Question
July 6, 2004
Ms. Nancy Ovuka
Compliance Specialist
Premerger Notification Office
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Room 301
Washington, D.C. 20580
Re: Re: Integrating Operations of Certain Limited LiabilityCompanies
Dear Ms, Ovuka:
I am writing to follow up on ourtelephone conversations of June 29, 2004 and to confirm my understanding that,under these circumstances, no :further HSR filingswill be required as a result of the restructuring moves described below.
In the late fall of 2003, "Fund A', through anewly-formed LLC, "Holding Company B", acquired the assets of "BIndustries" out of bankruptcy. In addition to assets, voting securities ofcertain subsidiaries of B Industries were acquired. To facilitate theacquisition, a principal LLC subsidiary wholly owned by Holding Company B,"Operating Company B", was established. Below Operating Company B, anumber of additional LLC subsidiaries were set up, Holding Company B is owned66.6% by Fund A, which is the ultimate parent entity, with the remainingmembership interests in Holding Company B being owned by two other funds. HSR notification and report forms were filed by Fund A and B Industriesin connection with the acquisition, and the waiting period expired or wasterminated prior to closing.
In the spring of 2004, Fund A, through adifferent newly-formed LLC, "Holding Company C", acquired the assetsof "C Industries" out of bankruptcy. In addition to assets, votingsecurities of certain subsidiaries of C Industries were acquired. To facilitatethe acquisition, a principal LLC subsidiary wholly owned by Holding Company C,"Operating Company C", was established. Below Operating Company C, anumber of additional LLC subsidiaries were set up. Holding Company C is owned100% by Fund A. HSR notification and report forms were filedby Fund A and C Industries in connection with the acquisition by Fund A of theC assets. These filings reflected Fund As control of Holding Company B andits assets and consequently the combination of the B assets and operations withthe C assets and operations. The waiting period on the Fund A/C Industriesfilings expired or was terminated prior to the closing.
Fund A is now in the process ofintegrating the operations of Holding Company B anal Holding Company C. Fluid Awill combine Holding Company B and Holding Company C, and then cause theresulting entity to effect a number of mergers and asset transfers for thepurposes of streamlining the organization and aligning operations along productand to an extent geographic lines. To effect the combination of HoldingCompanies B and C, Fund A is considering three different basic approaches:
Holding Company Cwould merge into Holding Company B, with the interests of Fund A and the twoother owners with an interest in Holding Company B being adjusted based on therelative values of Holding Company B and Holding Company C. Promptly followingthe merger, the resulting entity would elect to convert under state law from alimited liability company into a corporation.
Holding Company Bwould either have Operating Company B elect to be taxed as a `ccorporation'' for federal, income tax purposes or create a new subsidiary(Newco) taxed as a c corporation and contribute the ownership interests ofOperating Company B to Newco. Then Operating Company B (or Newco) would bedistributed to .he members of Holding Company B pro rata to their membershipinterests. After the distribution, Holding Company C would merge into OperatingCompany B (or Newco). If the Newco approach is used, there would be twooperating subsidiaries; otherwise the combined holding company would also holdthe B assets and Operating Company C would operate as a subsidiary.
In the third optionunder consideration, Holding Company B would sell all of the membershipinterests in Operating Company B to Holding Company C in a taxable transactionin exchange for convertible preferred stock with a value equal to HoldingCompany B's cost. The preferred stock would then be used to pay down loans fromor return equity to the three funds which own Holding Company B, resulting inownership by the fluids in the combined entity. Holding Company C would becomethe combined holding company, with Operating Company B and Operating Company Cbeing the principal operating subsidiaries.
The ownershipinterest an the combined holding company of Fund .A and the two minority ownersof Holding Company B under each of the alternatives under consideration wouldnot vary based on the alternative ultimately chosen. Each will end up withproportional ownership in the combined company based on, the relative values ofHolding Company B and Holding Company C. Fund A will in any event own more that50% of the membership interests of the combined entity.
During our conversation, we considered two different lines ofanalysis in discussing whether the integration process triggers an HSR filing requirement. First, we discussed the application to thesefacts of Formal Interpretation #l5 and related learning on the currenttreatment of LLCs under the Premerger Notification Rules. Second, putting asidethe question of whether those rules on LLC's might lead us to conclude that aparticular step, considered by itself, would trigger a filing requirement,'tone discussed whether any hex filings are necessary under these circumstancesbecause of the HSR filings made in. 2004 which covered thecombination of the businesses and operations of Holding Company B and Holding CompanyC.
