Question
November 3, 2003
ViaCourier
Mr. B. Michael Verne
Premerger Notification Office
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington,DC 20580
Re: Hart-Scott-Rodino Act Filing Requirements
Dear Mr. Verne
We are writing to confirmour understanding of an earlier conversation between you and the undersignedabout the premerger notification filing requirements relating to a proposedacquisition of convertible debentures and the stock of a corporation the onlyassets of which are limited partnership and limited liability companyinterests.
The Sellers, twopartnerships, propose to sell to Buyer: (1) 100 percent of the votingsecurities of Corporation A, and (2) certain subordinated convertibledebentures. The total purchase price exceeds $50 million. Corporation A's onlyassets consist of (1) a 49.3 percent interest in Limited Liability Company B("LLC-B"), (2) 46.7 percent of the limited partnership units inLimited Partnership C ("LP-C") and (3) indemnity rights againstothers under one or two contracts. LLC-B is the sole general partner of LP-Cand holds a 0.01 percent general partnership interest in LP-C. Corporation A'sinterests do not confer "control" for HSR purposes over either LLC-Bor LP-C as Corporation A does not have the right to 50 percent or more of theprofits of either entity or the right to 50 percent or more of the assets ofeither entity in the event of dissolution. See 16 C.F.R. 801.1(b).
The subordinatedconvertible debentures are convertible into limited partnership interests ofLP-C. We have assumed that the acquisition of the convertible debentures isexempt from the HSR filing requirements under Section 7A(c)(2) of the Act whichexempts acquisitions of obligations that are not voting securities. Since theseconvertible debentures do not entitle the holder either currently or uponconversion to vote for the election of directors (they are convertible intolimited partnership interests not stock of a corporation) they are not votingsecurities and thus qualify for the 7A(c)(2) exemption.
Based on ourconversation, we believe that the acquisition of the stock of Corporation A isalso exempt pursuant to 16 C.F.R. 802.4. Rule 802.4(a) provides:
"Anacquisition of voting securities of an issuer whose assets together with thoseof all entities it controls consist or will consist of assets whose purchasewould be exempt from the requirements of the act pursuant to Section 7A(c)(2)of the act, Sec. 802.2, Sec. 802.3 or Sec. 802.5 of these rules is exempt fromthe reporting requirements if the acquired issuer and all entities it controlsdo not hold other non-exempt assets with an aggregate fair market value of morethan $50 million."
This rule details howcertain exempt and non-exempt assets are treated for purposes of applying therule, but does not describe how non-controlling interests in other entities arehandled. As you explained, however, the PNO's position is that the value ofnon-controlling interests in other entities should not be included when valuingnonexempt assets for purposes of applying Rule 802.4. As explained inInterpretation 214 in the PREMERGER NOTIFICATION PRACTICE MANUAL (3d ed. 2003),non-controlling interests in a corporation are ignored for purposes ofcalculating the amount of non-exempt assets held by the acquired issuer (thoughthe acquisition of this non-controlling corporate interest must be analyzedseparately as a "secondary acquisition"). Similarly, non-controllinginterests in a partnership or an LLC are also ignored for valuing non-exemptassets held by the acquired issuer and would only be a factor in the HSRanalysis if the acquisition resulted in the acquiring party holding 100 percentof the partnership or LLC.
The only other assetsheld by Corporation A are indemnity rights, which if not exempt under section7A(c)(2) of the Act, have a fair market value far below $50 million. Thus, theacquisition of the stock of Corporation A would qualify for the 802.4exemption.
Buyer may acquireadditional interests in LLC-B and LP-C from entities other than Sellers priorto, or perhaps simultaneous with, closing the Corporation A and convertibledebenture purchase from Sellers. As a result of these other transactions, Buyermay end up with more than 50 percent of the interests in LLC-B or LP-C, thoughBuyer will not hold 100 percent of the interests in either LLC-B or LP-C as aresult of any of these transactions. We do not believe that these otherpotential acquisitions change the application of the section 802.4 exemption tothe transaction described in this letter between Buyer and Seller.
Pleaseconfirm our understanding of the HSR analysis in this transaction. We v muchappreciate your help on this matter; do not hesitate to contact the undersignedat if you have any questions.