Question
September 19, 2005
Via E-Mail
Mr. B. Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
Room 303
600 Pennsylvania Avenue, N.W.
Washington, DC 205$0
RE: Application of Hart-Scott Rodino Antitrust Improvements Act
Dear Mike:
Thankyou for taking the time to speak with me last week and both (redacted) and metoday regarding our questions on the application of the Hart Scott RodinoAntitrust Improvements Act of 1976, as amended (the "'HSR Act"), to the transaction described below. I am writing toconfirm the conclusions from our conversations and to ensure that neither Akinor I will misstate the views of the Premerger Notification Office to ourrespective clients. The transaction is described as followed:
My client, Company A,proposes to purchase certain of the assets constituting the foreigncorrespondent banking business of Company B. In connection with thisacquisition, Company A will have the right to offer employment to the employeesof Company B in its foreign correspondent banking business and intends to offerpositions consistent with its needs.
This foreigncorrespondent banking business primarily provides correspondent banking andtrade-finance products and services to international financial institutions(principally foreign banks). These services include payments, account and cashmanagement, letters of credit, short-term financing, bank-to bankreimbursements, export bill collections, and foreign exchange.
These internationalfinancial institutions who are customers of Company B in its foreigncorrespondent banking business are not required to use the services offered inthis business from either Company B or Company A. In fact, no assurances can begiven that these customers of Company B will become customers of Company A.These customers are free to use the correspondent banking and trade-financeproducts and services of other companies that are competitors of Company A. Ofcourse, Company A and Company B expect that substantially all of thesecustomers will become customers of Company A.
The foreigncorrespondent banking business of Company B is a single line of business.Company B conducts many other lines of business, including providing manydifferent types of loans, as well as letters of credit and bankers' acceptances,in its domestic businesses.
In connection withthis acquisition:
1. Company A will pay Company B a baseamount that is in excess of the size-of-transaction threshold. This base amountis, in essence, a "referral fee" for which Company B will refer itscustomers in its foreign correspondent banking business to Company A (Company Awould, of course, be contacting these customers directly to persuade them tocontinue as customers of this business after it is sold to Company A). Thisbase amount is subject to adjustment upwards depending on the number ofcustomers of Company B's foreign correspondent banking business that becomecustomers of Company A in this same business and downwards depending on thenumber of such customers that are still customers as of the time theacquisition is consummated. Both the potential upward and downward adjustmentsare subject to caps.
2. Company A will pay Company B an amountequal to the net book value of the non-banking assets held by Company B for useprimarily in its foreign correspondent banking business that Company A intendsto acquire. The assets include books and records, prepaid expenses, certainintellectual property, and the option to acquire, at Company A's election,certain contracts for the provision of data processing services outside the United States.
3. Company A will assume a "riskparticipation" on certain of Company B's loans, letters of credit andbanker's acceptances in its foreign correspondent banking business. In essence,Company A will reimburse Company B for any losses in connection with the riskparticipated loans, letters of credit and bankers' acceptances, which willinclude those outstanding as of the closing as well as, at Company A's option,certain additional ones that Company B may enter into after the closing tosupport certain ongoing services it will provide to the foreign correspondentbanking business on a transitional basis. Company A will not have areimbursement obligation to the extent that the losses result from the improperperformance by Company B of its administrative duties. In consideration forCompany A assuming this risk participation, Company B will pay Company A apercentage of the basis point spread associated with the risk participatedloans, letters of credit and bankers' acceptances during the term for the riskparticipation. Company A will also have an option (exercisable for a period ofapproximately 180 days after the closing) to purchase the loans, letters ofcredit and bankers' acceptances outright, in which event Company A would payCompany B their book value and the related risk participation would terminate.
Inour discussion, I referred to Int. #115 in the Premerger Notification PracticeManual (3=d ed.), which addressed whether payments under a recruitingagreement, where a seller is paid to assist in persuading its employees tobecome employees of the buyer, should be included in determining the"acquisition price" for purposes of the size-of-transaction test.Int. #115 concluded that the consideration paid under the recruitment agreementwould not be included in the "acquisition price." Only the value ofthe consideration for the assets is to be included. Although you did notindicate whether Int. #115 was directly analogous, you did remark that it isanalogous to situations in the insurance industry where a buyer pays a sellerto assist in transferring a seller's customers to a buyer. As a result, youconcluded that the amount paid by Company A to Company B for transferring thecustomer relationships did not need to be included in the acquisition price forpurposes of the size-of-transaction test.
Inour subsequent conversation, I referred to informal interpretations from theFTC website that indicated that indemnity reinsurance arrangements did not involvethe acquisitions of assets for purposes of the HSR Act.I suggested that these risk participations were analogous to these indemnityreinsurance arrangements in that Company A obligation to pay Company B arisesonly if Company B requests reimbursement and has complied with itsadministrative duties (e.g., Company B has not improperly permitted a draw on aletter of credit). You agreed that the risk participations did not need to beconsidered in determining the reportability of this transaction under the HSR Act.
Inour initial conversation, I also referred to Int. #8 in the PremergerNotification Practice Manual (3rd ed.), which addressed whether the acquisitionof consumer loans was exempt under Section 7A(c)(1) of the HSR Act. I referred to this interpretation for purposes of analyzingthe purchase by Company A of the loan portfolio and indicated that Company Bwould continue making various types of loans in its other lines of business,although it would no longer be making loans in the foreign correspondentbanking business (which is being sold to Company A) other than loans to support"transitional" services it will provide to Company A for a period ofabout 180 days post-closing. You confirmed that the purchase of this loanportfolio in this transaction would be exempt pursuant to Section 7A(c)(1) ofthe HSR Act. In our subsequent conversation, Ireferred to Int. #31 in the Premerger Notification Practice Manual (3rd ed.),which stated that the acquisition of an option to acquire assets would not betreated by the Premerger Notification Office as an acquisition of assets, andyou confirmed that this remains the position of the Premerger NotificationOffice.
Wethen discussed the remaining assets that are being purchased. You pointed out thatthe value of these assets will be the greater of their fair market value or, ifdetermined and greater, their acquisition price (of course, the value shouldalso include any assumed liabilities). Such value will be the acquisition pricefor purposes of the size-of-transaction test (and filing fee thresholds).
Accordingly,whether a filing is required under the HSR Act and,if so, the amount of the filing fee will depend on the acquisition price forthe assets identified in #2 above without regard to (i) payments for thecustomer relationships (#1 above), (ii) the acquisition of the riskparticipation (#3 above) and (iii) the potential payment for the portfolio ofloans, letters of credit and bankers' acceptances (#3 above).
Pleaselet me know at your earliest convenience whether the foregoing correctlyreflects our conversations and the view of the Premerger Notification Office ofthe Federal Trade Commission. I can be reached at the phone number or e-mailaddress listed above. Thank you again for your time and attention.