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16 February 2017
Tolling agreements are a common feature of the energy industry. Through these agreements, a buyer will supply fuel to an electric generator and, in return, the generator will provide power to the buyer. Although commonly used, the United States recently found that such a tolling agreement, entered into between companies that intended to merge, violated the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, 15 USC §18a, leading to the imposition of significant financial penalties against the buyer.
In August 2014 Duke Energy Corporation and Calpine Corporation, a competing seller of wholesale electricity in Florida, reached an agreement for Duke's purchase of Osprey Energy Center ‒ a combined-cycle natural-gas fired electric generating plant in Florida ‒ from Calpine. The structure of the proposed transaction included a tolling agreement, which gave Duke the responsibility to determine the amount of power to be produced at Osprey and to purchase the fuel necessary to generate that power. Essentially, the tolling agreement enabled Duke to assume operational control over the Osprey plant and limited Calpine's role to "mechanical operation of the Osprey facility consistent with Duke's instructions".(1)
On January 18 2017 the Antitrust Division of the Department of Justice (DOJ), acting at the request of the Federal Trade Commission (FTC), filed a complaint and proposed final judgment in the US District Court for the District of Columbia, alleging that Duke had violated pre-merger reporting requirements by obtaining and exercising beneficial control of Osprey from Calpine before observing the requirements of the Hart-Scott-Rodino Antitrust Improvements Act.(2) The complaint alleged that Duke began exercising operational control of Osprey before filing required notifications with the FTC and DOJ, and before observing the mandatory 30-day waiting period for antitrust review.
Although such tolling agreements, including provisions which give buyers control over output, are increasingly common in the energy industry, Duke admitted to the Florida Public Service Commission that the tolling agreement was entered into in connection with its agreement to purchase Osprey and had no rationale independent of the transaction.(3) The tolling agreement was intended to hasten Federal Energy Regulatory Commission (FERC) approval of the transaction, by enabling Duke to demonstrate that it "already controls" Osprey such that "no new harm could come from permitting Duke to acquire Osprey outright".(4)
According to the DOJ, agreements that transfer beneficial ownership and are executed before Hart-Scott-Rodino notification and expiration of the waiting period may constitute gun jumping under the Hart-Scott-Rodino Act if entered into while a buyer intends to acquire the target.(5) These types of agreement enable a buyer to assume control of a target and bring about effects of the combination before regulators have completed their antitrust review. The DOJ argued that, taken together, the term sheet and tolling agreement removed Calpine as an independent competitive presence in the market and allowed Duke to make all competitively significant decisions for the Osprey plant from the moment that the tolling agreement took effect and well before Hart-Scott-Rodino notification had been filed.
The DOJ imposed civil penalties of $600,000 against Duke, even though this appeared to be its first violation of Hart-Scott-Rodino notification and reporting requirements. The agencies often do not impose penalties on parties that inadvertently violate the Hart-Scott-Rodino Act, provided that (among other things):
In this case, because Duke's violation amounted to gun jumping rather than an inadvertently missed (and subsequently corrected) filing, the DOJ took a harsher approach.
This case highlights the importance of consulting experienced Hart-Scott-Rodino counsel before acquiring voting shares, non-corporate interests or assets through any means. Although tolling agreements are increasingly common in the energy industry, parties that have or may have an interest in acquiring the other party to the agreement must be careful to avoid assuming beneficial ownership of the target before complying with the Hart-Scott-Rodino reporting requirements if Hart-Scott-Rodino notification is required. Failure to do so may result in the tolling agreement constituting evidence of gun jumping and the acquiring person being subject to significant penalties of up to $40,654 per day for non-compliance.
For further information on this topic please contact Stefan Krantz, Joseph G Krauss, John Lilyestrom or Tracy Penfield at Hogan Lovells US LLP by telephone (+1 202 637 5600) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The Hogan Lovells website can be accessed at www.hoganlovells.com.
(1) Complaint, United States v Duke Energy Corporation, 1:17-cv-00116, at ¶ 17 (DDC January 18 2017) www.justice.gov/opa/press-release/file/928781/download.
(2) DOJ Press Release, "Justice Department Reaches Settlement with Duke Energy Corporation for Violating Premerger Notification and Waiting Period Requirements" (January 18 2017) www.justice.gov/opa/pr/justice-department-reaches-settlement-duke-energy-corporation-violating-premerger.
(4) Id at ¶ 16. In its order approving the transaction, the FERC elected not to attribute the Osprey capacity to Duke because the tolling agreement and transaction documents were entered into "on or near the same time" and were thus "linked". Osprey Energy Center LLC and Duke Energy Florida Inc, 152 FERC ¶ 61,066 at P 31 (2015).
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