Definition
“Gun jumping” is a term used in the financial and legal sectors, which refers to the violation of laws by prematurely promoting the share sale during a public offering before the registration is approved by the Securities and Exchange Commission (SEC). It includes any activity that can be construed as promoting or marketing the offering to the public before proper authorization. It can lead to penalties, fines or even a suspension of the offering by the SEC.
Phonetic
The phonetics of the keyword “Gun Jumping” would be: /ɡʌn dʒʌmpɪŋ/.
Key Takeaways
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- Gun Jumping refers to violations committed by merging entities when they unlawfully coordinate their competitive activities before the Federal Trade Commission or the Department of Justice completes its review of their proposed transaction.
- It’s important to avoid gun jumping as it can lead to severe consequences including fines, injunctions, and the requirement to unwind transactions that have already been partially or fully completed.
- To prevent gun jumping, the merging entities must continue to operate separately and independently of each other until they have obtained all necessary pre-merger clearances and approvals.
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Importance
“Gun jumping” is a critical term in the world of business and finance, particularly in matters related to mergers and acquisitions. It refers to instances when companies involved in a merger or a takeover engage in collaborative efforts or share sensitive information before the transaction has received regulatory approval. This is important because it can violate antitrust laws designed to maintain market competition. The consequences of gun jumping can range from fines to complete invalidation of the merger or takeover. Therefore, understanding and avoiding gun jumping is vital in ensuring fair business processes and legal compliance in major corporate transactions.
Explanation
‘Gun Jumping’ in the field of finance and business refers to a situation where a company that is going public, i.e., issuing its Initial Public Offering (IPO), violates regulations set by the securities commission, specifically the Securities and Exchange Commission (SEC) in the US. The purpose of these regulations is to maintain a fair and efficient market, protecting investors by ensuring all potential investors receive necessary information to make a proper investment decision. By ‘jumping the gun’ , a company can potentially create an unfair market or give misleading information about its stocks.While practices constituting ‘gun jumping’ may vary in different jurisdictions, it typically involves any activities undertaken by the issuer to boost interest or hype the investment too early or before the required offering materials have been filed with the regulators. This may include promoting the investment publicly, meeting with potential investors to discuss the upcoming IPO, or other non-compliant pre-offering communications. These actions are seen as problematic because they may unduly influence the market and potential investors prior to them having all the required information to make an informed decision. In essence, the ‘gun jumping’ rules serve to ensure a level playing field in securities offerings.
Examples
Gun jumping refers to the illegal practice where companies engaged in a merger or acquisition activity share too much information or coordinate too closely before the transaction is finalized, violating antitrust laws. Here are three real-world examples of the business/finance term, gun jumping:1. Ernst & Young: In 1999, accounting firms Ernst & Young and Cap Gemini’s proposed merger was challenged by the U.S. Federal Trade Commission for gun jumping because they had integrated their operations before the deal closed. Cap Gemini essentially gained beneficial ownership of Ernst & Young’s consulting business before obtaining FTC approval.2. Canon and Toshiba: In 2019, the US Department of Justice charged Canon Inc. and Toshiba Corp for violating antitrust laws by conspiring to bypass the regulatory waiting period for the transfer of a Toshiba subsidiary to Canon. Canon agreed to settle by paying $5 million in penalties.3. Oerlikon-Bührle Gruppe: In 1994, Oerlikon-Bührle Gruppe, a Swiss corporation paid a $4 million civil penalty to settle charges that its acquisition of Leybold AG had been prematurely consummated (gun jumped) by exercising operational control over Leybold’s U.S. assets prior to expiration of the waiting period required by the Hart-Scott-Rodino Act.
Frequently Asked Questions(FAQ)
What does the term ‘Gun Jumping’ mean in business and finance?
‘Gun jumping’ refers to a scenario in which companies that plan to merge start acting as a single entity before they have gained the required regulatory approval for their merger. This might include sharing sensitive information or coordinating business activities without approval, which is considered illegal.
Is ‘Gun Jumping’ illegal?
Yes, ‘gun jumping’ is illegal because it potentially violates antitrust laws. It can lead businesses to face severe penalties from regulatory agencies such as the Securities and Exchange Commission (SEC) in the United States.
What are the penalties for ‘Gun Jumping’?
In case a company is found guilty of ‘gun jumping’ , it can face hefty fines and penalties. In the United States, for instance, a company can be fined up to $41,484 per day by the SEC.
How can ‘Gun Jumping’ be avoided?
‘Gun jumping’ can be avoided by strictly adhering to the rules and guidelines associated with mergers and acquisitions. This includes not sharing sensitive or strategic information until necessary regulatory approvals have been received and ensuring that pre-close activities are not coordinated between the merging entities.
What is the ‘Waiting Period’ in reference to ‘Gun Jumping’?
The ‘Waiting Period’ is a duration set out in antitrust laws during which the merging companies can’t take any action toward merger or integration. The aim is to give regulatory bodies sufficient time to review merger proposals. Violating this period can be considered as ‘Gun Jumping’.
Can ‘Gun Jumping’ be unintentional?
Yes, it can be unintentional. That’s why it’s important for companies to ensure they fully understand regulations surrounding mergers and acquisitions. Often, in the process of due diligence or negotiation, they may inadvertently share sensitive information or make coordinated decisions.
Is ‘Gun Jumping’ relevant only in the context of mergers and acquisitions?
While the term ‘gun jumping’ is most common in the context of mergers and acquisitions, it can also refer to any violation of rules and regulations that pertain to the timing of certain business activities, such as a company revealing key information about a public offering before it’s permitted to do so.
Related Finance Terms
- Securities and Exchange Commission (SEC)
- Pre-Marketing
- Quiet Period
- Regulation Fair Disclosure (Reg FD)
- Initial Public Offering (IPO)
Sources for More Information
- Investopedia
- Harvard Law School Forum on Corporate Governance
- U.S. Securities and Exchange Commission
- FindLaw Corporate Counsel Center
