Question
[redacted]
June 16, 2000
By Facsimile
Mr. B. Michael Verne
Premerger Notification Office
Room 303
Federal Trade Commission
6th Street & Pennsylvania Ave., N.W.
Washington, DC 20580
Re: Request for Information Ruling on Whether a Closed Transaction Should Have Been Reported
Dear Mr. Verne:
I was recently asked whether a transaction that closed over a year ago should have been reported under HSR. It appears to me that if the transaction qualifies as a 801.40 formation of a joint venture or other corporation, filing was not required. On the other hand, if 801.2 analysis is applied, you may conclude that filing should have been made. The transaction does not involve a substantive antitrust issue, I believe, because it brought together under one roof distribution corporations that for licensing reasons were prohibited from competing in each other's states. In other others, the issue appears to be HSR compliance alone.
In 1998, A, B, and C were independent corporations. Each distributed the same types of products, and none engaged in manufacturing. Each was its won ultimate parent entity, although B and C were owned by members of the same family. By steps to be described shortly, late in 1998 all three corporations became wholly-owned subsidiaries of newly created Croup, Inc.
Before the combination A had annual sales of $181 million and assets of $44.5 million; B had sales of $34.6 million and assets of about $12 million; and C had sales of $26 million and assets of about $9 million.
The combination was effected by having A's shareholders exchange their stock in A for stock in Group, Inc. Until shortly before closing, it was planned that B and C's respective shareholders would proceed exactly as had A's shareholders. But because tax advice rendered to B and C late in the game, Group, Inc. created two transitory subsidiaries which merged into B and C respectively and thus disappeared. Group, Inc. issued its stock directly to the B and C shareholders. Thus, the result was the same in all three cases, that is, A, B, and C became wholly-owned subsidiaries of Group, Inc., and the former A, B, and C shareholders became Group, Inc. shareholders.
Joint Venture Analysis
Section 801.40 of the HSR regulations, entitled Formation of Joint Venture or Other Corporations, in pertinent part states:
[Contributors as "Acquirers"]
(a) In the formation of a joint venture or other corporation (other than in connection with a merger or consolidation), even though the persons contributing to the formation of a joint venture or other corporation and the joint venture or other corporation itself may, in formation transaction, be both acquiring and acquired persons with the meaning of 801.2, the contributors shall be deemed acquiring persons only, and the joint venture or other corporation shall be deemed person only.
[Conditions]
(b) Unless exempted by the Act or any of these rules, upon the formation of a joint venture or other corporation, in a transaction meeting the criteria of 7A(a)(1) and (a)(3) (other than in connection with a merger or consolidation), an acquiring person shall be subject to the requirements of the Act if:
(1)(i) The acquiring person has annual net sales or total assets of $100 million or more;
(ii) The joint venture or other corporation will have total assets of $10 million or more; and (iii) At least one other acquiring person has annual net sales or total assets of $10 million or more; or
(2)(i) The acquiring person has annual net sales or total sales of $10 million or more;
(ii) The joint venture or other corporation will have total assets of $100 million or more; and (iii) At least one other acquiring person has annual net sales or total assets of $10 million or more . . .
If 801.40 applied, filing would probably not be required because the joint venture or other corporation, Group, Inc. would not have total assets of $100 million or more, even assuming that at least two person acquiring Group, Inc. stock each had net sales or total assets of $10 million or more. See, 801.40 (b)(2)(ii). Section 801.40 (b)(1) is not applicable because no acquiring person had net sales or total assets of $100 million or more.
