Question
April5, 2004
Mr- Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
6th Street and Pennsylvania Avenue, N.W.
Room 301
Washington., DC 24582
Re: OrdinaryCourse Exemption
DearMr. Verne:
Thisletter is to confirm the substance of our telephone conversation of April 1, 2004,regarding the applicability of the Hart-Scott-Rodino Antitrust Improvements Actof 1976, as amended "ASR Act" to the proposed transaction outlinedbelow. I was joined on the call by (redacted) of (redacted) representing theacquired person. As you will recall, given the facts of the transaction weconcluded that filing of a Premerger Notification and Report Form will not berequired in this case.
Termsof Transaction
Company "A" and Company "8" arediscussing a possible transaction whereby Company A will acquire certain assetsof Company B. Company A and Company B are each publicly traded corporations andeach satisfy the HSR Act size of person threshold. The anticipated value of theassets to be acquired is greater than $50 million. The HSR Act issue presentedis whether the transaction is exempt from the HSR Act filing requirementspursuant to the ordinary course exemption set forth in 802.1 of the HSRAct regulations.
Each ofCompany A and Company B are in the equipment rental and leasing business,Company A intends to acquire substantially all of the assets of a division ofCompany B, consisting of, inter alia, all equipment inventory, income stream,information systems and name/trademarks (the "Acquired Assets"), aswell as taking on existing personnel and facilities obligations, and theassumption of the liabilities and obligations related to the ,Acquired Assetsand the existing contractual obligations, including vendor obligations,necessary for the day-to-day operations of the Acquired Assets.
The Acquired Assets consist primarily of used durable goodsto be used by Company A solely for the purpose of leasing to third partieswithin the meaning of 802.1(d)(1). Therefore, if the Acquired Assets do notconstitute an "operating unit" of Company a3, we believe that theacquisition would be exempt from the HSR Act reporting requirements as anacquisition in the ordinary course.
CompanyB Operations
In Company B's SEC filings and marketing materials, itdescribes its business activities as consisting of several operating groups,one of which is the "specialty finance group," within which arelocated the Acquired Assets. The Acquired Assets represent a very small portion(less than 10%) of the total assets of the specialty finance group of CompanyB.
The division of Company B holding the Acquired Assetsengages in its own advertisements, including its own web page, and describesitself as an equipment rental and leasing "company" but is notseparately incorporated. Its marketing material makes . clear it is a divisionof Company B, and describes the division holding the Acquired Assets as ore ofseveral "business units" of the specialty finance group.
The vast majority (approximately 80%) of the equipmentrental activities represented by the Acquired Assets consists of short tornrentals, usually 6 months or less. Also, the Acquired Assets focus on rentalactivities in a specific industry. As part of the transaction, it isanticipated that the parties will enter into a non-compete agreement wherebyCompany B, for a specified period of time, shall not engage in "Short TermRental" of the type of equipment included in the inventory of the AcquiredAssets. For purposes of this non-compete, "Short Term Rental" isdefined as the rental of certain equipment on a month-to-month basis, otherthan the rental of equipment that has been previously subject to a lease havinga term of at least 6 months or greater-
OrdinaryCourse Exemption
An "operating unit" is defined in the HSR Actregulations as "assets that are operated by the acquired person as abusiness undertaking ire a particular location or for particular products orservices, even though those assets may not be organized as a separate legalentity." 16 C.F.R. 802.1{a}. As originally promulgated, the 802.1exemption did not apply if the sale involved all of the assets of an"operating division."
In the 1996 rulemaking amending the HSR Act regulations toreplace "operating division" with the term "operatingunit", the FTC sought to emphasize that the nature and substance of theactivities conducted by a business unit are the only factors relevant indetermining the applicability of the ordinary course exemption under 802.1 of the HSR Act regulations. 61Fed. Reg. 13,666, 13,670 (1996). Therefore,the sale of a division of a company does not necessarily mean that an operatingunit will be sold.
HSRAnalysis
Webelieve it is appropriate to apply the "operating unit" definition tothe "operating groups" of Company B, one of which is the specialtyfinance group. This is how Company B describes its activities in SIC filingsand reports its earnings. Looking at the nature and substance of the activitiesconducted by the Acquired Assets -equipment rental and leasing -- the ordinarycourse exemption should apply because under the facts presented, Company B willcontinue in the equipment rental and lease business after the sale of theAcquired Assets.
Pursuantto the terns of the non-compete agreement, Company B would be precluded, for aspecified period of time, from, engaging in Short Term Rental (as definedabove). This fact should not be relevant to the ordinary course exemptionbecause Company B can engage in rental activities with respect to suchequipment for terms of 5 months or longer, and can also provide month-to-monthrentals for equipment that was previously subject to a lease having a term of 6months or longer.
As wediscussed, you agreed with our view that the proposed transaction does notinclude elements that would trigger a determination under 802.1 of theHSR Act regulations that an operating unit is being sold- Accordingly, theordinary course exemption is applicable and the transaction is nit reportableLinder the HSR Act.
Weappreciate your taking the time to discuss this transaction with us. Please letme know as soon as possible if the foregoing conclusions are not consistentwith your understanding