Question
October 28, 2004
Facsimile: 202-326-2624
Mr. James Ferkingstad
Premerger Notification Office
Bureau of Competition
Room 303
Federal Trade Commission
600 Pennsylvania Avenue, N. W.
Washington, DC 20580
Re: Confirmation of Advice Regarding Formation of LimitedLiability Company
Dear Mr. Ferkingstad-,
OnTuesday, October 26, 2004 and Thursday, October 28, 2004, you and I spoke regarding atransaction that included the contribution of assets to a newly formed limitedliability company and the subsequent sale of interests by its members to asingle purchase- that in the aggregate constitute control of the limitedliability company. I am writing to confirm your advice with respect to whetherthat transaction is reportable under the Hart-Scott-Rodino AntitrustImprovements Act of 1976, as amended ("HSR"), and the rules (the "Rules") promulgated thereunder.
FACTS:
Step1: Companies A, B, C and D, each a corporation, will form a limitedliability company (the "LLC") under Delaware law. Each company will contribute to the LLC all or substantiallyall of its assets used in its business. The LLC will assume the netindebtedness for borrowed. money of each company incurred in connection withits business (approximately $10.7 million in the aggregate at September 30, 2004 of which approximately $5,6million is owed 6y company B and approximately $6.4 million is owed by companyD). The fair market value of the assets being contributed by companies A, B, Cand. D is approximately $17.5 million, $17.8 million, $7.1 million and $22.1million, respectively, at September 30, 2004. In consideration of thecontribution of assets, companies A, B, C and 15 will receive membershipinterests of approximately 32.62284%, 22.59151%, 15.63994% and 29.1457%,respectively, in the LLCs These percentages represent the rightto the profits of the LLC and the net assets of the LLC upondissolution. Company A and company C are controlled by the same shareholder, Shareholder1, and thus are within the person Shareholder 1. Company B andcompany D are not controlled by any shareholder and, therefore, each is theirown person.
Step2: Immediately following the formation of the LLC and the contributions bycompanies A, B, C and D as described above, a newly formed corporation("Purchaser") that is unrelated to companies A,B, C and D and theirshareholders, will acquire from companies A, B,, C and D membership interestsin the LLC that will aggregate approximately 70.69% of the outstandingmembership interests in the LLC for cash of approximately $38 million.Companies A, B, C and D will use the monies they receive from the sale of aportion of their membership, interest in the LLC to Purchaser to purchase allor a portion of the shares of certain of their shareholders.
Step3: At the time of the closing of the formation of the LLC as describedabove and following the sale by companies A, B, C and D of membership intereststo Purchaser, the LLC will incur indebtedness of approximately $30 million interm loans and $12 in revolving credit and capital expenditurefacilities that will be used, in part, to refinance the indebtedness forborrowed money assumed by the LLC in connection with the contributions bycompanies A, B, C and D of their businesses (approximately $10.7 million at September 30, 2004) and to make a post closingdistribution of approximately $19.4 million in cash to its members, which atthat time will consist of companies A, B, C and D as well as Purchaser.Companies A, B, C and D will use the monies they receive in the distribution tomake a pro rata distribution to their continuing shareholders.
FORMATION OF THE LLC AND HSR FILING REQUIREMENTS:
Theformation of a limitedliability company is governed by Formal interpretation 15 issued February 1999and amended July 1999 and March 2001. The March 2001 amendment states that"This Formal Interpretation, therefore, changes the PNO's treatment of an LLC asfollows: The PNO will henceforth treat asreportable the formation of an LLC if (1) two or more pre-existing, separatelycontrolled businesses will be contributed, and (2) at least one of the memberswill control the LLC (i.e. have an interest entitling it to 50 percent of theprofits or 50 percent of the assets o f the LLC upon dissolution)."
TheMarch 2001amendment also states that "The acquisition of a membership interest in anexisting LLC will be a potentially reportable event (1) if it results in theacquiring person holding 100 percent of the membership interests inthe LLC and (2) that person has not previously filed for and consummated theacquisition of control of the LLC."
ANALYSIS:
While twoor more separate pre-existing businesses will be combined in the LLC its step1, the formation does not result in those businesses being under commoncontrol. The acquiring person Shareholder 1 will acquire the greatestmembership interest in the LLC, 48.26278%, which is less than a controllinginterest. Although Purchaser will acquire a controlling interest in the LLC in step 2, for purposes of. HSR, the steps to a transaction dono occur simultaneously. Thus the formation of the LLC is limited to thetransactions described in step 1. Accordingly, the formation of the LLC is nota reportable event. If we assume that Shareholder 1 will acquire a controllinginterest in the LLC rather than the percentage set forth, above, thenShareholder 1 would be an acquiring person and deemed to be making two separateacquisitions, the acquisition of company B's business from the acquired personcompany B and, the acquisition of company D's business from the acquired personcompany D. For either of these acquisitions to be reportable, the size oftransaction and size of parties tests must be met. The fair market value of theassets being contributed by company B to the LLC is approximately $17.8 millionat September 30, 2004. As a result,for purposes of HSR, the size of Shareholder 1'sacquisition of the assets of company B is only approximately $17.8 million,which does not satisfy the size of transaction test. Similarly, the fair marketvalue of the assets being contributed by company D to the LLC is approximately$22.1 million at September 30, 2004. Thus, forpurposes of HSR, the size of this acquisition is onlyapproximately $22.1 million and does not satisfy the size of transaction test.
Theacquisition byPurchaser of a controlling interest in the LLC its step 2 for cash also is notreportable because Purchaser is acquiring an. interest in an existinglimited liability company but will not, as a result of the acquisition, hold100% of the outstanding membership interests in the LLC. Purchaser'sacquisition from companies A, B, C anal D of membership interests in the LLCfor cash is not the formation of a new limited liability company becausePurchaser is not contributing a business to the LLC As well, the purchase by companiesA, B, C and D of all or a portion of the shares of certain of theirshareholders is not reportable under Rule 802.30, which provides thatrepurchases of voting securities by the issuer, even if not pro rata, areexempt.
Thedistribution by the LLC of cash to the members in step 3 is not reportable ascash is not considered an asset of the person from whom it is acquired and thecash distributed in step 3 does not affect the analyses of steps 1 and 2because the three steps are separate events.
CONCLUSION:
This transaction is not reportable because none of the steps is areportable event.
Iwish to thank you in advance for your time and consideration in this matter. Ifyou have any questions, please telephone me at (redacted).