Smithfield settles with D.O.J. over P.S.F. acquisition
January 25, 2010
by Bryan Salvage
WASHINGTON – Smithfield Foods Inc. said on Jan. 21 it had reached a $900,000 settlement to resolve a U.S. Department of Justice (D.O.J.) case relating to the Premium Standard Farms (P.S.F.) acquisition in 2007.
The D.O.J. alleged Smithfield prematurely assumed operational control of P.S.F., which violated the Hart-Scott-Rodino (H.S.R.) Act. The D.O.J. did not allege that Smithfield’s violated the substantive antitrust law (the Sherman Act) or caused any competitive harm.
“The D.O.J. cleared Smithfield's acquisition of P.S.F. more than two years ago and the action taken by the D.O.J. now in no way affects that clearance or calls into question the legality of the transaction,” Smithfield said in a statement. “The company stated that it reached a settlement with the D.O.J. to avoid the potential for costly and protracted litigation.”
According to a D.O.J. press release, the settlement requires the companies to pay a total of $900,000 in civil penalties for violating pre-merger waiting period requirements. The D.O.J.’s antitrust division filed a civil antitrust lawsuit in U.S. District Court for the District of Columbia, along with the proposed settlement that, if approved by the court, would resolve the lawsuit.
According to the D.O.J. complaint, after Smithfield and P.S.F. announced their proposed merger in September 2006, Smithfield exercised operational control over a significant segment of P.S.F.’s business without observing the pre-merger waiting period requirement in violation of federal antitrust law. Such conduct, commonly known as "gun jumping" violates the Hart-Scott-Rodino (H.S.R.) Act of 1976, according to the D.O.J.
The complaint claims that after entering into the merger agreement, P.S.F. stopped exercising its independent business judgment with respect to hog procurement. Instead, it sought Smithfield’s consent for all of the hog procurement contracts that arose during the waiting period, providing Smithfield with the contract terms, including price, quantity and duration.
According to the D.O.J., the hog procurement contracts were necessary to P.S.F.’s ongoing business and were entered into in the ordinary course. Requiring a buyer’s approval of the seller’s ordinary course contracts can prematurely transfer operational control, violating pre-merger notification requirements, the D.O.J. said.
"Merging companies must remain independent in their ordinary business operations, including purchasing decisions, until the end of the premerger waiting period," said Christine Varney, assistant attorney general in charge of the department’s antitrust division. "Observing the waiting period ensures that the marketplace remains competitive, which ultimately benefits consumers."
Federal courts can assess civil penalties for premerger notification or waiting period violations under the H.S.R. Act in lawsuits brought by the D.O.J. During the time period relevant to this case, the maximum civil penalty for a party in violation of the HSR Act is $11,000 for each day it is in violation.