Antitrust and HSR: What Companies in Emerging Industries Should Know . Presentation to Perkins Coie Emerging Companies and Venture Capital Law Group June 27, 2017 Barry Reingold Betsy Kristoferson Perkins Coie LLP
Investopedia Definition of 'Emerging Industry' o A group of companies in a line of business formed around a new product or idea that is in the early stages of development. An emerging industry typically consists of just a few companies and is often centered around a new technology . . . [I]t may be difficult to secure financing to grow the company [and] marketing expenses are high, because the product or service for sale is often unproven and companies in an emerging industry must convince both investors and consumers that the product or service they are selling is valuable. http://www.investopedia.com/terms/e/emergingindustry.asp o So what does antitrust have to do with my clients? 2 Perkins Coie LLP | PerkinsCoie.com
Sherman Antitrust Act (15 USC §1, 2) o Prohibits contracts, combinations and conspiracies in restraint of trade (multi-party conduct) and monopolization and attempted monopolization (single firm conduct) o Other than per se violations, plaintiff or US Government typically must show defendant has "market power:" • The ability of a firm within a relevant market to profitably raise prices above the competitive level for a sustained period of time “Profitably " means the firm doesn't lose so many sales that the price increase is not profitable o Again, what does antitrust have to do with my clients? 3 Perkins Coie LLP | PerkinsCoie.com
Typically, very little, but watch out for o Transactions between actual or potential competitors involving critical IP • Example, IP cross licenses that allocate future R&D efforts, customers or prices IP rights do not of themselves constitute "market power" for antitrust purposes, but are an important factor in determining whether market power exists o Transactions involving "industry roll ups" • Serial acquisitions of companies in the same emerging industry o Transactions that constitute per se antitrust violations (like price fixing) or involve products that may be used to facilitate per se violations • Example, automatic price equalization software United States v. Ashton , N.D. Cal. 2015 (criminal complaint alleging competing wall poster vendors adopted algorithms developed by one vendor to equalize prices) 4 Perkins Coie LLP | PerkinsCoie.com
Interlocking directorates (Clayton Act § 8) o No person may serve as a director or board-elected or appointed officer of two or more competing firms where an agreement between them restricting competition would be a per se violation of the Sherman Act (for example, price fixing). o DoJ and FTC have taken position “person” may be a corporate entity (for example, a VC firm) that appoints a different employee to sit as the firm’s representative on each corporate board. o Prohibition applies only where the “capital, surplus and undivided profits” of each interlocked firm exceeds an inflation -adjusted threshold, currently $32.9 million. o Exemptions exist for interlocks involving firms with very small overlapping sales 5 Perkins Coie LLP | PerkinsCoie.com
HSR obligations o A reporting obligation, not a substantive antitrust law • Reporting doesn’t turn on whether proposed transaction poses antitrust concerns o Transaction must satisfy two tests, which are currently: • Size of transaction: $80.8 million • Size of person: for transactions valued at under $323 million one person has sales or total assets of $161.5 million, the other person has total assets of $16.2 million, or, if a manufacturer, sales of $16.2 million • Size of transaction and size of person thresholds adjusted annually based on changes to GNP 6 Perkins Coie LLP | PerkinsCoie.com
The "person" is the "ultimate parent entity“ and all entities it controls o The UPE is the entity in the corporate ladder that is not "controlled" by another entity • For voting securities, "control" means holding 50% or more of another entity's voting stock, or the right to designate 50% or more of that entity’s board of directors Stock ownership percentage calculations must take into account differences in voting power between different classes of stock • For LLC interests, “control” means having the right to 50% or more of the LLC’s profits or 50% or more of its assets upon dissolution o Holdings of spouses and minor children are aggregated o Holdings of a settlor are aggregated with holdings of revocable trust, or irrevocable trust in which settlor retains a reversionary interest 7 Perkins Coie LLP | PerkinsCoie.com
Voting securities and LLC interests are treated differently o Any acquisition of voting securities is potentially reportable o Only acquisitions of a "controlling" interest in an LLC are reportable 8 Perkins Coie LLP | PerkinsCoie.com
HSR applies to stock purchases by officers and directors who do not control the target for HSR purposes o Acquisitions of stock during early stages when target was too small to meet the meet size of person test do not become reportable based on later increases in target value • But further acquisitions of stock (even a single share) may be reportable if the buyer's aggregate holdings will meet or exceed the size of transaction threshold, currently $80.8 million o Exemption exists for transactions in which an officer, director or large shareholder’s per centum holdings do not increase, as is typically the case for later round financings, IPOs and sales of target stock in which the early shareholders retain their stock interests • But post-event acquisitions of stock may be reportable if the buyer’s aggregate holdings will meet or exceed the size of transaction threshold, currently $80.8 million o In stock-for-stock deals, acquisitions of the buyer’s voting securities by the target’s officers or directors or largest shareholders may be independently reportable (‘two way deal”) 9 Perkins Coie LLP | PerkinsCoie.com
Good news o In the sale of a target, to-be-retired target debt (including debt owed to the target’s shareholders ) may be deducted from the purchase price when determining whether size of transaction test is met o Where HSR violations are discovered after closing, the FTC adheres to a "one free bite" rule regarding penalties (currently up to $40,654 per day). No penalties will be sought where • There have been no previous violations by the buyer • The violation is voluntarily brought to the FTC's attention • The violation was inadvertent • The buyer explains the circumstances surrounding the violation, how it was discovered, and describes procedures put in place to ensure no future violations 10 Perkins Coie LLP | PerkinsCoie.com
QUESTIONS? 11 Perkins Coie LLP | PerkinsCoie.com
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