Question
January 25, 2005
BY FEDERAL EXPRESS
Mr. B. MichaelVerne
Premerger NotificationOffice
Bureau ofCompetition, Room 303
Federal TradeCommission
6th Street and Pennsylvania Avenue, N.W.
Washington, DC 20580
Re:HSR Treatment of LLC Formation Transaction
Dear Mike
Iam writing to confirm my understanding of the Hart- Scott-Rodino ("HSR") analysis we discussed during our telephone conversationsof January 6, 2005 and January 12, 2005.
OnJanuary 6, 2005, (redacted) of my firm left you amessage with a question about the upcoming amendments to the HSR rules as they relate to a party's acquisition of an interest in alimited liability company ("LLC"). Among other things, (redacted)asked whether, under the proposed new rule concerning the formation of an LLC,16 C.F.R. 801.50, the parties contributing to the formation of the newLLC will be "acquiring parties" only for HSR purposes and not "acquired parties" - as 16 C.F.R. 801.40 currently provides with respect to the contributors to anewly-formed joint venture corporation. Based on our subsequent telephone callon January 6, we understand that 801.50 would indeed have this effect ascurrently proposed by the FTC staff, and that edits were made to the expectedlanguage of 801.50 in order to make this clear.
OnJanuary 12, 2005, (redacted) and I called you again todiscuss this issue in more depth. In that call, I explained that we hadadditional questions concerning the proposed new rules as they would affect atransaction involving an LLC, and I indicated that this call was related to theprior call held January 6, 2005. I then provided youwith a description of the following transaction.
"Owner"and "Investor" have entered into a Contribution Agreement pursuant towhich:
(1)Upon closing, Owner will transfer the principal assets of a business (the"Business"), including real property, intellectual property,contracts, voting securities, and liabilities, to a newly-formed LLC("Newco"). Newco was created for the purposes of this transaction,but until closing will remain a wholly-owned subsidiary of Owner. The Businessis valued at approximately $350 million.
(2)Upon closing, a financing transaction (arranged by Owner and Investor prior toclosing) shall take place pursuant to which Newco will receive debt financingfrom a third party in the amount of approximately $350 million.
(3)Upon closing, Investor shall obtain from Owner a 50% membership interest inNewco in return for Investor's payment directly to Owner of (a) $50 million incash; and (b) voting securities of Investor in an amount less than $20 million.
(4)Upon closing, Newco shall pay approximately $200 million in cash (obtained fromthe financing transaction) to Owner, which the contract provides isconsideration for the Business contributed by Owner to Newco.
TheContribution Agreement provides that at the closing, the above steps shall bedeemed to take place in the order set forth above. Additionally, for thepurposes of this analysis, we assume that both Investor and Owner will"control" Newco for HSR purposes after closing.
Basedon our January 12, 2005 conversation, I understand that thistransaction should be analyzed in the following manner under the proposed newrules. First, the transaction is properly considered a formation transactionsubject to proposed new rule 801.50. The fact that cash and securities arebeing transferred directly from Investor to Owner, and directly from Newco toOwner does not require a different analysis, or result in any reportabletransactions separate from the 801.50 formation transaction. (In effect, thesepayments can be considered equalization payments.)
Second,under the new rule 801.50, as discussed above, Owner and Investor will both bedeemed "acquiring persons" only for HSR purposes,and neither Owner nor Investor has any obligation to file an HSR form as an "acquired person" in connection with thetransaction described above.
Third,Owner's "acquisition" of a 50% membership interest in Newco is exemptfrom the HSR reporting requirements pursuant to new16 C.F.R. 802.4, which, as modified, will provide that the acquisitionof control of an LLC that holds only exempt assets (or less than $50 million ofnon-exempt assets) is exempt from HSR reportingrequirements. Here, the assets of the Business contributed by Owner will beexempt assets with respect to Owner pursuant to proposed new rule 16 C.F.R. 802.30(c). Additionally, any cash held by Newco or obtained by Owner aspart of this transaction is not an asset for HSRpurposes, pursuant to 16 C.F.R. 801.21(a). Finally, because Owner willnot hold voting securities of Investor (including any corporation under commoncontrol with Investor) valued in excess of $50 million, Owner's acquisition ofless than $20 million worth of Investor voting securities is not reportable.
Basedon our conversations, I also understand that a provision in the ContributionAgreement that allocates the purchase price for tax and other purposes does notchange this analysis. The relevant provision of the Contribution Agreementprovides that for the purposes of allocating the purchase price for tax andother purposes: (i) Owner will be considered to have contributed to Newcoassets of the Business valued at $50 million plus the value of the Investorsecurities obtained by Owner; (ii) Investor will be considered to havepurchased from Owner and contributed to Newco assets of the Business with thesame total value; and (iii) Newco will be considered to have purchased theremaining assets from Owner for $200 million. I therefore understand that,under the facts as described above, Owner is not required to file an HSR form and, because Newco will be exempt from filing pursuant to 16C.F.R. 802.41, only Investor could be required to file an HSR form in connection with this transaction.
Wealso discussed whether Investor is required to search for Item 4(c) documentsin the custody of Newco and/or Owner as part of this transaction. You confirmedour understanding that neither Investor, Owner, nor Newco are under anyobligation under the existing or proposed HSR rules tosearch the files of Newco and/or Owner for Item 4(c) documents. Additionally,you indicated that Investor would be permitted to file its HSR form as soon as the FTC officially approves and releases the newrules in the form that they will appear in the Federal Register, and not berequired to wait for the effective date of the proposed rules prior to filing(as long as Investor in good faith intends to close the transaction after theeffective date of the new rules).
Pleasecall me (redacted) at your earliest convenience to confirm that myunderstanding of the proper HSR analysis of the transaction describedabove, under the new rules, is accurate. Again, thank you very much for yourhelp.