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Date
Rule
FI 15 801.90
Staff
M Verne
Response/Comments
the formation occurs for HSR purposes when more than one person receives interests.

Question

October 7, 2003

VIAFACSIMILE

Mr.B. Michael Verne
Federal Trade Commission
Room 314
600 Pennsylvania Avenue, NW
Washington,DC 20580

Re- Hart-Scott-Rodino Matters

DearMike:

This willconfirm recent conversations among you, me, and (redacted) and (redacted) of (redacted)LLP regarding the application of the Hart-Scott-Rodino Antitrust ImprovementsAct o 1976 (the "Act'") to a proposed transaction.

In.connection with the proposed transaction, A has formed and is the sole memberof a limited liability company ("LLC"). Pursuant to a contributionagreement among A, B and the LLC, A will contribute approximately $108 millionin cash to the LLC, and B will contribute a hospital to the LLC upon theclosing of the transaction contemplated by the contribution agreement("Closing"). In exchange for B's contribution to the LLC, the LLCwill issue to B a ten percent membership interest in the LLC. AS a result ofthe foregoing, A will have a 90 percent interest in the LLC, and B will have aten percent interest in the LLC

Pursuantto the LLC Agreement between A and B, immediately after the Closing, the LLCwill make a special distribution of approximately $3.05 million in cash to B.Following the Closing' profits and losses from the LLC will be allocated to Aand B according to their respective interests. A will be the "managingmember" and exercise overall management and control of the LLC. A willreceive a management fee of approximately three percent of the LLC's netrevenues. The LLC will have a seven member management board, with five membersdesignated by A and two members designated by B. A will have a call option forB's interest in the LLC exercisable at any tithe within 180 days of the third,fifth, tenth, and fifteenth anniversary of the Closing date for the greater of120 percent of (a) $12 million, or (b) the fair market value of B's interest.In the event that the call option is nor exercised by A, at any time within 180days of the third, fifth, tenth, and fifteenth anniversary of the Closing date,B will have the option tout its interest in the LLC to A for the greater of $12million or the fair market value of its interest. At any time, A canexercise an "impairment call option" if B's actions interfere withthe reasonable operation of the LLC and B fails to cure the problem. Similarly,B has a "deficiency put option" that may be exercised if A fails tomanage the LLC in a reasonable manner and fails t cure the problem. Each of theimpairment call option and the deficiency call (staff comment: PUT) option willbe subject to certain notice and procedure requirements described in the LLCOperating Agreement t.

Youadvised us that, based on the facts as we presented them, unless thetransaction were d as a device for avoidance (16 C.F.R. 801.90 (2003)),the formation o f the LLC and the contribution of the money and the hospital tothe LLC would not be reportable under a Act. You explained that under FormalInterpretation 15, the formation of an LLC is not potentially reportable unlesstwo previously existing businesses under separate control are contributed tothe LLC. You also explained that in this transaction the critical event fordetermining reportability is not when the LLC initially was formed, but whenthe parties contribute the hospital and cash and the interests of the LLC areadjusted. You stated that whether a traps ors is structured as a device foravoidance is very fact specific and determined on a case-by-case basis.

Pleasecall me promptly at if you believe that any part of our conversation wasmisunderstood. Thank you for your help.

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