Question
February 12, 2004
Michael B. Verne
Premerger Notification Office
Bureau of Competition, Room 303.
Federal Trade Commission
Pennsylvania Avenue N.W.
Washington D.C.,
LLC and Grantor Trust HSR analysis
Dear Mike:
I am writing to follow up on ourdiscussion on January 29, 2004, concerning whether any HSR filings would berequired in connection with the formation of an LLC and trust structure andassociated initial public offering. This letter provides additional detail onthe proposed structure and related transactions, which may affect theconclusions we reached on our call.
I. Proposed LLC and trust structure
Company M proposes to form an LLC as a vehicle for an initialpublic offering. 100% of the membership interests in the LLC will be heldby a newly created special-purpose grantor trust. The trust will issue publiclytraded trust certificates, which will be offered to investors in the IPO. Thesole reason for the use of the trust in the structure is so that investors willreceive a 1099 tax statement, which would not be available if they held the LLCmembership interests directly.
The trust will act as a passive "mirror" of the LLC inthat each trust certificate matches each LLC membership interest, and thetrustee is required to vote the LLC membership interests in accordance with thevote of the certificate-holders. In this way, the trust certificates give thecertificate-holders the right to vote for directors of the LLC.
Following the IPO, no single investor will hold 50% or more of thetrust, certificates, and consequently no single investor will control 50% ormore of the LLC, membership interests
We did not discuss the HSR analysis of the acquisitions of trustcertificates by investors in the IPO, however, I believe these would not bereportable transactions even in the unlikely event that a single investor wereto acquire over $5O million in trust certificates. This is either because (1)the trust certificates are not voting securities under the HSR Rules; or (2)the investors are effectively acquiring LLC membership interests, which wouldbe non-reportable under Formal Interpretation 15. Please let me know if youagree with this assessment.
(Staff Comment Trust Certificates are not votingsecurities)
II. Contribution of businesses to the LLC
Simultaneously with the IPO, fourforeign entities, A, B, C and D, propose to, contribute their interests in twoU.S. corporations to the LLC in return for trust certificates. The interests ofeach of these entities are as follows:
Company 1 A - 50%equity
B - 50% equity
C - 50% subordinated debt
D - 50% subordinated debt
Company 2 A - 50% equity
B - 50% equity
Entities A and B will contribute the voting securities in the twocorporations, and entities C and D will assign the subordinated debt in Company1, so that the two corporations will be wholly-owned by the LLC(indirectly through a newly created, wholly owned subsidiary of the LLC). Inreturn, entities A and B will each receive approximately 8% and entities C andD will each approximately receive 2% of the trust certificates (equivalent to20% of the membership interests in the LLC).
From our discussion, I understand that this transaction would beviewed as an LLC formation in which A and B contribute the businesses operated byCompanies 1 and 2 and each take an 8% membership interest in the LLC. UnderFormal Interpretation 15, this transaction is not reportable because (1) noother trust certificate-holders are contributing businesses to the LLCin return for their interests, so there is no contribution of two or morepreexisting separately controlled businesses, and (2) no one of thecertificate-holders will control the LLC. I assume that, since thecontributions by C and D are not equity interests in the companies, their acquisitionsof trust certificates would be analyzed in the same manner as other investorsacquiring certificates in the IPO and no filings would be required.
You also suggested that this transaction may be exempt under 802.71of the HSR (Staff Comment NO) Rules, which exempts acquisitionsresulting from transfer by a settlor to an irrevocable trust. You commentedthat the taking back of trust certificates by A and B would likely benon-reportable since trust certificates are not usually considered to be votingsecurities. In light of' the voting rights that attach to the certificates,which we did not discuss on our call, I would be interested in whether youwould now come to a different conclusion on this point. (Staff Comment Does not change analysis.)
III. Other acquisitions
Simultaneously with, or very shortly after, the IPO andcontributions of Companies 1 and 2,'the LLC proposes to acquire otherbusinesses from Company M and other third parties. I understand that each of thesetransactions needs to be separately analyzed to determine whether (1) the valueof the voting securities or assets to be held by the LLC as a result of theacquisition exceeds the size of transaction threshold; and (2) the LLC/trustand the third party meet the size-of-person thresholds at the time of theacquisition (if the value is between $50 and 200 million). As the third partiesare not contributors to the LLC, I assume that 801.11(e)(1) would applyto determine the total assets of the LLC/trust for the size-of-persondetermination.
(Staff Comment Yes, for first acquisition.)
You advised that in order to allow these transactions to close ator shortly after the IPO, HSR filings could be made prior to the spin-off andIPO taking place on behalf of the trust as the ultimate parent entity of theLLC, even if at the time of making the filing the LLC membership interests wereheld by Company M.