reminders about best practices that parties should follow in drafting purchase agreements and during the pendency of the HSR waiting period.

1. Parties must continue to operate as separate entities until the HSR waiting period has expired or been terminated. Parties can conduct integration planning but should not implement plans or coordinate activities until after closing. In particular, buyers should not agree to take on financial risk or liabilities for sellers prior to closing. Further, buyers should take care before talking directly with sellers’ customers prior to closing (and should seek legal counsel before doing so) as such communications can lead to significant gun-jumping risk.

2. Parties cannot jointly set prices, allocate customers, coordinate on output, or agree to discontinue products or services pre-close. Until the transaction has closed, the parties must act as independent competitors in the marketplace. Sellers should not stop their ordinary course business activities or take direction from buyers on how to approach the market.

3. Parties must implement safeguards before sharing competitively sensitive information. To maintain compliance with antitrust laws, parties should work with counsel to manage the exchange of competitively sensitive information through the use of a clean team during due diligence and through the entirety of the pre-close period.

4. Parties must carefully negotiate interim operating covenants for all transaction agreements. Ordinary course of business covenants are reviewed by the antitrust agencies during the initial HSR process for all transactions that require an HSR filing, not just for transactions that result in a Second Request. Parties should carefully review covenants to ensure they do not prevent the parties to the transaction from engaging in ordinary course business activities without prior approval of the other party. In cases where the buyer’s consent is required for the target to enter into contracts that are outside the ordinary course of business, it is important to have guardrails that appropriately limit the exchange of competitively sensitive information between the parties when necessary to maintain compliance with antitrust laws. (For example, it may not be necessary to restrict the exchange of competitively sensitive information if the transaction involves a private equity buyer without competitive overlap or vertical issues.) Approval of non-ordinary course contracts should also be limited to “yes or no” consent rather than the buyer directing the target to include particular terms in the contract. Additionally, parties should work closely with counsel to ensure that covenants requiring the other party’s approval for expenditures above a certain monetary threshold are appropriate to the party’s business operations or contain a carve out for ordinary course activities.

5. Penalties for noncompliance are substantial. Civil penalties under the HSR Act are levied per person, per day for each day the parties are in violation. Under the terms of the settlement, each of EP and XCL/Verdun will pay $2.8 million in civil penalties. The complaint states the parties were in violation of the HSR Act for 94 days, from the date of signing the Purchase Agreement to the date the parties amended the Purchase Agreement to allow EP to resume well-development activities without XCL’s or Verdun’s consent. This equates to civil penalties of over $30,200 per day for each party. The current maximum for civil penalties is $51,744 per person per day.

6. Agencies can enforce violations long after the deal is finalized. Although the parties’ HSR waiting period ended in March 2022, the enforcement action was entered in January 2025, over three years after the alleged misconduct occurred.

If you have any questions about antitrust guidelines during the HSR filing and waiting process, please feel free to contact Jamillia Ferris, Kim Biagioli, Matthew McDonald, Michelle Yost Hale, Brendan Coffman, Maureen Ohlhausen, Beau Buffier, Ben Labow, or another member of the antitrust and competition practice at Wilson Sonsini Goodrich & Rosati.