Each year, the Premerger Notification Office answers thousands of letters, phone calls, and emails regarding the Hart-Scott-Rodino rules, giving informal advice on the potential reportability of transactions and help in completing the HSR Notification and Report Form.
Recently, the PNO considered a transaction involving a U.S. company acquiring a foreign issuer with both U.S. and foreign assets. These assets included both U.S. and foreign patents. The question was how to determine the location and value of the patents for purposes of complying with the requirements of the HSR Act.
Under Section 802.51(a), the acquisition of voting securities of a foreign issuer by a U.S. person may be exempt. The exemption applies if the foreign issuer’s sales in or into the U.S. and the fair market value of its assets located in the U.S. are each $70.9 million or less, which is the current threshold.
In this transaction, as the U.S. sales of the foreign issuer were considerably less than $70.9 million, the next step under Section 802.51(a) was to assess whether the foreign issuer held U.S. assets valued in excess of $70.9 million. The PNO has taken the position that U.S. patents are always located in the U.S. for HSR purposes, regardless of the entity holding the U.S. patents (e.g., U.S. patents held by a French issuer are still considered U.S. assets.) The foreign issuer had no other tangible U.S. assets. So, if the fair market value of the U.S. patents was $70.9 million or less, the acquisition would not be reportable.
The fair market value of U.S. patents should be determined using a method that is consistent with the method used for determining the value of the overall patent portfolio. That value should include the value of any goodwill, know-how or other intangible assets allocated to those U.S. patents. The board of the acquiring person, or someone delegated the responsibility, must determine the valuation in good faith. The PNO does not have a preferred method for conducting this valuation, and does not give advice on what method is appropriate.
Under section 801.90 of the HSR Rules, however, if the acquiring person or its designee has engaged in a valuation for the purpose of avoiding HSR compliance, that valuation may be disregarded by the antitrust agencies and a more appropriate valuation applied to determine whether the transaction is reportable.
As always, contact the PNO with specific questions regarding the HSR rules, and watch for future PNO posts on other topics.