United States: FTC Announces Revised Hart-Scott-Rodino Thresholds For Acquisitions And Exclusive Licenses

Neal N. Beaton is a partner in our New York office and John R. Dierking is a partner in our Orlando office.

The Federal Trade Commission (FTC) has announced this year's revisions to the thresholds under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR), which will be applicable to transactions closing on or after Feb. 28, 2018. The FTC is required to revise the Hart-Scott- Rodino (HSR) thresholds annually based on changes in the U.S. gross national product. This results in increases of approximately 4.45 percent from last year's figures. In particular:

  • The size-of-transaction threshold will now be met if, as a result of the transaction, the buyer will hold voting securities, assets and/or non-corporate interests of the seller valued in excess of $84.4 million
  • The size-of-person threshold (which is measured at the ultimate parent entity level of each party and includes all entities controlled by each such ultimate parent entity) will generally now be met if one party to the transaction has total assets or net sales of $168.8 million or more and the other party to the transaction has total assets or net sales of $16.9 million or more – provided that this threshold will not apply to transactions valued at $337.6 million or more

In addition to increases in the HSR thresholds, there are also increases in the filing fee tier levels and possible civil penalty amounts. Further details concerning these increases can be found here.

These revised thresholds can be relevant to healthcare, pharma and biotech companies in two types of transactions, namely:

  • As is the case for any industry, HSR requires parties intending to merge, purchase or sell voting securities, non-corporate interests or assets, or engage in certain other types of acquisition transactions to provide both the FTC and the Antitrust Division of the Department of Justice (DOJ) with information regarding their operations and the proposed transaction if certain minimum jurisdictional thresholds are met and there are no applicable exemptions. HSR filings stay the consummation of a covered transaction for the waiting period specified by law to allow the FTC and DOJ time to detect and potentially address any perceived anti-competitive effects of a transaction.
  • As sometimes is of particular relevance to pharma and biotech companies, the FTC has taken the position that the grant of an exclusive IP license — defined by the FTC for the pharma and medical manufacturing industry as covering "all commercially significant rights" (as discussed in further detail  here) — is the transfer of an asset to the licensee and may trigger the HSR requirements if jurisdictional thresholds are met and there are no applicable exemptions. In order for the transaction to be treated as an acquisition, the license must be exclusive – even against the grantor. Moreover, the FTC has taken the position that partial or limited exclusivity, such as license grants for exclusive geographic territories or for specific fields of use or jurisdictions, may be considered an acquisition of an asset for HSR purposes

The applicable regulations state that the acquiring party (i.e. the licensee in the case of an exclusive license) has the responsibility to determine the value of the rights being licensed for purposes of the size-of-transaction threshold. The valuation of rights under an exclusive license is not ultimately based upon the actual value of the assets as determined many years later but, rather, is to be based upon the licensee's "good faith" determination of the value at the present time.

To the extent payments are contingent based on conditions outside the control of the parties and too speculative (as is often the case for license agreements), a good faith determination needs to be made of the current fair market value of all assets being received. With respect to licenses covering both the U.S. and other countries, the valuation should be based on the U.S. rights being exclusively licensed, not non-U.S. rights or non-exclusive rights, pursuant to certain exemptions under the applicable regulations for acquisitions of foreign assets and the inapplicability of the HSR requirements to the purchase of non-exclusive licenses. Therefore, when an exclusive grant of intellectual property rights includes both U.S. and non-U.S. territories, the amounts being paid would need to be split into U.S. and non-U.S. components for valuation. In connection with a worldwide license of exclusive and non-exclusive rights including upfront, milestone and royalty payments, each of the typical possible payments should be determined and discounted as follows and then totaled:

  • A good faith estimate should be made of aggregate royalty payments if the product is successfully commercialized
  • The amount of any upfront, milestone or royalty payment should each  be discounted by the percentage of the overall value of the license for the licensed territory outside the United States, i.e. Europe, the rest of North America and the rest of the world (e.g. if 40 percent of the value of a worldwide license grant is with respect to revenues generated from sales in or into the United States, then a $100 million upfront payment would be discounted by 60 percent, producing a figure of $40 million)
  • The amount of any upfront, milestone or royalty payment should then each be discounted by the percentage of the overall value of any non-exclusive component of the license
  • The amount of any milestone or royalty payment should each be discounted to reflect the likelihood that the payment would not be made (e.g. if the aggregate royalties for exclusive U.S. rights are estimated to be $200 million for a successful product but the estimated likelihood of successful commercialization is 50 percent, then the valuation would be $100 million)

If the total exceeds the revised size-of-transaction threshold, then other thresholds and possible exemptions would need to be considered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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