Question
August 5, 2004
Nancy M. Ovuka
ComplianceSpecialist
PremergerNotification Office
Bureau ofCompetition
Room 303
Federal TradeCommission
Washington, DC20580
Re: Acquisition of 100% Ownership of LLCby Member that Held Over 50% Ownership upon LLC's Formation and Where There HasBeen No Prior HSR Notification
Dear Nancy:
I raised yesterday with you the following hypothetical situation.A two-member US LLC was formed in 1998. Member A contributed cash only andreceived an over-50% ownership interest in the LLC. Member B contributed theassets of an existing business and received an under-50% interest in the LLC.No HSR filing was made in connection with the formation of the LLC and theacquisition by A and B of their respective interests. In 2004 A and B expect toagree that A will acquire all of B's interest in the LLC, thus giving A an 100%interest ("the Transaction").
I asked you whether A's acquisition of B's entire interest wouldbe an HSR-notifiable transaction (assuming HSR thresholds, etc. are satisfied)in two different scenarios: (1) if the Transaction were consummated under thecurrent law and existing FTC interpretations; or, alternatively, (2) if theTransaction were not consummated until 2005.
You indicated that the Transaction would be notifiable if consummated todayunder current law and interpretations. The reasoning, as we discussed, is basedessentially on the following language of Formal Interpretation Number 15:"The acquisition of a membership interest in an existing LLC will be apotentially reportable event (1) if it results in the acquiring person holdingi100 percent of the membership interests in that LLC, and (2) that person had notpreviously filed for and consummated the acquisition of control of thatLLC. Such an acquisition is reportable as the acquisition of all the assets ofthe LLC. This is similar to the PNO's treatment of acquisitions of partnershipinterests." ABA Section of Antitrust Law, Premerger Notification PracticeManual, Third Ed., at 478-79 (2003)(emphasis added).
You said that if, after consummation, A were to hold only a 99% interest and Bor someone else were to hold the remaining 1%, an HSR filing would not berequired. You also indicated that your view on the notifiability of the (100%)Transaction was unaffected by the fact, under current law and PNOinterpretations, that the formation of the LLC with A receiving a controllingpercentage of over 50% would not have been notifiable because only onepre-existing business was contributed to the LLC (namely by B) at the time offormation and A contributed only cash but no second, pre-existing, separatelycontrolled business.
The FTC has proposed to revise its HSR regulations and replace FormalInterpretation 15 with Formal Interpretation 18. One of those revisions wouldtreat the acquisition of all outstanding ownership interests by the memberalready controlling the LLC as an exempt intraparty transfer. See FTC, 16 CFRParts 801, 802 and 803, Premerger Notification; Reporting and Waiting PeriodRequirements, Notice of Proposed Rulemaking (March 31, 2004) http://www.ftc.gov/opa/2004/03/fvi0423.htmand printed at 69 Fed. Reg. 18686 et seq. (April 8, 2004). You indicatedthat if the Transaction is consummated after these new regulations arefinalized and go into effect, the Transaction likely would not be HSRnotifiable. You also cautioned that the Commission's decision regarding thesubstance and wording of the revisions and their effective date has not beenmade.
If I have misunderstood your informal advice in any material respect, pleaselet me know right away. Many thanks for your help.