Guide to Computer Law—Number 281
Practitioner’s Perspective
by Holly K. Towle, J.D.
FTC Raises Reporting Thresholds in
Annual Adjustment and Extends the
Reach of the HSR Act to Acquisitions
of Unincorporated Entities
Holly K. Towle and Brian McCalmon*
Holly K. Towle is a
partner with Kirpatrick &
Lockhart Preston Gates
Ellis LLP (K&L Gates), an international law firm,
and chair of the firm’s E-merging Commerce
group. Holly is located in the firm’s Seattle
office and is the coauthor of The Law of
Electronic Commercial Transactions (2003,
A.S. Pratt & Sons). Holly.Towle@KLgates.com,
206-623-7580.
*Brian McCalmon is a partner in K&L Gates
Washington, DC office. Brian’s practice
concentrates on the areas of antitrust,
consumer protection and complex litigation.
Brian.McCalmon@klgates.com
Remember the Hart-Scott-Rodino act? Well, some have repressed it since
law school. But it is a part of daily life for others and all practitioners may
wish to take a new look at it because it has new rules, including for joint
ventures and other transactions that can be the life-blood of participants
in the computer or information industries. My colleague Brain McCalmon
has volunteered to explain the new developments in this month’s column.
So here we go:
The FTC Raises Reporting Thresholds in Annual Adjustment
The Federal Trade Commission (“FTC”) has published new notification
value thresholds governing when acquisitions of assets or voting securities
must be notified to the FTC and the Antitrust Division of the Department
of Justice (“DOJ”) under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (“HSR Act”). Mandated by amendments to the
Act that were passed in 2000, the new thresholds reflect the first of annual
adjustments to account for changes in the gross national product. The new
valuation thresholds apply to all acquisitions that close on or after March 2,
2005, and will replace the ones that were in effect:
Former Threshold
$50 million
$100 million
$500 million
$1 billion
Practitioner’s Perspective appears periodically
in the monthly Report Letter of the CCH Guide to
Computer Law. Various practitioners provideindepth analyses of significant issues and trends.
Threshold on March 2, 2005
$53.1 million
$106.2 million
$530.7 million
$1,061.3 million
The size-of-person thresholds and the various thresholds applied to
exemptions in the HSR Rules also change accordingly. For example,
the size-of-person thresholds have increased from their current values
of $10 million and $100 million, to $10.7 million and $106.2 million,
respectively. The valuation threshold at which a filing is required
CCH GUIDE TO COMPUTER LAW
without reference to the size of the parties, $200 million,
has increased to $212.3 million.
The FTC Approves New Rules that Apply the
HSR Act to Investments in and the Formation
of Most Unincorporated Entities; Aggregation
Rules and Common Exemptions to Change
Antitrust and corporate counsel have long been familiar
with the FTC’s interpretation that the Hart-Scott-Rodino
(“HSR”) Act does not apply to the formation of a partnership
or the acquisition of less than 100 percent of the interests
of a partnership. This long-standing interpretation of
the Act has allowed companies to acquire control of
partnerships without undergoing HSR review. Similarly,
an administrative interpretation in place since 1999 has
exempted from HSR review the formation of any LLC
that did not involve the contribution of at least two preexisting, separately controlled businesses to the LLC and
the acquisition of “control” of the LLC by one of the forming
entities. As with partnerships, the acquisition of existing
interests in an LLC was exempted entirely from the reach of
the Act except in limited circumstances. Combined, these
interpretations of the Act have allowed companies to form
numerous business combinations, including research and
development joint ventures, without the need for HSR filings.
These administrative interpretations are about to change.
An extensive revision of definitions in the Rules, approved
by the FTC on February 23 and effective 30 days after they
are published in the Federal Register, will apply the Act
to most acquisitions or formations that result in a person
having “control” of any unincorporated entity, including
partnerships and LLCs. “Control” will be defined solely as
the right to 50 percent of the profits of the entity, or 50 percent
of the assets upon dissolution (after payment of its debts).
The acquiring person will be deemed to have acquired all of
the assets held by the unincorporated entity and may need to
file for HSR approval if the HSR size thresholds are met. The
amendments will thus open a wide range of non-corporate
formations and acquisitions (including the formation of
non-corporate joint ventures) to potential HSR review.
Other aspects of the new rules, however, open up possibilities
for alert companies to expand the range of joint venture
formations and other acquisitions that are exempt from HSR
review, as the new Rules will address a host of loopholes
and inequities that have become apparent in the years since
the Rules were first promulgated in 1978. Among the most
important:
Acquisitions of Holding Companies and the Formation of
Joint Ventures. Current Rule 802.4 exempts the formation of
a corporation, as well as the acquisition of voting securities
in an existing corporate holding company, when the assets of
the joint venture or acquired company will consist of certain
enumerated forms of exempt real property or assets acquired
in the ordinary course of business, and the corporation
NUMBER 281
does not hold other non-exempt assets with an aggregate
fair market value of more than $53.1 million. As a result,
the acquisition of shell corporations or the formation of
corporate joint ventures is potentially reportable even if the
corporations only hold assets the direct acquisition of which
would be exempt under one of the many exemptions in the
Rules not enumerated in Rule 802.4 (e.g., cash).
