FTC Publishes Annual Merger Notification Jurisdictional Threshold and Filing Fee Adjustments
On January 10, 2025, the Federal Trade Commission (FTC) released increased jurisdictional thresholds, filing fee thresholds, and filing fee amounts for merger notifications made pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).
Merger Notification Threshold Changes
The HSR premerger notification regime requires transacting parties to notify the FTC and US Department of Justice (DOJ) of their intent to consummate a transaction that meets or exceeds certain jurisdictional thresholds, unless an exemption applies. The adjusted thresholds apply to all transactions that close on or after the effective date, which will be 30 days after the notice is published in the Federal Register.
The HSR thresholds are adjusted annually based on gross national product (GNP). The threshold changes are as follows:
The base statutory size-of-transaction threshold, the lowest threshold requiring notification, will increase to $126.4 million.
The upper statutory size-of-transaction test, requiring notification for all transactions that exceed the threshold (regardless of the size-of-person test being satisfied), will increase to $505.8 million.
The statutory size-of-person lower and upper thresholds (which will apply to deals valued above $126.4 million but not above $505.8 million) will increase to $25.3 million and $252.9 million, respectively.
HSR Filing Fee Changes
The FTC is also required to update filing fee thresholds and amounts on an annual basis. Filing fee thresholds are adjusted based on the percentage change in GNP and filing fee amounts are adjusted based on the percentage change in the Consumer Price Index. These changes will also take effect 30 days after publication of the notice in the Federal Register.
The adjusted filing fee thresholds and fee amounts are provided in the table below.
Beating Bump-Up Exclusions: Policyholder Prevails In Coverage for Settlement of M&A Shareholder Lawsuit
A Delaware court recently refused to enforce a directors and officers liability policy’s “bump-up” exclusion to a $28 million class action settlement, finding that the company’s insurers unjustifiably denied coverage. The decision, which is one of several recent bump-up D&O coverage disputes, provides valuable insights for corporate policyholders seeking coverage for M&A-related claims and settlements with shareholders.
Background
In connection with the sale of Harman International in 2017, a class of Harman stockholders filed a securities class action lawsuit alleging that disclosures made in connection with the sale were misleading and violated Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934 (the “Baum action”). The Baum action was settled for $28 million. When Harman’s D&O liability insurers denied coverage under the policies’ so-called “bump-up” exclusion, the company sued for breach of contract and sought a declaratory judgment that the settlement was covered in full by the policies.
Bump-up exclusions are frequently found in D&O insurance policies. While the wording varies among policies, bump-up provisions bar coverage for settlements or judgments in deal-related litigation where the “loss” constitutes an increase (i.e., a bump-up) in the purchase price of the company. While insurers may agree to defend insureds against alleged wrongful acts in negotiating or approving the deal, they will not effectively fund the purchase price of the acquired company.
In the Harman transaction, the insurers rejected the claim by invoking the bump-up exclusion, which barred coverage for all claims alleging that the price “paid for the acquisition . . . of all or substantially all of the ownership interest in or assets of an entity is inadequate” and where the loss “represent[s] the amount by which such price or consideration is effectively increased.” Because the Baum action demanded the difference in price the shareholders received and the true value at the time of the acquisition, the insurers argued the settlement was excluded from coverage.
The Court’s Analysis
In a January 3 opinion, the Delaware Superior Court agreed with Harman and held that the insurers had wrongfully denied coverage for the settlement. In deciding that the bump-up exclusion did not apply, the court focused on three elements of the exclusion: (1) whether the settlement related to an underlying “acquisition”; (2) whether “inadequate deal price” was a viable remedy sought in the underlying litigation; and (3) whether the settlement represented an effective increase in transaction consideration. The insurers carried the burden to show that all elements were satisfied.
The Nature of the Transaction. The parties disagreed on whether the transaction, which was structured as a reverse triangle merger, was an “acquisition” potentially within the bump-up provision.
The court determined that the Harman transaction was an “acquisition” because, among other reasons, the transaction resulted in the buyer owning 100% of Harman, which was in effect an acquisition. Other factors, like Harman’s post-transaction legal status and cancellation of Harman’s shares, also supported Harmon being acquired. Finally, the court pointed to Harman’s own Form 8-K filed with the Securities and Exchange Commission, which described the transaction as an “acquisition.” The court found that these factors, taken together, made the transaction an “acquisition” as such term was used in the bump-up exclusion.
The Viability of Alleged Damages. Harman contended that the settlement could not constitute an increase in inadequate deal consideration because a Section 14(a) claim can’t be used to obtain damages for inadequate consideration. The insurers disagreed, contending that the settlement had to represent an increase in deal price because the Baum complaint expressly sought damages equal to the difference between Harman’s true value and the price paid to the shareholders when the transaction closed.
