Question
From: (redacted)
Sent: Monday, February 07, 2005 9:18 AM
To: Verne, B. Michael
Subject: HSR Question About Allocation of Purchase Price to Noncompetes
> Dear Mr. Verne,
>
> I would appreciate your informal guidance on a Hart-Scott-Rodinotransaction valuation question.
> > Our client (the "Purchaser") is proposing to acquire100l0 of the issued and outstanding capital stock of a corporation ownedby two shareholders (the "Sellers"). Five days after the closing ofthe stock sale, the Purchaser will pay the Sellers an additional amount for allinventory located in the Sellers' business locations as of the closing date.
>
> The Stock Purchase Agreement provides that the Purchaser will pay theSellers an aggregate purchase price of $47,500,000 for their shares and forfive-year noncompetition agreements to be entered into by the Sellers atclosing. The Purchaser and the Sellers have agreed to allocate $2,000,000 ofthe $47,500,000 purchase price to the non-competition agreements. The Purchaserestimates that it will pay the Sellers an additional $4,500,000 for theinventory located in the Sellers' business locations.
>
> Under these facts, will the $2,000,000 that the parties have allocated tothe noncompetition agreements count towards the acquisition price for purposesof determining whether the Size of the Transaction Test is met? I understandthat in some situations the Premerger Notification Office staff has taken theposition that value allocated to employment agreements or agreements forconsulting services entered into by the sellers of a business and containingnoncompetition covenants does not count towards the acquisition price. Thereasoning in these situations seems to be that these agreements involvepayments in the future for services to be rendered in the future, and that thevalue allocated to the employment or consulting agreements is payment forfuture services rather than payment for voting securities or assets. I alsounderstand, on the other hand, that the Premerger Notification Office staff hasalso taken the position that payments for noncompetition agreements should betreated as though they were payments for intangible assets in determiningwhether a filing is required. It may be significant that, under our facts, theSellers are entering into stand-alone noncompetition agreements, notnoncompetition agreements wrapped in employment or consulting agreementsinvolving future services. The question seems to boil down to whether theSellers' promise to perform the noncompetition covenants in the future can beanalogized to a "service" that will be performed over five years,even though the entire $2,000,000 allocated as consideration for the noncompetitioncovenants will be paid at closing.
> If the $2,000,000 allocated to the noncompetition agreements countstowards the acquisition price, the size of the transaction test will likely bemet and a Hart-Scott-Rodino filing will be necessary. If the $2,000,000 allocatedto the noncompetition agreements does not count towards the acquisition price,it is possible that the combined value of the stock and assets to be acquiredwill not reach $50,000,000 and no HSR filingwill be necessary.
> If you would like to discuss this matter in more detail, please do nothesitate to call.
> Thank you in advance for your assistance.