Question
(redacted)
December 7, 2000
BY FACSIMILE
Patrick Sharpe, Esquire
Premerger Notification Office
Bureau of Competition, Room 303
Federal Trade Commission
6th Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Dear Mr. Sharpe:
Thank you for speaking with (redacted) and me on November 29, 2000,
concerning possible Hart-Scott-Rodino issues in a transaction that one of our clients is
considering. I am writing to summarize the facts we presented to you and the comments
you made to us.
Our client, Company A, is a petroleum company engaged in the distribution of
refined petroleum products such as gasoline, diesel fuel, heating oil, residual fuel oil and
jet fuel. Company A is considering the acquisition of assets from Company B, which
hold long-term contracts to operate storage tanks and related equipment at several
petroleum terminals for refined petroleum products. The purchase price Company A
would pay for these long-term contracts is $14 million.
The issue that led to our conversation was how to treat refined petroleum products
that are in the petroleum terminals. These products are owned by Company C, a
financial institution that does business with Company B. Company B has a contract with
Company C that requires Company B to buy the products in the petroleum terminals if
Company Bs contractual relationship with Company C ends. If Company B sell its
long-term contracts to Company A, Company Bs contract with Company C will
terminate. In that event, Company B will have to acquire the products in the petroleum
terminals. Because Company A is already in the petroleum bossiness, it has its own
products and does not need the products that are in the petroleum terminals, but it will
have to acquire those products if Company B purchases them.
Company As acquisition of the long-term contracts alone would not be
reportable because the selling price of the assets is less than $15 million. The products in
petroleum terminals are not now part of the assets of Company B, but if the contract
between Company B and Company C terminates, Company B would acquire the products
for a moment in time and then pass title to Company A. Company A has no way to
determine now what the value of the products in the petroleum terminals would be at the
time of closing, but we assume the value would be enough to make the entire transaction
more than $15 million, if the products in the petroleum terminals must be added to the
payments for the long-term contracts.
It was your position that if Company A acquires the products in the petroleum
terminals from Company B, even if Company B only owns them for an instant, the value
of the products must be added to the value of the long-term contracts to determine the
size of transaction.
You said it would be better if Company A could acquire those products directly
from Company C. It is our understanding that in that case the transaction between
Company A and Company B would be below the level required to meet the size of
transaction test and would not be reportable. Company A now is trying to determine if
that can be done.
Please telephone me if I have misunderstood you position. Again, we appreciate
your comments.
Sincerely.
(Redacted)
(redacted)
SUMMARY OF HSR ANALYSIS
Facts
1. Buyer has total assets or net sales in excess of $100 million.
2. Target has total assets or net sales in excess of $10 million.
This is a transaction that will result in the following:
3. Target, currently a corporation with community member, will be restructured to have
two corporate members, Parent (a new corporation) and Buyer. The community
members of Target will become the members of Parent.
4. Buyer will contribute assets and cash ($7,000,000) to Target.
5. Target will distribute cash ($4,000,000) to Parent.
6. Through the rights granted in Target Corporate Bylaws, Buyer will appoint 4 Board
members; Parent will appoint 4 Board members, local physicians will appoint 3 Board
members; and one physician will serve ex officio with voting rights.
7. Targets Articles of Incorporation state that upon dissolution, Parent and Buyer will
equally share in the distribution of assets.
Analysis
1. This is a restructuring of membership in a non-profit corporation that has the
effect of combining tow businesses and is treated as a merger or consolidation.
Therefore, this is an acquisition of voting securities, but is treated as an asset acquisition
for valuation purposes (Interpretations 99, 109, 115; 801.2(d).
Staff Comment: No - there are no voting securities
2. As a result of director voting rights, Buyer and Parent will each hold 33% of the voting
securities of Target (801.12(b)).
Staff Comment - No
3. Buyer and parent may be viewed as having the contractual right to appoint 33% of the
directors (Interpretation 64).
Staff Comment - Yes
4. Buyer does not control Target because 801.1(b)(1)(ii) [Staff Comment: (2)] does not apply.
Staff Comment - Agree - but review rule
5. Buyer is the acquiring person; Target is the acquired person..
Staff Comment - yes
6. The value of the voting securities is determined by the value of the Assets (Interpretations
99 and 115).
Staff Comment - asset value only - no voting securities
7. The value of the assets is base on fair market value or the acquisition price, whichever is
Greater. Acquisition price is the sum of the property and cash that Buyer is contributiing
(801.10(b)).
Staff Comment - Agree
Conclusion
8. The transaction satisfies 7A(a)(3)(A) [15%], but not 7A(a)(3)(B) [$15 million]
(801.1(b), 801.1(c), Interpretation 242). The transaction is exempt under 802.20
because:
Staff Comment - Dont need the analysis - there is no acquisition because there is no change in control.
a. Buyer will not hold more than $15 million of the assets of Target (33% of
$22,000,000) under 802.20(a); and/or
b. Buyer will not control Target under 802.20(b).
Exhibit 1 (graphics)