Question
September 13, 2004
VIA OVERNIGHT DELIVERY,
Michael Verne
Premerger Notification Office
Federal Trade Commission
600 Pennsylvania Ave., N.W.
Washington, D.C. 20580
Re: Application of Hart-Scott-Rodino Rules and Regulations
Dear Mr. Verne:
Weare writing regarding the interpretation of the Hart-Scott-Rodino Act and therules and regulations interpreting it. In general, the question has to do withrules regarding the Hart-Scott-Rodino reportability of member substitutionsamong not-for-profit entities, and specifically, determining the value of thetransaction where the entity to be acquired is in substantial danger offailure.
CompanyA and Company B are non-profit entities that meet the size-of-personrequirement. However, we are seeking confirmation about the method fordetermining whether or not the transaction would satisfy thesize-of-transaction requirement. Generally, the contemplated transaction wouldsubstitute a newly-created parent of Company A for the current parent ofCompany B through a member substitution. Specifically, Company A will create aparent organization ("Parent") that will have the authority toappoint the Board of Trustees of both Company A and Company B.
Nomoney is to be paid in consideration for the change of membership. NeitherCompany A nor the Parent would be paying any funds to Company B or its currentparent. Company B, not the Parent, will continue to remain responsible for itsdebts and liabilities after the transaction.
CompanyB is a financially troubled institution that may not survive over the longterm. Indeed, Company B's most recently prepared balance sheet showsapproximately $140 million in assets and $180 million in liabilities. Since thebook value of Company B would appear to be well below $50 million, the Parent'sattempt to assume control of the institution and to resolve Company B'ssignificant financial and operational problems would not appear to bereportable. However, we understand that the "book value" of a companyis not used to determine the value of the transaction for HSR purposes. Rather, we understand that the value of the transactionis the fair market value of the assets.
Weare requesting confirmation that the appropriately determined fair market value(e.g., an independent appraisal), can be the basis upon which we shoulddecide whether or not the value of the contemplated transaction exceeds $50million, and, therefore, would be subject to the Hart-Scott-Rodino notificationrequirements.
We look forward to your response.