Rule(s):	801.50, 802.4
Staff:	Michael Verne
Response / Comments:	06/30/2011 - Agree.
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From:         (Redacted)
Sent:          Thursday, June 30, 2011 12:18 PM
To:              Verne, B. Michael
Subject:     Question re Formation of LLC

Greetings Mike,

I would be grateful if you could confirm my analysis concerning the reportability of certain agreements to form an LLC.

Companies A and B propose to form an LLC under a series of agreements. The LLC will construct and operate a substantial manufacturing plant. Each of A and B have assets and sales greater than $100 million (as adjusted). A will contribute $30 million in cash and B will contribute to $20 million in cash, plus nonexempt real estate which will provide the site of the plant. Assume the real estate has a fair market value of $10 million. In exchange for their contributions, each of A and B will obtain a 50% equity interest in the LLC, with rights to 50% of profits and 50% of assets upon dissolution of the LLC. In order to construct the manufacturing plant, the agreements require the LLC to independently obtain a loan for $100 million, without any guarantee from either A or B.

Based on my understanding of 16 C.F.R. §801.21, §801.40, §801.50, and §802.4, I believe this transaction to be exempt from any reporting obligation under the HSR Act, based on the following analysis:

• First, the transaction is principally governed under §801.50, which addresses the formation of unincorporated entities, which includes limited liability companies (LLCs).
• Second, because each will obtain a 50% stake in the LLC, under §801.50(a) A and B are each "acquiring persons" and the LLC is the "acquired person." Under §802.30(c), for purposes of valuing the LLC interests that A and B are each acquiring, A excludes the value of its contribution to the LLC and in turn B excludes the value of its contribution.
• Third, while the LLC will acquire a loan for $100 million, that loan (or "credit" or "obligation") that the LLC shall obtain pursuant to A and B's agreement, will not be considered an "asset" of the LLC, as §801.40(d)(2) only requires that valuation of the LLC interests include the "credit or ... obligation[s]" of the LLC when extended or guaranteed by one of the acquiring persons (here, A or B). Otherwise, the loan itself is a liability of the LLC and not an "asset" affecting the fair market value of the LLC.
• Fourth, under §802.4, A will be deemed to only acquire LLC interests containing $10 million in reportable assets (the real property), as the remaining $20 million in cash contributed by B is considered an exempt asset pursuant to §801.21. And for the reasons explained above, the $100 million loan secured from a third party need not be counted as an asset of the LLC For all these reasons, B will be deemed to acquire LLC interests containing no reportable assets.