The court acknowledged that the Baum action alleged inadequate consideration, but the court emphasized that damages for an undervalued deal were not a viable remedy under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Rather, the court said those claims focus on the accuracy of the proxy statement’s disclosures and did not raise any claims authorizing the court to remedy an inadequate deal price.
The Purpose of the Settlement. Lastly, the court examined the settlement and concluded it did not represent an increase in the deal price. The insurers contended that the settlement resulted in an increase in consideration because the settlement amount was based in part on the alleged fair value of Harman stock compared to what Harman shareholders actually received.
Harman argued that the settlement represented only the value of legal expenses that it avoided by not litigating. The court looked no further than the agreement itself, which denied liability and stated the sole purpose of the settlement was to avoid litigation. The $28 million settlement price closely resembled the estimated legal fees and was not in line with the potential increased deal consideration, which the court estimated would be over $279 million. Therefore, the court concluded that the Baum settlement did not constitute an adjustment of the consideration offered to Harman’s stockholders to complete the acquisition.
Discussion
The Harman decision has several takeaways for policyholders.
Deals Driving D&O Disputes. As insurers continue to test the limits of these exclusions, bump-up disputes continue to make headlines and drive high-value, contentious coverage litigation for deal-related D&O claims. The Harman decision is the latest example of judges grappling with enforcement of bump-up language in different scenarios, including other cases in Delaware, which have had varying outcomes for policyholders.
The recent win is significant, especially for policyholders incorporated in Delaware that may be more inclined to pursue coverage litigation in the First State where the Delaware Supreme Court has stated that Delaware law should apply to disputes over D&O policies sold to Delaware companies.
Insurers Have High Burdens. The decision reinforces the difficult burden that insurers should face in proving that a loss fits within a bump-up exclusion, especially in the context of a settlement rather than judicial decision on the merits. The court resolved the dispute through the “norm” that a bump-up exclusion is “construed narrowly” and that any ambiguity must be interpreted in favor of coverage. And a bump-up provision should apply only “if the settlement clearly declares that its purpose is to remedy inadequate consideration given in an acquisition.” While the Harman court felt that this standard was “beyond debate,” not all courts interpreting similar exclusionary provisions have been so clear in holding insurers to this burden, so it will surely be a welcome reminder for policyholders assessing deal-related D&O claims.
Allegations, Even of Inadequate Consideration, Are Not Dispositive. The insurers cited allegations of an “undervalued” acquisition resulting in damages calculated as “the difference between the price Harman shareholders received and Harman’s true value at the time of the Acquisition.” But the court more closely followed the language of the bump-up exclusion. The provision required not just that plaintiffs alleged inadequate consideration in the deal but that the loss “represent” an effective increase in consideration. The court only looked to the complaint to assess whether inadequate consideration was a viable remedy under the theories of liability alleged. Because cured inadequate deal price wasn’t available for Section 14(a) and Section 20(a) securities claims, the plaintiff’s “bare request” for relief for inadequate price was not enough. This will be welcome to policyholders because stockholder-plaintiffs routinely assert a variety of theories and purported damages in M&A litigation which should not necessarily dictate the nature of the settlement.
Consider Insurance Early and Often. The decision provides a roadmap of key issues for policyholders to consider when thinking about potential coverage in deal-related litigation. It starts with the structure of the deal itself, which here was a reverse triangular merger that Harman argued did not fit within the exclusion’s applicability to “acquisitions.” While the court did not accept that position, it pointed to a statement in Harman’s Form 8-K calling the deal an “acquisition” to suggest that the company in some sense understood it to be an acquisition.
More importantly, the court emphasized two aspects of the settlement agreement itself in determining the nature of the settlement: an express denial by the policyholder of any wrongdoing or liability; and statements that the reason for the settlement was “solely” to avoid protracted and expensive litigation and that it would be “beneficial to avoid costs, uncertainty, and risks” inherent in such litigation. This was not necessarily dispositive to the case. Given the lack of evidence from the insurers that might show the settlement was an effective increase in merger consideration, it may not have mattered if the settlement agreement read differently. But when faced with evidence that the settlement represented the estimated litigation costs, the court declined to speculate and rejected the insurers’ bump-up defense.
Conclusion
The Harman decision shows the continued importance of bump-up exclusions and how they can lead to coverage disputes in deal-related litigation. Policyholders need to understand whether their D&O policy has problematic exclusionary language and, if so, whether to address it before pursuing an M&A transaction. The decision also provides guidance for settlement strategies that may maximize coverage.