Addressing the latter point first, the acquisition of the CIndustries assets by Fund A was covered by the 2004 HSR filings, and Fund A already held the B Industries assets, asreflected in the filings. Since no objection to the acquisition was raisedprior the expiration or early termination of the waiting period, Fund A had,and still has, an effective filing for acquisition of all of the C Industriesassets, A variety of modifications made to a transaction prior to the closing donot necessitate a refiling-for instance, shifting from are asset deal to astock deal (ox vice versa) is not material enough to require an amendment. SeeInt. # 265 of the ABA Premerger Notification Practice Manual.No transaction under consideration post-closing (such as, fox
instance, substituting a corporate form for an LLC form of holdingcompany) would, if undertaken prior to closing, require a modification to thefling or a new filing.1 As the integration transactions underconsideration can properly be seen as "clean. up" refinements to thestructures of the basic acquisition, or steps involved in completing theacquisition. And integration of the businesses formerly run by C Industries andB Industries, and the basic acquisition has air effective filing is in place,there should be no her filing requirement for the steps outlined above. Myunderstanding of our conversation was that you concurred in the view that sincethe 2004 HSR filings reflected the acquisition byFund A of the assets now held by Holding Company C, and Fund A controls HoldingCompany B, the transactions involving Holding Company B and Holding Company Coutlined above are fairly covered by those filings and thus do not trigger anyfurther filing requirement.2
While the foregoing would be dispositive of the question ofwhether a filing is required, we first reviewed the proposed transactions inlight of Formal Interpretation #15, in some detail. Assuming for the sale ofanalysis that we did not have the effective filing to cover the transactions,my understanding of where we came out in the conversation is as follows:
Merger/Conversion. The first alternative involves a mergerof Holding Company C into Holding Company B, followed by a conversion ofHolding Company B from limited liability status into corporate solution. Youagreed with me that under Formal Interpretation #15, the merger should notrequire a filing because the two businesses being combined are not separatelycontrolled before the merger. However, you did not agree with the furthhersuggestion that the parenthetical exclusion in 801.40 for corporationsformed "in connection with" mergers was a basis for concluding thatthe conversion into a corporation was not potentially reportable under801.40. Your view was that the conversion would be potentiallyreportable, at least until the proposed amendments to 502.10 becomeeffective.
Distribution/Merger. The second alternative involves a prorata distribution of Operating Company B to the members of Holding Company B,followed by a merger of Operating Company B with Holding Company C. A variationof this under consideration as the creation by Holding Company B of a newwholly-owned subsidiary, Newco, and the contribution of Operating Company B toNewco. The ownership of Newco would then, be distributed to Holding Company Bowners, to be followed by a merger with Holding Company C, We concurred thatthe distribution of the LLC interests would not be reportable because no onewould be acquiring 100% of the interests, and that the follow on merger shouldnot be reportable under Formal Interpretation #15 for the reasons discussedabove. Accordingly, the only area of potential reporting here would be if Newcowere created as a corporation rather than an LLC; that was a question. youwished to reserve on.
Sale of Assets. The third alternative involves the saleof Operating Company B to Holding Company C. As this would involve all of themembership interests of Operating company B, it would be treated as a sale ofassets under Formal Interpretation #1 ,5 potentially reportable under therules.
Downstream Consolidation. Finally, onceHolding Company B and Holding Company C are combined, all transactions amongthe wholly-owned subsidiaries of the new "Holding Company BC" (or between a subsidiary and Holding Company BC) should beexempt because wholly-owned LLC's can be ignored or looked through for purposesof HSR analysis. Thus the transfer, say, of anoperating subsidiary from the B side to the C side would be exempt eitherbecause it would be considered as an intracompany transfer of assets or, if acorporate subsidiary is involved, it would be exempt under 802.30,
Please let meknow if you disagree with any of the foregoing or if my memory of ourconversation is faulty in some respect. I appreciate your time and patience in,helping work though these questions.
Footnotes
1 The one exception might be the issuanceof voting securities that will ultimately be owned by the two minority ownersof Holding Company B. Based on the valuation of the B Industries business inthe HSR filing, the voting securities issuableto each minority owner of Holding Company 73 will have a value of less than $50million per owner.
2 All integration steps are expected to becompleted during calendar year 2004.