Under the Securities and Exchange Act of 1933, after a company goes through an Initial Public Offering (IPO) registration with the Securities and Exchange Commission, there is a “quiet period” for at least 25 days afterward. In this period, the company cannot release any information to its underwriters that were not already available through usual corporate communications and the prospectus.
The act of “gun-jumping” occurs when a company releases information to the public that goes beyond the usual advertising and earnings announcements.
What Kind of Conduct Qualifies as Gun-Jumping?
A merger that amounts to price-fixing would be the most obvious example of gun-jumping by merging companies. If the companies coordinate prices for products offered to customers or plan any type of customer allocation before the merger deal has closed, this would be gun-jumping and a violation of federal law.
While there have been no cases in which acts of companies were qualified as gun-jumping by a federal judge, there have been settlements between companies and the Department of Justice for conduct the DOJ qualified as gun-jumping.
Some types of conduct that the DOJ has seen as gun-jumping are:
- Moving the actual locations of operations of one company to the other companies’ facilities
- One company controlling the pricing of the products of the other company
- One company trying to settle disputes between a union and the other company
- The merging companies agreeing to shut down competing operations
Are “Gun-Jumping” Prohibitions Still Enforced by the SEC?
Many critics of the “gun-jumping” prohibition contend that the law is outdated due to today’s technology, which allows virtually any source to instantly communicate with the public.
Journalists and investor analysts are likely to discuss an IPO during the company’s quiet period, and either through these sources or through the company’s need to rebuke those sources, information will probably be released to the public that goes beyond the limited information provided by the prospectus.
Recent examples, such as Salesforce.com’s indefinite delay of its IPO, illustrate that the SEC still takes gun-jumping violations seriously and will enforce laws against it.
During a New York Times interview, the CEO, Marc Benioff, allowed a journalist to spend the day with him. This was considered “gun-jumping” by the SEC since it invited the publication of lengthy articles that detailed information beyond the prospectus. Salesforce.com has been threatened with having to buy back all of its shares released to the public by the SEC.
What Is “Gun-Jumping” When Two Companies Merge?
A merger occurs when two or more companies merge together to form a new company. Usually, it involves one company acquiring its competitor. During this period, the companies involved in the deal must still act as competitors until the merger has been closed. In other words, the companies cannot start strategizing together while the merger deal is still being negotiated. In order to act like a single company, it must be legally incorporated.
“Gun-jumping” occurs when the two companies start strategizing together and no longer act as competitors before the merger has been completed. This is considered a violation of the Sherman Antitrust Act and the Hart-Scott-Rodino Act, and the companies who engage in such conduct can be subject to civil penalties and perhaps even criminal antitrust enforcement by the U.S. Department of Justice and the Federal Trade Commission.
The Three Main Federal Antitrust Acts
There are three main bodies of law that comprise federal antitrust law. The Antitrust Division of the Justice Department and the Federal Trade Commission enforce these three federal acts. Most states also have their own antitrust laws, which are enforced by the states themselves. Various laws allow private parties to file lawsuits alleging anti-competitive business practices as part of the enforcement of antitrust laws.
Federal antitrust law is composed of three main acts:
- Sherman Antitrust Act of 1890: The Sherman Act prohibits contracts and conspiracies that restrain trade and promote monopolization. Examples of conduct that the Sherman Antitrust Act outlaws are agreements among competitors to fix prices, rig bids, and allocate customers between or among them.
- These acts can be punished as criminal felonies. Courts may impose fines on those convicted or even prison terms. In addition, courts may issue orders restraining future violations. The Antitrust Division of the Justice Department mostly enforces the provisions of the Sherman Act;
- Clayton Act of 1914: The Clayton Act deals with specific types of illegal restraints, including exclusive dealing arrangements, tie-in sales, price discrimination, mergers and acquisitions, and interlocking directorates. Violations of the Clayton Act lead to civil penalties only. The Clayton Act is enforced jointly by both the Antitrust Division of the Department of Justice and the Federal Trade Commission. The act also authorizes lawsuits by private parties in federal court for damages and to prohibit future violations;
- Federal Trade Commission Act: The Federal Trade Commission Act is enforced solely by the Federal Trade Commission (FTC). This act is viewed as a catch-all set of laws constructed to include all the prohibitions of the other antitrust laws. In addition, there are provisions that close loopholes in the other, more explicit regulatory statutes.
