Question
March 15, 2002
Michael Verne
Prernerger Notification Office
Federal Trade Commission
6th Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Request for Informal Advice
Dear Mr. Verne:
I am writing to confirm our telephone conversation Wednesday in which you advised that the following transaction is exempt from the premerger notification requirements of the Hart Scot-Rodino Antitrust Improvements Act of 1976, as amended, (the "HSR Act" or the "Act"), and the rules promulgated thereunder, 16 C.F.R. 801.1 et seq. (the "Rules").
[redacted], a US company and its own ultimate parent (which I described as company A in our conversation), and [redacted], a Mexican company (company "B" in our discussion), are the only shareholders of a Mexican joint venture corporation, [redacted], (company C in our conversation). Company A currently holds minority interest in Company C, but has proposed buying Company Bs interest so that Company C would become a wholly-owned subsidiary of Company A. Company C is a manufacturing company that makes appliance products. Company C sells appliances in Mexico and other countries but does not sell appliances directly into the US. Rather, pursuant to an export supply agreement between Company A and Company C, Company A pays Company C the units of appliances that Company C produces for sale to Company A as soon as Company C manufactures them, and Company C ships these units to a warehouse in Mexico where Company A takes possession of them. The agreement contemplates that the products being purchased by Company A will be shipped to the US and, in fact, almost all are except for a small number of units shipped directly from Mexico to other countries.
Under the terms of the agreement between Company A and Company C, which has been in effect for the past five years, title to the products, as well as the risk of loss, passes to the Company A when the appliances arrive at the warehouse in Mexico. In addition, both Company A and Company C treat the sales of appliances from Company C to Company A taking place in Mexico for tax and accounting purposes. US customs forms prepared on behalf of Company A also treat Company A as the owner of the products before they cross the border into the US. Company C is listed on a Mexican customs form (pedimento) as the exporter of record, but we understand that this is because Company A has no branch in Mexico and that only a Mexican resident (including an entity) duly registered with the Mexican Federal Taxpayers Registry can act as an exporter of record (which is not the case with Company A). Further, according to Mexican Customs Law, a person or entity may act as an exporter of record regardless of the fact that the exporter does not have title to the exported goods, but rather sold these goods to another party in Mexico before they ultimately were exported. Finally, this form provides that Company Cs sales to Company A are made on an ex works basis, meaning title passes to Company A when the products leave Company Cs plant.
Under the HSR Act, transactions meeting the Acts size-of-the-persons and size-of-the-transaction dollar thresholds are reportable unless there is an applicable exemption. Company A and Company B meet the size-of-the-persons threshold. In addition, the Company C voting securities that Company A is acquiring from Company B are valued in excess of the $50 million size-of-the-transaction threshold. As we discussed, however, the transaction is exempt from the Acts filing requirements under Rule 802.50(b).
Rule 802.50(b) provides that an acquisition by a US person (Company A) of voting securities of a non-US issuer (Company C) is exempt unless that issuer has (i) assets located in the US with a book value of $15 million or more (not including cash and certain other investment assets) or (ii) sales in or into the US valued at $25 million or more in the issuers most recent fiscal year. In this case, while we understand that appliances manufactured by Company A and purchased by Company C for transportation to an resale in Mexico sometimes travel briefly through the US. Company C does not have assets with a book value of $15 million or more located in the US. The question, therefore, is whether Company Cs sales to Company A are sales in or into the US. Company Cs sales to Company A were considerably in excess of $25 million in Company Cs most recent fiscal year. These sales are not sales in or into the US by Company C, however, Company C sells appliances to Company A in Mexico, where both legal and beneficial ownership, including the risk of loss, pass to Company A. Moreover, both Company A and Company C treat the sales as taking place in Mexico for other purposes in the ordinary course of business (tax, accounting, customs). Given these facts, it is Company A, not Company C, that is making sales of appliances into the US. Because Company C is selling the appliances to Company A in Mexico, and Company C has no direct sales to the US, Company C has no sales in or into the US for purposes of Rules 802.50(b).
This analysis is supported by an informal interpretation issued by the Premerger Notification Office. See ABA Premerger Notification Practice Manual (1991 ed.) (ABA Premerger Manual), Interpretation No. 262. In that case, the purchaser, A, a US person, sought to acquire assets located in Hong Kong that had $32 million in sales to US customers. The Hong Kong company used an agent located in New York to solicit US customers. The customers then would travel to Hong Kong to view the products, negotiate prices and submit purchase orders. The products next would be delivered to US customers in Hong Kong, Bangkok or Taiwan, at which time title and the risk of loss would pass to the customer. The customer was responsible for transporting the product and clearing customs. The Premerger Notification Office concluded that these were not sales related to the acquired assets in or into the US under Rule 802.50(a) (which deals with acquisitions of non-US assets). As in Interpretation No. 262, Company Cs sales or appliances to Company A should not be considered sales by Company C in or into the US for purposes of Rule 802.50(b). See also ABA Premerger Manual, Interpretation No. 261 (acquisition by US person of assets of foreign natural gas producer, virtually all of whose gas was purchased by foreign government agency and resold into the US, exempt because producers sales were not in or into the United States.).
Please review this letter and call me as soon as is convenient to let me know whether you agree with my description of your advice.
Sincerely,
[redacted]