FTC Imposes Record Fine on Oil Companies for Illegal Pre-Merger Conduct
On January, 7, 2025, the Federal Trade Commission (FTC) announced that crude oil producers XCL Resources Holdings, LLC (XCL), Verdun Oil Company II LLC (Verdun) and EP Energy LLC (EP) collectively will pay a $5.68 million civil penalty to resolve allegations they engaged in illegal pre-merger coordination, also known as “gun jumping,” in violation of the Hart-Scott-Rodino Act (HSR Act). This is the largest fine ever imposed for a gun jumping violation in US history.
The HSR Act requires merging parties to report transactions over certain size thresholds to the FTC and Department of Justice so that those agencies can conduct an antitrust review before closing. The agencies typically have 30 days after a transaction has been reported, which is known as the HSR waiting period, to conduct their initial assessment. The investigating agency can extend that waiting period by issuing a “second request” demand for additional information should they deem the transaction needs more in-depth review. During the HSR waiting period, the acquiror is prohibited from taking ownership or control over the target business. Such gun jumping is punishable by a civil penalty of up to $51,744 per day (the maximum penalty is adjusted annually).
On July 26, 2021, Verdun and XCL entered into a $1.45 billion agreement to acquire EP that triggered the HSR Act’s notification and waiting period requirements. During the initial 30-day HSR review period, the FTC’s investigation identified significant competitive concerns about the transaction, including that it would have eliminated head-to-head competition between two of only four significant energy producers in Utah’s Uinta Basin and would have harmed competition for the sale of Uinta Basin waxy crude oil to Salt Lake City refiners. To resolve those concerns, on March 25, 2022, the FTC entered into a consent agreement with XCL, Verdun and EP that required the divestiture of EP’s entire business and assets in Utah.
According to the FTC’s complaint, instead of observing the waiting period requirement, XCL and Verdun “jumped the gun” and assumed operational and decision-making control over significant aspects of EP’s day-to-day business operations immediately upon signing the purchase agreement. Per the complaint, the parties’ unlawful gun jumping activities during the interim period that were memorialized in the purchase agreement included:
Granting XCL and Verdun approval rights over EP’s ongoing and planned crude oil development and production activities. XCL immediately took advantage of these rights and ordered a stop to EP’s new well-drilling activities, resulting in a crude oil supply shortage for EP when the US market was facing significant supply shortages and multiyear highs in oil prices.
Providing that XCL and Verdun would bear all financial risk and liabilities associated with EP’s anticipated supply shortages, which resulted in XCL and EP working in concert to satisfy EP’s customers supply commitments, and EP employees reporting to their XCL counterparts with details on supply volumes and pricing terms. XCL engaged directly with EP’s customers and held itself out as coordinating EP’s supply and deliveries in the Uinta Basin.
Requiring EP to submit all expenditures above $250,000 to XCL or Verdun for approval. As a result, buyer approval was required before EP could perform a range of ordinary-course activities needed to conduct its business, such as purchasing supplies for its drilling operations and entering or extending contracts for drilling rigs.
Permitting XCL and Verdun to order EP to change certain ordinary-course business operations, including its well-drilling designs and leasing and renewal activities.
Allowing Verdun to review and coordinate with EP regarding prices for EP’s customers in the Eagle Ford region of Texas, with Verdun directing EP to raise prices in the next contracting period.
Providing XCL and Verdun with almost-unfettered access to EP’s competitively sensitive business information, including EP’s site design plans, customer contract and pricing information, and daily production and supply reports.
As stated in the FTC’s complaint, the waiting period obligation for this transaction began on July 26, 2021, the date the parties executed their purchase agreement. On October 27, 2021, during the course of the FTC’s investigation, XCL, Verdun and EP executed an amendment to the purchase agreement that allowed EP to resume operating independently and in the ordinary course of business, without XCL’s or Verdun’s control over its day-to-day operations, thereby ending the illegal gun jumping conduct. Thus, XCL, Verdun and EP were in violation of the HSR Act for 94 days.
This case is noteworthy not only for the magnitude of the penalty imposed on the transaction parties, but also because the violation arose both from provisions in the purchase agreement itself, as well as the parties’ conduct after they executed the purchase agreement. It serves as an important reminder that merging businesses in HSR-reportable transactions must maintain independent operations at least until expiration of the HSR waiting period and in some cases until closing (similar obligations can also apply to M&A transactions involving competitors even in non HSR-reportable deals). This independence must be reflected in both the transaction documents and the actions of the parties. Antitrust counsel can assist with drafting appropriate conduct of business covenants in the purchase agreement and properly navigating integration planning and preclosing coordination during the interim period between sign and close.