Section 801.40 states that it does not apply to the formation of a corporation in connection with a merger or consolidation. The HSR regulations use the word "consolidation" without ever defining it, although an example refers to a transaction in which corporations A and B consolidate into newly formed corporation C, and with A and B losing their separate pre-acquisition identities. See, 801.2, example 5. This is consistent with the usual meaning of a consolidation under state corporate law. Because the subject transaction A, B, and C continue to exist, the transaction is not a consolidation. [Note: Wrong. This is a consolidation. But they exist as wholly owned subs of Group, Inc. (See, . . . )]
The determinative issue as to whether 801.40 applies would appear to bee whether the formation of Group, Inc. may be deemed to have been "in connection with a merger" because the brief appearance on the scene of the transitory subsidiaries that merged into B and C. As previously mentioned, these subsidiaries were not a fundamental part of the negotiated transaction and were only added because a tax advisor consulted late in the process by B and C, unlike the tax advisor to A, believed that they enhanced the likelihood of favorable tax treatment. In fact, the formation of Group, Inc. was not "in connection with a merger or consolidation." Rather the formation of the joint venture was conceived, negotiated, and implemented as an exchange of stock, which only incidentally involved subsidiary mergers. In a true merger one of the merger partners disappears. Here A, B, C, and Group, Inc. all remain in existence.
Nonjoint Venture Analysis
Section 801.2 of the HSR regulations defines acquiring and acquired persons. Of particular interest to use are 801.2 (d)(2)(i) and (ii), which state:
(i) Any person party to a merger or consolidation is an acquiring person if, as a result of the transaction, such person will hold any assets or voting securities which it did not hold prior to the transaction.
(ii) Any person party to a merger or consolidation is an acquired person, if as a result of the transaction, the assets or voting securities of any entity included within such person will be held by any other person.
Thus, under subparagraph (i) the acquiring persons are all shareholders in Group, Inc. and Group, Inc itself. Under subparagraph (ii) the acquired persons are A, B, C, and Group, Inc.
Group, Inc.'s Acquisition of Voting Securities in A, B, and C
What are the sizes of the parties, and what are the sizes of the respective transactions? Initially, Group, Inc. had neither assets nor sales. As stated above, A had $44.5 million in assets and $181 million is sales. Thus, an acquisition of all of A's voting securities by Group, Inc. considered alone, would not satisfy the size-of-the-persons tests. Although A was $100 million player, Group, Inc. was not a $10 million player. Similarly, if the acquisition by Group, Inc. of B, a non-manufacturer with about $12 million in assets, were regarded as simultaneous with the acquisition of A, no reporting was required because Group, Inc. was not still a $10 million, much less a $100 million player.
If these essentially simultaneous transactions were treated as though they occurred sequentially, however, the size-of-the-persons threshold would been crossed. After acquiring A, Group, Inc. would have become a $100 million player, Group, Inc. was not a $10 million player. Similarly, if the acquisition by Group, Inc. of B, a non-manufacturer with about $12 million in assets, were regarded as simultaneous with the acquisition of A, no reporting was required because Group, Inc. was still not a $10 million, much less a $100 million player.
When Group, Inc. acquired C, a $100 million player was acquiring a non-manufacturer whose assets were less than $10 million. Therefore, the size-of-persons threshold was not crossed.
In present context, a transaction to be reportable must involve an acquisition of either in excess of $15 million in voting securities or voting securities giving the acquiring person control of an entity with assets or sales of $25 million or more. Thus, Group, Inc.'s acquisition of A, B, and C each crossed the transactions threshold, regardless of price paid, because each acquired company had sales in excess of $25 million. But because the acquisitions of A and C, even applying a sequential rather than simultaneous analysis, appear not to have crossed the size-of-the persons threshold, the transaction test as to them appears irrelevant. In other others, even it a sequential approach is employed, only Group, Inc.'s acquisition of B seems in question.
Acquisitions by Shareholders of Group, Inc. Voting Securites
While it is difficult to value the closely held and heavily restricted stock that the shareholders received, we believe that none of the individual shareholders acquired more than $15 million in Group, Inc. voting securities.
* * *
I would greatly appreciate your calling me with your interpretation of the above facts. If one or more filings should be made in connection with this transaction, the parties will, of course, want to proceed promptly to correct their mistake.
Thank you very much for your assistance.
Sincerely,
[redacted]