Gun-Jumping Isn’t the Stuff of Legends: DOJ Fines Hospitality Management Company $3.5 Million for Alleged Unlawful Pre-merger Coordination

On August 5, 2024, the Department of Justice (“DOJ”) announced that it filed a civil complaint and proposed settlement with Legends Hospitality Parent Holdings LLC (“Legends”) for unlawful pre-merger coordination, commonly referred to as “gun jumping,” in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”). The DOJ alleged that Legends improperly exercised operational control over an acquisition target by having the target fulfill Legends’ own contractual duties before the HSR waiting period had expired. As a result, the DOJ fined Legends $3.5 million, appointed an outside compliance monitor, and is requiring four years of antitrust training and compliance certification. These conditions are expensive and highlight the importance of undertaking effective measures to prevent any potentially unlawful coordination or control during the HSR waiting period.

The HSR Act prohibits mergers and acquisitions beyond a certain size (the threshold for 2024 is $119.5 million) from closing before the parties observe a waiting period that allows the antitrust agencies, the Federal Trade Commission and the Antitrust Division of the DOJ, to review the deal. For most types of transactions, the waiting period is 30 days, and the waiting period will be extended if one of the agencies initiates an in-depth investigation known as a Second Request. A Second Request tolls the expiration of the waiting period until 30 days following the parties’ compliance with the investigating agency’s requests for additional documents and information. The antitrust laws prohibit the buyer from exercising “control” over the to-be-acquired company or assets prior to the end of the HSR waiting period. Concerns that the merging parties have prematurely transferred beneficial ownership of the target to the buyer can lead to a lengthy investigation (even if the deal has no competition problems) and substantial fines, currently up to $51,744 per day for each day the violation persists.

In November 2023, Legends agreed to acquire ASM Global, Inc. (“ASM”), a company that offers day-to-day venue management services such as event booking, operations, sanitation, and security, for approximately $2.4 billion. The parties submitted their HSR filings for the deal that same month and the DOJ issued a Second Request in January 2024. The HSR waiting period expired on May 29, 2024. In December 2023, shortly after the signing of the acquisition, and during the pendency of the Second Request, Legends, a New York-based venue services company that focuses on food and beverage services, product development, and sales, entered into an agreement with ASM under which ASM would manage a city-owned arena in California for which Legends had won the management contract.

In this case, the DOJ brought a gun-jumping claim against Legends but did not independently challenge the deal based on any potential antitrust harms uncovered during its Second Request investigation. The DOJ alleged that rather than fulfill its duties under the management contract, Legends had ASM continue managing the arena on its behalf during the HSR waiting period. Although not alleged in the complaint, presumably the DOJ theorized that this contract did not reflect arm’s-length terms. The DOJ alleged that this conduct constituted a premature transfer of control and beneficial ownership of ASM by Legends in violation of the HSR Act. The complaint also cites pre-signing conduct where, the DOJ alleges, Legends considered not bidding against ASM for certain venue management opportunities and changing competitive bids (against ASM) to joint bids (with ASM), though it does not appear that DOJ considered these acts, standing alone, to constitute gun-jumping.

The suit serves as a reminder to merging parties that they need to be cautious during the interim period to avoid potential gun-jumping violations. This is especially true when the parties receive a Second Request, which results in a longer interim period and gives the agencies access to the parties’ internal documents and communications. Parties typically can avoid violating the rules by abiding by a handful of guiding principles. For example, it is permissible for parties to proceed with integration planning and discussions of transitions for the future business, so long as parties do not actually begin integrating prior to the deal closing. Prudent companies also should establish safeguards to avoid sharing competitively sensitive information, and may use a clean team to undertake due diligence, planning, or regulatory processes. When in doubt, merging parties should consult experienced antitrust counsel to determine whether any particular action is permissible and that the parties are not unintentionally running afoul of the antitrust laws.

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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.