Question
January 27, 2005
ViaE-mail
Mr.Michael Verne
PremergerNotification Office
Federal Trade Commission
6th Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Applicationof the Investment-Only Exemption
Dear Mike:
I am writing toconfirm the advice that you provided to me and (redacted) in our telephoneconversation of January 24, 2005, and my follow-up call of January 25, relatingto Rule 802.9, 16 C.F.R. 802.9, and Section 7A(c)(9) of theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSRAct" or "the Act"), 15 U.S.C. 18a(c)(9), commonlyreferred to as the "investment-only" exemption.
The factualbackground that we provided to you is as follows:
1. Company A and Company B are pharmaceutical companies. Company A engages inresearch and development and actively markets and manufactures products.Company B engages in research and development, but has not yet commercializedany of its products.
2. Company A is acquiring an exclusive license from Company B that will giveCompany A the rights to develop, manufacture and market compound X whichCompany B owns. Assume that the consideration to be paid in connection with theacquisition of the exclusive license renders the acquisition reportable underthe HSR Act.
3. At the same time that Company A licenses compound X, and pursuant to thesame agreement, Company A will also acquire less than 10% of Company B'soutstanding voting securities for separate consideration. This separateconsideration is a result of a trade-off made during negotiations in whichCompany A refused to pay more for the rights to the license but was willinginstead to make an equity investment in Company B.
We understand that the acquisition of the exclusive license is treated as thetransfer of an asset to the licensee under the HSR Act. ABA SECTION OFANTITRUST LAW, PREMERGER NOTIFICATION PRACTICE MANUAL, Interpretation No. 29(3d Ed. 2003). We further understand that the consideration paid for theacquisition of the assets and voting securities must be aggregated for purposesof valuing this transaction absent an applicable exemption.
In our telephone conversation, we asked you to assume that Company A does nothave a subjective intent that is inconsistent with that of a passive investor.We also asked you to assume that Company A does not currently engage in, andhas no present intention to engage in, any of the conduct described in theStatement of Basis and Purpose ("SBP") to the original rules that areidentified as inconsistent with an investment-only purpose. See 42 Fed.Reg. 33465 (July 31, 1978).
The language of that SBP also states that being a "competitor"disqualifies an acquiring person from invoking the exemption. However, youconfirmed that Company B would not be deemed a competitor of Company A becauseCompany B has not yet commercialized any of its products.
The HSR rules also state that voting securities are held or acquired"solely for the purpose of investment" if the person holding oracquiring such voting securities has no intention of participating in theformulation, determination, or direction of the basic business decisions of theissuer. You confirmed that Company A's acquisition of an exclusive license ofone of Company B's compounds is by itself not inconsistent with harboring aninvestment-only intention as long as Company B would not be involved in anyco-promotional or co-marketing activities relating to the licensed intellectualproperty. You indicated that such activities might render the exemptionunavailable depending on the circumstances, such as if the product involvedwere the licensor's main or only product.
We appreciate your taking the time to respond to our questions with respect to thismatter. Please contact me directly if I have misstated any of your conclusionsor if you have any questions after reviewing this letter.