Question
December 13, 2001
Mr. Michael Verne
Premerger Notification Office
Federal Trade Commission
Bureau of Competition
Room 303
600 Pennsylvania Ave-, N.W.
Washington, D.C. 20580
Dear Mike:
This letter is to confirm our conversations regarding the Hart-Scott-Rodino Act implications of the transaction described below. The transaction involves three parties: Z, a natural person; A Co., a corporation; and B ('.o., also a corporation. In effect, the transaction will combine A and H, install Z as the Chairman and Chief Executive Officer of the combined company, and allocate to an entity controlled by 7 a 20% stake in the combined company.
The Parties
Z is a natural person who holds IUU'% of the outstanding voting securities of ZCoInc. a corporation, through which Z offers advisory services.
A Co. is a corporation not engaged in manufacturing with total assets of more than $10 million, but less than $100 million and annual net salts of more than $100 million. A is its own ultimate parent entity.
B Co. is a corporation not engaged in manufacturing with annual net sales and total assets exceeding $1 UU million. More than 50% of the outstanding voting securities of B are held by CLP, a partnership.
Structure of the Transaction
The structure of the transaction is as follows:
1. ZCoInc. forms Holdco, a corporation that will be a wholly-owned subsidiary.
2. Holldco forms NewcoA Sub, a corporation that will be a wholly-owned subsidiary.
3 Simultaneously
- B merges into Holdco with Holdco as the surviving corporation; B shareholders get Holdco stock.
- A merges into Newco A Sub with Newco A Sub as surviving corporation; A shareholders get Holdco stock.
After these steps, Holdco will be its own ultimate parent entity. The mergers of A and B into first and second tier subsidiaries of ZCoInc., in exchange for Holdco stuck, have the effect of diluting ZCoInc.'s interest in Holdco to 20% of the outstanding voting securities.
Premerger Notification Office Analysis
You informed me that the PNO would regard the simultaneous mergers of B into Holdco and A into Newco A Sub as a consolidation transaction. Accordingly, per 16 C.F.R. $A01.2, both A Co. and CLP, as the ultimate parent entity of B Co., would be regard as acquiring and acquired persons subject to the HSR Act. If, as I had suggested to you, the fair market value of A Co. is less than $50 million, the only potential reportable transaction would be the deemed acquisition of B Co. by A Co.
Under thin consolidation approach, you would also deem Z. as ultimate parent entity of ZColnc. to be acquiring a 20% stake in Holdco. That acquisition will not be reportable if Z is not a $10 million person or if the 20% stake in Holdco is not valued at more than $50 million.
We also discussed another approach that I raised, namely to view of the transaction as a series of mergers. Under this interpretation, Z could be deemed to control Newco A Sub after the merger of A Co. into Newco A Sub but just before the merger of B Co. into Holdco.[1] In your view, there was no point in taking this interpretation because Z would not control A Co. and would need A Co. to complete and certify the form in any event. The consolidation approach ensures filings from both A and B and therefore was regarded as sufficient.
Please let me knew al your earliest convenience if this comports with your recollection of our conversation.
Thanks again for your considerable help in sorting this out.
Best regards.
Very truly yours,
(redacted)
[1] It is not possible that Holdco would be its own ultimate parent entity after the A Co. merger into Newco A Sub if the issuance of Holdco shares to A Co. shareholders had the effect of diluting ZCoInc.s stake in Holdco to below 50%. If so, the HSR analysis would converge with your consolidation approach.