The amendments will extend the exemption not only to
the acquisition of unincorporated holding companies or
interests in unincorporated joint venture vehicles, but also to
many acquisitions in holding companies and the formation
of many joint venture corporations that hold assets the direct
acquisition of which would be exempt under any of the
exemptions contained in the Rules or the Act. For example,
although the acquisition of a U.S. corporation that only
holds manufacturing plants in Mexico would be potentially
reportable under the current rules, it would be exempt under
the amended rules if the Mexican plants did not record $53.1
million (as adjusted from $50 million) in sales in or into the
United States in the most recent fiscal year.
The new rule carries with it benefits and disadvantages.
Although the formation of joint venture partnerships will
be potentially reportable where now they are not, alert
companies may take advantage of the expansion of this
exemption to form corporate research and development joint
ventures that will be exempt from HSR where now they are
not exempt. For example, Companies A and B form Newco,
Inc. to pool intellectual property and create new technological
processes that neither A nor B could create alone. Each
contributes $20 million worth of patents, copyrights, and other
intellectual property, and funds the joint venture with capital
contributions of $40 million each. In return, each acquires 50
percent of the voting securities of the new corporation. Under
the current rules, assuming the personal size test were met as
to each contributor, each would need to file an HSR because
each would acquire voting securities worth more than $53.1
million. Under a new exemption and the expanded 802.4
exemption, however, the formation would be exempt. New
Rule 802.30(c) exempts assets contributed to the formation
of a new entity with respect to the person contributing those
assets. In addition, per new Rule 802.4, the cash contributed to
Newco would be exempt. Thus, as to each contributor, Newco
has only $20 million in non-exempt assets (not $53.1 million),
and therefore A and B’s acquisitions of voting securities in
Newco would be exempt under Rule 802.4 even though the
fair market value of the securities acquired would exceed $53.1
million. The new rules, therefore, provide greater flexibility
for companies to structure a research and development joint
venture by allowing unlimited contributions of capital to
the venture and allowing larger contributions of intellectual
property to the venture before a filing will be required prior
to taking back a stock interest.
Aggregation. Under the current Rules, in order to know
the value of “assets to be acquired” in an asset acquisition
CCH GUIDE TO COMPUTER LAW
(necessary to determine whether the acquisition will cross a
reporting threshold), the acquiring person must aggregate a
prior separate acquisition of assets from the same acquired
person only when the Letter of Intent or other acquisition
agreement for the contemplated acquisition was signed within
180 days after closing the prior acquisition. Aggregation was
never required if the first acquisition was not closed prior to
signing the LOI for the second acquisition. The new Rules
will close this loophole and require aggregating the value of
separate asset acquisitions from the same acquired person
if, within the 180 days preceding the execution of an LOI
or agreement, either 1) a still valid LOI or agreement which
has not been consummated was executed with the same
acquired person, or 2) assets were acquired from the same
acquired person and are still held by the acquiring person.
NUMBER 281
but identical acquisitions between unincorporated entities
and corporations or unincorporated entities under common
control are not. For example, if Company A consolidates its
wholly-owned corporate subsidiary B under the control of a
partnership that A also controls, the acquisition is potentially
reportable under the Act despite the impossibility of
competitive concern with the consolidation. In recognition
that corporations use non-corporate ownership forms much
more extensively today and in ways not contemplated
when the Rules were drafted, the amendments will extend
the intra-person exemption to any acquisition of assets or
interests in an entity where the acquiring and acquired
persons are the same, regardless of the nature of the interests
that establish the requisite control. Thus, all manner of
consolidations and other intra-person acquisitions will
be exempt regardless of the form of the entities involved.
In addition, consistent with the current treatment of voting
securities, any new acquisition of non-corporate interests
in an unincorporated entity that will result in control
of the entity must be aggregated with any previously
acquired non-corporate interests in the same entity for
purposes of determining the value of the transaction
(regardless of when acquired), but need not be aggregated
with the value of previously acquired assets or voting
securities unless control is gained through the acquisition.
Financing Transactions. A new rule confirms that financing
transactions have no competitive impact and should be
exempt. An acquisition of non-corporate interests that confers
control of a new or existing unincorporated entity is exempt
as to any financier who provides cash to the new entity and
thereby takes temporary control over the entity, as long as
the terms of the financing agreement state that the financier
will relinquish control after realizing its preferred return.
Intra-Person Acquisitions and Consolidations. The
amendments correct one of the most egregious inequities in
the HSR Rules by extending the exemption for intra-person
acquisitions to acquisitions of assets and other non-corporate
interests. Currently, acquisitions of voting securities or assets
between sister corporations or between parent corporations
and subsidiary corporations are exempt from HSR review,
This column highlights the amendments likely to have the
broadest impact on the application of the Act to common
transactions. However, there are many other amendments
that will affect companies’ reporting obligations, so a
review is in order whenever a company is contemplating an
acquisition that will give it more than $53.1 million worth of
another entity’s stock, assets, or non-corporate interests.