What Do State Antitrust Laws Do?
There are antitrust laws in many states. Generally, they are similar to federal antitrust laws, allowing private parties to sue companies that engage in anti-competitive behavior.
Even though state and federal antitrust laws are conceptually similar, their exact provisions vary widely. Some state antitrust laws follow the language of federal laws substantially. Certain sections of federal antitrust laws are incorporated into state law in other states. Some of them may define specific types of prohibited acts, while others may cover entirely new topics.
When it comes to the kinds of conduct that are prohibited, state antitrust laws often cover more ground than federal antitrust laws. State courts often interpret federal antitrust laws in accordance with state antitrust laws, but not always.
Some examples of state antitrust laws are as follows:
- The California Cartwright Act: This is the primary antitrust law in California. It prohibits a variety of anti-competitive actions by companies operating in California. The Cartwright Act prohibits any agreements among competitors to restrain trade, fix prices or production, or reduce competition. Private parties are authorized to file lawsuits claiming violations of the Cartwright Act. The private parties who initiate Cartwright Act lawsuits are generally competitors who claim unfair competition. Or they could be consumers who allege that price fixing or restraints on trade have increased the prices they have paid for products and services. Among the prohibited activities are:
- Price Fixing: When competitors agree to buy or sell products, services, or commodities at the same fixed price or rate, they have committed price fixing;
- Group Boycotting: Group boycotting happens when competitors agree to boycott a certain entity;
- Market Division Scheme: A market division scheme is an agreement between or among competitors to divide markets, products, customers, or territories amongst themselves rather than allowing customers to make choices about the business they wish to patronize;
- Exclusive Dealing: Exclusive dealing involves requiring a buyer to buy all of a certain product from a single supplier or a seller to sell all of a certain product in its inventory to a single buyer;
- Price Discrimination: Price discrimination involves selling the same or similar goods to different buyers at different prices. The point is usually to drive one of them out of business in order to give an advantage to another;
- Tying: Tying comprises selling a product or service on the condition that the buyer also agrees to buy another product or service offered by the business;
- California Unfair Practices Act: The California Unfair Practices Act (CUPA) prohibits illegal price discrimination in California. The act authorizes private parties to file lawsuits against companies that engage in prohibited practices. The CUPA prohibits price discrimination where the practice intends to lessen competition. Those acts that represent efforts to compete legitimately with competitors are not prohibited. Prohibited activities include the following:
- Selective Payment of Secret Commissions or Rebates: If a business secretly offers rebates, commissions, or other special services to some customers but not to others, this can be unlawful when those payments lessen competition. For example, a company may sell a product to many distributors and secretly offer a discount to all except one in an attempt to drive it out of business;
- Price Discrimination: Businesses sometimes offer different prices for the same service in order to drive competitors out of business. For example, a cable company with a single competitor in one territory may lower its prices in that territory to drive the competitor out of business;
- Selling a Product or Service Below Cost: Some companies sell products below the cost of producing or acquiring them in order to drive competitors out of business. By temporarily losing money, these companies can gain a long-term market share increase when their competitor exits the market;
- Loss Leaders: “Loss leaders” are products that a company sells below what it costs the business to produce or acquire them. These products are sold below cost to increase sales with the goal of increasing sales of other products or services. For example, a cell phone company may sell phones to its customers below what it costs to acquire or produce them in order to attract customers to its highly profitable service contracts;
- The New York Donnelly Act: The Donnelly Act is the main antitrust law in New York, and it closely resembles the Sherman Act. It explicitly prohibits several actions, including:
- Price Fixing: Price fixing happens when competitors agree to buy or sell products, services, or commodities at a fixed price or rate;
- Bid Rigging: When competitors agree to divide contract bids among themselves in a certain way, they are engaged in bid rigging;
- Market Division Scheme: Market division schemes are agreements between competitors to divide markets, products, customers, or territories amongst themselves. This involves businesses choosing their customers rather than customers choosing the business with which they prefer to deal;
- Group Boycotting: If business competitors agree to boycott a certain entity, they are engaged in group boycotting;
- Tying: Tying involves selling a product or service on the condition that the buyer also agrees to buy a different product or service.
What Should I Do if My Company Is Accused of Gun-Jumping in the Midst of Going Public?
You will want to consult a securities law attorney. Your lawyer will be able to tell you what rights and options your company has, as well as potential defenses against the accusations.
