Question
December 4, 2003
Via Messenger
B. Michael Verne
Federal Trade Commission
Premerger Notification Office
6th & Pennsylvania Avenue, N.W.
Bureau of Competition, Room 303
Washington, D.C. 20580
Dear Mr. Verne:
I amwriting to confirm the Hart-Scott-Rodino advice you provided to (redacted) of (redacted)and myself in a telephone conversation on December 3, 2003. We discusseda propose transaction involving two currently unaffiliated partnerships:Partnership A and Partnership B. Each partnership has a limited liabilitycompany as its general partner ("GP-A" and "GP-B").
As weindicated, the transaction involves two steps:
Step One: Partnership A will acquire a 50% non-voting membershipinterest in GP-B in exchange for a cash payment in excess of $50 million.Partnership A's 50% interest in GP-B will entitle it to certain rights to vetomajor events of Partnership B, e.g., declaration of bankruptcy. However,Partnership A will not participate in the management and affairs of PartnershipB; the other member of GP-B will continue to be the sole managing member of theGP-B.
Step Two: Partnership A and Partnership B will merge (as will GP-Aand GP-B) in a Hart-Scott reportable merger transaction.
You advised thatcompletion of step one would not be subject to Hart-Scott filing requirements.In conformity with Formal Interpretation 15, you indicated that Partnership'sA's acquisition would not be reportable because, as a result of theacquisition, A would not hold 100% of the interests in the LLC. You furtherindicated that your conclusion that no step one filing is required is notchanged by the fact that the LLC interest in GP-B will be acquired at the sametime or shortly after the merger agreement for step two is signed. As youindicated, the fact that at the time step one is completed the parties have theintention and contractual obligation (subject, of course, to variousconditions) to complete the merger does not change the application of FormalInterpretation 15 to the circumstances here. Thus, you advised that step onewould not be deemed to constitute "gun jumping," i.e., premature transfer-of beneficial ownership. In any event, step one is a freestanding andindependent transaction. If for any reason the merger in step two does not takeplace, step one is not subject to any automatic unwind.
We further requested youradvice on an issue regarding the filing required in connection with step two.Specifically we asked how we should account for the LLC holdings of PartnershipA that were acquired in step one. The issue arises because partnership A willhold 50% of the membership interests of the GP-B LLC, but GP-B has varyingrights to the profits of Partnership B. GP-B currently has a 1 % generalpartnership interest in Partnership B which entitles it to incentivedistributions. These distributions are paid out in increasing percentages asPartnership B's quarterly distributions increase. The distributions are cappedat a marginal rate of 50%, but the total distributions are of course less than50% of B's total distribution in any quarter. You indicated that in a situationsuch as this one where the payout of partnership profits is based on a varyingpercentage, the profits to which a party is entitled are said to be"indeterminate" for HSR purposes, and the percentage of partnershipcontrol is determined based on entitlement to assets upon dissolution of thepartnership. Thus, you advised that Partnership A would only be deemed tocontrol Partnership B if GP-B (as to which Partnership A would have 50% controlfollowing step one) has the right, at the time of filing to 50% or more of theassets upon dissolution of Partnership B.
Please call me at (redacted) or(redacted if the above does not accurately describe the advice you provided orif you have any questions. We very much appreciateyour help on this matter.