Question
From: (redacted)
Sent: Thursday,December 09, 2004 12:50 PM
To: Verne, B. Michael
Subject: LLC Formation /Exempt Asset Rules
Mike - this is to follow up on our call this morning regarding an LLC formationunder the current rules and under the proposed rules relating to LLCs. Pleaselet me know if you disagree or have questions on any of the analysis set forthbelow. Also, there is a small third participant that I did not mention thismorning, and the dollar amounts / percentage ownership is a little differentthan we discussed, but I do not see how that would change the analysis.
FACTS.
A, B and C intend to form a new LLC.
Awill contribute assets with a fair market value of $60 million (net asset valueis $37 million, as there is $23 million in debt that will come with theassets). A will take an appx. 54% interest in the LLC.
Bwill contribute assets with a fair market value of $37 million (net asset valueis $23 million, as there is $14 million in debt that will come with theassets). B will take an appx. 36% interest in the LLC.
C will contribute $8 million in cash, for an appx. 10% interest inthe LLC.
CURRENT RULES
Theonly party with a potential reporting obligation is A, because it is the onlyparty acquiring a 50% or more interest in the LLC. A is treated as acquiringB's assets. Since B's assets are valued at $37 million, the HSR size-of-transaction test is not satisfied, and no filing isrequired. Alternatively, if the parties used a partnership rather than an LLC, thatalso would not be reportable as partnership formation is not reportable. A doesnot have any reporting obligation for its "acquisition" of $8 millionin cash from C.
PROPOSED RULES
Underthe proposed new rules that you plan to send to the Commission shortly, thetransaction also would not be reportable, but for different reasons. Thebullets below paraphrase the text from the proposed rules from last March, butI understand based on our discussion this morning that the concepts are similaror identical in the rules that you propose to send to the Commission shortly.
First,new rule 802.4 says that -- in an acquisition of non-corporate interests in anentity whose assets (including the assets of all entities it controls) willinclude assets the acquisition of which is exempt under part 802 of the rules-- an acquisition is exempt from the reporting requirements if the acquiredunincorporated entity (and entities it controls) will not hold non-exemptassets with an aggregate fair market value of more than $50 million.
Second,new rule 802.30(c) would say that assets contributed to a new entity upon itsformation are not subject to the requirements of the Act with respect to theperson contributing the assets to the formation.
Third,new rule 801.50 relating to the formation of unincorporated entities, a personcontributing to the formation of an unincorporated LLC can only have a filingobligation if it acquires control (50% plus interest) in the LLC orpartnership.
Applyingthese three rules to the facts above if the formation were to occur after thenew rules come into effect, we concluded that no filing would be required.
B'sacquisition and C's acquisition. B does not have any reporting obligationbecause it is not acquiring 50% or more of the LLC. The same is true for C. Thesame would be true if the parties used a partnership rather than an LLC.
A'sacquisition. Under proposed 802.30(c), the assets that A is contributing to theformation of the LLC are treated as "exempt assets" for A under therules. Because the $60 million in assets contributed by A are "exemptassets" with respect to A, they are treated as exempt assets with respectto A's acquisition of an interest in the LLC. Thus, from A's perspective, theLLC would only hold $37 million of non-exempt assets (consisting of the assetscontributed by B; the cash contributed by C is not treated as an asset acquiredby A under 801.21). Since the LLC does not have in excess of $50 million innon-exempt assets from A's perspective, A's acquisition of an interest in theLLC would be exempt under proposed rule 802.4. The same analysis would apply ifthe parties used a partnership rather than an LLC.
Conclusion
Underboth the current rules and the proposed rules, in an LLC (or partnership)formation described above, as long as the minority holder (B) is notcontributing assets worth in excess of $50 million, the transaction is notreportable. The parties intend to proceed with the transaction described above,and are doing so with the understanding that they will not be required to filethe transaction under either the current rules relating to LLCs or the proposedrules relating to LLCs. Alternatively, if the parties employed a partnershipstructure instead, the transaction would not be reportable under the current orproposed rules. Please let me know if you have any questions or concerns aboutthe analysis set forth above. As always, thanks for your help!